In this final chapter of this three-part series, we are focusing on charitable giving. In addition to all the personal benefits of philanthropy – giving to a cause of your choice, helping those in need, making a difference, just doing good – there are tax benefits from giving away some of your assets to charity during life or at death. Someone with AGI of $300,000 who makes a charitable gift during life of $20,000 could reduce her marginal tax rate by almost 5%. A single person with a $10,000,000 estate would save $339,560 in federal estate tax and $151,200 in Massachusetts estate tax if his estate left $1,000,000 to charity. Substantial tax savings achieved by giving to a handpicked, worthy cause!
There are many different ways to make charitable gifts. This alert is intended to give you some ideas for making gifts that accomplish those dual purposes of helping others and helping both you and your family save some tax.
Get the Best of Both Worlds – Split Interest Trusts
If the idea of using one mechanism (a trust) to benefit both your family and your favorite charity is appealing, consider making a split-interest gift. Primary examples of split interest gifts include:
Charitable Remainder Trust – a CRT pays out annual income payments you or your chosen family member(s) for life or for a term of years. When that term is up, the remaining balance goes to charity. A CRT is a great tool that offers the certainty of fixed income, then a gift to charity, all in tax-efficient fashion.
The reverse of a CRT is a CLT or Charitable Lead Trust. A CLT is a device where the charity or charities gets the income payments first. When the charitable term is up, the remaining balance goes to the individual beneficiary. Talk to your estate planner about using a CLT to fund your children’s retirement.
The Gift That Keeps on Giving – Perpetual Charitable Gifts
If you are looking to leave a charitable legacy, you could set up your own charitable foundation. This type of permanent giving can be done during life or at death. Creating your own foundation allows you to set the parameters for how you want your money managed to support causes important to you for the long haul. You can also involve the next generation(s) in the foundation by involving them in decision-making and gradually giving them leadership roles.
No Strings Attached – Making Direct Gifts
Charitable Gifts from You or Your Will or Trust
If you make a gift directly to charity during life, you get the deduction on your personal return. An outright gift to charity made at your death from your will or trust can lessen your estate’s tax burden.
Annual gift of your RMD
At the end of last year, Congress passed the Consolidated Appropriations Act of 2016, which made permanent (finally) the opportunity for retirement plan owners to make a direct charitable gift from retirement plans. Now that the legislation is permanent, each year you have all year to consult with counsel and then decide if you want to take the RMD or have it go right to charity to save on your income taxes.
Estate Transfer of Retirement Plan
Another opportunity with retirement plans is to name a charity as the beneficiary of your retirement plan and leave the rest of your assets to charity. Giving the retirement plan to charity will partially save your loved ones some income tax and will save your estate federal and Massachusetts estate taxes.
No matter if you have a priority in tax savings or not, if you have charitable leanings you should consult with your estate planner to find out what works best for you.
Thank you for tuning in to this three-part series on Tips for the Tax Season. These tips are helpful year round and we are here to help you fulfill your planning goals.
If you have any questions about the information presented here, please contact Jennifer Fleming, the author of this alert at jfleming@princelobel.com.