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The adage that charity begins at home is never more obvious than in estate planning. I have never worked with a client yet that does not want to provide for their own family first. Once family provisions are finalized however, most are equally willing to provide to a charity, especially if it helps the family avoid paying taxes. Gifting to a charity is an effective way to manage your estate so that you can legitimately avoid income taxes during your lifetime and estate taxes at your death. It is also a rewarding way to demonstrate your family values and social responsibility to your loved ones. With both income and estate taxes on the rise, now is a great time to explore the options available to you through planned giving. Here are just some of the ways to structure a charitable plan.
Annual Charitable Tax Deduction Planning
This option is an easy yet often underutilized tax saving strategy. If you are qualified to itemize your return, you can not only provide to your charity of choice but pay less in income tax as well. Your contributions can also help you avoid capital gains tax. You deduct the full value of highly appreciated assets avoiding the payment of capital gains you would have had to pay at their sale. Although there are limitations as to how much you can deduct each year, capital gains carry-over provisions allow you to take deductions every year until exhausted.
Bequests by Trust or Will Planning
One of the most common ways to leave money to charity at your death is by bequests, either in your will or your trust. These contributions are subtracted dollar for dollar from your estate tax liability and better yet, if properly executed, can reduce the income tax that must be paid by the beneficiaries of your IRAs and/or annuities.
Charitable Trust Planning
Charitable trusts come in two basic types: Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs).
Under a Charitable Remainder Trust (CRT), property or money is donated to a charity, but the donor continues to use the property and/or receive income from it while living. At the donor death, his beneficiaries continue to receive the income for a specific period of time. At the expiration of that term, the charity receives the remaining assets. The donor avoids any capital gains tax on the donated assets, and also gets an income tax deduction for the fair market value of the assets to be donated to the charity at the end of the term. In addition, the asset is removed from the estate, reducing subsequent estate taxes. While the contribution is irrevocable, if they wish to, the donor may retain control over the way the assets are invested. They can even change the identity of the charity as long as any named charity fits the IRS definition of a qualified charitable organization.
The Charitable Lead Trust (CLT) on the other hand, is a mirror image of a CRT. Instead of providing payments to the donor, with the remainder going to the charity, the CLT makes payments to the charity for a term of years. The remaining assets then go to whomever the donor designates, usually members of the donor’s family. Like the CRT, the charitable contribution made annually result in a charitable income tax deduction. The CLT provides an estate tax deduction as well. The CLT allows the donor to benefit the charity during their lifetime or immediately following their death with a series of payments before the remaining assets pass to family members at substantially reduced gift and estate tax cost.
The Social Conscience
There are many reasons that my clients prefer to avoid taxation. Rarely are they driven solely by a desire to acquire more wealth. With our national debt mounting, many question the fiscal responsibility of government. Others feel that bureaucracy by its nature breeds inefficiency and therefore feel their money will not be used to its best advantage. Still others have a social cause they are passionate about, one they have contributed to during their lifetime and want to continue to fund after their death. Whatever your reasons, charitable giving nurtures our fundamental need to give back to our society.
Making the Most of Your Charitable Giving in Virginia
We encourage and assist the tradition of giving to charitable causes. In addition to the many personal rewards inherent in making a charitable gift, most gifts also provide a current charitable income tax deduction. However, some also can save capital gains taxes, increase income, and provide you, or whomever you designate, with an income for life. Additionally, these types of gifts may provide an estate tax deduction — an important consideration in planning your estate.
If given the choice between paying taxes (involuntary philanthropy), or making a charitable gift (voluntary philanthropy), most people would choose the latter, because it gives them the benefit of knowing who the money will benefit and how it will be used. The same cannot be said for money paid to the U.S. Treasury. We help clients make charitable gifts and practice good stewardship in the most tax-efficient manner.
There are many different ways to make charitable gifts:
- A charitable remainder trust or a charitable gift annuity will give you an immediate income tax deduction, a lifetime stream of income, and a waiver of capital gains taxes owed on contributed property.
- A charitable lead trust creates an income stream to charity for a term of years with the remainder of the trust going to your children without any estate or gift tax consequences.
- A private foundation offers you the considerable freedom to control amounts given by placing restrictions on how your gifts are used by charities.
- A donor advised fund allows you to maximize your income tax savings on your regular monthly or weekly contributions to church or charities.
This has been a very general overview of a very complex subject matter. If there are causes or organizations you would like to support, while also maximizing your tax-saving strategies, please contact us to explore your options.
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