Don’t wait until December to plan your charitable giving. Don’t do what can be even worse: Wait to make charitable gifts, especially cash gifts, through your estate. When you take either or both of those widely followed actions, you could be leaving a lot of money on the table. That money could have benefitted you, your loved ones and charity.
Most people make lifetime charitable giving by writing checks. That has benefits. If you itemize deductions, you receive a deduction for the contributions. Many people also have their estate make cash gifts to charity. That gives the estate a charitable deduction against the federal estate tax, but that isn’t of value to most estates these days.
There are many other ways to make charitable giving contributions. Some of them reduce your income taxes and estate taxes more than other strategies. Some strategies also provide a range of benefits in addition to tax savings. They can help you reach goals in addition to helping a charity.
Because few estates now are subject to federal estate taxes, lifetime charitable giving often makes the most sense. You receive current income tax benefits, which usually are far more valuable than future estate tax benefits. You also might see how your gifts are used and could have the opportunity to adjust future gifts if you aren’t satisfied.
Perhaps more importantly, there are charitable giving strategies you can execute now that generate a stream of income for you or your loved ones, or provide heirs with a larger inheritance than otherwise would be possible.
We’re going to survey those strategies to give you an idea of what’s available and how you use one or more of them to enhance the benefits for you, your loved ones and charity. When you’re charitably inclined, it can be worth your while to spend some time with an estate planner or a tax pro and discuss how you could benefit from some of these strategies. I’ve even met people who said they weren’t charitably inclined but found the overall benefits to be so powerful that they used one of the strategies and helped a charity.
Instead of writing a check, consider giving appreciated investment property, such as stocks, bonds, mutual funds, or real estate. If you itemize deductions, the charitable contribution deduction will be the property’s current fair market value. You won’t owe capital gains taxes on the appreciation that occurred while you owned the property. The charity won’t be taxed either. It can sell the property and spend the full proceeds.
Making charitable gifts with appreciated property can provide more after-tax cash to you and the charity. You often have more after-tax wealth than if you sold the property and made your charitable giving in cash. Everyone wins, except the taxman. The strategy also can be especially useful with difficult-to-sell property, such as real estate, when you favor a charity that will accept the property.
With a charitable gift annuity, you benefit charity, receive a current income tax deduction and generate a guaranteed stream of income for life. You transfer cash or property to a charity. In return, the charity promises to pay you (or you and a beneficiary) a fixed income for life or for a period of years, whichever you choose. The annuity payments will be less than you’d receive from a commercial annuity. The difference is a gift to the charity, and you receive a tax deduction for it when you purchase the annuity.
Most charities pay the amount recommended by the American Council on Gift Annuities. See the web page http:// www.acga-web.org/gift-annuity-rates for details. But there are exceptions. Stanford University, for example, has a reputation for generally paying less than most, while Pomona College says its annuity pays more than even some commercial annuities.
Your tax deduction is based on your age and current interest rates and is computed using a formula in IRS regulations. Your estate planner and tax specialists with the charity will be able to determine your deduction.
Keep in mind that all you receive is a promise from the charity to pay you income for life.
Triple tax benefits are available when you create a Charitable Remainder Trust (CRT). The CRT is ideal when you want to sell highly appreciated property, especially when you’d like it to generate income.
You create a trust and give appreciated investment property to it. The trust sells the property. Since the trust is charitable, it isn’t taxed on the sale. All the sale proceeds can be reinvested. You also aren’t taxed on the appreciation that accrued while you owned the property, because you’re giving it to a charitable entity.
The CRT begins paying you, or a beneficiary you name, annual income. The income can be a fixed annual amount, known as a charitable remainder annuity trust (CRAT). Or it can be a percentage of the trust’s value at the end of the previous year, known as a charitable remainder unitrust (CRUT). With the CRUT, income can increase if the trust’s investments do well, or payments can decrease if the investments do poorly.
You can add some variations to the distribution formula, which your estate planner will discuss with you if the CRT seems attractive. The tax code puts some limits on the annual annuity that your estate planner also will review with you.
Once the income term ends, the charity receives whatever property is remaining in the trust.
You receive an income tax deduction after transferring property to the CRT. IRS regulations are used to determine the present value of the amount the charity is expected to receive in the future, and that will be your income tax deduction. As with a gift annuity, the amount of the deduction varies with your age (or the age of whoever receives the income) and current interest rates
The property you give to the CRT is out of your estate, so for people with taxable estates it reduces the estate tax while providing current income and income tax benefits.
Some people prefer the charitable lead trust (CLT), a sort of inverse of the CRT. Under the CLT, you transfer money or property to the trust, and the charity receives income for a period of years after the CLT is created. Then, after the income term expires, the remaining trust property either reverts to you or is transferred to your loved ones, such as adult children. You decide which when creating the trust.
When the trust is created you take a charitable giving deduction for the present value of the charity’s stream of income payments, using IRS regulations that consider the number of years the payments will be made and current interest rates. When your loved ones are the final beneficiaries, you’re making a gift to them. For tax purposes, the gift is the present value of the amount they are expected to receive in the future, and that is computed using the same IRS regulations. If the investment returns of the trust exceed the interest rate used in the IRS regulations, your loved ones are likely to receive more than the calculated amount of the gift.
The CLT is not a tax-exempt trust. All of its income and gains are taxed to someone. You can set it up as a grantor trust. In that case, you pay all the taxes on the trust income and gains. Paying the taxes further reduces your estate and is a way to give more to the charity and your loved ones.
The CLT is a good way to remove an asset and its future appreciation from your estate while retaining some control of it by acting as trustee. The CLT is especially good for assets with low value today but that you expect to appreciate.
When you are able to give millions of dollars, you might create a private foundation. You and your family can serve as the officers and board of the foundation and decide over time which charities receive the money. Private foundations have a lot of rules and regulations. You’ll need experienced tax counsel guiding all your actions if you want to avoid problems with the IRS, which has been more aggressive in this area in recent years. That’s why a private foundation only makes sense if you donate a very large sum of money.
Owners of traditional IRAs should consider the IRA charitable gift exclusion, which is discussed in this month’s IRA Watch.
Always keep in mind there are annual limits on charitable giving contribution deductions. For cash donations made to most public charities, the annual deduction limit is 50% of your adjusted gross income. But when the donation is of property or to a non-public charity, the limit might be 30% or even 20% of adjusted gross income. Check with your tax advisor for the limits on your planned contributions. Donations that can’t be deducted because of these limits can be carried forward to future years to be deducted in the same way until they are exhausted.
There are specific, detailed requirements for each of the strategies discussed here. You want to work with one or more experienced advisors before implementing a strategy.
When giving to charity is part of your long-term plans, you might not want to wait to give through your estate. You, your family and the charity all might benefit more if you give today, especially when you use one or more of these strategies.