Do you have a certain charity or charities you donate to or wish to start donating to? In addition to the positive impact you can have on your community, did you know that depending on how and when you gift, you can receive quite generous tax benefits?
If you have assets that you would like to donate to one or more charities, you should discuss your intentions and goals with your attorney and accountant. There are many options for charitable gifting, and these should be reviewed to ensure that your gift will have the most impact and provide you with the best tax benefits.
To start, consider the following issues when deciding which assets to donate and how to donate them:
- Who has title to the assets?
- Who will enjoy their use?
- Does the gift create a legacy?
- Who will have control over the management of the assets?
- What are the tax consequences?
Questions regarding these issues can be taken up and answered by your attorney. You can also review the following charitable gifting techniques:
1. Making a gift at the time of death
Making a charitable gift at the time of death provides your estate with a tax deduction, and it also allows you to continue using the assets during your lifetime. It is also revocable so you can change your mind about donating this particular asset or you can change the recipient until the time you pass away. This allows you to increase the size of the gift during your lifetime as well.
A gift at the time of death can be made by listing a charity as a beneficiary under your Will or Living Trust, or by naming a charity as a beneficiary on an asset, such as a retirement fund. Designating a charity as a beneficiary on an IRA is a tax efficient manner of gifting, as it will avoid taxes on distributions from the IRA after your death.
2. Making a gift during your lifetime
This is an outright gift or transfer of assets to a charity with the charity immediately becoming the owner. In most cases, you will receive the tax deduction immediately for most, if not all, of the value of the gift. This has the benefit of reducing your tax liability and avoid estate taxes on the gift. Realize, however, that you have no control over management or administration of the assets and cannot derive any income from it once it is transferred.
One of the most common and most tax efficient methods of gifting is to direct your Required Minimum Distributions (RMDs) from an IRA to charity. These distributions count towards your RMD and are not included in your adjusted gross income. Note, the distribution must be made directly to the charity for it to count as a tax-free transfer; you cannot withdraw the money and then make a contribution to charity. Accordingly, you will need to contact your IRA administrator to make sure the RMD check is sent directly to the charity.
3. Donor-advised fund
This type of fund allows you to transfer assets to a fund that will invest the assets and distribute them over time to public charities that you may also designate. For individuals looking to make a large gift who are concerned with a prudent investment of the assets, this is often a preferred method of gifting. To start a fund, you will want to name your fund, focus on your fund’s impact, determine grant advisors, select an investment pool manager, and decide when and how the fund should give. You will receive an immediate tax deduction on the fair market value of the donated property that also avoids estate taxation. You can also involve your family in your giving by naming them as successor advisers to the fund. These can be set up through an organization such as the Greater Milwaukee Foundation.
4. Private foundation gifting
If you want a lasting legacy, consider creating a private foundation that you fund either during your lifetime and/or at your death. At your passing, a trustee is directed to distribute the funds to any charities you have designated or that you allow your family to so designate. This does require a minimum annual distribution or it will be forced to terminate, so the fund must be sizable. You are able to enjoy a tax deduction for the basis of the transferred funds rather than its fair market value. The donated assets also avoid estate taxation. Creating a private foundation requires more up front and administrative expenses that utilizing a Donor Advised Fund, but for those individuals and families serious about making a large charitable impact and maintaining maximum control over the foundation, this may be a better option.
5. Charitable gift annuities
A popular technique in gift giving is the charitable gift annuity whereby you make a gift to a charity who then pays you a lifetime annuity for a certain amount. You can even extend the annuity after your death if structured properly. This allows you to enjoy a tax deduction that is the difference between the amount that was gifted and the annuity’s value to you. You do lose the ability to manage or administer the assets as they are now the property of the charity.
6. Charitable lead trust
If a charitable gift annuity is not your preference, consider a charitable lead trust. You can make an irrevocable transfer of assets into a trust that makes annual payments to the charity for however long you designate. When the term expires, the remainder goes to your designated heirs. If the assets appreciate, you will not have to pay estate taxes on them.
7. Charitable remainder trust
A charitable remainder trust is similar to a charitable lead trust, but with an important distinction. In this instrument, you create a trust that distributes payments either to you or your heirs until the death of the last remaining beneficiary, with the remainder of the assets going to the designated charity. You do reserve the right to re-designate the beneficiaries and you receive a tax deduction for the value of the remainder interest in the year of the transfer. No estate tax is paid on the property that eventually passes to the charity.
Contact Schloemer Law Firm if you are interested in donating to a charity, and learn how you, your heirs, and your charity or charities can benefit from your generosity by careful planning and structuring using particular charitable gifting techniques.