Charitable Planning Strategies
Numerous charitable gifting solutions are available, both during lifetime and at death, that provide significant tax benefits for the charitably inclined client. Qualifying testamentary
charitable transfers are deductible in full for estate tax purposes to the extent that the property transferred is includable in the client’s gross estate. If, instead, the transfer is
made during the client’s lifetime, it can qualify for a full gift tax charitable deduction as well as an income tax charitable deduction subject to the charitable deduction limitations of
the Internal Revenue Code. The lifetime gift provides an income tax deduction that is not available for a testamentary gift, and can therefore be more advantageous to the client. However,
the disadvantage to a lifetime charitable gift is that it must be irrevocable in order to save income taxes. Charitable gifting options include outright gifts, gifts in the form of a
charitable remainder trust, gifts to a Charitable Lead Trust, and gifts to private foundations.
If the client is concerned about the lost value of the gift in their estate, the income tax savings generated by a lifetime gift can be used to purchase life insurance so that the
diminution in the value of the estate is minimized. Two common charitable planning tools are Charitable Remainder Trusts and Private Foundations, which are briefly described below.
Charitable Remainder Trusts
Properly drafted Charitable Remainder Trusts (herein “CRT”) provide numerous benefits to a client including a charitable income tax deduction, charitable estate tax deduction and avoidance
of capital gains on the sale of the assets placed into the trust. Clients also receive an income stream from the trust and have the opportunity to increase their return on investment since
low-yielding appreciated assets can be sold in the trust without any tax on the appreciation and the proceeds can then be used to purchase higher-yielding assets or assets that produce
tax-exempt income to further reduce the income tax consequences to the client.
Generally, a CRT must provide for an annual payout to the estate owner, or another person named by the estate owner, of an amount equal to a fixed percentage of the trust assets valued
annually. This percentage must be at least 5% and no more than 50% of the value of the trust assets. It is important to note that this payment must be made annually to the client and is
based upon the principal of the trust on the valuation date, and not the investment performance of the assets. Thus, even if the investments within the trust decline, the Client is still
entitled to the income payment for that year.
Private Foundations
Clients wishing to leave substantial assets to charity can establish a private foundation to do so. A private foundation can be the best structure for those clients who wish to teach their
family the importance of giving back to the community and who wish to leave a legacy long after they are gone.
Charitable contributions to private foundations result in income tax deductions to the donor under IRC § 170, provided that the aggregate of such contributions do not exceed 50% of the
taxpayer’s contribution base (approximately their adjusted gross income) for the taxable year. Gifts of capital assets to a private foundation are subject to a 30% limit of the donor’s AGI
if the sale of the property at the time it was donated would have produced a long-term capital gain.
The main benefit of contributions to private foundations is that it allows the donor increased control of his assets than if he had made the contribution directly to a charity. This is
especially true when a donor establishes his own foundation and makes contributions. Serving on the foundation’s board of directors and voting on how to distribute contributions will not
negatively affect deductibility.
Should you wish to discuss these or any other charitable planning opportunities, please do not hesitate to contact either Todd M. Villarrubia or
Ronald “Chip” Morrison. |
