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Fullfill Your Charitable Intentions

Gain Tax Advantages

Tumultuous financial times seem to have no silver linings but in the area of charitable giving, not only do charitable organizations, such as the Medical Society of Delaware, need greater funding but for taxpayers in higher tax brackets, it has never been a better time to consider planned giving opportunities. 

Charitably inclined individuals may simply write annual checks to charities to obtain a charitable deduction but this can often result in loosing or wasting certain tax advantages for making planned gifts currently and in your estate planning.  This article will examine some available options for making planned gifts and discuss the tax ramifications of charitable gifting both during your lifetime and upon your death. 

Simple May be Better.  Those who are not in the highest tax bracket and are able to itemize their deductions may take advantage of simple charitable deductions, without caps or limits to their gift.  If you make a donation of $1,000 you will be able to deduct $350.  Another simple option is often to gift appreciated stock to a charity.  Although you stock portfolio may be down, stocks are one of the best long-term investment vehicles available.  For example, if you are in the 35% bracket writes a check for $10,000 to charity, you receive a deduction for $3500.  The cost of the gift is actually only $6,500.  However, if the instead you donate $10,000 in appreciated stock owned for at least one year and you basis (the price you paid for the stock) is $2,000 the deduction would still be $3,500 but there will be no capital gains for selling the stock first and then donating it to the charity.  The $8,000 of long term capital gains is not taxed to you providing you with a savings of $1,200 of capital gains tax.  Your cost for that gift becomes only $5,300 rather than $6,500.

Utilize your Will and Trust.  You may name a charity in your Will or Revocable Trust as a specific beneficiary, residuary beneficiary or a contingent beneficiary.  The tax benefit to these types of gifts, which only occur upon our death, is a deduction for estate and income tax purposes and but only if the document is drafted properly.  Most importantly, the estate planning attorney should designate in the Will or Trust which assets should pay the specific charitable bequest, especially if retirement assets are part of the estate or trust to avoid income tax consequences to the estate or the beneficiaries when there should be a charitable deduction. 

Charitable Trusts Provide Tax Advantages If you wish to enjoy lifetime income and donate to the Medical Society of Delaware or another qualified charity at your death, a Charitable Remainder Trust (CRT) provides you with economic advantages as well as tax advantages.  You receive a stream of income from the trust and a current income tax deduction based on the present value of the charitable remainder interest.  In addition you do not pay capital gains tax on any appreciated assets transferred to the CRT.  There are two types of CRT’s available.  One that provides a fixed income called a Charitable Remainder Annuity Trust (CRAT) and the other is a Charitable Remainder Unitrust that provides a percentage based on the asset valuation but no less than 5% and no more than 50%.  In these fluctuating times, often a CRAT is more dependable if a steady income stream is important in your financial plan because the annual distribution in a CRUT will increase or decrease as the value of the assets funding the trust increase or decrease.  A CRT can be created for the remainder of your life or a term not to exceed 20 years.  Upon your death or the end of the term of the trust, the balance in the trust passes to the charity or charities named in the trust.  Upon your death, your estate will also receive a charitable deduction equal to the trust assets at that time.

If you would rather currently benefit the charity and provide a distribution to a beneficiary, such as your children or grandchildren, at your death, a Charitable Lead Trust (CLT) may be established.  Similar to a CRT, a CLT provides the charity with a fixed amount of income or a percentage in the trust’s value each year.  At the end of the trust term, the remaining trust assets may be transferred to your beneficiary tax free.  However, unlike a CRT, you will not receive a charitable deduction at the time that you transfer the assets to the trust.  This type of trust allows an asset to grow tax free and pass outside of federal estate tax, and if the ultimate beneficiary is your grandchild, will pass also avoiding generation skipping transfer tax.  An advantage of this trust in 2009 is the low section 7520 rate which is established by the Internal Revenue Service as the rate which the assets will grow.  When the trust is established, the growth is determined by this rate.  This year, the rates have been significantly low so the income earned above those rates passes tax-free to the Trust’s beneficiaries. 

Gifting Using your Retirement Assets.   You may name the qualified charity of your choice as the beneficiary of all or part of your qualified Retirement Benefit Plan, including IRA’s and 401(k)’s.  Since the charity does not pay income tax, it will not be taxed on the distribution.  If you named your family as the beneficiary, any distributions to them are subject to income tax.  In addition, during this current year, if you are over the age of 70 ½ you may distribute your required minimum distribution directly to the charity up to a maximum of $100,000.  This distribution will not be included in your income tax for this year. 

If you name your Trust or your estate as the beneficiary of your retirement assets, care must be given in the drafting of your Will or Trust that the income from these assets and the proceeds from these assets are to specifically pass to the charity and not other beneficiaries or that trusts for other beneficiaries are not funded with retirement assets.  In addition, naming a charity as a beneficiary in a trust when you also have other beneficiaries named, can create difficulties in permitting the ability of your other beneficiaries to “stretch” the IRA for their lifetime.  An estate planning attorney should make sure the requisite language is included in the Will or Trust.

Life Insurance You may designate the charity as the beneficiary of your life insurance policy by using the money you may be considering giving annually to the charity to pay for a life insurance policy payable at your death.  This may provide an increased benefit to the charity.  Be aware though that payment of the premium is not tax deductible although the annual direct payment to the charity may be.  If you maintain control of the policy, such as retaining the right to change the beneficiary, then this asset may still be included in your estate for federal estate tax purposes so often, it is recommended the ownership of the policy be transferred to the charity irrevocably. 

Gifts of Real Estate You may wish to gift highly appreciated real property to a charity.  These gifts are deductible at full market value, up to 50% of your adjusted gross income or up to 30% if there is a long term appreciate and the excess deduction may be carried over for five additional years.  In addition, by gifting the real property, you avoid capital gains if instead you sold the property and then gifted the net proceeds to the charity. 

If you desire to benefit a charity, the charity and you will both reap the benefits of the donations being handled in a planned manner.  The charity may receive more in the long run and the donor or his or her estate may receive greater tax benefits.  If the desire is to give the greatest benefit to the charity and to your family, planning charitable giving will help you meet those goals.  The Medical Society of Delaware has personnel to assist you with your intentions and can recommend estate planning attorneys who are experienced in the areas of planned charitable giving.

For more information, please contact Barbara Snapp Danberg at bdanberg@elzufon.com.

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