6 Estate Planning Strategies to Leverage Your Gifts to Charity

At year end, many people focus on estate planning and charitable giving. But don’t simply write a check or leave a sum of money to charity in your will. There are better ways to give that can increase your tax deductions or even your income, and they also can give you more control over how your gift is used.

The general rules on charitable contribution limits are simple. You deduct contributions up to 50% of your adjusted gross income. If your donations for the year exceed the 50% limit, you carry the unused donations to future years until they are used. Donations to a private foundation and of special types of property are more limited, but most contributions qualify for the 50% limit.

Unfortunately the small print in the tax law can take away a big chunk of your deductions. Itemized deductions, including charitable contributions, are reduced for “high income” taxpayers. Currently, you lose itemized deductions equal to 3% of the amount.

Here is a list of the best ways to leverage your charitable giving and maximize tax write offs, from the simplest steps to sophisticated giving. There still is time before year-end for estate planning and implementation of these strategies.

1. Use your credit card.

You don’t have to write a check by Dec. 31 to get a charitable gift deduction. The IRS ruled that a charitable contribution via credit card can be deducted in the year it is charged against the card, even if you don’t pay the bill until the next calendar year. You can give now, take the deduction, and part with the cash later.

2. Give appreciated property.

Most charities are fairly sophisticated these days and will accept many kinds of appreciated property. You don’t have to sell your appreciated investments, pay the capital gains tax, then contribute what is left after taxes. Instead, transfer your appreciated investments to the charity. Then, if you held the assets for more than one year, you deduct the fair market value of the investment.

No one pays taxes on the appreciation, and you probably will end up with more cash than if you sold the property first. Charitable giving is a good way to deal with property that might incur high commissions or other selling costs or for which finding a buyer at the right price is difficult. Such property includes art, antiques, collections, real estate, and small company stocks.

3. Donor-advised funds.

Suppose you want to get a charitable contribution deduction today but aren’t sure exactly which organization should get the money. You could set up a private foundation or trust, but that requires a fair amount of money and incurs costs.

Instead, consider a donor-advised fund for your estate planning. These foundations take charitable contributions and disburse them over time to charities recommended by the givers. You can leave the money in the charity for years, where it is invested and grows in value. Technically, you don’t have the right to determine who gets the money. For you to get the deduction at the time of your donation, you have to give up control. But it is rare that a donor-advised fund doesn’t honor a donor’s request.

Traditionally, community foundations in most localities were the prime donor-advised funds. There probably is one in your area, and many universities and other institutions have their own donor-advised funds. In addition, financial institutions are setting up the funds so that they can reap management funds before the money is given away. The biggest such fund probably is the Fidelity Charitable Gift Fund. Vanguard also recently started such a fund. The funds established by financial institutions generally require minimum initial contributions of at least $10,000. After making a contribution you can direct how it is invested among a few mutual funds, then direct gifts as you desire.

4. Charitable Remainder Trust.

This involves giving away future rights to property but keeping its use and income for some years. You set up a trust and donate property to it. The trust specifies that you are allowed to use the property (if it is something like art or a vacation house) for the rest of your life, then charities specified in the trust get it after your death. Or you receive income from the trust (in an amount specified by you within limits set by the IRS) for the rest of your life. Then the remainder goes to the charity.

You get a tax deduction the day that you transfer property to the trust. The deduction is less than the full value of the property and an tax expert can compte it based on your life expectancy, current interest rates, and the value of the trust. The older you are, the larger the tax deduction. If you give appreciated property, you don’t pay capital gains taxes on the appreciation. Income you receive from the trust will be taxable to you.

The charitable remainder trust is a tax-advantaged way to turn a valuable asset that produces no income into a stream of income as part of your estate planning.

5. Charitable lead trust.

This is the flip side of the remainder trust, for someone who doesn’t need the income from property but wants the property returned or inherited by heirs. You set up the trust and donate property to it. Then the trust pays income to a charity for a number of years specified by you in the trust. After that, the property either is returned to you or goes to heirs designated by you.

When property is donated to the charitable lead trust, you get a deduction equal to the present value of the charity’s income stream, as computed using tables developed by the IRS. If your heirs get the property after the trust expires, there probably will be gift taxes when the trust is set up based on the present value of what the heirs will receive. If you will get the property back, there are no other taxes but the property will be included in your estate planning.

6. Charitable gift annuities.

This is another way to get a charitable deduction and a stream of income. Basically you purchase an annuity contract from the charity of your choice. The income you’ll receive from the annuity will be less than what you would receive from a commercial annuity. The difference is considered a charitable contribution. You get to deduct the value of that gift at the time you purchase the annuity.

If you have enough money and want to deal with the costs and headaches, you can set up your own private foundation or endowment fund as part of your estate planning. Or you can always give simple gifts of cash and outright bequests in your will. But you, the charity, and your heirs all might be better off if you look for ways to leverage your charitable gifts through one or more of these strategies.