Charitable Giving & Tax Planning

COMMON CHARITABLE PLANNING VEHICLES

There are two main categories of charitable planning vehicles: irrevocable and split-interest. The following types of gifts within their respective vehicles will ring more familiar to most.

Split-Interest Gifts

• Charitable Remainder Trust (CRT)
• Charitable Lead Trust (CLT)
• Charitable Gift Annuity (CGA)

Irrevocable Gifts

Family Foundations are often best for donations of $1 million or more, particularly when the family serves as the primary research or charitable board with substantial philanthropic activities.

Families often express interest in establishing a private foundation because of its appeal and prestige. However, foundations are typically costly and time-consuming to establish and maintain. They involve complex rules and restrictions, potential for high excise taxes, and lower adjusted gross income deduction caps compared to other charitable vehicles.

A Donor-Advised Fund (DAF) allows donors to bunch future years’ charitable intent by contributing cash or highly appreciated assets such as stock or mutual funds. There is an immediate deduction for the value of the donated asset, and there is no capital gains tax due on highly appreciated holdings that are sold within the donor-advised fund.

The resulting cash can be invested in a portfolio; there is no grant requirement for a minimum distribution, and the donor-advised fund can be honorably named to recognize the family. Additionally, donors can claim a deduction of up to 30% of their adjusted gross income when donating highly appreciated assets, and up to 60% of their adjusted gross income when donating cash.

This vehicle can foster family unity by teaching core money and philanthropic values to the next generation, who can serve as successor trustee for continued disbursements to charities of their choice.

A Qualified Charitable Distribution (QCD) is a nontaxable distribution made directly from an IRA to a qualified charity. This strategy is particularly valuable for individuals age 70½ or older who must take required minimum distributions and have charitable intent.

The qualified charitable distribution does not affect the adjusted gross income, meaning the amount withdrawn from the IRA and donated is not counted toward adjusted gross income, even though it is part of the retirement distribution. This can be beneficial for Medicare premiums and taxable Social Security calculations.

Split-Interest Gifts

A Charitable Remainder Trust (CRT) pays an income interest to you or other beneficiaries for a term of years or lifetime, with the remainder of the assets passing to a charity. You receive an upfront deduction equal to the present value of the remainder interest and income stream. The annual income payment can be either a fixed dollar amount in a charitable remainder annuity trust or a percentage of the trust’s value calculated each year in a charitable remainder unitrust.

This vehicle is particularly useful for diversifying highly appreciated assets while generating retirement income. However, you will not avoid capital gains tax altogether, though it may be spread out over several years, which often results in a lower overall effective rate.

A Charitable Lead Trust (CLT) operates in reverse to a Charitable Remainder Trust. The charity receives an income stream for a specified term of years, and at the end of that term, the remaining assets pass to beneficiaries such as family members. An upfront deduction is provided equal to the present value of the income stream to charity.

This is particularly effective for transferring wealth to the next generation while reducing estate and gift taxes. The annual income payment to charity can be either a fixed dollar amount in a charitable lead annuity trust or a percentage of the trust’s value calculated each year in a charitable lead unitrust.

A Charitable Gift Annuity (CGA) is established with a charity, such as the Red Cross, whereby the donor makes a charitable donation in exchange for an annuity for life.

The donor gets a deduction equal to the difference between the present value of the annuity stream and the value of their contribution.