Charitable Gifting: Overview and Tax Implications - …

1 Overview The desire to assist a Charitable organization must be a primary mot ive for making a gif t; if a Charitable incli nation does not exist, Charitable giving is difficult to ju stify. On the ot her hand, if a Charitable mot ive does exist, the tax laws provide various methods and in centives to encou ra ge the donor s goodwill. The fol lowing su mmarizes th e genera l ru les applicable to Charitable giving, in clu ding a discussion of some of the more common st ra tegies used. Tax I mplications - Charitable Deduction Rules Genera lly, Charitable gifts can re duce fe deral income, gift, and/or estate tax.

2 In addition, states that impose income and/or estate tax genera lly allow Charitable deductions. An Inc ome Tax Deduction is available for lifeti me gifts to charity. The available deduction amount varies with: The don or ; The typ e of charity; The typ e of pro perty don ated; The form of the gift; and Whether the don or is an individual or a corporation. Individuals to a public charity (c hurch, hospital, unive rsity, etc.) : Cash is genera lly deducti ble up to 50% of the do nor s Adjusted Gro ss Income (AGI). Ordinary Income property or short-term capit al gain property is deductible up to 50% of AGI; however, the deduction is limited to the lesse r of the don or s cost basis or the propert y s fa ir market value on the date of the gift.

3 Long-term capit al gain property i s deductible up to 30% of the don or s AGI. (Alternatively, the donor can make a special election to deduct the lesser of cost basi s or fa ir market value up to 50% of AGI.) Gifts for the use of the charity are deductible up to 30% of AGI. Charitable Gifting: Overview and Tax Implications Page 1 of 6 Not e that partial interest gifts ( , those which ar e made into trust or which pay income on ly to the charity) may genera te lower income tax dedu ctions (discussed below). Individuals to a private fou ndation: Cash is genera lly deducti ble up to 30% of the do nor s AGI.

4 Ordinary income pro perty or short-term capit al gain property is deductible up to 30% of AGI. Long-term capit al gain property i s genera lly deductible up to 20% of AGI. Con tributions in excess of the above AGI li mits may genera lly be carri ed forward to fu ture tax re turns for up to five years. Upon death, the five-year carry forward dies wi th the decedent, but it can be claimed on the decedent s last re turn. Corporations generally may deduct up to 10% of taxable income, wi th the five-year carry forward. An Esta te Tax Deduction is available for testamentary Charitable gifts and is generally unlimited regardless of whether the re cipi ent is a public charity or private foundation.

5 However, partial in terest gifts made at death are not eligi ble for a full deduction; only th e pre se nt value of the Charitable intere st is deductible . Charitable Gift ing Strategies Charitable Le ad Tr usts Charitable Lead Trusts are designed to provide an income flow to charity for a period of time, afte r which the donated property may be re turned to the donor or distributed to other non-charity benefi cia ries. CLTs are on e of the fe w Charitable givi ng techniques that can genera te an in come, gift, and estate tax deduction. CLT s may be appropriate where a donor (i ) has a desire to re duce in come tax; (i i) owns an income-producing asset yet doe s not need the income curre ntly; and (i ii) would like to re tain the asset principal or pass it on to other benefi ciaries.

6 A gift to a CLT is con sidere d a gift "for the use of" (n ot a gift "t o") charity, which re duces the income tax deduction to the pr ivate foundation limits disc ussed above. Ty pically, these arra ngements are use d to transfe r property to ju nior genera tion fa mily members wi th litt le or no gift tax. Be cause the fa mily member wi ll not re ceive benefi ts fr om the property for a number of years, the value of the gif t can be discou nted su bstantially. Disc ou nted value si mply re cognizes that a doll ar to be re ceived in the future is worth less than a dollar today.

7 Charitable remainder Trus ts Gifts to a Charitable Re mainder trust (C RT) provi de income to the donor for li fe or for a specified number of years, up to 20 years. At the end of the trust term, the charity re ceives the re mainder of the property somewhat the op posite of the Charitable Lead Tr ust. Con tributions generate a curre nt income ta x deduction to the don or, based on the discou nted value of the fu ture gift to charity. The size of the deduction varies wi th the age of the ta xpayer, the term of the pa yout, and the size of th e annual payout in re lati on to the value of the donated property.

8 Low-basis se curities or real estate often are att ractive assets for such do nations. The assets may pay li ttle income to the donor, yet if he or sh e se ll s the ass et, su bs tantial capi tal gains would be due. However, if the assets are transf erre d to a CRT, they can be liquidated income tax-free since the CRT is a tax-exempt entity. The proceeds can be re invested to provide incre ase d income to the don or. The don or pays income tax on ly as the payments are re ceived fr om the trust . It is important, however, th at the donor transf er the assets to the CRT in adv ance of agre eing to sell the assets to a third part y.

9 Page 2 of 6A Charitable Re mainder An nuity trust (C RA T) is an arra ngement in whic h property is donate d in exchange for fi xed annuity payments to the don or or the donor s designee. An nual payments must amount to at least 5% of the fair market va lue of the donated property at the time of the gift. If a fi xed term (a s opposed to a li fe term) is use d, it cannot exceed 20 years. Additional con tri butions cannot be made afte r the initial fu nding. A Charitable Re mainder Unitrust (C RUT) is simila r to a CRA T, but differs because the payout to the donor or designee may vary each year.

10 The CRA T pays a fi xed percentage of the original value of the trust assets, and the CRUT pays a perc entage of the trust assets as re valued each year. CRUTs also allow additional con tributions in subsequ ent years. Pooled Income Funds A pooled income fu nd is a ty pe of trust cre ated and managed by a charity, into which a donor transf ers property . In re turn for the donation, the donor (or his designee) re ceives a lifetime in come paid fr om the earn ings of the fu nd. Not e, if the donor names a designee ot her than him se lf as the income benefi ciary, gift tax con se quences may re su lt.