Are you charitably inclined? Most people are, but for many, charitable giving is limited to cash donations that support their schools, religious institutions, or causes they care about. You might however, want to take a more strategic approach to your charitable giving.
Cash donations are an easy way to give and may provide a needed income tax deduction whether you have excess funds or are charitably inclined, even if your income has dropped. There are, however, planned giving vehicles that may fit your needs and help you more effectively achieve your goals. Please find below four charitable giving strategies that we recommend you discuss with your advisor.
Beneficiary Designations
Donors can designate a charitable organization as a beneficiary of their will, retirement plan, individual retirement account (IRA), life insurance policy, annuity, or any other asset that passes by contract, such as a payable on death account. The charity can be the primary beneficiary or one of several beneficiaries.
Accounts with named beneficiaries are generally not subject to probate; however, designating a charitable beneficiary under a will is subject to probate. Distributions of retirement assets that would be subject to income tax, such as from a traditional IRA, are also exempt from income tax when passing to a charitable organization.
Charitable Remainder Trust
If you want to make a future gift while retaining the right to a stream of payments from the assets during your lifetime, you could consider a charitable remainder trust. This is an irrevocable trust funded with either cash or property. You retain the right to a stream of payments that is either a fixed amount, such as with a charitable remainder annuity trust (CRAT), or a fixed percentage of trust asset value, such as with a charitable remainder unitrust (CRUT).
Payments are made for a number of years or for the life of the non-charitable beneficiary. When the trust ends, the assets pass to one or more charitable entities.
You may be entitled to a tax deduction when you transfer assets to the trust. Also, by donating appreciated property to the trust rather than selling it and donating cash, you avoid capital gain tax on the sale of the property, as the charitable remainder trust is a tax exempt entity and would own the property when it is sold. To the extent gain is distributed to the non-charitable beneficiary as part of the stream of payments, that beneficiary would pay tax on the gain. Any gain not distributed to the non-charitable beneficiary, would escape taxation.
Keep in mind that such a trust is irrevocable, so you cannot terminate it or change its terms (other than retaining a power to change charitable beneficiaries). Also, when the stream of payments ends, the assets remaining in the trust will be distributed to one or more charities, and, therefore, will not be available to your heirs.
Charitable Lead Trust
Like the CRAT or CRUT, the charitable lead trust makes periodic payments, usually for a term of years. However, unlike a charitable remainder trust, the stream of payments is made to one or more charitable organizations rather than to the donor or another individual. When the trust ends, the remaining assets return to you or pass to other noncharitable beneficiaries, such as your children.
Depending on how the trust is structured, you may be entitled to an income tax charitable deduction when assets are transferred to the trust.
Donor-Advised Fund
If you would like to make multiple gifts but are tired of the paperwork, consider creating a donor- advised fund. This is a charitable fund managed by a community foundation or a charitable entity created by a bank or other organization. Contributions to a donor-advised fund are tax deductible; however, assets transferred to the fund do not need to be immediately distributed to a charity. You may retain the ability to make recommendations for distributions to charitable beneficiaries. This is helpful if you want to take a charitable deduction but are not yet sure which charities you want to support.
Conclusion
There are more ways to benefit charity than by writing a check. Certain of these charitable giving methods allow you or your heirs to benefit from your assets while also providing funds to charity. If these options interest you, consult with your attorney or other financial advisor to determine how they may be incorporated into your overall estate plan.
