CHARITABLE Gifting

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.

Donor Advised Funds

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.

Real Estate

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.

Cash

A cash gift is the simplest form of charitable giving. Your tax deduction is equal to the amount of cash you donated, minus the value of any goods or services you received in return. For example, memberships to non-profits, like a zoo or some other organization, are considered cash gifts. Titles, certificates, or stocks are not transferred in a cash donation either. The benefit of gifting cash is that it’s incredibly simple to do, and there are no confusing tax deductions or benefits to handle.

Stocks

One of the most tax-efficient ways to give is by contributing long-term appreciated securities, like stocks. There are two huge advantages to donating in this way. One, since you are not selling your stocks, there are no capital gains taxes to be concerned with, and the more appreciation the stocks have, the bigger your tax savings will be. The second advantage is that any of your stocks that were purchased over a year ago that have a current value greater than their original cost can be donated and become eligible for a tax deduction equal to the full fair market value of the stock, up to 30 percent of your adjusted gross income.

Charitable Trusts

There are two types of charitable trusts you may be interested in making part of your financial plan—a charitable lead trust (CLT) and a charitable remainder trust (CRT).

Charitable Trusts

There are two types of charitable trusts you may be interested in making part of your financial plan—a charitable lead trust (CLT) and a charitable remainder trust (CRT).
  • CLT

    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.

  • CRT
    A CRT is similar to a CLT, with one big difference. In a CRT, the beneficiaries and donor are paid first, receiving their stream of income before the charitable organization does. However, this is beneficial as it gives you and your beneficiaries income and diversifies your investments. This is perfect for those with highly appreciated investments that want to create income but still provide consistent cash flow to a charity. Like a CLT, the only disadvantage is the annual administration of the trust.

Giving Assets to Charity

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.

Pooled Income Fund

If you’re looking to generate income but want to give smaller portions to charity, a pooled income fund may be your best choice. You can “pool” together different securities and/or combine them with cash to create a larger amount of money to distribute to charity. Money is paid out to you and any other beneficiaries that have pooled together assets to the fund. At your death, the remainder of the pooled income fund is donated to charity. In some cases, you may be able to receive a charitable tax deduction equal to the amount of money a charity is expected to receive.

Private Foundation

Private foundations are charities set up as charitable trusts or corporations. If you’re looking to set up your own charitable foundation, a private foundation is a great way to get the family involved, particularly if you have a cause that’s very dear to your heart. Although there are stricter regulations and tax laws, a private foundation can give grants to individuals and you can retain control of donated assets.

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