Strategies for Charitable Gifts.
Recent world events have caused many people to consider donating money for worthy causes. Such altruistic wishes can benefit you as well as the charity since our tax system encourages such behavior by offering deductions for gifts to charitable organizations. Not only do you get the satisfaction of furthering activities and organizations that benefit the world, but you also get to donate money that would have been paid as income and estate taxes to the state and federal governments. Charitable remainder trusts can be structured to either pay all of the income generated by the trust, or a fixed annual amount at a set percent.
Choice of Assets
In general, the best assets to use for charitable giving are those that have appreciated in value. When you sell assets that have increased in value since you acquired them, you pay income tax on the increase. Giving away appreciated assets avoids that tax, and gives you a deduction against other income.
Another good choice for charitable contributions is an IRA or other tax-deferred accounts. Normally the recipient pays income tax at their rate. Charitable organizations do not.
By giving charities appreciated assets, rather than selling them, you avoid paying capital gains taxes. By naming charities as beneficiaries on your IRA or other retirement accounts, payable upon your death, the charities avoid paying the income tax that most other beneficiaries must pay upon receipt. If you give non-cash assets to charities, it is important that you obtain a qualified appraisal of the fair market value so as to establish the amount of your charitable deduction.
Charitable Remainder Trusts
It is possible to create an irrevocable trust, the terms of which provide steady income to you during your lifetime, with the balance paid out to designated charities upon your death. If, for example, you had $500,000.00 of stock that you originally purchased for $100,000.00, your sale of that stock would create a tax liability on the capital gains in the amount of approximately $120,000.00.
By transferring the stock to a charitable remainder trust, and then having the trust sell the stock, there is no income tax liability. This means that the entire $500,000.00 is available to pay you income during your lifetime. This technique is especially valuable with appreciated assets that do not generate much income. For example, by selling the stock in the charitable trust, you can convert it from low dividend yield to high-yielding bond funds. Moreover, because the stock has been donated to a charitable trust, it is excluded from the estate for purposes of computing estate taxes.
Charitable remainder trusts can be structured to either pay all of the income generated by the trust, or a fixed annual amount at a set percent.
Wealth Replacement Trusts
Many clients have told me that they would be interested in utilizing a charitable trust, but they are concerned that such an arrangement would defeat their ability to leave their estate to their children. The good news is that there is a way to do both. This is through the use of a wealth replacement trust in conjunction with a charitable remainder trust.
Because the person who created the charitable remainder trust now has increased income distributed to them from that trust, they can take some of this increased income to fund an irrevocable life insurance trust for the benefit of their children. Assuming that they are insurable, a large amount of insurance can be purchased on the donor’s life using some of the funds from the charitable trust. The revocable wealth replacement trust then buys a life insurance policy which is not considered a part of the donor’s estate. When the donor passes away, the cash from the life insurance is then distributed to the donor’s children. The net effect is the children still receive the same amount as was in the donor’s estate, the donor has given a large contribution to charities, and is has all been funded with money that would otherwise have been used for income and estate taxes.
By Christopher C. Jones © November 2001
