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Tax Planning with Charity in Mind

Tax Planning with Charity in Mind

| December 05, 2023

Do you have a desire to leave a large gift to a charitable organization before or after death? The tax benefits in the year of the gift can be substantial. Below are tax advantaged strategies individuals/families use to make significant gifts to one or multiple charitable organizations.

Donor Advised Fund

A giving account that allows donors to make an irrevocable charitable contribution, receive an immediate tax deduction, and recommend grants from the fund over time. The contribution can be cash, stock, or real estate.  Donors can contribute to the fund as frequently as they like and recommend grants to their favorite charitable organizations whenever the time is right. Your donation will be considered a tax-deductible charitable contribution. The federal/state tax deduction amount will depend on the type of asset donated and how long you have owned it. The assets in the account can be invested and the growth is tax free for the donor. A donor-advised fund allows the donor to make gifts during their lifetime and can be continued after death.

Charitable Remainder Annuity Trust (CRAT)

A donor contributes cash, stock, bonds, or real estate to an irrevocable trust and receives an immediate tax deduction. The trust pays a fixed income stream to one or more designated noncharitable beneficiaries in the form of an annuity. The income stream must be no less than 5% of the initial value of the trust assets. A CRAT lasts until the donor dies or after a set period of no longer than 20 years. At the end of the trust term, any funds remaining in the trust are donated to one or more previously selected public charities or private foundations. This is an excellent strategy for individuals who own highly appreciated assets because the assets can be sold in the trust without incurring a capital gain, and the proceeds are reinvested to produce income for the donors. In short, the donor receives an immediate tax deduction for the contribution, avoids capital gains tax on the sale of highly appreciated assets, gets a fixed income stream until death or 20 years, and leaves a donation to one or more charities at the end of the trust term.

Charitable Remainder Unitrusts (CRUT)

Very similar to a CRAT, but the income stream is revalued every year based on the performance of the trust assets, and additional contributions can be made. The income stream is a fixed percentage (no less than 5%) of the revaluation. Thus, the income can fluctuate up/down based on market performance. A CRUT is suitable for someone willing to take a little more risk because the income stream isn’t fixed like a CRAT. In short, the donor receives an immediate tax deduction for the contribution, avoids capital gains tax on the sale of highly appreciated assets, gets an income stream until death or 20 years, and leaves a donation to one or more charities at the end of the trust term.

 

Tax Deduction Details

 

Donor Advised Fund - 60% of AGI for contributions of cash, and 30% of adjusted gross income (AGI) for contributions of non-cash assets held more than one year.

CRAT – Tax deduction is calculated by taking the value of the property contributed less the present value of the CRAT’s annuity payments. Limited to 50% of adjusted gross income (AGI) for cash contributions, and 30% of AGI for non-cash contributions held more than one year.

CRUT – Tax Deduction is calculated by taking the value of the contributed property less the present value of the unitrust interest for a term of years or for the life of the income beneficiary. The method is for a CRUT because the income stream fluctuates with changes in the value of the trust property. Limited to 50% of adjusted gross income (AGI) for cash contributions, and 30% of AGI for non-cash contributions held more than one year.


LPL Financial and The Jenkins Group do not offer tax/ legal advice or services.