Tis the Season for Charitable Gift Planning

While charitable giving has always been an important part of tax planning, the current tax and economic environment has greatly incentivized many wealthy individuals to give more. 

Higher tax rates and a concentration of asset growth from both an appreciation and overall net-worth standpoint have created optimum conditions for giving. Charitable planning not only serves to reduce taxes, but also can alleviate concerns of too much wealth going to heirs. Not surprisingly, charitable giving has been up significantly in recent years. Given these realities, there exists a need for integrated charitable planning, both in the short-term and long-term, in order to maximize efficiencies for both income and transfer tax savings. 

The simplest form of giving is an outright gift to charity, which provides for a current year tax deduction. However, it is important to know the rules so that the expected result is achieved. Charitable deductions can be limited depending on what type of property is contributed, the type of organization donated to and the taxpayer’s adjusted gross income (AGI). A cash gift to a public charity (including a donor advised fund) generates a deduction up to 50% of the taxpayer’s AGI (30% for contributions to private foundations), while a contribution of appreciated assets generates a deduction up to 30% of AGI (20% for contributions to a private foundation). Any portion of the contribution that is not deductible due to these limitations in the current year carries over for five years. 

Along with these AGI limitations, taxpayers must also be cognizant of whether their deduction base is fair market value or basis, which is also dependent on the asset and organization. When giving to public charities or donor advised funds, assets held long-term (held more than 12 months) will qualify as fair market value property. If giving to a private foundation, only long-term stock trading on an established market would qualify. As assets get more complicated (tangible, ordinary income property, etc.), so too do the rules establishing the deduction base. 

Finally, when making outright contributions, taxpayers should be sure to follow IRS requirements to insure deductions are allowed. For example, depending on what and how much is contributed, an appraisal may need to be prepared and filed with the tax return to substantiate the deduction. While outright giving is an easy way to accomplish charitable goals on a yearly basis, for more complex situations, other charitable planning techniques can provide greater efficiencies. 

For individuals looking to diversify a highly appreciated, concentrated position, a charitable remainder trust (CRT) can be a very attractive option. This type of trust allows for an immediate charitable deduction and gain deferral, while still providing the donor and/or donor’s spouse a controlled income stream until the trust terminates and the remainder goes to a charity (including a foundation) of the donor’s choosing. Depending on the specific fact pattern, CRTs can be tailored to an individual’s specific tax and non-tax needs. 

For taxpayers looking to achieve both income and transfer tax benefits, a charitable lead trust (CLT) can be a very powerful tool. Essentially the opposite of the CRT, a CLT provides for a fixed annual income stream to a charity (also including a foundation) of the donor’s choosing, with the remainder going to heirs. From a gift tax perspective, the trust can be structured so that the present value of the remainder interest is worth zero, thereby avoiding any gift tax issues. To the extent the trust assets outperform the proscribed interest rate used to determine the present-value of the remainder interest (2% in November), that appreciation passes to heirs free of transfer tax. 

From an income tax perspective, a CLT can be either a grantor or a non-grantor trust. If structured as a grantor trust, the donor gets an immediate charitable deduction, typically equal to 100% of the value transferred to the trust, and then pays the trust’s income tax bill until termination. If structured as a non-grantor trust, the donor does not get a charitable deduction for the gift. Instead, income that would have been taxed on the donor’s individual income tax return attributable to the assets transferred is moved to the trust’s income tax return, where it is typically off-set by the trust’s charitable deduction as it makes annual payments to charity. Like a CRT, a CLT can be tailored to fit a specific situation. In addition to the CLT itself, it is also possible to engineer financial instruments to maximize CLT efficiencies as well. 

In today’s tax and economic environment, charitable giving can be highly effective. From simple outright contributions to very sophisticated planning, charitable giving can take many forms and provide several benefits. To meet both tax and non-tax objectives, proper planning is critical and should be viewed with short and long-term goals in mind.