Charitable giving is one way that many people elect to support a specific cause or organization that is close to their heart. From a financial standpoint, charitable giving can be an important part of your estate, tax, and financial planning. In fact, twenty-six percent of taxpayers itemize charitable deductions on their tax return.
Depending on the type of your estate, the amount of money you want to give, and how you want to give it, you may find that you’re unsure of what type of charitable giving can work best for you and your philanthropic goals. There are several different ways you can give, each with its own pros and cons, depending on what you’re looking for.
A donor-advised fund (www.schwabcharitable.org) is a type of charitable giving where you donate a nonrefundable amount, either in cash or securities, to a nonprofit of your choice. This type of giving makes up more than 3 percent of all charitable gifts in the United States. The advantage to this type of giving is that if you feel very close to the cause or organization and want to be involved with how the funds that you give are utilized, you are able to direct the fund’s administrator to which grants you think should be made.
You also immediately receive the maximum tax benefit from the IRS for your contribution and you can set up the funds to continue even after your death.
If you have a property that you’re no longer using and would have to pay a large tax if you sold the property, you may find that donating that real estate to charity is a good option. If you are still living in the property that you’d like to give away, you can set it up to become a charitable contribution by having the deed to your real estate transferred after your death. At that point, the value of the home will be taken out of your estate, lowering your estate taxes. You may also find a great tax benefit by donating real estate.
In some cases, you may be eligible for a tax deduction equal to the fair market value of the real estate.
This is a trust that you establish by transferring assets into the trust and donating a stream of income from the assets to a charitable organization each year. Money left over in the trust at the end of the period you’ve established to donate can be disbursed to other beneficiaries or held in the trust. Your gift tax deduction is immediate and based on the value of the income stream to the charity. Not only is this great for transferring wealth to your heirs, it also provides consistent cash flow to the charity of your choice.
The only disadvantage is that it requires annual administrative management.
A major advantage of giving your assets, such as retirement accounts and life insurance policies, to charity is that in addition to any charitable income tax deduction, your estate will not have to recognize that gifted income, which can give you a break on the estate tax. Many also choose to use assets that would normally have an income tax liability, leaving tax-deferred accounts in their estate for beneficiaries, giving them a nice inheritance that won’t be taxed. You may also have tangible assets you want to donate to charity.
These items, like art and jewelry, may entitle you to a tax deduction equal to the value of the assets you’ve donated. If your asset is related to the charity, such as art to a museum, you’re more likely to receive a larger tax deduction than gifting something that doesn’t directly correlate with the organization’s aim or mission.