Charitable giving is alive and well. With the federal estate tax exemption increasing in 2004 and 2005 to $1.5 million, the idea of charitable giving to reduce estate taxes may, for many, seem less important. However, there are still income tax benefits and other reasons to give to charity. In addition to the "feel good" benefits you get from helping out your favorite organization and giving back to your community, the financial benefits should not be dismissed. For example, many individuals have substantial retirement funds as part of their estate. These funds, on distribution to beneficiaries, are subject to the payment of income taxes by the beneficiaries, at their particular tax bracket. Electing to distribute some portion of these taxable funds to a charity, as part of the overall distribution plan for your estate, will result in substantial income tax savings.
There are many charitable giving techniques, and this article will address four of the more significant ones: outright giving, Charitable Remainder Trusts, Charitable Lead Trusts and Private Foundations.
Obviously, the simplest way to benefit your favorite charity is to make an outright gift during lifetime or at death as part of your overall estate plan. Lifetime gifts to qualified charities will result in an income tax deduction and will also remove the gifted asset from your estate. Outright bequests to charities as part of an estate tax plan are, dollar for dollar, deductible against both federal and New York estate taxes, if the estate is subject to estate taxes. Individuals with no close relatives, or whose beneficiaries already have substantial assets of their own, can employ charitable gifts to not only benefit their favorite charities, but also to substantially reduce or eliminate the payment of any estate taxes.
The obvious drawback with an outright gift to charity is that the donated money will not be available for the benefit of your surviving family members. If you want to benefit both family members and your favorite charity, you should consider either a Charitable Remainder Trust or a Charitable Lead Trust. Both of these trusts allow family members and the charity to receive benefits over time.
You can use a Charitable Remainder Trust ("CRT") in those instances where an outright gift to charity is less desireable because surviving family members may require the initial use of, or access to, the funds otherwise designated for charitable purposes. This type of trust can provide that the beneficiary (for example, your spouse) would receive annual distributions of at least five percent of the value of the assets held in the trust for his or her lifetime, with the trust property passing to your favorite charity upon the subsequent death of the beneficiary. A CRT set up during lifetime can provide substantial income and potential capital gains tax benefits, or can be set up at death, as part of your estate plan, to reduce overall estate taxes. Also, if a CRT is funded after death with assets held in your retirement account, these funds can pass free of any current income taxes to the trust to be invested and held for the benefit of the beneficiary. The calculation of the estate tax benefits available through the use of a CRT is subject to too many variables to be discussed here and should be reviewed on an individual basis.
For a larger "upfront" estate tax deduction, one can consider a Charitable Lead Trust ("CLT"). A CLT is basically the opposite of a CRT, in that the charity receives the annual payments from the trust for a period of years with the balance, after the term of years has passed, to be paid to your family members. CLT’s are usually created at death to provide the estate tax deductions you may need, but can be created during lifetime (although the tax issues for a lifetime CLT require more in-depth analysis). The estate tax savings generated by a CLT are often greater than those provided by a CRT due, primarily, to the fact that the charitable interest is paid out first, with the balance passing to your family members. As indicated above, under a CRT, the charity has to "wait" for its distributions until the termination of the trust.
Your decision whether to use a CLT or CRT involves the review of many different issues, such as potential estate taxes and estate tax savings, income tax issues (especially those involved with taxable retirement accounts), capital gains tax concerns, and the age and financial needs of the trust beneficiaries.
Another charitable planning option for you to consider involves the use of a Private Foundation or the creation of your own charity. A Private Foundation can be created to be the recipient of the charitable contribution (either during lifetime or at death). The Board of Directors or Trustees of the Foundation (usually family members) decide on how the charitable dollars will be allocated to and among other qualifying public charities. In other words, a Foundation gives the family the ability to distribute their charitable dollars among several worthy recipients, as opposed to a direct one- time gift to a few selected organizations. The creation of a Private Family Foundation is not difficult but does involve some initial time and effort, as well as annual administrative obligations.
Depending on the amounts intended to be contributed and the extent of your desire to control the investments and the disposition of the charitable dollars, another alternative is to make a gift to a "Community Foundation". A Community Foundation is, in and of itself, a public charity through which individual charitable "family funds" can be created. You and your family can participate in the decisions with regard to qualifying charities that ultimately receive the distributions from the family fund. The benefit of using a Community Foundation lies in the fact that it is "ready made" and does not require the time, effort and expense involved in creating and maintaining a Private Family Foundation.
In conclusion, even with the increases in the estate tax exemption amounts, charitable giving should always be included as part of the discussions of your estate plan. This is even true in situations where there are no estate tax issues. It has been said a living is what you earn, a life is what you give. Charitable gift planning is not a "one size fits all" issue. Rather, these options and others should be discussed with your advisors to determine the charitable giving options most appropriate for your situation. If you would like to discuss these concepts in more detail, please contact your Woods Oviatt attorney.
