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Categories: Estate Planning, Article

tax implications of charitable giving

A variety of charitable gifting techniques are available during your lifetime and as part of your estate plan. Depending on your income, or the size of your estate, you may find tax savings so significant after making a charitable gift that the net after tax effect is minimal.

Here is a summary of some of planning ideas which will help you start your charitable gifting program.

Charitable Giving & Taxes

The income tax deduction for a gift to a qualified public charity during a lifetime is limited to 50% of the donor's adjusted gross income per year.

A gift of capital gain property (e.g. real estate or securities held more than 12 months) to charity is made at its fair market value. The income tax deduction for a gift of capital gain property is limited to 30% of the donor's adjusted gross income per year. The donor of capital gain property is not subject to tax that would have occurred had the property been sold and the proceeds donated to charity. To avoid capital gains, donate the property and let the charity sell the property.

Property (especially appreciated capital gains property) may be transferred to a charitable remainder trust ("CRT"), which is either a charitable remainder annuity trust ("CRAT") or a charitable remainder unitrust ("CRUT"). An individual creating a trust ("Settler") retains an income interest in a CRAT for a fixed number of years, with the remainder passing to charity at the end of the term. A CRAT pays a fixed annuity for the Settler's life or a fixed term. A CRUT pays the Settler a fixed percentage of the value of property transferred to the trust, valued annually ("Unitrust Amount"). A CRUT may pay the Settler the lesser of the Unitrust Amount and the income of the trust each year. This "income-only" CRUT may make up prior years' deficiencies to the Settler. CRT's can be created by both spouses.

Property transferred to a CRT is removed from the Settler's estate. The Settler (i) receives a current income tax deduction equal to the present value of the remainder interest, (ii) receives an income stream, and (iii) avoids tax on capital gains on the sale of appreciated property by the CRT.

Charitable Lead Trust

In a charitable lead trust ("CLT"), the annuity or unitrust interest is paid to charity for the Settler's lifetime (or a fixed number of years), and the remainder is paid to non-charitable beneficiaries. The income interest payable to charity is similar to the rules for the CRT. The Settler receives a current charitable deduction equal to the present value of the charitable lead interest.

An increasingly popular alternative is to make donations to a pooled income fund. This allows you to "bank" your charitable deductions and to choose charities to receive income earned from your donation.

The value of gifts made to charity is excluded from your estate. A CRT may be established upon the death of the first spouse which provides income to the surviving spouse and then children, with the remainder distributed to charity.

Other planning techniques include (i) making a gift of the remainder interest in your house to charity, (ii) buying a life insurance policy and transferring the policy to the charity or naming the charity as beneficiary, (iii) using an irrevocable life insurance trust to replace the value of property gifted to charity and (iii) naming a charity or CRT as beneficiary of your pension plan or IRA.

Before undertaking a charitable gifting program, be sure to contact a qualified professional. The impact of charitable planning is individual and each person considering a charitable plan should seek independent tax advice to determine what the net tax effort will be.


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