There are several strategies that can be utilized to help you implement your philanthropic mission. While you can make gifts that solely benefit charities, you can also make gifts that provide you with financial benefits. Both offer the opportunity for immediate and deferred gifting. John O. McManus, Founding Principal, McManus & Associates, identifies tax-efficient estate planning vehicles to consider for your ongoing philanthropic mission.
Set up a Family Foundation
Rather than making gifts directly to charities and surrendering any say as to the application of the gifts thereafter, a Foundation allows you to retain control over the administration and investment of the assets that you have earmarked for future grant-making, while enjoying the full benefit immediately of a charitable income tax deduction – up to 30% of your adjusted gross income for cash gifts and 20% for gifts of appreciated stock. By making gifts to charities in increments over time, you and your family can maximize your influence over their ongoing use to the selected charities. Presently, your estate would benefit from an estate tax deduction equal to the fair market value of any assets passing to the Foundation at your death. However, under President-Elect Trump’s tax proposal, contributions of appreciated assets to a private foundation established by the decedent or the decedent’s relative would be disallowed.
Create a Charitable Remainder Trust (CRT)
Charitable remainder trusts are irrevocable trusts that provide for two classes of beneficiaries: (i) the income beneficiary who receives a fixed percentage of income for the CRT term, which could be a specified number of years (up to 20) or the remainder of your lifetime, and thereafter (ii) the designated charity or family foundation, to which the remaining assets of the CRT go after the term is completed. Due to the fact that a gift of the remainder interest in the CRT is given to a tax-exempt, not-for-profit organization, you would qualify for an income tax deduction for the initial contribution to the CRT. The amount of the current income tax deduction is based on the present value of the remainder interest to the charity and is limited to 20% of your adjusted gross income. Any part of the deduction not deployed for the year of the gift to the CRT (for example, if your income is less than the deduction) may be carried forward as an income tax deduction in the succeeding four years.
Consider a Charitable Lead Trust
Charitable Lead Trusts (CLTs) are irrevocable, split-interest trusts in which income payments are made to a qualified charity, while the remaining trust corpus is given to a noncharitable beneficiary, generally the spouse or children of the donor. The assets are permanently excluded from your estate for estate tax purposes. When the trust terminates, the assets remaining are passed to the designated beneficiaries free of estate and gift tax. For those with a strong interest in making charitable donations, CLTs provide a means to make donations to charities without completely disinheriting children or a spouse. The low interest rate environment today reduces the required annual charitable donation and increases the probability of greater assets transferring to the beneficiaries. The challenge is to manage the assets so that they generate the necessary payments for the charity, while at the same time providing growth that will pass to your family.
Contribute to a Donor-Advised Fund
A donor-advised fund is a separately identified fund that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization. Each fund is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, the donor retains advisory privileges with respect to the distribution of funds and the investment of assets in the account.
Donors receive a tax deduction when they make a charitable contribution to a donor-advised fund. Deductions can be taken up to 50% of adjusted gross income (AGI) for gifts of cash and up to 30% of AGI for gifts of appreciated securities (with a 5-year carryforward for unused amounts above this AGI limit).