You don’t need to be wealthy to make an impact & get a win-win.
Do you have to make a multimillion-dollar gift to a charity to receive immediate or future financial benefits? No. Consider the following options, which may bring you immediate or future tax deductions.
Partnership gifts. These gifts are made via long-term arrangements between donors and recipient charities or non-profits, usually with income resulting for the donor and an eventual transfer of the principal to the charity at the donor’s death.
For example, a charitable remainder trust allows you to pay yourself a dependable income (perhaps for life) derived from assets placed within the trust. When you die or the trust term ends, the remaining trust principal can go to charity. A charitable lead trust works the opposite way. It makes annual, charitable gifts, giving you the potential to reduce gift and estate taxes; your beneficiaries get the leftover trust assets at the end of your life or the trust term.1
If you don’t have enough funds to make one of these trusts worthwhile, you might opt to invest some of your assets in a pooled income fund. Your charitable gift goes into a “pool” of assets invested by the money manager of a charity or university endowment fund; you get an income stream from the fund for life (which varies yearly per the fund’s return). Eventually, the principal amount of your gift goes to the school or charity.2
If you like the idea of a family foundation, but don’t quite have the money and don’t want the bureaucracy, you could consider setting up a donor-advised fund with the help of a community foundation. You make an irrevocable contribution to a third-party fund; in the process, you get an immediate, charitable income-tax deduction and decrease the size of your taxable estate. The fund invests the cash or securities for you; the invested assets grow without being taxed. True to the name, you can advise the fund sponsor (i.e., the financial company administrating the fund) where donations should go, but the sponsor will have the final say.2,3
Lifetime gifts. These are charitable gifts in which the donor retains no powers or other controls over the gift once it is made. You simply give money away or relinquish ownership of assets. Lifetime gifts include outright donations of cash and gifts of appreciated assets, such as stocks or collectibles. Donating cash has a drawback: the charitable tax deduction on a cash gift to a charity is commonly capped at 50% of your adjusted gross income (AGI).4
Alternately, if you donate appreciated securities that you have held for at least a year to a qualified charity or non-profit, you may be able to take an immediate income-tax deduction for their fair market value, and you will also avoid capital gains tax that would come from selling them. If you donate a car, a boat, a valuable artwork, or some other big-ticket item to a qualified charity, you are also in line to take an immediate income-tax deduction for its full, fair market value – but if the car, boat, or collectible is worth more than $5,000, an appraisal may be needed before the gift can be made.4
Similarly, you can transfer a real estate deed to a qualified charity in exchange for tax breaks and avoid capital gains taxes that may result from a property’s sale. If you have held the appreciated property for at least a year, the full value of the asset is deductible, but limited to 30% of your AGI.5
Estate gifts. These are deferred gifts you make after your lifetime – without impact on your current lifestyle. You can make a bequest to a charity through your will or a revocable living trust, which can reduce your taxable estate. A gift of a paid-up life insurance policy to a university or qualified charity can give you an immediate income-tax deduction equal to its replacement value. You can also gift an IRA or retirement plan account to a qualified charity or non-profit organization upon your death.2,6
The caveats. If your income increases, you may face limits on the charitable gifts you can deduct. The I.R.S. says that your charitable deductions for any tax year cannot be more than 50% of your AGI (possibly 30% or 20% depending on the nature of your gifts). But if you exceed such limits, the I.R.S. lets you carry forward excess contributions for up to five years.5
Would you like to learn more? Okay, so they may not name a hospital wing or a library after you, but your charitable gifting can have real effect, even if you don’t have a fortune. Keep in mind that your unique circumstances need to be weighed before making any decision. As with all tax and estate planning, please consult your financial advisor, attorney, or tax advisor to affirm your degree of potential benefit from charitable deductions.
1 – gobankingrates.com/retirement/revocable-irrevocable-trusts-trust-accounts/ [9/30/16]
2 – wellsfargoadvisors.com/estateguide/charitable-giving.htm [4/5/17]
3 – cnbc.com/2016/12/12/donor-advised-funds-can-be-great-if-you-know-the-rules.html [12/12/16]
4 – tinyurl.com/nx25l8k [12/29/16]
5 – wwcgift.org/giftlaw/glawpro_subsection.jsp?WebID=GL1999-0001&CC=1&SS=1&SS2=3 [4/6/17]
6 – bam.org/support/legacy-giving/life-insurance-and-retirement-plans [4/6/17]