Supporting a favorite charity or philanthropic organization during your lifetime and/or after your death can be accomplished in several ways. A previous article discussed the benefits of private foundations and donor-advised funds. Determining the best strategy for charitable giving that takes into account estate tax considerations should begin with a consultation with your estate planning attorney and should include a discussion about the benefits of a charitable trust to accomplish your gift giving goals.
Outright Charitable Donations
An outright gift made during your lifetime or at your death is the easiest way to accomplish your charitable giving desires. Gifts made during your lifetime must be carefully planned to reap maximum tax benefits from them.
You could be eligible for an income tax deduction for gifts made during your lifetime, but there are limits as to how much you may contribute during the course of the year. Speak with your income tax preparer before making a lifetime gift to make certain it does not exceed the maximum amount allowed based upon your adjusted gross income under federal tax regulations.
An outright gift to charity at your death can be made in a number of different ways. You can provide for a charitable gift in your revocable trust or in your will if you do not have a trust. You can name one or more charities as the beneficiary of all or part of a retirement account, an annuity and/or a life insurance policy. You can set up a bank account or brokerage account so that it pays on death to one or more charities, all or in part. All are effective, relatively simple ways to support charity at your death. As usual, however, there are potential income and/or estate tax issues that should be considered before proceeding.
Charitable Trusts
Charitable trusts offer a method to reap income and estate tax benefits from your charitable giving. A charitable trust is referred to by the Internal Revenue Service as a split-interest trust because income generated during your lifetime can be payable to a named beneficiary, which could include yourself as the donor. Upon your death, the remaining assets of the trust are transferred to the charitable organization you designated in the trust agreement.
The “split-interest” designation comes from a beneficiary having an interest in the income generated by the trust for a period of time and then the remainder interest being distributed upon expiration of the income interest. There are two types of charitable trusts.
Charitable Remainder Trusts
A CRT pays the designated individual beneficiary the income payments for the term set and then the remainder to one or more charities. When setting up a charitable remainder trust, an election must be made between one of the following types:
- Charitable remainder annuity trust: This is a charitable trust with a predetermined and fixed income payment made to an individual beneficiary during the term of the trust. Once the trust terminates, either by reaching the end of the term set by the trust agreement or through the death of the grantor or other individual, the trust assets are transferred to the named charity or charities at the end of the term.
- Charitable remainder unitrust: The primary distinction between a unitrust and an annuity trust has to do with the nature of the income payments made to the designated beneficiary. The income payment from a charitable remainder annuity trust is calculated based upon the fair market value of the income-producing assets when first placed in trust. Unitrust payments to the beneficiary fluctuate because they are based upon the value of the assets as determined each year during the life of the trust. Upon termination of the trust, the assets are transferred to the charitable organization(s).
Using appreciated assets to create a charitable remainder trust can provide you or another beneficiary with income while allowing you to avoid capital gains taxes on the asset(s) transferred to the trust.
Charitable Lead Trusts
A charitable lead trust, as with a charitable remainder trust, is a split-interest trust. The distinction has to do with the income generated by the trust and to whom it is paid and with the distribution of the remainder at the end of the term of the trust.
The income generated by the assets in a charitable lead trust is paid to the designated charity during the term of the trust. The trust assets are transferred to a designated non-charity beneficiary upon termination of the trust. As with charitable remainder trusts, a charitable lead trust can be set up as an annuity trust or a unitrust depending upon how you wish to structure the income payments.
Income paid to the charity provides an income tax deduction. It may also reduce the tax obligation of the non-charity beneficiary.
An Estate Planning Attorney Can Help with Charitable Giving
Creation of a charitable giving strategy to meet your philanthropic goals while maximizing tax estate tax benefits should begin with a consultation with an experienced estate planning attorney. The attorneys at Magee & Adler use their knowledge of California and federal law to review your charitable giving and discuss options for its implementation. Call them now at 562-432-1001 to schedule an appointment.
