Part V: Charitable Giving
By FPA member Tim Sobolewski, CFP®
Last Updated: September 26, 2011
This month we will explore the power and flexibility of charitable giving in crafting an estate plan. Most people give to charities throughout their lives, but often neglect to endow that charitable giving at their death. Advance planning can create estate planning opportunities that are not possible otherwise, and can allow you to take advantage of the charitable deductions for both income and estate taxes.
Most charitable giving at death is by a simple bequest in the will, but there are many other forms; for example, setting up an endowment in the will, opening a donor-advised fund at a community foundation, and establishing a private foundation. In addition, the more complicated topic of “planned giving” includes split-interest gifts and deferred gifts.
Split-interest gifts to charity allow for both income and estate tax charitable deductions, but for less than the full value of the gifted asset. Rules governing these gifts are very complex, but we will review the basic forms.
Charitable remainder trusts (CRT) from major donors can be heard credited for many a PBS broadcast. These allow the donor (or some other designated beneficiaries) to receive an income interest for life (or over some set period, in which case no more than 20 years). After death or at the end of the set period, the remainder interest is paid to a charity. In exchange, the donor receives a tax deduction based on this calculated remainder interest — the amount to be left for the charity based on the terms of the trust and the Applicable Federal Rate (AFR), or §7520 rate, which is published monthly by the IRS.
Charitable Lead Trusts (CLT) are basically the same idea in reverse. The charity receives the income from a gifted asset for a period of time (during which time, presumably, the donor does not need the income), and the remainder interest is left to the donor's family or some other named non-charitable beneficiary. In a time of low Applicable Federal Rates (like now), a CLT can maximize the donor's charitable deduction by minimizing the amount of the remainder interest.
In order to receive any charitable deduction, both a CLT and CRT must be set up as either an:
- Annuity trust, Charitable Remainder Annuity Trust (CRAT) or Charitable Lead Annuity Trust (CLAT), in which income is established as a fixed amount at the beginning, with no additions possible to the trust, or a
- Unitrust, in which income is recalculated as a preset percentage of trust assets each year. This would then be either a Charitable Remainder Unitrust (CRUT) or Charitable Remainder Annuity Trust (CRAT).
The Net Income Charitable Remainder Unitrust (NIMCRUT) is a variant that allows for more flexible payments, so that a shortfall in your desired income one year may be made up the next year.
Another popular charitable giving vehicle is the charitable gift annuity. You would buy this directly from a charity, which provides you with guaranteed, fixed lifetime income. Like all annuities, the annual income amount will depend on your age at the time of purchase. As with a CRT and CLT, you receive an immediate income tax deduction, which can be carried forward for five years if necessary.
Finally, through 2011 if you are over 70 ½ the IRS allows you to donate some or all of your Individual Retirement Account (IRA) directly to charity through a charitable IRA rollover, or qualified charitable distribution. The amount you donate can include your RMD (Required Minimum Distribution), but can't exceed a total of $100,000. Also, the donation must be made directly by your IRA trustee, not out of your checkbook. This can be a valuable way to avoid tax, particularly if you don't need your RMD as current income. Also, the usual percentage and itemized deduction limitations do not apply.
As you can see, you may need the help of a financial planner to evaluate all of these options, but this should give you some idea of the power and flexibility of charitable giving.
FPA member Tim Sobolewski, CFP®, is President of The Financial Planning Center, Amherst, N.Y.