Year End Charitable Gifting Strategies

As we discussed last week, many of our clients use this time of year to make annual gifts to family members. A number of those clients also plan their charitable gifting for the end of the year to take advantage of the deduction that such gifts provide against income tax liability. Some of our clients make direct cash gifts to their chosen charities, while others satisfy their charitable inclinations with gifts of property, such as artwork, real estate, or stock. These gifts allow them to deduct the charitable contributions, up to 50%, 30%, or 20% of their adjusted gross income, depending on the type of property contributed and the type of donee. Depending on the client’s financial situation, more advanced gifting techniques can provide greater benefit to both the client and the charity.

One of our clients, who will likely have some estate tax liability, uses Charitable Remainder Trusts (CRT) to maximize the value of her charitable gifts. The CRT stipulates that the client receives an annual payout of a percentage of the value of the trust during her lifetime, with charities receiving the remainder of the trust assets at her death. In addition to satisfying her charitable intentions over the long-term, she reduces her potential estate tax liability, obtains an income stream for her lifetime, and is eligible for an income tax deduction equal to the present value of the remainder interest, determined by using IRS tables. In her case, at age 70, a $1,000,000 transfer to a CRT with a 6% annual payout provided her with $60,000 of annual income for life, and give her a $466,370 charitable deduction.

Another client, who does not need additional current income, chose to take the opposite path and fund a Charitable LeadTrust (CLT). A CLT provides charities with an annual income stream for a period of time, with the remainder interest going to other beneficiaries. In this case, the client just sold a business, had a significant gain, and wanted a tax deduction in the year of sale. We set up the CLT to provide a 6% payout to charities for twenty years. At the end of twenty years, the remaining balance of the trust will be held for the benefit of his three children. This allowed our client to take an immediate charitable deduction of $2,124,000. In order to take the deduction in the year the CLT is funded, the taxpayer must report the income earned by the trust over the next 20 years, which our client was comfortable with because his income in future years would be much less than the current year. As with the CRT and additional benefit of a properly structured CLT is a reduction in the value of the client’s future estate tax liability.

Not all techniques require a long-term trust to facilitate gifting. One of our clients, knowing he was selling his business, sought advice regarding the best way to donate a portion of the proceeds to his favorite charities. To maximize funds received by the charities, we recommended that he donate a portion of the stock to a charitable trust set up for those charities. The trust then joined in the sale, received a portion of the proceeds tax-free, and distributed those proceeds to the charities. By contributing the stock first to the charitable trust and then having the charitable trust join in the sale, the charitable trust received the full amount of the proceeds without liability for income taxes. If the client had sold the stock first, he would have been liable for capital gains tax and there would have been fewer dollars available for the charitable contribution.

Finally, for those clients receiving distributions from an IRA, 2013 provides a unique opportunity. The tax rules provide that if a donor is at least 70 1/2 years of age, he or she can have the IRA distribute up to $100,000 per year directly to a charity and treat it as excludable from income. One of our clients, with a large IRA but little other available assets, has been using direct distributions from an IRA to charities for the last few years. This technique allows her to satisfy her chartable inclinations and reduce her own potential income tax liability. Unfortunately, due to a change in the law, 2013 is the last year this option is available.

There are a number of other creative ways to fund a client's charitable desires, provide them with income tax deductions, and limit liability for future estate taxes, but these techniques require proper planning. If any of your clients are interested in charitable gifting options for this year, they should consult with their advisors soon in order to provide sufficient time to implement strategies that maximize their charitable contributions.

Alan Ferrara and Matt Ferrara