There are many options for including charitable planning into your life and into your estate plan. Charitable planning is first about philanthropy; however, with the right technique, it is possible for you and your chosen charitable organization to get more out of your gift. Discussed below are various options that incorporate charitable planning into your life and your estate plan.
The most basic option for charitable giving is a direct gift to a charity. This can be a lifetime gift, or it can be done by including a charitable bequest in your Will or Trust, which provides that at your death the gift will be given directly to the organization from the assets contained in your Estate or Trust.
If you are considering a lifetime gift to a public charity, it is possible to maximize your gift by donating appreciated stock or property to a public charity instead of giving cash. While you would likely pay tax on the capital gains from the sale of appreciated property, a qualified charitable organization will not have to pay tax when the property is sold, because charitable organizations do not pay income tax. This can provide an additional income tax advantage to you and may allow you to make a larger donation to the charity of your choice.
When you are considering leaving a bequest to a charity following your death, instead of providing for the bequest in your Will or Trust, consider naming a charity as a beneficiary of a retirement account (i.e. 401(k), 403(b), or IRA). You can name the charity as a partial beneficiary to receive a percentage or sometime even just a lump sum from the account. The advantage of using a retirement account to fund a direct charitable bequest is that while other beneficiaries would have to pay income tax on the money coming from the retirement account, the charity will not. The result is more money can pass income tax-free to your other beneficiaries, while not diminishing the gift to the charity.
Another option, which was recently made a permanent part of the tax code also allows individuals over the age of 70 ½ to make tax advantageous lifetime gifts from IRAs. The law provides that individuals who have reached the age of 70 ½ can make a tax-free direct payout to public charities of up to $100,000. The rollover to the charity can fulfill part or all of a person's required minimum distribution for the year.
Donor Advised Fund
Another option, which combines the benefits of giving a direct gift to charity while allowing the donor many of the functions of a charitable foundation, is a donor advised fund. The benefits of a donor advised fund over a private foundation are that a donor advised fund is simpler to create and less costly than establishing a foundation. A donor advised fund is an agreement between you (the donor) and a charity that gives you the right to advise the charity on how your contributions to the fund will be distributed to other charities over time.
A donor advised fund can be a great opportunity if you need to offset higher income in a given year and you would like to make a charitable gift but are unsure of the exact organization you would like to benefit. You can transfer a lump sum to a donor advised fund and get a deduction in the year of the gift, then later decide which charities to benefit. You can also make additional contributions to your fund in future years.
You can set up a donor advised fund through charitable organizations themselves such as the New Hampshire Charitable Foundation (www.nhcf.org) or through charitable organizations associated with large investment firms such as Fidelity Charitable (www.fidelitycharitable.org).
Just like with direct gifts, most donor advised funds can also accept gifts of appreciated property, allowing you to take advantage of additional tax savings, as gifts to a donor advised funds are generally treated as gifts to a public charity.
Charitable Remainder Trust
A Charitable Remainder Trust ('CRT') is an irrevocable trust, under which the person who creates the Trust, the Grantor, is entitled to receive an income stream from the CRT each year during his or her lifetime. Once the Grantor passes away the remaining interest in the Trust is payable to a charity of the Grantor's choosing. The Grantor can reserve the right to change the charitable beneficiary by designation of a new charitable beneficiary at any time during the Grantor's lifetime. The Grantor is entitled to an immediate income tax deduction in the amount of the present value of the remainder interest passing to the charity.
There are two types of CRTs: (1) a Charitable Remainder Annuity Trust, which provides a fixed dollar payout amount based on the fair market value of the trust at the time the trust is funded and (2) a Charitable Remainder Unitrust, which provides a unitrust payout amount each year based on the annual fair market value of the trust that year. To qualify as a CRT, the trust must meet certain requirements: (1) the Grantor must receive at least a 5% payout but no more than a 50% payout each year, (2) the duration can either be for your lifetime or for a term of years, up to 20 years, and (3) the remainder interest to the charity must be greater than or equal to 10% of the initial value of the trust.
One of the significant benefits of a CRT is that it pays no income tax on its income. Therefore, the CRT is not taxed on any capital gain it realizes upon selling appreciated property. It can provide an excellent opportunity if you plan on selling property that will cause a large capital gain to be realized. While the CRT is not taxed on income, the annuity or unitrust payment to the Grantor is includable in the Grantor's income for tax purposes. The taxation of the income to the Grantor is subject to specific rules, which are beyond the scope of this article, if you have questions about this, please contact us.
Charitable Gift Annuity
While CRTs typically makes sense only for larger gifts, an option with similar characteristics that can be used for smaller gifts is a charitable gift annuity. While they are similar to CRTs, much of the administration is done by the charity instead of the Trustee of the CRT. A charitable gift annuity is a contract between you and a charity in which you transfer property to the charity and you receive income for your life. You receive an upfront income tax charitable deduction for your gift of the remainder interest to the charity. Charitable gift annuities take on much of same characteristics as commercial annuities with the issuing charity acting as the insurer. Most organizations offer annuity rates as suggested by The American Council on Gift Annuities. Rates for joint-and-survivor life annuities are lower and reflect longer combined actuarial life expectancies.
Charitable Lead Trust
A Charitable Lead Trust ("CLT") works essentially in reverse of a Charitable Remainder Trust. A CLT provides income payments to charity, then after a term of years or the Grantor's lifetime, the remaining trust assets are either paid to the Grantor or to individual beneficiaries named in the Trust (often the Grantor's children). There are several types of CLTs, some provide the Grantor with a charitable income deduction and then pay back the Grantor the remaining assets in the Trust when the term of years is up. These types of CLTs are useful for donors who desire to make a multi-year charitable pledge and accelerate the charitable deductions. Others CLTs share more in common with a Grantor Retained Annuity Trust, and are designed to be focused more on providing estate tax savings, while incorporating charitable donations into the plan.
This article is designated to provide a broad overview of several methods of incorporating charitable planning into your estate plan. If you have particular questions on how they can be used in your personal estate plan, we would be happy to discuss this with you. Feel free to call the office and schedule an appointment with Christine or me.