Marjorie A. Horwin
If charitable gifting is one of your New Year’s resolutions, it is important to examine the ways in which donations will be made to your favorite charities.
Whether you are new to charitable gifting or a long-time donor, contributions should be made in a manner that not only benefits the charity, but also accomplishes your income and estate tax-planning goals.
Also, now that President Obama has signed the Tax Relief Unemployment Insurance Reauthorization and Job Creation Act of 2010, advisors are better equipped to make recommendations to their clients about the most effective methods of charitable gifting.
The following 10 gifting options are prudent given the current economic and financial environment, and also allow donors to benefit from appropriate income, gift and estate-tax planning:
1. Outright cash donation – Here, the donor receives an immediate income tax deduction that can offset 30 percent to 50 percent of adjusted gross income depending upon whether the gift was paid to a private foundation or public charity. As with all charitable contributions, amounts not deducted in the current year may be carried forward for future periods, not to exceed five years. While cash donations may not always be the most tax efficient manner of gifting, it is a simple and immediate means of making a gift.
2. Gift of appreciated publicly traded stock – With this option, the donor receives an income tax deduction equal to the fair market value of the stock and avoids payment of capital-gains tax upon sale of the stock by the charity. A charitable deduction may be taken, not to exceed 20 percent or 30 percent of adjusted gross income, depending on whether the gift was paid to a private foundation or public charity.
3. Gift directly from a designated retirement account – Pursuant to the new tax bill, qualified charitable distributions of up to $100,000 per year may be made from an IRA or other designated retirement account. The distribution will qualify for the owner’s Required Minimum Distribution, and no income or charitable deduction is reported as a result of the gift. The donor must have reached age 70 1/2, and the charitable gift must be made directly from the trustee of the retirement account to the charity.
4. Fund a charitable lead trust – This trust provides for a stream of guaranteed annuity or unitrust payments to charity for a term of years, or for the lives of one or more individuals, with the remainder passing to a designated non-charitable beneficiary. The trust may be designed as a grantor or non-grantor trust. As a grantor trust, the grantor will receive a current income tax deduction equal to the present value of the payments to charity. As a non-grantor trust, a charitable deduction is taken by the trust each year as payments are made to the charity. With current interest rates at historical lows, this type of trust may result in meaningful remainder interest passing to the designated non-charitable beneficiaries without the grantor being subjected to gift tax.
5. Create a private foundation – This is an effective vehicle for donors who appreciate long-term control over amounts placed aside for charity. A charitable deduction is available as cash or property is transferred into the entity. At a minimum, the foundation is required to make charitable contributions to a public charity equal to five percent of the fair market value of the entity. There are upfront and ongoing compliances costs of creating and maintaining a private foundation that prevent certain donors from considering this option.
6. Fund a donor advised fund – Treated as a public charity, a donor advised fund is an excellent vehicle to hold funds that will be paid to charity without incurring the compliance costs of a private foundation. An immediate charitable deduction is received when funds are given to the donor advised fund. When the donor wishes to make a gift, a written request is sent to the fund naming the desired charity and the amount of the gift. Historically, public charities have been very accommodating and adhere to requests made by the donor.
7. Gift of a life insurance policy – The owner of the policy may make an irrevocable assignment of an insurance policy and receive a charitable deduction equal to the fair market value or adjusted cost basis of the policy. The adjusted cost basis is defined as premiums paid less dividends and outstanding loans that may have been made to the policy holder. There is no loss by the donor of current cash flow and the policy is not included in the donor’s gross estate for estate tax purposes.
8. Charitable remainder trust – This provides for a stream of guaranteed annuity or unitrust payments to a non-charitable beneficiary for a term of years or for the lives of one or more individuals, with the remainder passing to a charity. The donor will receive a current income tax deduction equal to the present value of the remainder interest passing to charity. This vehicle may not be as advantageous as a charitable lead trust due to the current low interest-rate environment.
9. Bargain sale to charity – This vehicle involves an individual transferring property to a charity and receiving back less than fair market value. A charitable deduction is available for the difference between the fair market value of the property and the gross proceeds.
10. Remainder interest in residence – The donor is able to retain a life estate in the residence and continued use of the property during their life. The donor also receives a current income tax deduction for the present value of the remainder interest passing to charity.
While this list includes 10 effective methods of reaching your charitable gifting objectives, it is always wise for donors to consult with the charity’s development associates as well as their own professional advisers.
Timing of income tax deductions, gift, and estate tax issues are all affected by the category of the charity and the property gifted.
Be an astute philanthropist and make your New Year’s resolutions come true.
Marjorie A. Horwin, CPA, is the partner-in-charge of the Boca Raton office of Morrison, Brown, Argiz & Farra, LLC Certified Public Accountants & Consultants, which serves affluent residents of Florida’s Palm Beach County.