I want to donate To Charity - But How?

The United States is, as a whole, incredibly generous. For a variety of personal reasons – Americans give billions to charity each year. There are a variety of ways to do that, and which vehicle is best depends on several factors.

Of course the simplest is an outright donation – either by writing a check or including the charity in your estate plan. At Bruce Estate Law, we can certainly help you draft the latter.

But for larger gifts and gifts involving an element of tax planning beyond the income tax deduction, clients should talk to their financial advisor about other methods, which we can then implement. Some of the most common methods include charitable gift annuities, donor advised funds (and private foundations), charitable lead trusts and charitable remainder trusts.

Charitable gift annuities (CGAs) are a relatively simple way of providing philanthropic donations to a charity. If the charity has this process in place, you transfer assets to the charity, which then provides you with an annuity back for your life or a term of years. You receive an immediate income tax deduction for the value being provided to the charity. The primary advantage of a CGA is its simplicity, but you lose control over the assets and their investments and cannot change charitable recipients.

Donor Advised Funds (DAFs) are also fairly simple to set up and maintain. DAFs can be set up independently through your financial advisor (e.g. – through Fidelity Charitable - https://www.fidelitycharitable.org/) or through an organization like the Indian River Community Foundation (https://ircommunityfoundation.org). You receive an immediate income tax deduction, but maintain more control over how the assets are invested, as well as can advise on which charity(ies) should receive a donation each year. As the Donor, you do not receive any economic benefit back (like an annuity) but may remain more engaged with the charity(ies) as you decide each year what organizations and programs should benefit from your generosity. Your financial advisor can help you determine where you should house your DAF based on your needs and preferences.

Private Foundations work similarly to DAFs but are more costly to create and maintain, and have different rules and limits on what types of assets can be donated. The differences between the two should be discussed with an qualified attorney and tax professional, and are beyond the scope of this overview.

Charitable Lead Trusts (CLTs) are a type of split-interest gift where you are donating the income from the trust to a charity first, for a set term, and after that period of time the remainder goes on to non-charitable recipients (children, grandchildren, etc.). They can be structured to provide either income tax benefits immediately or each year depending on your other income tax needs and goals. There are two main types of charitable lead trusts that change how to value the amount of money going to the charity each year, which is something your financial planner can help determine which would be better for you. Charitable lead trusts can provide significant estate and gift tax savings because the value of the remainder interest passing to your heirs can be substantially reduced for gift and estate tax purposes, if these are of concern to you. These are best used if you want to transfer wealth to heirs at a reduced cost while making charitable gifts during your lifetime.

The biggest difference between these and charitable remainder trusts deals with whether or not you need income back yourself during your lifetime as well as whether or not you want to see the fruits of your donations to the charity during your lifetime. The general rule of thumb for charitable lead trust is “charity now, heirs later” and best for donors who want to reduce their estate and gift taxes while benefiting heirs and also support charity during their life. If your priority is wealth transfer to heirs at a reduced cost while also giving to charity a charitable lead trust is a great vehicle for you. Talk to both your lawyer and financial advisor about what assets you have that would be good to use to seed a CLT.

Charitable Remainder Trusts (CRTs) are another popular type of split-interest gift that is the reverse of the charitable lead trust. With charitable remainder trust you are donating the remainder interest to the charity or charities while reserving an income stream to yourself or your spouse for a number of years or for the rest of your life. They too can be structured in two different ways that affect how your income stream is valued and determined each year (as well as whether or not you can make subsequent donations to the trust).

The major tax benefit occurs when you fund the trust because you receive an immediate charitable deduction on your income taxes for the present value of the remainder interest that’s going to the charity. If the trust is tax exempt, as it should be structured, it can sell appreciated assets without immediate capital gains tax, which makes charitable remainder trusts very useful for low basis, highly appreciated assets. You would receive taxable income on the value of the payment that you’re receiving during your lifetime. The general rule of thumb for CRTs is “income now, charity later” and best for donors who want or need income, but also want to benefit charities of their choice while maintaining control over the investments. If your priority is income generation and deferring taxes on appreciated assets a CRT is an excellent vehicle for you to investigate. Your lawyer and financial advisor, working together, can determine (1) if this is the best vehicle for your giving and then (2) what asset(s) you have that could effectively seed a CRT.