Charitable Giving

Charitable Gifts

Seniors who are able to afford it may take generous estate tax deductions by leaving money and other assets to qualified charities.

Charitable giving falls into two categories: traditional and planned giving. Traditional giving includes lifetime gifts, bequeathing funds to a charity through a will, and gifting life insurance to charity. Wealtheir individuals may set up charitable foundations during their lifetimes, while those of more modest means may set up a donor-advised account.

The most popular planned-giving vehicles are pooled income funds, chartiable gift annuities, and charitable trusts (Raymond, 2000). Other methods include charitable family limited partnerships and pooled-income trust.

Both traditional and planned giving offer middle and high-income donors the satisfaction of supporting worthwhile causes while receiving estate and income tax deductions. In addition, planned giving provides additional benefits to the donor and the beneficiaries.

Common Methods of Charitable Giving

Method

Donor’s Wealth

Can Reduce Estate Taxes

Can Reduce Income Taxes

Pays Income To Donor During Life

Beneficiaries After Donor’s Death

Pooled-income funds

Modest

Yes

Possible

Yes-varies year to year

Heirs if they are alive when the assets were transferred

Donor-advised funds

Modest to wealthy

Yes

Yes

No

N/A

Charitable gift annuities

Modest to wealthy

Yes

Yes

Yes

Charity

Charitable foundation (public/private)

Wealthy

Yes

Yes

No

N/A

Chritable remainder trust (created during life or at death

Modest to wealthy

Yes

Yes

Yes

If created at donor’s death, can be named beneficiaries for income; remainder always to charity

Charitable lead trust

Extremely wealthy

Yes

Yes

No-income is given to the charity

Named beneficiaries

Testamentary charitable lead trust

Extremely wealthy

Yes

N/A

No-income is given to the charity

Named beneficiaries

 

Pooled-Income Funds

Individuals of modest means may transfer cash or other assets to a pooled income fund maintained by a charity. The charity uses this fund to combine the donations of multiple donors. In return, a donor receives a life income from a portion of the funds annual earnings. Thus, the individual’s contributions provide income during life, as well as estate and gift tax relief. The annual income stream will vary from year to year. Although the income is theoretically taxable as ordinary income, a charitable deduction may substantially offset any tax due on the income from the fund. Also, the donor may name other income beneficiaries as long as they are alive when the assets were transferred into the fund. In this way, the donor can provide for a spouse or children even after death.

Donor-Advised Funds

With a donor-advised fund, a senior may make an initial donation, choose a name for the fund, and remain active in decisions about how the fund is invested, as well as select the charitable causes to receive grants from the fund. Some financial institution or foundation provides administrative support and coumentation, amanges disbursements, and assures compliance with applicable tax regulations. A small administrative fee is charged to manage donor-advised funds.

Donor-advised funds may be established with a wide range of assets, including cash, securities, closely held sotkc, life insurance, or real estate. Gifts may be made during life or as after-death bequests that thonor the donor’s personal interests and values. The donor can also name a successor advisor, which allows the fund’s activites to extend across many generations.

Charitable Gift Annuities

A charitable gif tannuity is an agreement by a charity to pay a lifetime annuity in exchange for assets received from a donor. The annuity income represents fixed payments over the lifetie of one or tow individuals (such as the donor and spouse). The donor receives an immediate income tax deduction and removal of the donated asset from the estate for estate tax purposes. In addition, any capital gains tax that would have been required of the donor is usually deferred. The transaction benefits the issuing charity with few if any costs. A potential disadvantage is that the payments, while fixed, are not adjusted for inflation.

Charitable Foundations

Many wealthy seniors wish to support certain charities of their choice and may be looking for reasonable methods to accomplish that. Charitable foundations provide them an opportunity to channel dollars to a particular cause while generating income tax deductions during life and reducing the overall size of their taxable estates.

There are several types of charitable foundations. As individual may set up a private foundation that must incorporate as a nonprofit corporation (a cumbersome process, especially for those with smaller initial donations). As an alternative, a person can give to a large number of community charitable foundations across the country that operate a wide range of nonprofit organizations.

Charitable Remainder Trust

A charitable remainder trust (CRT) is an irrevocable trust designed to pay income to living beneficiaries. The donor transfers assets into the CRT, reserving an annuity income interest from the CRT (generally for life), and contributes the remaining assets in the CRT to the charity at the donor’s death. The CRT offers income, gift, and estate tax benefits. Although the CRT inherits the donor’s basis, the trust generally avoids or minimizes estate, gift, and capital gains tax liability when trust assets are sold because the CRT qualifies for charitable income tax treatment. Upon the death of the annuity beneficiaries or the experiation of a fixed number of years, trust assets pass to one or more designated charities (the donor may reserve the right to change the designated charitable beneficiary).

For example: Sylvia has owned some vacant land for many years. Although the land has value on the open market, it is not producing income for her. The land has appreciated significantly since Sylvai purchased it, creating a substantial capital gains tax liability for Sylvia if she sells it. Sylvia creates a CRT and transfers the land to the CRT. The CRT provides that Sylvia will receive a set amount of income for life, and when she dies the remainder of the trust goes to her favorite charity.

The CRT sells the land to a third party buyer. (The trustee of the CRT must not be obligated to sell the land when the CRT is created.) The CRT invests the proceeds from the sale to provide Sylvia with the promised income, while minimizing the jeopardy to the principal amount. Sylvia pays income taxes only on the income she receives each year.

The donor may choose to be trustee of the CRT, but the administrative duties of a trustee can be onerous. In addition, there must be meaningful restrictions on a donor trustee for the CRT to qualify for charitable income tax treatment.

Seniors may find themselves with highly appreciated assets that are not providing enough income for them. Fearing the capital gains tax, they may be considering holding onto the assets until death so their children can inherit the assets and sell it without incurring capital gains tax. You can advise them to consider a CRT to generate income with the full value of the asset (since it is not reduced by capital gains tax) to create higher returns.

Charitable Lead Trust

A charitable lead trust (CLT) pays income to one or more charities, and when the CLT is terminated, the remaining assets are distributed to the donor’s family members. Generally, CLTs do not reduce a donor’s estate for estate tax purposes. Lifetime CLTs can be useful for individuals with discretionary wealth and a philanthropic attitude, but generally CLTs appeal only to extremely wealthy individuals.

However, the use of a testamentary CLT can allow a senior whose estate is hovering around the threshold of the applicable exclusion amount to eliminate or reduce estate taxes. A testamentary CLT can be extremely useful for an individual whose estate is worth $ 3.5 million (the maximum applicable exlucsion amount in 2009 under EGTRRA). IN 2010, EGTRRA repeals federal estate tax altogether; and in 2011, it establishes the applicable exclusion amount for estate tax at $ 1 million-unless new federal legislation is passed changing these terms.

The individual can instruct in a will or trust that the CLT be established only if there are estate taxes due and that the CLT last only as long as necessary to bring the estate tax to zero. In essence, the charity is renting the asset and receiving the income. In exchange, the estate receives a charitable deduction sufficient to wipe out the estate tax, and the heirs receive the asset at the end of the trust’s term.

The information above is reprinted from Working with Seniors: Health, Financial and Social Issues with permission from Society of Certified Senior Advisors® . Copyright © 2009. All rights reserved. www.csa.us