Charitable Giving Can
Benefit Tax and Estate
Planning Strategies

Giving to a charity can be as simple as writing a check or donating old clothes and furniture. But as you give, you might also be looking to save on taxes and meet estate-planning goals.

There are several advanced planning strategies that can help you achieve those goals. But before using any of the strategies mentioned below, you should consult a qualified tax professional or estate-planning attorney.

Appreciated property

If you own property that has increased in value, whether it’s stocks, mutual funds, or even real estate, you can give it outright to a charitable organization and potentially enjoy three tax benefits.

  1. You could avoid the capital gains tax that might be due if you sold the property.
  2. You could get an income tax deduction based on the property's fair market value or its cost, when you itemize on your taxes. The type of property, your holding period and your adjusted gross income are all factors that need to be considered.
  3. You could reduce the size of your estate and therefore the potential impact from federal and state estate and gift taxes.

Keep two caveats in mind.

  1. Before donating large sums, talk to your Wealth Advisor to make sure you have enough liquidity for your financial goals.
  2. If you have investments that have declined in value, you should talk to your tax advisor about selling them yourself and then gifting the proceeds to charity; that way, you may get the benefit of the tax loss.

Gift Annuities

With charitable gift annuities, you enter a contract with a qualified charity, then transfer cash, securities, or saleable real estate, to that charity in exchange for its promise to pay a lifetime income stream to you and possibly your spouse as well.* This can also include a partial tax deduction at the time of the gift. The size of the income stream depends on a variety of factors, including the amount of the gift, your age, and if it's a joint-and-survivor annuity, then the age of your spouse.

A gift annuity, which gives you a charitable deduction, will likely give you less income than a conventional immediate-fixed annuity bought from an insurance company, which does not give you a charitable deduction. Please keep in mind that gift annuities entail expenses and fees.

Charitable Remainder Trusts

Many colleges, churches, arts organizations, medical institutions, and other charities would be happy to help you set up a charitable remainder trust. Or you can retain an attorney to prepare one specifically tailored to your desires.

The strategy: A charitable trust is prepared by an attorney, and you transfer property or money into it, and continue to receive income from the trust for as long as the trust dictates. This can be a specific term of years or for life, whichever the trust sets forth. You can decide how much income you will receive, based on your age at the time the trust is established, how long the trust is designed to last (lifetime or a term of years), and a percentage of the charitable trust’s initial net fair market value. As the grantor of this charitable trust, you can avoid capital-gains tax on the donated assets. When the trust ends, the trustee distributes the balance of the trust's assets to the charity or charities you chose. Keep in mind that the gift is irrevocable, but you may have some control over how the assets are invested. Also, trusts entail fees and expenses, so the income may be less than what you may have received had you not set up the trust.

There are two types of charitable remainder trusts. Remember, the charity receives whatever is left in the trust when the trust term has ended.

  1. A charitable remainder annuity trust (CRAT). You receive a fixed dollar amount for life or for a specified number of years. You also receive a current income-tax deduction. Once you have made your transfer of assets to the trust, you can't add to the CRAT, but you can always create new charitable remainder annuity trusts. A CRAT is especially attractive for someone with appreciated securities as it is one of the strategies you can employ to diversify away from a concentrated position.
  2. A charitable remainder unitrust (CRUT). This type of trust gives you the same tax benefits as the annuity trust, but you can make additional contributions and your charitable deduction is calculated each time you make a contribution. Because the annual distributions can change based on the market value of the trust each year, the unitrust may provide a hedge against inflation, unlike the annuity trust.

Charitable Lead Trusts

You might think of a charitable lead trust as the reverse image of a charitable remainder trust. Once again, you can transfer cash, securities, or other assets to fund the trust and receive a charitable deduction. Unlike charitable remainder trusts, charitable lead trusts are not tax-exempt.

With a charitable lead trust, the qualified charity you chose is in the lead position and receives income payments from the trust for the rest of your life or for a specified number of years. Whatever remains in the trust when it ends will be passed to you or your heirs. Any appreciation in the value of the trust's assets, after payments to the charity are made, will pass to beneficiaries free of gift or estate taxes. If the trust lasts for multiple generations, the generation-skipping tax may apply in some situations.

The charitable lead trust also comes in two types:

  1. An annuity trust, where the charity receives a fixed payout amount annually.
  2. A unitrust, in which the payments are based on the annual value of the trust, which is recalculated each year.

Donor-Advised Funds

Several investment firms and community foundations can help you establish a Donor-Advised Funds. You get a tax deduction of up to 60% of Adjusted Gross Income for cash gifts, and 30% for appreciated items, including securities. If your donations exceed a certain percentage, you may be eligible to carry over the excess deduction for up to five tax years.

While the gift to your Donor Advised Fund (DAF) is irrevocable, you are able to make recommendations as to which charities should receive a charitable distribution and when and how the funds will be distributed from your Donor Advised Fund. Also, because the checks come from your DAF, you can remain anonymous, if you wish. Please keep in mind that donor-advised funds entail fees and expenses.

Private Foundations

People with substantial assets might consider a private foundation. You get a tax deduction of up to 30% of Adjusted Gross Income for cash, and 20% for long-term publicly traded appreciated securities. While the tax benefits aren't as great, you maintain full control over investment management, as well as controlling which charities benefit. Keep in mind that an attorney is generally required to help you with the legal set-up of the private foundation and a private foundation requires ongoing administrative costs, board meetings, grant making and has required tax reporting to be filed each year.