Now that your taxes are filed or you’ve filed an extension, the thought has probably crossed your mind about how you could ease the pain of that tax bill next year. Ren has several philanthropic tools to help take some of the teeth out of the tax bite. Here, we will share with you the different gift types we can help you to establish and how they may help you cut your tax burden as well as reach your philanthropic goals.
Some individuals hold taxable assets that have appreciated to the point that they have become a strain on their financial health. For example, a couple may own a stock that is more volatile than they are comfortable with, however the sale of that stock would result in a significant hit in capital gains taxes. In this scenario, a Charitable Gift Annuity (CGA) may be a great solution. A CGA is an agreement that a donor can make with a charity to gift their assets to the charity, and in return, the charity will pay them or their beneficiaries for life. The donor is then able to defer the capital gains tax for any appreciated assets used to fund the CGA contract. Additionally, the income stream from a CGA can be set up to start immediately, or on a future date, allowing the donor the opportunity to supplement income after retirement.
For those individuals who may need an income tax deduction or a transfer tax deduction, a Charitable Lead Trust (CLT) is a possible solution. A CLT is an irrevocable agreement in which a donor transfers his or her assets to a trust creating income or lead interest for a charity. The trust’s remainder interest either comes back to the donor or passes to some other non-charitable beneficiary after the end of the term of the trust. The charitable interest can be designated for the benefit of one or more charitable beneficiaries. A CLT is often the best option for individuals who experience an event that brings significant income to an individual or if the donor anticipates high estate and gift taxes when transferring their wealth to heirs.
There are two main types of CLTs. They are Grantor Lead Trust, in which the assets of the trust revert to the donor at the end of the trust term and provide an upfront income tax deduction. The Non-grantor Lead Trust, in which the assets of the trust are transferred to one or more beneficiaries designated by the donor, will provide a transfer (estate or gift) tax deduction. With a CLT, the charity receives an income stream for the life of the trust.
The opposite of a CLT is a Charitable Remainder Trust (CRT). CRTs are tax-exempt trusts that allow the donor to liquidate an asset tax-free to create a lifetime income stream and provide a generous gift to charity at the end of the term. The income stream is paid out to a designated beneficiary, usually the donor of the trust, until the end of the trust term, or for the life of the beneficiary. The remainder interest is then passed on to a qualified charitable organization or organizations that are chosen by the donor. Qualified organizations include public charities, private family foundations and donor-advised funds. Individuals who are subject to paying capital gains taxes on appreciated assets, whose estate is subject to estate taxes, would like to benefit charity, or have a need for income, may be a candidate to for a CRT. Unlike a CLT, the charity(ies) of their choice will not begin to receive the income stream until the end of the life of the trust. A gift to a CRT can provide you with a current income tax deduction that can offset various forms of income. You may own a highly appreciated asset that generates little or no income, but the capital gains tax hit makes the sale of that asset prohibitive. This is a great way to sell the asset without the capital gains tax recognition and generate a larger income stream. This solution can also help when planning for retirement. In addition, a CRT can be an effective alternative to the payment of gift and estate taxes. Amounts transferred to a CRT are not generally subject to gift or estate taxes. The combination of capital gains tax, gift tax and estate tax avoidance can be very compelling for those who wish to control their social capital.
Perhaps the most popular and fastest growing philanthropic vehicle over the past fifteen years has been the Donor-Advised Fund (DAF). A DAF is very similar to a health savings account. Funds deposited into an account that can grow in value but instead of using the dollars to pay for health expenses, they are granted out to charities. Donors may contribute assets of various types directly to a sponsoring charity that maintains their DAF account. Those donors then receive an immediate charitable deduction for their donations and can then recommend grants to any qualified public charities they want to support. Gifts of real estate and tangible assets can be made to the sponsoring organization who sells those assets, allowing the donor to avoid the capital gains tax on appreciated assets. The ability to make grant recommendations will continue for the life of the donor and then future generations can be appointed to make the recommendations for the rest of their lives, making DAFs a great way to establish a legacy of giving. Heirs and loved ones can be part of the process of distributing grants to charity and the philanthropic spirit can live on for generations to come. Donors can choose to make grants immediately from their account or delay their giving for a future date. Also, donors have the ability to set-up recurring grants, a favorite feature of those who use their donor-advised fund to give on a regular basis. This philanthropic solution is perfect for anyone who is subject to paying capital gains taxes on appreciated assets, whose estate is subject to taxes, who wants to benefit charity, or who want to involve their family in philanthropy.
Donors who are philanthropically minded, have a need for income, and have a more modest budget can still benefit with donations to a Pooled Income Fund (PIF), an irrevocable trust maintained by a “public charity”. Gifts from multiple donors are combined for investment purposes and the income from the PIF is paid out to each donor according to their proportionate share of the entire pool. All donors benefit from income tax deductions for their direct contributions to the PIF and can avoid the capital gains tax on appreciated assets. Gifts are typically cash or securities, although some PIFs may accept other types of property. Each named income beneficiary (usually the donor and spouse) receives a proportionate share of the net income earned by the PIF each year. Upon each donor’s death, a portion of the PIF representing the value assigned to that beneficiary is distributed to the charitable organization that sponsors the fund. Contributing appreciated assets to a PIF can reduce taxes by providing an income tax deduction at the time of contribution
For individuals who wish to receive a current income tax deduction, and who want to be actively involved in the management of those charitable funds, a Private Foundation is a perfect option. A Private Foundation is established as a tax-exempt entity that can receive contributions as a charitable organization qualified under Section 501(c)(3) of the Internal Revenue Code. Donors who establish Private Foundations exercise greater control over the operation and grant-making activities of the foundation than is permitted with a donor-advised fund. Once qualified as a 501(c)(3), Private Foundations can make grants to qualified public charities and provide income tax deductions to donors for direct contributions to the foundation and be the charitable beneficiary of both CLTs and CRTs.
Contact us to find answers to any of your other charitable planning questions.