Plan to take advantage of all of the rewards of philanthropy

Kim Last

Kim Last

A gift to charity could be a great financial favor to you, too — some charitable gifting methods offer notable tax advantages.

Here’s a brief look at some popular options:

Charitable remainder trusts (CRTs) offer a useful estate planning tool. People with such highly appreciated assets as stocks or real estate are often hesitant to sell those assets and reinvest the proceeds because of the capital gains taxes that could result from the sale. In transferring highly appreciated assets into a CRT, you get a tax deduction for the present value of your future charitable gift, income payments from the CRT for up to 20 years and tax-free compounding of the assets within the CRT. You avoid paying capital gains taxes on the amount of your gift and you can exclude an otherwise taxable asset from your estate. After you die, some or all of the assets in the CRT will go to the charity (or charities) of your choice. What about your heirs? You can structure a CRT in conjunction with an irrevocable life insurance trust so they aren’t disinherited as a result.

A charitable remainder annuity trust (CRAT) pays out a fixed income based on a percentage of the initial fair market value of the asset or assets placed in the trust. In a charitable remainder unitrust (CRUT), income from the trust can increase as trust assets grow with time.

Charitable lead trusts (CLTs) offer the inverse of a CRT. You transfer assets to the CLT and it periodically pays a percentage of the value of the trust assets to the charity. At the end of the trust term, your heirs receive the assets within the trust. You don’t get an income tax deduction by creating a CLT, but your gift or estate tax could be markedly reduced.

Charitable gift annuities. Universities commonly suggest these investment vehicles to alumni and donors. Basically, you donate money to a university or charity in exchange for a flow of income. You — and optionally, your spouse — receive lifelong annuity payments. After you pass away, the balance of the money you’ve donated goes to the charity. You can also claim a charitable deduction on your income tax return in the year you make the gift.

Pooled income funds. In this variation on the charitable gift annuity, the assets you donate are used and “pooled” with the assets of other donors. Essentially, you’re buying “units” in an investment pool, like an investor in a mutual fund. The rate of return on your investment varies from year to year. Pooled income funds often appeal to wealthier donors who don’t have a pressing need for fixed annuity payments. As just interest and dividends are paid out of a pooled income fund, it’s possible to shield the whole gain from, say, a highly appreciated stock through such a fund. You get an immediate income tax deduction for a portion of the gift, which can be spread over a few consecutive tax years. Also, the balance of the assets left to the charity at your death could be greater than if a charitable gift annuity is used. Another nice option: You can put more assets in the fund over time, whereas a charitable gift annuity is based on one, lump sum gift.

Donor advised funds offer a variation on the family foundation concept. Unlike a private foundation, though, a DAF isn’t subject to excise taxes. And lawyers and employees aren’t required to implement and administer a DAF. You establish a DAF with a lump sum gift to a public charity. The gift becomes the property of the charity, which manages the assets. (You can continue to contribute to the fund.) Each year, the charity determines the percentage of the value of the fund which will become available for grants or other programs. You advise the charity on how to spend the money. DAF contributions are tax-deductible in the year they’re made. You could avoid capital gains taxes and estate taxes on the gift, and the assets may grow tax-free.

Scholarships These can be created at a school in your own name or in memory of a loved one, and you can set the criteria. Commonly, you and your advisor can work directly with a school to create a scholarship.

Life insurance and life estate gifts. Some people have unwanted or inadequate life insurance policies that could end up increasing the size of their taxable estates. In such cases, a policyholder could donate their policy to charity. The donor reduces the size of his or her taxable estate and enjoys a current tax deduction for the amount of the cash value in the policy. The charity can receive a large gift at the donor’s death or they can tap into the cash value of the policy to meet current needs.

Life estate gifts offer an interesting option, allowing you to give real estate to a charity, university or other non-profit – even while you live there. You can take a tax deduction based on the value of property, avoid capital gains tax and live on the property for the rest of your life. (If you can’t remain at that residence, the charity could opt to lease or sell it. You can gift all of a property or just some of a property as appropriate.)

Give carefully. If you’re thinking about making a charitable gift, remember the amount of your tax deduction depends on the kind of assets you contribute and the variables of your individual tax situation. Remember also that some charitable gifts are irrevocable. Be sure to consult qualified financial, legal and tax advisors before you decide if, when and how to give.

About
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Kim Last is president of Kimberly A. Last Financial Services in Grand Junction. Working in the financial services industry since 1998, Last holds the CFP, CLU and CLTC designations. Her clients include individuals and small businesses. She focuses primarily on retirement planning, including accumulation, tax strategies, distribution, long-term care and wealth transfer planning. Securities and investment advisory services are offered through Brokers International Financial Services, LLC, Panora, IA, Member FINRA/SIPC. Brokers International Financial Services, LLC, and Kimberly A. Last Financial Services are not affiliated companies. These are the views of Peter Montoya Inc., not the named representative, and shouldn’t be construed as investment or tax advice. Neither the named representative nor broker/dealer offer tax or legal advice. Please consult your financial advisor for more information.
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Posted by on Dec 19 2012. Filed under Contributors. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

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