Charitable Planning: How to Proceed

Gabriel Katzner - May 25, 2020 - Estate Planning
New York Estate Planning Attorney

You may decide to give to a charity because you believe strongly in a cause or organization, but there are also additional personal benefits to this move that you may or may not have considered. For example, charitable giving can reduce your yearly income tax bill and remove value from your estate which can help you with your estate planning / tax concerns. We can help if you’re considering making a donation but aren’t sure how to proceed. Contact us and we’ll work closely with other members of your financial team to craft a plan using charitable planning strategies that can best help you achieve your goals.

Charitable Trust

The same way a revocable living trust can benefit you during your lifetime and those you choose upon your death, a charitable trust can also benefit a cause you care about. Here are some options to keep in mind.

Charitable Remainder Trust (CRT)

A CRT is a tax-exempt irrevocable trust designed to reduce your taxable income now and estate taxes when you die by removing cash or property from your estate. As part of this strategy, you will fund the trust with property that has grown in value over the years (like stocks or real estate). Once funded into the trust, the money is invested in a way that will produce a stream of income. Because the CRT sells the property in order to do this, there will be no capital gains tax on stock or real estate sales. You will receive either a set amount of money per year or a fixed percentage of the value of the trust for a term of years. When the term is over, the remaining amount in the trust will be distributed to the charity you have chosen. The term of the trust can be for an established number of years or for your lifetime. You will receive an immediate income tax deduction based upon the value of assets that go to the charity.

Charitable Lead Trust (CLT)

Like a CRT, you fund this trust with property that has grown in value, but in a CLT, the charity receives the income stream for a term of years. Once the term has passed, the individuals you have named in the trust agreement will receive the remainder. This method lets you benefit a charity but still provide for your loved ones. You will receive a deduction for the value of the charitable gift that is made, which will offset the gift or estate tax that may be owed when the remaining amount goes to your beneficiaries.

Gift Annuity

A gift annuity is a contract between you and you and your chosen charitable organization. According to the terms, you agree to donate a certain amount of cash or property and the charity agrees to pay you a fixed monthly or quarterly annuity for the remainder of your life, or the combined lives of you and your spouse. The charity then invests your gift and pays you the annuity until your death. At that point, the charity receives the balance from the investment of your gift. Because a gift annuity is a contract between two parties, it can only be used to benefit one charity, and you will only receive a partial income tax deduction when the gift is made because you are receiving some of the gift back in the annuity. This is also the case with any capital gains tax that might be generated from the sale of your gift by the charity. Since the CLT removes money and property from your estate, it can reduce the estate taxes due at your death.

Private Foundation

If you have a large amount to donate and you want to retain as much control as possible, you might consider starting a private foundation, or an entity established with a charitable purpose, funded by donations from you, that distributes money to charities you choose. The entity can be established as a trust with a trustee managing the donation or a corporation with a board of directors managing the donation. Since you create the entity, you can decide who will run the foundation and how, who will receive the donations, and how much will they receive. In order to qualify as a private foundation and receive the favorable tax benefits, it is crucial that all of the appropriate formalities and rules are followed when operating the private foundation. An income tax deduction may be received for the donations made to the private foundation up to 30% of your adjusted gross income. Additionally, if you donate an asset (e.g., stocks or real estate) that has increased in value, you may be able to avoid paying capital gains tax if those items are sold by the private foundation instead of by you. Lastly, after donating these valuable assets to the private foundation, they are no longer owned by you or under your control, so when you die, they will not be subject to estate tax.

Donor Advised Fund

This is a fund created by you but owned by a non-profit sponsoring organization. You can deposit the money or property you would like to use as your charitable donation into a fund account. Once you deposit the money into the account, you are eligible for an income tax deduction. The sponsoring organization then takes ownership and manages the fund. This could include selling the property and reinvesting the money. Although the sponsoring organization owns the fund, you have the ability to advise which qualifying charities should receive money from your fund and how much they receive. One of the benefits of a donor advised fund is that you can get the income tax deduction the year you donate to the fund, even if the money is not distributed to a charity that tax year. As with other gifting strategies, the amount you gift is not subject to estate tax upon your death.

Outright Gift to the Charity

If you would like to donate a lump sum of money and do not need to receive a stream of income from the gift, an outright gift may be the quickest solution. It will also provide the charity with the immediate benefit of the gift without any ongoing administration by either party. By making an outright donation, you are able to take advantage of an income tax deduction for that year. Additionally, you no longer own the cash or property, so it is not subject to estate tax upon your death.

Contact us today and we’ll discuss your charitable objectives and work with you to craft the best strategy that allows you to leave a lasting legacy.

You can use the link below to schedule a call with Gabriel Katzner, or just call us at 855.528.9637 to learn more about how best to plan today to protect those most important to you





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