While working on the St. Peter 2016/17 Stewardship Campaign it became very clear to me that some very smart endowed good people simply do not know about the various types of charitable contributions that can be created or even simply how to charitably give.
Once you’ve recognized the significance of giving back, you may as well achieve some immediate tax benefits in the process. It all starts with understanding the terminology.
There are MANY types of Charitable Contributions generally identified as either Testamentary Gifts or Split Interest Gifts including:
- Charitable Gift Annuities – A contract entered into between a charity and a donor in which the charity agrees to pay an annuity to the individual donor in return for an amount transferred by the individual to the charity. Like a commercial annuity, each payment that the annuitant receives is made up of a taxable interest portion and a tax-free return of principal. Taxpayer receives a charitable income tax deduction upfront equal to the charity’s calculated actuarial remainder interest. Whether the annuity offered by the charity provides a better return than a commercial annuity will vary.
- Pooled Income Funds – A trust maintained by a charity to which donors contribute property in exchange for units of participation. The donation is typically reinvested to generate income payable to the donor; this is typically taxable as ordinary income. Donor receives a charitable income tax deduction equal to the donation.
- Charitable Remainder Trusts (CRTs) – A trust created by the authority of IRC §664 provides for (1) annual or more frequent series of payments to a non-charitable beneficiary and (2) a remainder interest to be paid to a charity at a specific future time. This is an excellent way to make large gifts for select donors because the technique can maximize the income tax benefits of charitable gifting.
- Charitable Lead Trusts (CLTs) – Basically the reverse of a CRT. The charity receives a series of payments and the grantor receives a remainder interest. It can provide income tax and estate tax benefits
- Donor Advised Funds – A donor enters into a written agreement with a sponsoring charity to establish an account to benefit the donor’s causes. The donor makes a contribution to the fund and receives an income tax deduction equal to the value of the donation. The donor then, over a period time, requests the sponsoring organization to make grants to various charities.
- Community Foundations – Grant making organization which qualifies as a publicly supported charity. A board of directors or trustees distributes funds to charities in the community.
- Private Foundations – Charitable organization generally established by an individual donor or a family who wishes to control, as much as possible, the use of their charitable contributions. It allows the donor to memorialize his name or the name of a family member in perpetuity. It is the most restrictive with respect to current income tax charitable deductions; also subject to a number of special taxes. It devotes most of its resources to the active conduct of charitable activities, rather than just making contributions to other charitable organizations. Common examples include museums, libraries, and historic preservation sites.
- Public Charities are organizations supported by the general public; including religious organizations, education organizations, medical care organizations, units of governments
- Private Charities include fraternal organizations, veterans’ groups, non-profit cemeteries
There are generally four (4) ways in which charitable donations are usually made:
- A specified amount of money, also known as a pecuniary bequest
- A specific asset, also known as a bequest
- A percentage of an estate also known as a fractional bequest, and
- A residual amount – often used to reduce the taxable portion of an estate
So here’s the rub. You aren’t taking it with you so you may as well spend it. If you prefer to leverage your legacy I urge you to consider any one of the above vehicles. Donating charitably in areas of personal passion is so much more beneficial to the world than paying income or estate taxes.
Consult an Enrolled Agent today.