Most of us donate to some kind of charitable organization, and many have heard that you can reduce your overall taxation through charitable giving. Giving can be spontaneous and natural, but for some, it’s important to give the most and get the most out of your gifts. There are a number of legal options to choose from to properly structure donations and select the appropriate property.
Benefits of Charitable Giving: Reduce Income Tax
Charitable giving is most often used to reduce directly your income tax. Under U.S. law, one can give cash, real estate or personal property. Gift of property are valued at its fair market value at the time the gift is made. The U.S. Tax Code permits non-citizen nonresident aliens an unlimited charitable deduction, but their deductible contributions must be made to U.S.-based charities. U.S. citizens and residents need not limit their gifts to U.S. organizations, or even to use within the U.S.
Benefits of Charitable Giving: Reduce Estate Tax
Charitable giving can also be used to reduce estate tax. This can be done via a specific gift of cash or property, or as a percentage of a trust estate. Note that if you bequeath a gift to a child or other person, who then assigns it to a charity, the gift does not qualify for the estate tax charitable deduction. It’s therefore in your best interest to make clear, specific gifts in your will that accord with your best intentions.
Private Foundations
For potential donors who wish to make larger gifts to multiple organizations, there can be a number of methods available. The largest and most flexible of these is the private foundation. Private foundations are somewhat akin to a corporation whose primary function is grantmaking. They are governed by strict rules that require a minimum distribution of funds each year and prohibit payouts to affiliated persons and companies.
Charitable Remainder Trusts or CRT
For most donors, however, a charitable remainder trust (or CRT) is the appropriate tool to plan and structure giving. Because gifts to a CRT allow capital gains tax on the gift to be forgiven, clients can choose to give a highly-appreciated asset, like real estate, to the trust. Over time, the designated charitable recipient of the CRT can be adjusted. The CRT generates income tax and potentially estate-tax benefits. There are also ways to use the CRTs for estate-planning purposes.
Even if charitable giving is not high on your radar screen, it is a valuable tool that can accomplish multiple goals. As lawyers with in-depth tax knowledge, we want to help you with all of your tax and estate planning needs.