Charitable Giving

A charitable gift imparts a double satisfaction to the donor: supporting a charity's good works and the potential benefits of a tax deduction. Charitable contributions are deductible, within certain limits, in calculating income, estate, and gift taxes. Contributions can be in the form of cash or property.

Deductibility is a strong incentive for many charitable gifts and it is a major reason why Americans are generous givers to charitable causes. If you are considering a significant gift to a qualified charitable organization it can be very advantageous to make your gift through a charitable trust.

Similar to other trusts, a charitable trust is a legal arrangement whereby a trustee holds property and uses it for the benefit of the person or organization you name - the beneficiary. The trustee receives the cash, securities, or other property from you, along with exact instructions for making the gift to the charity on your behalf. Gifts are possible during lifetime or through your will.

Using a trustee as intermediary allows you to split the ownership interest in the trust's assets between the charity and another beneficiary. And that means valuable added tax benefits. By splitting the ownership of your gift you define the period during which the charity benefits from the gift and such other time as the other beneficiary benefits.

  • The charity can receive your gift after your other beneficiary. For example, you could have your trustee give 10,000 shares of stock to a charity but give all the income from those shares to your children while they live. The charity receives control of the stock only after the death of your last child.
  • Or, the charity can receive the benefit first. Your charitable gift could consist of all the income from your shares for 20 years, but at the end of that period your children would own the stock outright.

Both ways to split ownership - known respectively as the charitable remainder trust and the charitable lead trust - allow the donor to take an immediate income-tax deduction.

Charitable Remainder Trust
A charitable remainder trust is the legal arrangement that can be used to give to a charity now, but make your gift effective only after you or another income beneficiary have received income from the gift for a period of time.

This kind of trust has a great advantage over simply making an outright gift - during lifetime or through your will. That advantage is the present tax deduction you can take for what is effectively a future gift. A charitable remainder trust allows you to:

  • give now
  • take a deduction now
  • deliver the gift later

This delayed delivery lets you or another beneficiary continue to receive the income from the gift during the time before your trustee conveys the trust's assets to the charity.

For the tax year when your trustee makes your gift you can deduct the present value of the charity's interest in the charitable remainder - the assets the charity will ultimately receive. You can still take your deduction if you are the beneficiary who receives the trust's income during the term of your trust.

To qualify for a deduction, a charitable remainder trust must be in the form of a unitrust or annuity trust. (A pooled income fund is also a possible form, but in that case the charitable organization creates the fund, rather than an individual.)

A unitrust pays the income beneficiary a fixed annual percentage of the value of the trust assets. The percentage payment remains the same for the entire term of the trust, but the amount paid varies as the market value of the trust assets changes.

For example, if your gift placed in the trust has a net fair market value of $200,000, given a 5% annuity, the first year's payment would be at least $10,000. With an increase in value the next year to $220,000, the minimum payment would rise to $11,000. With a decrease to $180,000, the minimum would fall to $9,000.

An annuity trust pays a fixed annual amount to the income beneficiary throughout the term of the trust.

Charitable Lead Trust
A charitable lead trust is the gift arrangement that provides for the charity's benefit first, because it receives the trust income during the term you set for the trust. At the end of the term, your non-charitable beneficiary receives ownership of the trust property. With this trust you can:

  • Give now
  • Deliver the gift now
  • Take a deduction now
  • Have your property returned to your beneficiary at a later date

A charitable lead trust will generally produce a lower deduction amount than a charitable remainder trust, therefore it is much less frequently used. It may be the more desirable choice, however, if you have little need for immediate income and are willing to trade some current income for tax advantages.

Deduction Amounts
The amounts a charitable remainder trust pays to your beneficiary affect your deduction amount inversely. Higher payments reduce the remainder that you can deduct. Lower payments increase the remainder and, thus, the deduction. IRS formulas and tables specify the value you must use for the charitable organization's remainder interest.

With a charitable lead trust, there is a direct relationship between payments and deductions. Higher payments and a longer term result in a higher deduction. The IRS formulas and tables also determine the amount of this deduction.

The amount you can deduct for your charitable gift, with or without a trust, is also subject to the Internal Revenue Code's overall limitations on income tax deductions for charitable contributions. These limitations generally allow taxpayers to deduct no more than a set percentage of adjusted gross income. The limitations that apply depend on the type of property contributed and the identity of each donor and charity. Not unreasonably, property valuations must be realistic and based on “fair market value”, not the taxpayer's estimate.

Charitable deductions can also be used to reduce gift or estate taxes. Determining the best form of donation and best use of the resulting deduction requires an individual judgment that takes account of the donor's total tax and financial situation.