Charitable Gifting Can Maximize Benefits

It may be the result of the bear market or the uncertainty surrounding estate taxes. Perhaps it's because the huge surge in giving after September 11, 2001, consumed potential future donations. Whatever the reason, charitable giving by Americans has been dwindling.

In one recent survey of individuals with a reputation for steady donations (people with more than $3 million in assets), 20 percent had planned to scale back giving in 2002. Individuals feeling pinched by the current economic climate might be interested in a vehicle that allows them to donate assets while potentially earning income and reducing their current tax burden.

Charitable Remainder Trusts for Charitable Gifting

With a charitable remainder trust (CRT), a donor transfers assets to an irrevocable trust and names a charity as the beneficiary.2 The donor may receive regular income payments from the trust throughout his or her lifetime, even though the assets are no longer considered part of the donor's estate. After the donor’s death, the charity receives the remaining principal.

Tax Advantages of CRTs as Charitable Gifting Vehicles

The tax advantages of CRTs make them well suited for highly appreciated assets such as stock, real estate, and mutual fund shares. Because trust assets are generally not subject to taxes, the full amount of the donation is preserved. This allows the charity to receive a potentially larger gift than if the donor sold the asset, paid the capital gains taxes, and donated the after-tax proceeds to the charity. At the same time, this increases the donor's potential income because it keeps more of the donor's money working to generate current income.

Typically, the donor also receives a current income tax deduction based on the present value of the future gift to charity. The deduction is based on the donor's age, the retained interest, and interest rate assumptions.

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Charitable donations can take many forms, including cash, securities, life insurance, or even your free time. However, if you are looking for a giving strategy with greater potential benefits for the charity and your family, a charitable remainder trust may be worth considering.

It is important to note that the use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional and your legal and tax advisors before implementing such strategies. In addition, bear in mind that not all charitable organizations are able to use all possible gifts. It is prudent to check first. The type of organization you select can also affect the tax benefits you receive.