February 21, 2019
People choose to give for many different reasons—some altruistic, some fueled by more practical purposes such as the potential tax advantages. Regardless of your motivations, if you’re considering incorporating charitable giving into your financial plan, it’s important to understand the various ways you can give to maximize impact while reaping the applicable benefits.
The following methods of gifting assets are commonly used by those with philanthropic and tax planning goals.
Outright Gifts of Cash, Securities and Real Estate
The easiest way to donate your assets is to make an outright gift to the charity of your choice. Nearly all charities accept cash or marketable securities like stocks and bonds, while fewer have the capability to receive real estate.
The rules for donating items like art and other collectibles are a little more complicated, and not all charities are equipped to accept these types of donations. The associated income tax deduction depends on whether you’re classified as a dealer, investor or collector, the type of charity receiving the asset, and the charitable organization’s intended use for the item.
Charitable Gift Annuity
A charitable gift annuity is a contract between a charity and a donor whereby the charity pays an annuity to the donor for life in exchange for a gift of cash or other assets. This arrangement is part charitable gift, part purchase of an annuity contract with a term equal to the life of the donor. The administrative burden is placed on the charity. Generally, the donor receives an income tax deduction for the difference between the value of the property transferred and the annuity value.
Donor-advised funds (DAFs) are accounts set up within a charitable organization, such as a community foundation. With a DAF, you contribute personal assets to an account where the contribution can be invested and grow tax-free until a grant is made to a qualified charity. The administrative burden is placed on the managing charity. The donor receives an income tax deduction upon contribution, based on the same contribution limitations as to public charities.
Retained Life Estate
To implement a retained life estate, the donor makes a gift of a residence, farm or other property to a charitable organization and retains the right to occupy the property for a designated term or life, with the property passing to the charity at the end of the term, or at the death of the last person who retained an interest in the property.
A foundation is a private wealth fund established for charitable purposes. The donor may have complete control over grantmaking and may pass control to relatives or others while still alive or upon death. Foundations require significant administrative oversight compared to other giving strategies and may have large upfront costs to establish, making them less practical for smaller donors.
Charitable Remainder Trust
A charitable remainder trust is an irrevocable trust that pays an income stream to the grantor or other non-charitable beneficiary for a designated period, and then pays the remaining value of the trust to the charity at the end of the term. The administrative burden is on the trustee, who is responsible for preparing and filing tax returns, calculating the annual payout and tracking the various categories of income. Typically, the grantor receives an income tax deduction equal to the present value of the remainder interest in the trust up to a certain limit.
Charitable Lead Trust
A charitable lead trust is an irrevocable trust whereby one or more charities receive a fixed or variable amount during the term of the trust, with the remainder passing outright or in trust to the donor’s heirs at termination. The donor’s income tax deduction depends on whether it is a grantor or non-grantor trust. The administrative burden is placed on the trustee.
A charitable LLC is a relatively new way to strategically gift assets to charitable organizations. The LLC is not tax-exempt; rather, the income tax liability as well as deductions and losses are passed through to the donor or other LLC members. Like a foundation, the donor may have complete control over grantmaking and can pass control to others. However, the LLC is governed by applicable state corporate law and has no separate IRS reporting requirements for charitable activities. Generally, the LLC has no restrictions on donations, investments or income.
Each charitable giving method has its advantages and limitations, and you may find some to be more attractive than others depending on the level of control you wish to retain and how involved you want to be in the administrative aspects. Since the set-up requirements and tax implications of these strategies can be complex, you may want to consult with your financial advisor or estate planning attorney to determine which giving strategy is most appropriate given your financial circumstances and objectives.
Cathy Schnaubelt is a senior wealth strategist for CIBC Private Wealth Management's Houston office, with more than 35 years of industry experience. In this role, Cathy is responsible for the development of integrated wealth management solutions and provides comprehensive estate and financial planning services to high net worth clients.
This article originally appeared on Forbes.com on Jan. 9, 2019.
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