Charitable Giving
Can Benefit Tax and Estate Planning

Giving to 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.

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

Keep two caveats in mind. First, before donating large sums, talk to your Financial Advisor to make sure you have enough for your financial goals. Second, if you have investments that have declined in value, you should consider selling them yourself, because 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 a promise to pay a lifetime annuity to you and possibly your spouse as well, plus 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. Still, you may find the gift annuity appealing because, if you die fairly early, your premature death should benefit the charity, not an insurance company. Please keep in mind that gift annuities entail expenses and fees.

Many colleges, churches, arts organizations and other charities would be happy to help you set up a charitable remainder trust.

Charitable remainder trusts

Many colleges, churches, arts organizations and other charities would be happy to help you set up a charitable remainder trust. The strategy: You leave property or money to a charity, but continue to receive income from it while you are living. You can decide how much income you will receive, based on your age at the time the trust is established, how long (lifetime or a term of years) the trust is designed to last and a percentage of the property's initial net fair market value. As the grantor, you 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 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. With a charitable remainder annuity trust (CRAT), you get a current income-tax deduction and you're paid a fixed dollar amount for life or for a specified number of years. 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.

Additionally, you may wish to establish a CRAT in the year you sell a company or when you have an extraordinary gain. The other type of charitable remainder trust is the 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 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 donate 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 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 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 you or your heirs free of gift or estate taxes, although the generation-skipping tax may apply in some situations.

The charitable lead trust also comes in two varieties: an annuity trust, where the charity receives a fixed payout, and a unitrust, in which the payments are based on the value of the trust, which is recalculated each year. In addition, charitable lead trusts may be attractive during periods of low interest rates when the applicable federal rate (AFR) is low.

Donor-advised funds

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

While the gift to your Donor Advised Fund is irrevocable, you can 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 the fund, 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 publically 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 a private foundation requires ongoing administrative costs, including a separate tax form that has to be filed each year.