Strategies for Your Charitable Planning

There are many reasons why you may want to give to a charity: You may give because you believe strongly in a cause or organization, but it can also reduce your yearly income tax bill and remove value from your overall estate. If you are considering making a donation, but are unsure of how to proceed, we are here to help. Working closely with other members of your financial team, we can craft a plan utilizing the charitable planning strategies that will best help you achieve your goals.

Charitable Trust

Just like a revocable living trust can be used to benefit you during your lifetime and those you choose upon your death, a charitable trust can also be a great tool for benefiting both yourself and a charity.

Charitable Remainder Trust (CRT)

This is a tax-exempt irrevocable trust designed to reduce your taxable income now and estate taxes when you die by removing cash or property from your ownership. As part of this strategy, you will fund the trust with property that has grown in value over the years (like stocks or real estate). Once funded into the trust, the property is sold and the money is invested in a way that will produce a stream of income. Because the CRT is selling the property, there will be no capital gains tax on the sale of stocks or real estate. Then, you will receive either a set amount of money per year or a fixed percentage of the value of the trust (depending on how the trust is worded) for a term of years. When the term is over, the remaining amount in the trust will be distributed to the charity you have chosen. The term of the trust can be for a set number of years or for your lifetime. Additionally, you will receive an immediate charitable income tax deduction based upon the value that will go to the charity.

Charitable Lead Trust (CLT)

Like a CRT, you are funding the trust with property that has grown in value, but in a CLT, the charity receives the income stream for a term of years. Once the term has passed, the individuals you have named in the trust agreement will receive the remainder. This can be an excellent way to benefit a charity but still provide for your loved ones. Also, you will receive a deduction for the value of the charitable gift that is made. This will offset the gift or estate tax that may be owed when the remaining amount is given to your beneficiaries.

Gift Annuity

A gift annuity is a contract between you and the charity you have selected. According to the contract, you agree to donate a certain amount of cash or property (stocks, bonds, etc.) and the charity agrees to pay you a fixed annuity either monthly or quarterly for the remainder of your life, or the combined lives of you and your spouse. The charity then invests your gift and pays you the annuity. Upon your death, and that of your spouse, if applicable, the charity receives the balance from the investment of your gift. Because a gift annuity is a contract between two parties, it can only be used to benefit one charity. Additionally, you are only able to get a partial income tax deduction when the gift is made because you are receiving part of the gift back in the form of the annuity. This is also the case with any capital gains tax that might be generated from the sale of your gift by the charity. Similar to the CRT, gifting the cash or property to the charity removes a large amount of money or property from your estate, thereby reducing the estate taxes due at your death.

Private Foundation

If you have a large amount to donate and you want to retain as much control as possible, a private foundation may be an option worth considering. This is an entity established with a charitable purpose and funded by donations from you and possibly your family that distributes money to charities you choose. The entity can be established as a trust with a trustee managing the donation or a corporation with a board of directors managing the donation. Since you create the entity, you control the operations, who will run the foundation, who will receive the donations, and how much will they receive. In order to qualify as a private foundation and receive the favorable tax benefits, it is crucial that all of the appropriate formalities and rules are followed when operating the private foundation. An income tax deduction may be received for the donations made to the private foundation up to 30% of your adjusted gross income. Additionally, if you donate an asset (e.g., stocks or real estate) that has increased in value, you may be able to avoid paying capital gains tax if those items are sold by the private foundation instead of by you. Lastly, after donating these valuable assets to the private foundation, they are no longer owned by you or under your control, so when you die, they will not be subject to estate tax.

Donor Advised Fund

As the name would suggest, this is a fund created by you but owned by a non-profit organization known as a sponsoring organization. You can deposit the money or property (real estate, stocks, etc.) you would like to use as your charitable donation into a fund account. Once you deposit the money or property into the account, you are eligible to take the income tax deduction. The sponsoring organization then takes ownership and manages the fund. This could include selling the property and reinvesting the money into an income producing account. Although the sponsoring organization owns the fund, you have the ability to advise which qualifying charities should receive money from your fund and what amounts should be distributed. One of the benefits of a donor advised fund is that you are able to get the income tax deduction the year you make the donation to the fund, even if the money is not distributed to a qualifying charity that tax year. As with other gifting strategies, because you have gifted the money or property into the fund, you no longer own it and it is not subject to estate tax upon your death. This strategy can be combined with other strategies, such as the CRT, to produce valuable tax and flexibility results.

Outright Gift to the Charity

If you would like to donate a lump sum of money and do not need to receive a stream of income from the gift, an outright gift may be the quickest solution. It will also provide the charity with the immediate benefit of the gift without any ongoing administration by either party. By making an outright donation, you are able to take advantage of an income tax deduction for that year. Additionally, you no longer own the cash or property, so it is not subject to estate tax upon your death.