During our lives, we make decisions on whether or not to make a financial contribution to our favorite charities. You should also consider making charitable gifts in your estate plan. These types of gifts include: cash bequests, gifts of securities, gifts of tangible personal property, or gifts of real property in your will or revocable living trust; naming a charity as a beneficiary of your retirement accounts or life insurance policies; establishing a charitable remainder or charitable lead trust; establishing a charitable gift annuity; establishing a donor-advised fund; or establishing a private foundation. The main benefit of making a charitable gift must be the willingness to help a charity with its ultimate goals. There are also tax benefits as well. In order for a gift to a charity to be eligible for either an income tax deduction or an estate tax deduction, you need to make sure that the organization is an IRS tax-exempt organization. Please see IRS Publication 78, www.irs.gov/Charities-&-Non-Profits/Search-for-Charities to determine if a gift to a charity is tax-deductible.
Charitable Gifts in Wills and Trusts
The simplest way to leave assets to a charity is by a gift in your will or revocable trust. This gift can be a specific dollar amount or a percentage of your assets. Since this gift can be amended or revoked at any time, you do not receive any current income tax benefits; however, upon your passing, your estate would receive an estate tax charitable deduction.
Naming a charity as a beneficiary of your retirement accounts (IRA, 401k, or annuity) is made on your beneficiary designation form for that particular retirement asset. Since this beneficiary designation can be amended or revoked, you receive no current income tax benefit; however, upon your passing, your estate receives an estate tax charitable deduction. These are great assets to pass to a charity because the charity will not pay any income tax which a non-charitable beneficiary would pay. If a child inherits this type of asset, he or she may only net 30% of the asset, whereas a charity would net 100% of the asset.
Charitable Remainder Unitrust
A charitable remainder unitrust (“CRUT”) is a trust into which an individual makes a contribution of property in exchange for an income interest payable for the life of one or more non-charitable beneficiaries. On the death of the last surviving non-charitable beneficiary, the trust assets pass to the charitable organizations named in the trust document. A CRUT qualifies for an immediate income tax deduction of a portion of the gift based on a number of factors and an estate tax deduction upon your death. In addition, is that the donor does not recognize gain on the transfer of assets to the trust. The trust itself is exempt from income tax, so it too avoids recognizing any taxable gain. The result is that an individual can transfer appreciated property to a CRUT and the trustee can sell the property and reinvest it without any capital gain.
Charitable Lead Trust
Another charitable estate planning technique is the use of a charitable lead trust (“CLT”). A CLT is a charitable document in which an individual contributes assets to a CLT and the terms of the CLT provide that a fixed annuity or unitrust interest will be paid to a charity for a specific number of years, and then the remainder will pass to the individual’s non-charitable beneficiaries, such as children or other relatives. The benefit of this type of trust is that if the trust assets produce a return which is in excess of the Internal Revenue Code § 7520 rate which was in effect when the trust was established, then the gift to the remainder beneficiaries will be undervalued for gift tax purposes. Thus, you will be using less of your gift tax exemption when this gift is made. Another benefit is the income tax deduction during life and reduction in the gross estate at death.
Tangible Personal Property
Some individuals will make charitable gifts of tangible personal property as well. This can be an often problematic type of situation if the income tax rules are not specifically followed. The deduction for a gift of tangible personal property is limited to the basis of the tangible personal property unless the use by the donee of the property is related to the charity’s exempt purpose. For example, if contributing art to a museum in which the museum does not intend to sell the art, then a deduction will be allowed for the fair market value of the piece of tangible personal property.
Charitable Gift Annuity
A charitable gift annuity is a contract in which an individual transfers assets to a charity and in return, the charity agrees to pay a fixed amount of money to the individual for their lifetime. The individual receives an income tax deduction for this gift and the deduction is based on a number of various factors including the life expectancy of the individual, the amount of money returned to the donor, and the income tax and interest rates in effect at the time of the gift.
Donor Advised Funds
Establishing a donor-advised fund is another way to incorporate charitable gifts into your estate plan. A donor-advised fund is a charitable giving technique which is established during your life and administered by a third party and which is created for the purpose of managing charitable donations on your behalf. This type of fund is easy to establish, there is a low cost in administering it, and this is a charitable giving alternative to either direct giving or creating a private foundation. You can enjoy administrative convenience, and tax advantages, with little administrative cost by making charitable gifts through this fund.
Donor-advised funds are the fastest-growing charitable giving vehicle in the United States. This type of fund is most commonly used with community foundations such as the Tuscarawas County Community Foundation. Since the Tuscarawas County Community Foundation would own the assets, there is an income tax deduction available without the other restrictions which are imposed on private foundations. The maximum income tax deduction is received by you at the time that the gift is made, and the Foundation administers the fund with the donor having an advisory status. The Foundation would make grants to public charities upon the donor’s recommendation. Upon your death, your estate does not include the assets in the fund and you can direct additional funds to your fund and obtain an estate tax charitable deduction as well.
Another type of charitable gift which you should consider in your estate plan is the establishment of a private foundation. Private foundations are actual legal entities which are established by individuals or families for charitable purposes. The establishment of a private foundation is a way for an individual to allow family members and advisors to continue your philanthropic interests after you have passed. You receive an income tax deduction on the gift to the Foundation. This type of charitable vehicle has a number of administrative costs and various legal restrictions which must be followed.
Please contact your estate planning attorney and tax advisor if you are charitably inclined and want to discuss your charitable giving options.
NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.