February 27, 2015
For years, the US has been one of the most generous countries in the world. There are many charitable vehicles available to accomplish both your charitable and personal goals. We address some of the complexities of the tax rules that may influence the amounts you wish to contribute and vehicles you wish to employ.
Charitable Deduction Limitations
Taxpayers cannot offset all of their income with charitable gift deductions. There are three categories of charitable deduction limitations based on your adjusted gross income (AGI). Any gifts in excess of these percentages of income are carried forward by the taxpayer for a maximum of 5 years.
50% of AGI Limitation – Gifts of cash or non-appreciated property to public charities
30% of AGI Limitation – Gifts of appreciated property to public charities OR gifts of cash to private foundations
20% of AGI Limitation – Gifts of appreciated property to private foundations
Beyond Public Charities – Donor Advised Funds vs. Private Foundations
Many of our clients have questions about how to create a legacy of charitable gifting. They have heard about donor advised funds and private foundations, but are unsure which would best suit them. This determination requires several considerations:
Q1: What are your charitable goals? Do you have long term specific charitable goals?
A1: If you are not yet sure what public charities you ultimately want to support, a donor advised fund may work best. This will give you the time to research and review charitable organizations without any requirements to gift immediately while receiving a current charitable deduction. Alternatively, private foundations generally require a certain amount of gifting every year. If you already have specific ideas of charitable organizations that you would like to support, a private foundation may be a good choice.
Q2: Are you interested in creating a family legacy of giving, involving different generations of family members?
A2: While both options offer families the ability to involve younger generations, many of our multi-generational clients like the idea of a family foundation that can carry a family’s charitable legacy. In addition, many of our clients have established a family board of directors for their private foundation and use it as a tool to educate their children and grand-children about investment returns and charitable giving.
Q3: What are your feelings about complexity? Do you mind additional administrative costs?
A3: Private foundations require more effort and cost to set up. An attorney needs to draft agreements and request tax exemption. They also have continuing complexity due to required annual federal and state filings. Realize can assist with these filings and apprise the family board of other complexities such as required annual distributions and minimizing excise tax on investment income. Alternatively, donor advised funds are easily set up at a financial institution or community foundation, which will handle all administration.
There are two types of charitable trusts that allow you to satisfy personal and charitable gifting goals:
Charitable Remainder Trusts (CRT)
A CRT is generally funded with appreciated assets. The grantors of the trust are entitled to an annual distribution from the trust. At the creation of the trust, the grantors will also receive a charitable deduction equal to the present value of the expected remainder of the trust assets at the end of the trust term. A charity is chosen by the grantors as the “remainder beneficiary,” meaning it will receive whatever assets remain in the trust at the trust’s termination. From a tax perspective, the most popular feature of a CRT is the deferral of tax on the appreciated assets. Taxation of trust income occurs only when the grantors receive their annual distribution.
Charitable Lead Trusts (CLT)
A CLT works inversely to a CRT. During the term of the trust, the charity chosen by the grantor will receive an annual distribution. At the termination of the trust, the remainder assets are left to persons of the grantor’s choosing. At creation, grantors have the choice to set up either a grantor trust or a non-grantor trust. A grantor trust will allow the grantors to claim a current charitable deduction based on the present value of the expected annual payments to the charity, but the grantor is responsible for paying all the trust’s taxes. On the other hand, a non-grantor trust does not allow a current charitable deduction, but is not subject to the charitable deduction limitations described above. Non-grantor CLTs can be highly effective for charitable individuals who are constantly exceeding their charitable deduction limitations.
Charitable planning, especially when layering in personal goals, can be extremely complex. We welcome the opportunity to speak to you about your own charitable goals and to advise you on the best structure to meet those goals.