CHARITABLE GIVING AS PART OF YOUR ESTATE PLAN CAN HELP YOU

With the onset of global natural disasters, and a tight economy which has strained private charities, there is an increasing demand for charitable giving. There are several ways to provide benefits to charities. Depending on the alternative you choose, helping your favorite charity may help you maximize your tax savings.

Options for charitable giving as part of your estate plan include:

Cash. The simplest way to contribute both from your perspective and that of the recipient charity is a cash gift. Cash gifts (bequests), like any other contributions you make at the time of your death, are fully deductible for estate tax purposes.

Marketable Securities. Most charitable organizations are well organized to receive stock and mutual funds that are traded on established markets. In providing a gift of securities, you could also benefit by avoiding any potential capital gain that you would realize if you sold the shares to generate the cash needed to make the contribution. If you wish to get a charitable deduction for the entire value transferred, you must donate securities you have held for more than one year.

Other Assets. As long as an item can be readily valued, it will generally qualify for a charitable deduction in the same fashion as marketable securities. You should bear in mind that the IRS recently refined the rules for contributing vehicles. So, before contributing a vehicle to an organization, make sure it meets the eligibility requirements.

Beneficiary Designation. You can make a contribution at death by naming a charitable organization as the beneficiary of your 401(k) or IRA. There is no immediate income tax benefit for designating the charity as a beneficiary; the deduction for the contribution is allowed at death. The contribution, therefore, reduces your taxable estate if the value of your estate is otherwise subject to the estate tax.

If not given to charity, a retirement fund will increase the taxable value of your estate; it will also be treated as taxable income to a non-charitable beneficiary. Because of this double taxation, many view retirement funds as the perfect asset for charitable giving.

Private Foundation. A private foundation is a charitable entity that you create to further your charitable intent. The charitable gift must be significant for this option to be cost effective.

Donor Advised Funds. The establishment of a private foundation is very expensive and also requires a significant initial gift. The “light” version of a private foundation is a donor advised fund, which is created by making a donation to a public charity that segregates your funds and gives you discretion in making contributions to other charities.

Charitable Trust. There are two basic types of charitable trusts: a charitable remainder trust (CRT) and a charitable lead trust (CLT). With a CRT, you as the grantor reserve the right to receive payments either for your life (yours and others) or for a specified period, limited to no more than 20 years. At your (or the last beneficiary’s) death, or when the term ends, any assets that remain in the trust revert to the charity. Thus, there is an element of risk by creating a trust based on your life. (Note that you may reduce that risk by opting for a CRT for a term instead of your lifetime.) A CLT, on the other hand, flips the timing of the charitable and non-charitable beneficiaries, so the charity receives the right to payment of income during your lifetime and the remainder goes to you or your specified beneficiary or beneficiaries at the end of the term.

Charitable Gift Annuity. A charitable gift annuity is a strategy which combines the outright gift with an annuity feature, and is similar to a CRT. You make a gift to the charity and, in turn, the charitable organization guaranties a certain return from the asset for a specified period.

SUMMARY: The charitable giving option that fits your needs depends on your goals and financial circumstances. Thankfully, there are many options to consider that will assist you in your estate and income tax planning, while also providing much needed assistance to worthy charitable organizations.