Investor Education – Estate Planning
Charitable Giving Techniques
For individuals and families who are charitably inclined, there are a variety of tax-efficient strategies that can help them achieve their goals and create a gifting legacy for the next generation. Charitable giving may also provide tax-advantaged benefits in other critical areas of wealth management including estate planning, the protection of real estate and the diversification of concentrated stock portfolios.
We’ve provided a brief overview of some of the most popular strategies to consider when developing or enhancing your own charitable gifting plan.
Outright contributions of Appreciated Property
An outright gift of a low-basis asset to a charitable organization is effective for an individual who wishes to benefit a charity, receive a charitable deduction, and avoid capital gains on the appreciation of the donated asset.
- An outright gift can also diversify a donor’s concentrated position.
- As a general rule of thumb, property that has depreciated in value should first be sold and the proceeds contributed to the charity. This way, the tax benefits of the loss are not wasted.
- Taxpayers who currently do not itemize deductions receive no tax benefits from a charitable gift; however, legislation has been proposed that would allow non-itemized charitable deductions.
Charitable Remainder Trust (CRT)
A CRT is an effective technique for a charitably inclined individual who wishes to diversify a large concentrated position and retain an income stream for life or for a term of years.
- A CRT can unlock the gain in low-basis assets and provide the donor with an annual income payment.
- Capital gains from a sale within a CRT may be deferred.
- The donor will receive a charitable income tax deduction the year the CRT is established.
- At the end of the income term, the remaining property passes to charity.
Charitable Lead Trust (CLT)
An outright gift of a low-basis asset to a charitable organization is effective for an individual who wishes to benefit a charity, receive a charitable deduction, and avoid capital gains on the appreciation of the donated asset.
- A CLT is appropriate for a charitably inclined individual who wishes to pass assets to heirs at a discounted value.
- A CLT will make an annual payment to charity for a period of years or life; the remainder will pass to the donor’s heirs.
- Taxpayers who currently do not itemize deductions receive no tax benefits from a charitable gift; however, legislation has been proposed that would allow non-itemized charitable deductions.
- Certain CLTs may provide the donor with a current income tax deduction.
- A CLT is a good technique for an individual who is currently making annual gifts to charity, and it may be combined with a donor advised fund.
- A CLT is best utilized when interest rates are low.
- A testamentary zeroed-out CLT provides a good backstop to a donor’s estate plan given the uncertainty of the estate tax repeal.
Pooled Income Fund
A pooled income fund is appropriate for charitably minded individual who wishes to have an income stream for life without the tax burden resulting from liquidating appreciated investments.
- The donor receives a current charitable income tax deduction.
- The charitable contributions are pooled and professionally managed.
- The income interest retained by the donor is for life; it cannot be for a term of years.
Charitable Gift Annuity
A charitable gift annuity is appropriate for an individual who wishes to reduce his/her taxable estate, obtain a current charitable deduction and receive an income stream for life.
An individual transfers property to a charitable organization in exchange for a specified payment each year for the remainder of his/her life or the lives of other named
- Beneficiaries.
- Other named beneficiaries may cause gift and/or estate tax consequences.
- The administrative burdens are normally taken care of by the charitable organization rather than by the donor, as is typically the case with charitable remainder or lead trusts.
- A charitable gift annuity is best utilized when interest rates are low.
Private Foundation
A private foundation is essentially a privately funded charity that can provide an organized structure for a family’s charitable goals and objectives.
- The foundation can be funded in high-income years, yet have the grants paid out over many years to maintain the family’s normal level of charitable giving.
- The charitable income tax deduction is available to the grantor the year in which the foundation is funded.
- A private foundation can provide business training and employment for children. Proposed legislative changes may restrict the amount of administrative costs private foundations can include in their annual payout.
- The foundation can be the charitable beneficiary of trusts, including charitable remainder or lead trusts.
Donor Advised Fund (DAF)
A donor advised fund is a cost-effective alternative to a private foundation. The donor may set aside funds for charitable intentions during high-income years while making the actual distributions to favored causes at future times.
- A charitable income tax deduction is available for the full amount in the year that the donor makes the contribution to the fund, even though disbursements to qualifying charitable organizations can be made at any time in the future.
- A DAF provides professional management of assets and avoids estate taxes.
- A DAF offers the many benefits of private foundations without the restrictions, administrative burdens and high costs associated with them.
Community Foundation
A community foundation would be appropriate for individuals who want to benefit a local community and desire the private foundation structure, but not the expenses and restrictions that accompany them.
- The donor may impose various restrictions on the fund, particularly in advising how to manage and distribute the assets.
- A donor can involve his/her family as advisors to the fund.
- A community foundation allows the donor to receive a current income tax deduction with each contribution.
Remainder Interest in a Personal Residence or Farm
A gift of a remainder interest in a personal residence or farm may be appropriate for a charitably inclined individual who wishes to live in or use the property for life or for a set period of time.
- At the end of the donor’s interest the property passes to the charity.
- The gift of the remainder interest provides a current income tax deduction for the actuarially determined value of the property at the end of the donor’s retained interest.
- Gain on the sale of a primary residence exclusion may be lost.
Conservation Easement
A gift of a qualified conservation easement is appropriate for a unique vacation home or property with some conservation qualities.
- The donor can make a deductible gift of an interest in property while retaining personal use of the property.
- The rules in this area are fairly complicated and a donor should ensure that the transaction meets the appropriate requirements before making such a gift.
For more information on this topic, please contact us. At Bartlett & Co, we assist high net worth individuals and their families in defining & reaching their life goals.