The year-end is approaching, but you still have time to work on your 2022 tax planning. Consider giving to your favorite charity to make this holiday season merry. Planned charitable giving provides you a way to maximize contributions to charities while maintaining your lifestyle or planning for loved ones. Planned charitable gifts range from simple (gifts of cash or specific assets) to more complex techniques to benefit you and the charity. The following is a brief review of the giving options, beginning with the minimum-planning techniques.
Show Me the Money – Cash Gifts
The simplest charitable giving technique is an outright gift of cash. Cash gifts provide immediate support to the charity and may provide tax-deductible benefits to you—a charitable income tax deduction equal to the amount given, subject to annual deduction limitations. Keep in mind that a lifetime gift of cash (and other assets) allows the charity to recognize you during your lifetime and allows you to witness the gift being used for its intended purposes.
All Right, Show Me the Stocks – Gifts of Stock
Another outright gift technique is a gift of stock, bonds, or mutual funds. Charitable gifts of stock can be particularly beneficial if the assets are highly appreciated. Marketable stock is easily transferred and usually easily valued. You can avoid capital gains tax on the increased value of appreciated stock by gifting the stock to charity. And, of course, you may be entitled to a charitable income tax deduction. The charity, as a tax-exempt entity, will not incur tax on the gains when it sells the stock.
Patience – Gifts of Life Insurance Proceeds
Designating a charity as a beneficiary of a life insurance policy is a simple and inexpensive way to make a large gift to a charity. You name the charity as the beneficiary of the policy (or designate the charity to receive a percentage of the proceeds). During your life, you continue to pay the premiums, but the policy proceeds received by the charity will not be included in your estate for estate tax purposes.
Instead of naming the charity as a beneficiary, you can transfer ownership by assigning all rights and ownership interests in the policy to the charity and delivering the policy itself to the charity. You can agree with the charity to continue to pay the premiums on the policy and receive an income tax deduction for the donation of premiums paid on the policy.
Location, Location, Location – Gifts of Real Estate
Real estate likely constitutes an important part of your wealth but may not produce income on which you rely. Further, the appreciation in the value of the real estate is likely not a source of support. If your real estate investments are not producing income, that investment asset may be an attractive asset for charitable giving. A gift of real estate may be made outright by simply signing and recording a deed that names the charity as the new owner. Gifts of real estate to a charity can be made as part of your estate plan.
The Internal Revenue Code allows you to make a charitable gift of a remainder interest in your personal residence. You can fulfill your charitable goals by entering into a life estate agreement with the charity. This agreement allows you to continue living in your home for as long as you desire while transferring a remainder interest to the charity. You remain responsible for the upkeep, maintenance, and taxes associated with the property. You may be entitled to a charitable income tax deduction equal to the value of the remainder interest transferred to the charity (if you otherwise qualify to claim the deduction). Be careful that the charity has a written policy for accepting gifts of real estate to address all the aspects of real estate ownership.
More Patience – Gifts of Retirement Assets
A gift of assets from a retirement account may be a favorable plan because of the significant tax savings. At your death, family members who inherit retirement assets may owe both estate and income taxes on the assets. To avoid this double tax hit, you may want to consider making a charitable bequest of these retirement assets.
Any amount given to charity from a retirement plan account by testamentary transfer will not be subject to income tax, and the entire amount of the gift will be available to the charity to use for its mission. Subject to several rules governing retirement plans, you can make a gift of retirement assets to a charity during your lifetime by withdrawing proceeds from your retirement plan and gifting the funds. These withdrawn proceeds, however, are subject to income tax, which may be offset by a charitable income tax deduction. Special rules apply to charitable gifts from IRAs, which may make such gifts attractive for tax planning and charitable giving purposes.
Well, I’m Gone – Post-Mortem Gifts (Estate Planning)
Naming a charity as a beneficiary under your will or trust allows you to continue your charitable intent while also providing for loved ones. The gift may be a specific dollar amount or a percentage/fraction of your assets remaining at death. Of course, you may also leave all your assets to one or more charities. Gifts by bequest or devise may be for unrestricted purposes or restricted for a specific purpose.
A Few Strings Attached – Donor Advised Fund (DAF)
To create a donor advised fund (DAF), you make an irrevocable gift to a fund or account established in your name with a sponsoring organization over which you or your family have advisory rights regarding investments and distributions. Sponsoring organizations can include charities, community foundations, and financial institutions. Like a CRUT (see below), you may make additional contributions to the DAF. Though you can recommend the charities to which grants should be made at the desired times, the sponsoring organization has the ultimate authority over distributions.
A donation to a DAF does entitle you to an immediate tax benefit. Further, you avoid paying capital gains tax on any appreciated assets contributed to the fund. A DAF is simple to establish and may only require a minimal contribution. The sponsoring organization is responsible for administering the fund, including all filings with the IRS. With a DAF, you trade a lack of control for simple creation and relief from administrative burdens.
Share the Wealth – Charitable Remainder Trusts
Now for more complexity. A charitable remainder trust (CRT) allows you or loved ones to retain an income stream while making a gift to charity. With a CRT, you create an irrevocable trust from which you or your loved ones receive annual payments during your life or for a term of years not to exceed twenty years. At the end of the term, the remaining trust assets go to the charities specified in the CRT. A charitable remainder trust provides you a charitable deduction equal to the value of the charity’s interest, determined using IRS tables.
Charitable remainder trusts may be set up as a charitable remainder annuity trust or a charitable remainder unitrust.
With a charitable remainder annuity trust (CRAT), you select a specific sum of money to be paid at least annually to you or other designated individuals. These current beneficiaries receive consistent payments throughout the term of the trust, which provides stability, but the payments will not increase with the value of the trust assets. With a CRAT, the remainder interest passing to the charity benefits from the appreciation in the principal.
A charitable remainder unitrust (CRUT) also pays a fixed percentage of the fair market value of trust assets to the donor or loved ones at least annually. The net value of the trust assets, however, is revalued each year, and unlike a CRAT, during the term of the CRUT you may contribute additional assets to the charitable remainder unitrust. The distributions to the current beneficiaries increase or decrease as the value of the trust assets changes. Thus, the charitable remainder unitrust lacks the certainty of the charitable remainder annuity trust. With a CRUT, the appreciation in the assets is shared between the current beneficiaries and the charity. Thus, the charity will receive a smaller remainder interest with a CRUT.
A charitable remainder trust is an excellent tool for the transfer of appreciated stock and the diversification of a low-basis portfolio. Because the charitable remainder trust is exempt from taxes, capital gains tax will not be owed upon the sale by the trustee of appreciated assets held by the trust.
Share the Wealth, Part II – Charitable Lead Trust
A charitable lead trust (sometimes referred to as charitable income trust) is designed to accomplish the same planning goals as the charitable remainder trust, by providing for both the charity and you and/or your loved ones, but in the reverse order. You contribute property to an irrevocable trust from which a designated charity receives payment of income for a specified term or someone’s life. At the end of the term, the remaining trust assets are distributed to you and/or your loved ones. A charitable lead trust may be established during your lifetime or at your death. Like charitable remainder trusts, charitable lead trusts can be set up as an annuity trust or a unitrust. Depending on the trust terms, the charitable lead trust may entitle you (or your estate) to a tax deduction. The tax consequences of a charitable lead trust, however, are more complex than the consequences with a CRT.
This outline is intended only to provide a high-level look at the planned charitable giving techniques discussed. As with most things, the devil’s in the details. To discuss these details, please reach out to one of our firm’s estate planning and charitable gift planning attorneys.