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Estate Planning to Increase the Benefits of Charitable Giving

Last update on: Jun 23 2020
estate planning

Most charitable gifts are contributions of money or property directly to the charity. But there are other ways to give that provide additional benefits that you should consider in your Estate Planning.

Some of the charitable giving strategies allow the donor to retain more control than a straight gift. Others provide income for a period of years or can provide payment of a lump sum after time has passed. These alternative strategies are not for small gifts. But when planned gifts will be large either in one year or over time, the donor should consider if an alternative strategy is the best way to give.

Consider these charitable strategies.


Estate Planning Charitable Strategy #1

Private foundation. This is perhaps the oldest of the strategies for making big gifts. The Ford Foundation and others are brand-name foundations that are well-known.

A donor creates an organization, sets its purpose, establishes its by-laws, and appoints the initial board. The foundation gives the donor control. He takes a tax deduction when a contribution is made to the foundation, and can dole the money out for charitable purposes over time. There are many resources that provide research and advice to help foundations decide how to make gifts.

A foundation also helps the donor’s family. When family members are employed by or on the board of the foundation, they help build a legacy and learn to work together for a common purpose. In addition, they can draw reasonable salaries and travel expenses.

A foundation is expensive to set up and operate. A donor should be giving several million dollars to make incurring the costs worthwhile. Strict tax rules must be followed, and Congress is in the process of tightening the rules because of some past abuses. Also, the tax deduction is limited if it is a private foundation. To get the highest tax deduction, the foundation must be most of its funding from the public.


Estate Planning Charitable Strategy #2

Charitable Remainder Trusts. Perhaps the most underused tool is the charitable remainder trust. A donor gives appreciated property to the trust, usually securities or real estate. The donor owes no capital gains on the lifetime appreciation. The trust also can sell the property and not owe taxes, because it is a charity. Often, the trust sells the property and invests it to create a diversified portfolio.

The trust pays income to the donor or a beneficiary named by the donor. There is a fair amount of flexibility regarding the income payments. The income can be paid in the future or right away. The amount of the income can be fixed or it can be a percentage of the trust value. The tax code limits the amount of the income, but the ceiling provides a fair amount of flexibility.

The donor gets a deduction based on the fair market value of the property at the time of the transfer to the trust. The percentage of the value that can be deducted depends on how long the income will be paid. The longer the income will be paid, the lower the deduction will be. Also, the maximum deduction for one year is 30% of adjusted gross income.

Interest rates also influence the amount of the deduction. The higher interest rates are, the higher your deduction. In a period of rising rates, it can pay to wait to make the deduction until rates appear near a top.

After income payments end, the charity gets the remaining value of the trust. Because of the costs of setting up the trust, the assets should be worth at least $250,000 to create a charitable remainder trust.


Estate Planning Charitable Strategy #3

Charitable lead trust. This is the opposite of a charitable remainder trust. The charitable receive income first for a period of years set by the donor. After the income period ends, the remaining principal is returned to the donor or goes to a beneficiary named by the donor.

The real advantage of the lead trust is that it limits estate and gift taxes when the remainder interest is left to heirs. The gift taxes are due when the trust is set up. But they are discounted from the fair market value based on the estimated income that will be paid to the charity and the time that will pass before the heirs receive the property.

There is the potential that the heirs might receive a far larger gift than the one on which taxes were paid. If the investment returns of the trust exceed the income paid to the charity, the heirs will receive more than was originally placed in the trust. But gift taxes would be computed on less than the initial value, because it will be assumed that the income paid will decrease the principal. If the trust does earn high returns, it might owe income taxes on the excess returns.

Of course, there is the risk that the trust’s investments do worse than expected. Then, the heirs would receive less than anticipated and less than the amount on which taxes were paid.

Advisors recommend a charitable lead trust only for amounts of $1 million or more.


Estate Planning Charitable Strategy #4

Donor-advised fund. These can be thought of as group private foundations. These funds usually are set up by a community or by a financial services firm. The donor makes a contribution to the trust and takes a current tax deduction. Gifts usually are made by check, but some funds will accept transfers of securities and even real estate. There might be a large one-time gift or regular contributions over the years.

The contributions are invested by the fund. Sometimes the donor can choose how the account is invested, within limits.

The donor decides when all or part of the account is to be donated to a charity and can suggest the charities to receive the fund. The fund can decline the donor’s suggested charity, but that rarely happens. As a practical matter, the donor decides how much to give, when to give, and who receives the gift.

The donor-advised fund allows the donor to take a tax deduction now and decide later which charities will receive the money. It also gives the donor the opportunity to let several years’ of contributions compound so that a large gift can be made.

Most brokers and mutual funds now offer donor-advised funds, as do many communities and local governments. The minimum donation usually is the same as for opening a mutual fund or brokerage account.


Estate Planning Charitable Strategy #5

Supporting organization. This is almost a hybrid of a donor-advised fund and private foundation. It is an organization set up to support a particular public charity. But this organization has a separate and independent board and usually is established by the donor.

SOs generally are for donors of $500,000 or more. The donor gets the same tax deduction as for a contribution to a public charity but has much of the control of a private foundation by selecting the board of the supporting organization. The SO board decides when and how much to contribute to the selected public charity. That allows the board to select particular projects to fund and negotiate with the charity over details.


Estate Planning Charitable Strategy #6

Gift annuities. These are fairly simple vehicles that are available from most large public charities. The donor in effect buys an annuity from the charity. The annuity pays less income than a commercial annuity. The difference, as computed using IRS tables, is a charitable deduction in the year the annuity is purchased. A variant of this offered by some charities is the pooled-income fund.



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