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Great Estate Planning Strategies for Year-End Giving

Last update on: Jun 23 2020
estate planning

You don’t need cash to put a sizeable tax deduction on this year’s tax return. If you have some appreciated assets, you have a way to keep the taxman at bay. The best assets to use are your first or second home and securities, such as stocks or mutual funds. Pick the proper Estate Planning Strategy and you’ll be able to give more than under standard strategies without crimping your lifestyle.

Give an appreciated long-term capital asset to charity and you won’t owe capital gains taxes on the appreciation. In addition, you can deduct the current fair market value of the property as a charitable contribution. The deduction is limited to 50% of your adjusted gross income in most cases, and any unused deduction can be carried forward to future years’ tax returns until exhausted.

Those are the basic rules. But there also are ways to get a tax deduction today while retaining the benefits of the asset. Here’s a selection of charitable contribution strategies with appreciated assets to consider. Most work with either real estate or appreciated securities.

A straight gift of the property is the easiest estate planning strategy and uses only the basic rules. If you own mutual fund shares worth $15,000 that cost you $10,000, you would owe taxes on a $5,000 gain if you sold them. You’d have $14,000 to give or spend after taxes. Instead of giving after-tax cash to a charity, give the shares. You’ll get a $15,000 deduction. The charity will get the entire $15,000, because it can sell the shares tax free.

Transferring the shares to the charity usually can be done with a telephone call to the fund company or broker that holds the shares. Most charities are glad to accept shares, though not all will. The estate planning strategy also works with real estate, including your personal residence. But not all charities are willing to accept gifts of real estate. Check with the charity of your choice before making an estate planning gift of either securities or real estate.

With the straight gift, all you get is the tax deduction. Now, let’s look at ways to get a tax deduction and still benefit from the property.

You can give a partial interest in a home, known as a remainder interest. This allows you to live in the home the rest of your life, then the charity gets the home. Your deduction will be less than the current value of the home, because you deduct only the present value of the charity’s remainder interest. Current interest rates and IRS tables, along with your age, determine the amount of the deduction. The older you are, the larger the percentage of the home’s value you can deduct.

The home and the land on which it sits must be valued separately, because the home depreciates and declines in value while the land does not. The higher the value you can assign to the land, the higher your deduction. That makes resort or vacation property the best candidates for this estate planning strategy, since the land is very valuable.

A charitable gift annuity will provide you with income for either a period of years or for the rest of your life, whichever you select. With this annuity, you give money or property to a charity. The charity promises to make regular payments to you, usually quarterly. The payments are less than you would get from a commercial annuity, and the rate generally is set by the American Council on Gift Annuities of Dallas, Texas. The older you are, the higher the payments. Recently, an 85-year-old’s annual payment would be about 10.5% of the contribution; a 73-year-old’s 7.6%.

Charities generally require you to be at least age 60 to set up a gift annuity, and the average age for a gift annuity is about 77. But younger people can give property and set up a deferred charitable gift annuity. You make the gift and get the tax deduction now, but income payments don’t begin until later, say age 65.

With either annuity, in addition to the income payments, you get a tax deduction when you transfer property to the charity. That’s because the difference between the payout rate and comparable commercial annuity payouts is a gift by you. The payout is set so the charity usually gets 50% or more of the original contribution. In addition, part of each annuity payment will be tax free as a return of your principal.

A 70-year-old male can deduct over 38% of a contribution to a gift annuity and gets an annual payment equal to 7.2% of the contribution. A married couple with a 70-year-old male and a 68-year-old female would deduct about 29.5% of the contribution and get annual payments equal to 6.5%.

The charitable gift annuity is a good deal for someone who wants a reliable stream of income at better-than-CD rates and who needs a tax deduction. But your heirs get nothing.

Most established charities now offer charitable gift annuities. There isn’t much competition on payouts. Most use the rates set by the American Council on Gift Annuities, and the rates are posted on the ACGA website at
Most charities will accept cash or securities in return for a gift annuity. Some charities will accept a future interest in your home in return for a gift annuity, paying you cash for the rest of your life in exchange for the future right to own your home.  But you’ll need to have a very valuable home, be around age 80, and deal with a large charity.

A similar estate planning option that could give you more benefits is the charitable remainder trust.
You create a trust and transfer appreciated property to it. The trust will pay income to you (or you and another loved one) for life or for a period of years, whichever you select. After the income period ends, the property left in the trust goes to a charity or charities designated by you in the trust agreement.

You get a tax deduction for creating the trust. The amount of the deduction depends on the length of the income period, current interest rates, and the value of the property. You receive income from the trust, and the property is out of your estate.

You can set the trust to pay you a fixed amount each year or a fixed percentage of the trust’s value. The percentage payout, known as a unitrust, gives you inflation protection since payments will increase as the trust’s portfolio increases. But that won’t be the case if the trust’s portfolio declines. You set the payout rate, within the limits of IRS regulations. Most charitable remainder trusts distribute 3% to 6% of the asset value annually.

Suppose a couple with each spouse age 70 gives $150,000 of property to a trust that will pay them 5% of the trust’s value each year for life. They would get a tax deduction of about $63,000 today plus the annual income from the trust. If they were each age 80, the deduction would be about $88,000.

The charitable remainder trust is a great way to convert a single, appreciated asset into a diversified portfolio without paying capital gains taxes. You can contribute a home or stock to the trust. The trust sells the property and owes no capital gains taxes because it is a charitable trust. The full sale proceeds then are invested in a diversified portfolio that will pay you income for life.

If you are younger or don’t need the income now, consider a Flip Unitrust. The trustee invests the money so that no income is generated. The trust is invested for growth and capital gains. On the occurrence of a stated date or event, such as your turning a certain age, the portfolio is changed so that it generates income, which is distributed to you.

These estate planning strategies work with second homes as well as first homes and securities. But generally if you use a home with any estate planning strategy other than giving a remainder interest, you’ll have to move and the home will be sold.

Before making a charitable contribution, check the effect of the stealth taxes discussed in the September issue. You could lose itemized deductions, including charitable contributions, because your income is high or because of the alternative minimum tax. Be sure you know the real tax benefit you’ll get before making a contribution.

Large charitable gifts also require more reporting on your tax return. When a contribution of property is between $500 and $5,000, you have to provide details about the gifts on Section A of Form 8283. When the value exceeds $5,000, you have to include a qualified appraisal. Complete details about the reporting requirements are in IRS Publication 561 “Determining The Value Of Donated Property” and Publication 526 “Charitable Contributions” available on the IRS web site or by calling 800-TAX-FORM. For some free information about charitable giving strategies generally, check the web sites or


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