How Can My Charity and I Both Benefit from My Gift?
One popular estate planning technique is planned giving. You could receive an immediate income tax deduction. With a properly structured gift, you could realign your investment portfolio without paying capital gains tax on appreciated property. Another strategy may allow you to pass your estate on to your heirs while avoiding both probate and estate taxes.
Cash Donations
Your deduction for an outright gift will equal the value of your gift up to certain generous limits. You can carry forward any gift amount that exceeds these limits for up to five years.
Donating Appreciated Assets
In addition to cash contributions, consider donating appreciated assets, including securities if you have owned them for at least a year. The donated asset is assessed at full fair market value. You can take a tax deduction and avoid payment of capital gains taxes on the security.
For example, let's assume that you own a share of stock that you purchased for $40 and it is currently worth $100. If you sold that stock for income purposes or to rebalance your portfolio, you would have to pay capital gains tax on the $60 of growth you received. If you held the stock for over a year, then you could have to pay up to 15% of your total gain in capital gains taxes. While paying $9 in taxes to sell one share of stock may not seem that bad, imagine if you sold 100 shares and had to pay $900!
Instead of selling your stocks or other investment products, you could donate them to your favorite charity. The donation could be tax deductible and help you avoid paying capital gains taxes.
Donor-Advised Funds
Another way to give is through a donor-advised fund. Here's how it works: You contribute cash, stocks or certain other assets, which are in turn invested in one or more investment options. The investment company manages the investment options to potentially increase the value of the initial contribution and produce a steady income stream. You can recommend eligible charities for grants from the fund over a period of time while taking an immediate tax deduction.
Advanced Strategies
Trusts may also play a role in a giving plan. They could help charities while benefiting you now and your heirs later. One popular option is a charitable remainder trust (CRT). By using a charitable remainder trust, the Trustee can sell highly appreciated gifted investments and reinvest the proceeds to generate income without paying capital gains tax. Thus, a properly planned gift could enable you to realign your investment portfolio without incurring any current income taxes. That could allow you to diversify your holdings and even increase your cash flow.
A CRT can be funded with a variety of assets, including stocks, bonds, mutual funds and real estate. The trust provides you with income for a specified time period, after which assets are transferred to the charity of your choosing. You will receive a tax deduction based on the amount the charity is estimated to receive after expenses.
Another possibility is a charitable lead trust. It provides a stream of income to a charity for a specific period. Upon dissolution of the trust, your heirs would potentially receive the remaining assets free of estate taxes.
The only thing you can't do is take back your gift. You can't start selling assets and then pocket the money. But depending on the strategy you select, you might be able to change the charity that will eventually receive your gift.
Making a donation to a qualified organization provides some very attractive benefits. There are other ways to leverage your assets to benefit others while helping you pursue your financial objectives. Discuss your options with your financial advisor, your estate planning attorney, and tax professional.
Whatever gifting strategy you choose, planned giving can be very rewarding. It's wonderful to see your gift at work while receiving tax benefits on your donation.
The opinions voiced in this material are for informational purposes only and are not intended to provide specific advice to any individual. Consult your legal, tax, and/or financial advisor to determine what is appropriate for your situation.
