Having It, Holding It, & Sharing It
A variety of charitable gifting techniques are available during
your lifetime and as part of your estate plan. Depending on your
income, or the size of your estate, you may find tax savings so
significant after making a charitable gift that the net after tax
effect is minimal.
Here is a summary of some of planning ideas which will help you
start your charitable gifting program.
The income tax deduction for a gift to a qualified public
charity during a lifetime is limited to 50% of the donor's adjusted
gross income per year.
A gift of capital gain property (e.g. real estate or securities
held more than 12 months) to charity is made at its fair market
value. The income tax deduction for a gift of capital gain property
is limited to 30% of the donor's adjusted gross income per year.
The donor of capital gain property is not subject to tax that would
have occurred had the property been sold and the proceeds donated
to charity. To avoid capital gains, donate the property and let the
charity sell the property.
Property (especially appreciated capital gains property) may be
transferred to a charitable remainder trust ("CRT"), which is
either a charitable remainder annuity trust ("CRAT") or a
charitable remainder unitrust ("CRUT"). An individual creating a
trust ("Settler") retains an income interest in a CRAT for a fixed
number of years, with the remainder passing to charity at the end
of the term. A CRAT pays a fixed annuity for the Settler's life or
a fixed term. A CRUT pays the Settler a fixed percentage of the
value of property transferred to the trust, valued annually
("Unitrust Amount"). A CRUT may pay the Settler the lesser of the
Unitrust Amount and the income of the trust each year. This
"income-only" CRUT may make up prior years' deficiencies to the
Settler. CRT's can be created by both spouses.
Property transferred to a CRT is removed from the Settler's
estate. The Settler (i) receives a current income tax deduction
equal to the present value of the remainder interest, (ii) receives
an income stream, and (iii) avoids tax on capital gains on the sale
of appreciated property by the CRT.
In a charitable lead trust ("CLT"), the annuity or unitrust
interest is paid to charity for the Settler's lifetime (or a fixed
number of years), and the remainder is paid to non-charitable
beneficiaries. The income interest payable to charity is similar to
the rules for the CRT. The Settler receives a current charitable
deduction equal to the present value of the charitable lead
interest.
An increasingly popular alternative is to make donations to a
pooled income fund. This allows you to "bank" your charitable
deductions and to choose charities to receive income earned from
your donation.
The value of gifts made to charity is excluded from your estate.
A CRT may be established upon the death of the first spouse which
provides income to the surviving spouse and then children, with the
remainder distributed to charity.
Other planning techniques include (i) making a gift of the
remainder interest in your house to charity, (ii) buying a life
insurance policy and transferring the policy to the charity or
naming the charity as beneficiary, (iii) using an irrevocable life
insurance trust to replace the value of property gifted to charity
and (iii) naming a charity or CRT as beneficiary of your pension
plan or IRA.
Before undertaking a charitable gifting program, be sure to
contact a qualified professional. The impact of charitable planning
is individual and each person considering a charitable plan should
seek independent tax advice to determine what the net tax effort
will be.