Tax Efficient Giving – Henry & Associates
Tax Efficient Charitable Giving
Vaughn W. Henry
With $203 billion given to charities in 2000, donors are more likely than ever to use planned gifts. “Planned or deferred giving” refers to a popular charitable gifting technique that provides valuable tax benefits and/or income benefits for the donor. Whether a donor uses stock, cash or other hard to value assets (real estate, art, or business interests), a planned gift can make charitable giving a powerful tool benefiting both donor and the non-profit organization. Where to get help? Well-trained development officers or financial advisors craft a planned gift to meet both the donor’s charitable and financial or estate planning goals. These gifts are made by bequests, trusts or contracts between a donor and a charity.
Advantages of many planned gifting programs
· Increases current income by repositioning assets
· Reduces income tax with current charitable tax deductions
· Lowers estate tax liabilities by strategically shrinking estate size to levels that pass tax free to heirs
· Avoids capital gains tax on appreciated assets
· Increases opportunity to pass additional assets to heirs in an organized plan
· Creates significant tax efficient charitable gifts benefiting the donors community
· May empower families through the concept of economic citizenship
· Controls and redirects social capital which otherwise would have defaulted to the government
Types of Planned Gifts
Bequest — When a donor leaves assets to charity through a will, he or she is making a bequest. The donor’s estate will receive a charitable estate tax deduction at death, when the gift goes to charity. Some gifts are better at death; for example, savings bonds may be listed individually and given to charity through the will, otherwise, a gift of bonds may trigger income tax if given outright. This is a common tool, but usually not well thought out or designed with tax efficiency in mind.
Life Insurance and Beneficiary Designations — Insurance policies (new or existing) may be given to charities in most states. Depending on the contracts paid-up status, the charity may need to continue paying premiums. Donors may also name a charity as a beneficiary of an existing policy, either entirely or in part. Additionally, a charity may be named as a beneficiary of a retirement plan (e.g., IRA, 401k, profit-sharing, etc.) or annuity contract. The advantage of this strategy is that the charity usually receives the proceeds without the accompanying income tax liability. This allows surviving family members to inherit assets that step-up in value and the charity receives assets that would otherwise be reduced by taxes paid as income in respect of a decedent (IRD). Check with your tax advisors on this technique, as it will affect minimum required distributions.
Charitable Remainder Trust — This § 664 trust makes payments, either a fixed amount (annuity trust) or a percentage of trust principal (unitrust), to whomever the donor chooses to receive income. The donor may claim a charitable income tax deduction and may minimize any capital gains tax if the gift is of appreciated property. At the end of the trust term, the charity receives whatever amount is left in the trust. Charitable Remainder Uni-Trusts (CRUT – paying a fixed percentage) may provide some flexibility in the distribution of income, and thus can be helpful in retirement planning, while Charitable Remainder Annuity Trusts (CRAT – paying a fixed dollar amount) are more rigid and restrictive.
Charitable Lead Trust –This trust makes payments, either a fixed amount (annuity trust) or a percentage of trust principal (unitrust), to charity during its term. At the end of the trust term, the principal can either go back to the donor or to heirs named by the donor. The donor may claim a charitable tax deduction for making a lead trust gift. However, a non-grantor lead trust does not usually generate a tax deduction, but it does eliminate the asset (or part of the assets value) from the donors estate.
Charitable Gift Annuity — A gift annuity is a contract between a charity and donor. In return for a donation of cash or other assets, the charity agrees to pay the donor, (or a friend or family member if the donor so chooses), a fixed payment for life. The donor can also claim a charitable tax deduction. If a donor funds a gift annuity with long-term capital gain property like appreciated stock, the donor will report only some of the gain, and may be able to report it in installments over many years. Income from a gift annuity may be deferred for a period of years and these are often set up by younger donors to supplement retirement income.
Pooled Income Fund — The name describes this planned gift as a charity accepts gifts from many donors into a common fund and distributes the income of the fund to each donor or recipient of the donor’s choosing. Income recipients receive income in proportion to their share of the fund. A gift to a pooled fund provides a charitable income tax deduction and the donor will not have to pay capital gains tax if the gift is of appreciated property. When an income beneficiary dies, the charity receives the donor’s portion of the fund.
Retained Life Estate — A donor may make a gift of a farm or residence to charity and retain the right to live in the house for the remainder of the donor’s life. The donor receives an immediate income tax deduction for the gift. At the donor’s death, the property goes to charity.
While many of these split interest gifts and techniques are used for donors with estate tax liabilities, they still work when the donor has a modest estate. A good advisor should be able to suggest tools to help a donor preserve personal financial security and still fulfill any charitable goals.
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