Many people make gifts of cash, appreciated securities, and/or personal property to their favorite charities. They want to help others but are also happy to receive a charitable deduction from their income taxes for the fair market value of the donated items. For those who want to explore other impactful ways to give back and/or wish to have more direct control over how their donation is ultimately used, there are several strategies that can help provide more money to the charity and save additional taxes for donors. If you are interested in thinking big about your charitable giving, our tax and estate planning attorneys can help you determine which option may be appropriate for you.
Donor Advised Fund (DAF)
DAFs are offered by public charities that are affiliated with financial institutions. You begin by making an irrevocable contribution to the sponsoring charity for which you receive an immediate income tax deduction. Once your DAF is initially funded, any time you add money to it, you will receive an income tax deduction in that year.
An important benefit of DAFs is that you have significant flexibility and control over how the money donated is managed and used. Generally, you can direct how much money will go to as many IRS-qualified charities as you like at any time. Further, you decide how the money not donated is invested subject to the investment options offered by the fund. For instance, you might decide to make immediate grants with some of the money to your favorite charities and invest the balance of the funds to grow over time so you can grant even higher amounts to charities in the future.
DAFs also have very little overhead or cost. There is usually only an administrative fee charged by the underlying charity that covers tax reporting, investment management, and other expenses.
A private foundation works much the same way as a DAF. However, you have more control and flexibility than a DAF. Depending on the amount of planned giving and the expected duration of the fund, a private foundation may be superior to a DAF. Foundations provide an income tax deduction up to certain limits and can be named as a beneficiary of your estate, thereby reducing or eliminating estate tax liability. They can also fundraise, provide direct charitable services and receive donations from third parties to support their charitable giving.
However, foundations require more overhead and management than DAFs. They must be set up properly and are subject to ongoing administration and governance requirements, such as maintaining records and preparing annual tax returns.
Charitable Remainder Trust (CRT)
A CRT allows donors to provide for themselves and their families while also leaving money to charity after they are gone. A CRT is an irrevocable trust that generates an income stream for you and/or your beneficiaries during your lifetimes. After you are gone (or at the end of a specified term), the remainder of the trust goes to the named charity.
There are two types of charitable remainder trusts. A charitable remainder annuity trust (CRAT) pays beneficiaries a fixed annuity every year. However, you cannot make additional contributions to the trust after it is created. A charitable remainder unit trust (CRUT) distributes a fixed percentage of the trust assets annually. CRUTs do allow you to add money to the trust after it is set up.
Charitable Lead Trust (CLT)
Like a CRT, the charitable lead trust provides money to both charitable and non-charitable beneficiaries. However, a CLT gives the income stream to the charity while the remaining assets are left to family or other non-charitable beneficiaries. People choose CLTs to get an upfront tax deduction and reduce estate and gift taxes when heirs inherit.
The tax benefits you receive depend on the type of CLT. In a Non-Grantor CLT, you get a tax deduction for the full value of the property transferred into the trust. Subsequently, taxes owed on trust income are reduced by any charitable donations made by the trust in that year. Any remaining income taxes are paid by the trust.
In a Grantor CLT, you pay the taxes on the trust income every year but you get an immediate deduction for the present value of the future payments to the charitable beneficiary, within certain limits. The present value is calculated based on an IRS formula.
What Is the Best Way to Give a Large Gift to a Charity?
Charitable giving options are complex. The ideal strategy for you depends on your needs and goals. Our attorneys can help you develop a plan that benefits you and your favorite causes. Contact us today to discuss your estate and tax planning needs.