Strategies for Your Charitable Planning

Giving to a cause you care about can be one of the most meaningful parts of your estate plan. Depending on your situation, it may also lower your income taxes or reduce the taxes your estate may owe. Your estate is everything you own when you pass away, such as your home, savings, investments, and personal belongings. Many families do not owe estate tax, but the rules can vary by location and can change over time, so it is worth checking how they apply to you.

Below are six common ways you can consider giving to charity. If any of these resonate with you, we can work with your accountant or financial advisor so that every piece of your plan fits together.

Charitable Trusts: Remainder Trusts vs. Lead Trusts

A trust is a legal arrangement in which a person or company you choose (a trustee) manages property for the benefit of others. A charitable trust is set up so that a charity receives part of the benefit. The two main types of charitable trusts differ in who is paid first: you, your loved ones, or the charity.

Charitable Remainder Trust (CRT)

A charitable remainder trust (CRT) pays you a stream of income for a set time. Afterward, what is left goes to a charity you choose. It is irrevocable, which means that you generally cannot undo it once it is set up. Because the value that passes to charity is generally not subject to estate tax, a CRT is designed to lower your taxable income now and may reduce the taxes your estate owes later.

Here is how it works: You put property that has grown in value, like stocks or real estate, into the trust (referred to as funding the trust). Once the trust is funded, it sells the property and invests the proceeds in a way that will produce a stream of income. Because a CRT is generally tax-exempt, it generally will not pay capital gains tax on the sale of stocks or real estate. Some of that gain may still be taxed to you as you receive payments over time.

You will receive either a set amount of money per year or a fixed percentage of the trust’s value (depending on how the trust is worded) for a term of years. When the term is over, the amount remaining in the trust will be distributed to the charity you have chosen. The term of the trust can be for a set number of years or for your lifetime. Additionally, you may receive a charitable income tax deduction right away based on the value that is expected to go to the charity.

Charitable Lead Trust (CLT)

A charitable lead trust (CLT) works in the opposite order from a CRT. You fund the trust with property that has grown in value, and the charity receives the income stream for a term of years. When the term has passed, the people you have named in the trust agreement will receive what is left.

A CLT is a way to support a charity while still providing for your loved ones. Depending on how it is set up, it may also reduce the gift or estate tax that could apply when the remaining amount is distributed to your loved ones.

Charitable Gift Annuity

A gift annuity is a contract between you and the charity. You donate a certain amount of cash or property (e.g., stocks, bonds, etc.) and the charity agrees to pay you a fixed amount on a regular schedule (an annuity) for the remainder of your life or the combined lives of you and your spouse. After the payments end, the charity keeps what remains. Because the contract is with one charity, a gift annuity benefits only that charity. Since you get part of your gift back as payments, your income tax deduction is usually smaller than the full amount of the gift. Any tax on profit from the appreciated property may also be spread out rather than due all at once. Like a CRT, a gift annuity removes money or property from your estate, which may reduce the estate tax owed at your death.

Private Foundations for Larger Gifts

If you plan a larger gift and want a say in how it is used over time, creating a private foundation may be worth considering. It is a separate organization you create to give money to charities you choose. You, and possibly your family, fund it.

A foundation can be set up as a trust that is managed by a trustee, or as a corporation that is managed by a board. Because you create it, you decide who runs it, which charities receive money, and how much they receive. Private foundations come with strict rules and ongoing paperwork. To keep the tax benefits, the foundation must follow those rules carefully. You may be able to claim an income tax deduction for gifts to the foundation, though limits apply. If you give property that has grown in value, such as stocks or real estate, you may be able to avoid capital gains tax that you would have owed if you had sold them yourself. However, your deduction for appreciated property other than publicly traded stock is generally limited to what you paid for it. The foundation, not you, then owns what you gave it. Also, because these assets are no longer owned by you, they are not counted in your estate for estate tax purposes.

Donor Advised Fund (DAF)

A donor advised fund (DAF) is like a charitable giving account. You open it with a nonprofit organization that manages DAFs (a sponsoring organization). You put money or transfer property, such as real estate or stocks, into the fund. Once you deposit the money or transfer property, you are eligible to take the income tax deduction. The sponsoring organization then owns and manages the fund, which may include selling the property and reinvesting the money. You can recommend which qualifying charities receive money and how much. One of the benefits of a DAF is that you can claim the deduction in the year you make the donation to the fund, even if the money is not distributed to a qualifying charity that tax year. As with other gifting strategies, because you have gifted the money or property into the fund, you no longer own it, and it is generally not subject to estate tax upon your death.

Making an Outright Gift to Charity

If you want to give a lump sum and do not need income in return, an outright gift may be the simplest option. The charity receives your gift right away, and there is typically little to no ongoing paperwork. You may be able to claim an income tax deduction for the year of the gift, depending on whether you itemize your deductions. Because you no longer own what you gave, it is generally not counted as part of your estate at your death.

Building Charitable Giving Into Your Estate Plan

Giving is personal, and the right approach depends on what you hope to accomplish for the causes you love and the family you care about. Call us today to talk through your charitable goals. We will work alongside your financial team to find the strategy that fits your plan and helps you leave a lasting legacy.

Charitable Planning FAQs

What is the difference between a charitable remainder trust and a charitable lead trust?

The two trusts reverse the order of who is paid first. A charitable remainder trust pays you an income stream for a set term or your lifetime, and what is left then goes to the charity you choose. A charitable lead trust pays the charity an income stream for a term of years, and the remaining property then goes to the loved ones named in the trust agreement.

Can charitable giving reduce estate taxes?

It can. Charitable trusts, gift annuities, private foundations, donor advised funds, and outright gifts all move money or property out of your estate, which may reduce the estate tax owed at your death. Many families do not owe estate tax, though, so it is worth reviewing how the rules apply to you.

When do I get the income tax deduction for a donor advised fund?

You are generally eligible for the deduction in the year you put money or property into the fund, even if the sponsoring organization does not distribute the money to a qualifying charity until a later tax year.

How is a charitable gift annuity different from a charitable remainder trust?

A gift annuity is a contract with one charity that pays you a fixed amount on a regular schedule for your life or the combined lives of you and your spouse, and the charity keeps what remains. A charitable remainder trust is an irrevocable trust that pays you a set amount or a fixed percentage of the trust’s value for a term of years or your lifetime before the remainder passes to the charity you choose.

What is the simplest way to give to charity?

An outright gift is usually the simplest option. The charity receives your gift right away, there is typically little to no ongoing paperwork, and you may be able to claim an income tax deduction for that year if you itemize your deductions.

Gunderson Law Group, P.C.

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Tempe, AZ 85282
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