Charitable giving not only reduces your taxable income but also allows you to have an impact on the world. Of course, not all giving approaches have equal effect.
Here are some advanced strategies that can pay dividendsA cash payment to investors who own stock in the company. to you, your charity and your heirs.
- Charitable Bequests. The most direct way to donate is through a charitable bequest—that is, donating a cash amount or antiques and artwork to a charity, school, private foundation or donor-advised fund via your will or a revocable trust. Whatever your donation, your taxable estate will be reduced by the value of the gift. Even better: There’s no limit to the deduction.
Charitable bequests allow you to maintain control of your assets for the duration of your life and only pass them on once your estate is settled. Of course, to avoid any protracted legal wrangling, it’s vital to communicate your intentions clearly to your estate planning attorney, your loved ones and the recipient of these gifts.
- Charitable Remainder Trust (CRT). Charitable bequests can reduce your taxable estate, but what if you need the tax deduction now? Enter the CRT. A charitable remainder trust (CRT) is an irrevocable trust that potentially reduces your taxable assets and generates a predefined income stream for the donor or other beneficiaries, with the remainder of the donated assets going to your favorite charity at a specified time in the future. When you transfer cash or other assets into a CRT, you receive an immediate income tax charitable deduction based on the present value amount in the trust that will ultimately go to the named charity.
Some things to keep in mind: First, a CRT is irrevocable: You permanently relinquish control of the assets. Next, you’ll need to work with your adviser and estate planning attorney to determine what type of income stream will come from the trust. Most grantors choose either an annuityA financial instrument that pays the holder a guaranteed stream of payments. The annuity is funded by either a lump sum (one-time) or a series of deposits. Once funded, the sum is invested by the insurance company who sold the annuity (the accumulations phase). After a certain trigger (for example, the holder’s retirement or reaching a certain age) payments begin to be issued to the holder (annuitization phase). Annuity payments may be fixed or variable in both amount and in length (some pay out for a designated span of years, others until the holder’s death). (a fixed annual amount) or a unitrust (a fixed percentage; say, for example, 5% of the trust’s value at each year-end). The best choice depends on your income needs going forward—but remember that the income you receive is taxable.
A final consideration is how you’ll fund a CRT. Real estate is a good option; rare antiques are less relevant due to the lack of liquidityThe ease with which an asset can be bought or sold. Assets for which there are many buyers and sellers at any given time are highly liquid (for example, a stock which trades on a public exchange). Assets which trade rarely are illiquid (for example, a Picasso painting or a high-end home).. Highly appreciated securities or closely held stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. can be even better, as gifting them helps reduce capital gains taxes.
- Charitable Lead Trust (CLT). If reducing income taxes is a main driver for CRTs, a CLT reduces gift and estate taxes. CLTs are also irrevocable, but instead of the grantor receiving income during the term of the trust, the charity does. Another important difference between the two is that the assets inside a CLT are taxed to the grantor.
As with a CRT, it’s crucial to have a conversation with your adviser about how to minimize the tax burden of the income stream that’s created, and you will likewise decide between an annuity or unitrust payment and receive a charitable deduction against your income when you fund the trust. A key distinction is that growth on CLT assets (above the Section 7520 interest rate) passes to the beneficiary estate- and gift-tax-free. Thus, with careful planning, you can give generously to your heirs and support a cause.
All of these options require careful planning and may incur an expense—especially when you factor in the administrative cost of maintaining trusts. Our estate, tax and financial planning professionals can help you determine the best charitable vehicle for your goals. Since this service is complimentary to Adviser Investments clients, we can assist with the prep work to help you cut down billable hours from an attorney.
Please don’t hesitate to contact your wealth management team; we’re always happy to help.
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