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The recent natural disasters in Haiti and Japan may have you appreciating life a little more and wondering what you can do to help others in need. Philanthropy not only gives you great personal satisfaction, it also gives you an income tax deduction, lets you avoid capital gains tax and reduces the amount of tax your estate may owe upon your death.
There are many ways to give charitably: You can make gifts during your lifetime or upon your death; you can make gifts outright or use a trust; you can name/ designate a charity as a beneficiary in your will, retirement plan or life insurance policy; or, if your gift is substantial, you can establish a private foundation, community foundation or donor-advised fund.
Making Outright Gifts
An outright gift is one that benefits the charity immediately and exclusively. With an outright gift you may receive an income and gift tax deduction, if you itemize your deductions and meet certain criteria. Generally, you can deduct cash contributions in full up to 50% of your adjusted gross income, and contributions of long-term appreciated capital gain assets in full up to 30% of your adjusted gross income. Charitable contributions in excess of these limits can be carried over to the following tax year, for a maximum of five years.
Tip: Make sure the charity is a qualified charity, according to IRS guidelines. Get a written receipt or keep a bank record for any cash donations, and get a written receipt for any donations other than money (e.g., property, vehicles, etc.).
Will or Trust Bequests and Beneficiary Designations
These gifts are made by including a provision in your will or trust document, or by completing a beneficiary designation form. The charity receives the gift after your death, at which time your estate may take the income and estate tax deductions.
Charitable Trusts
Another way for you to make charitable gifts is to create a charitable trust. You can name the charity as the sole beneficiary, or you can name a non-charitable beneficiary as well, splitting the beneficial interest (this is referred to as making a partial charitable gift). The most common types of trusts used to make partial gifts to charity are charitable lead trusts and charitable remainder trusts.
Charitable Lead Trust
A charitable lead trust pays income to a charity for a specified period (generally in years), and then the trust principal passes back to you, your family members or other heirs. The trust is known as a charitable lead trust because the charity gets the first, or lead, interest.
A charitable lead trust can be an excellent estate planning vehicle if you own assets that you expect will substantially appreciate in value. If created properly, a charitable lead trust allows you to keep an asset in the family and still enjoy some tax benefits. Income from the trust goes to the charity, and at the trust’s end the balance goes to you and your family.
Charitable Remainder Trust
A charitable remainder trust is the mirror image of the charitable lead trust. Trust income is payable to you, your family members or other heirs for a specified period (generally in years), then the principal goes to your favorite charity. A charitable remainder trust can be beneficial because it provides you with an immediate stream of income – a desirable feature if there isn’t adequate income from other sources. Income from the trust goes to you and your family first, and at the trust’s end the balance goes to the charity.
Private Family Foundation
A private family foundation is a separate legal entity that can endure for many generations after your death. You create the foundation then transfer assets to the foundation, which in turn makes grants to public charities. You and your descendants have complete control over which charities receive grants. But, unless you can contribute enough capital to generate funds for grants, the costs and complexities of a private family foundation may not be worth the effort.
Tip: One rule of thumb is that you should be able to donate enough assets to generate at least $25,000 a year for grants.
Community Foundation
If you want your dollars to be spent on improving the quality of life in a particular community, consider giving to a community foundation. Similar to a private family foundation, a community foundation accepts donations from many sources and is overseen by individuals familiar with the community’s particular needs and professionals skilled at running a charitable foundation.
Donor-Advised Fund
Similar in some respects to a private family foundation, a donor-advised fund offers an easier way for you to make a significant gift to charity over a long period of time. A donor-advised fund actually refers to an account that is held within a charitable organization. The charitable organization is a separate legal entity, but your account is not – it is merely a component of the charitable organization that holds the account. Once you transfer assets to the account, the charitable organization becomes the legal owner of the assets and has ultimate control over them. You may only advise – not direct – the organization as to how your contributions should be distributed to other charities.
Donating IRA-Required Minimum Distributions
For the past several years, IRA owners age 70½ and older have been able to take a tax-free distribution of up to $100,000 from their traditional IRAs and donate it to a charity. The money must be transferred directly from the IRA to the charity. This strategy helps reduce the tax due on the IRA withdrawal, and it is especially beneficial for those who do not itemize deductions on their tax returns. The amount of the donation is not included in adjusted gross income, which can help in qualifying for some other benefits (Medicare Part B and Part D premiums are based on AGI). It is possible that this benefit will continue to be extended in the coming years.
How We Can Help
Gifting highly appreciated assets may be a better option than gifting cash. Trust accounts and donor-advised fund accounts can be set up at Schwab. Simply contact your FIM Group representative to help you identify assets and complete the necessary paperwork.Please consult a qualified tax advisor before implementing any of these gifting strategies.
