Charitable Gifts

There are many things to consider when planning to make a charitable gift. One of the most important decisions is whether the gift should be made upon your passing or during your lifetime.

You may be considering making a charitable gift as part of your estate. One of the benefits of making a charitable gift then is your estate would receive an estate tax deduction.

There are numerous ways you can make a gift to a charity so that becomes effective upon your passing:

1. Will/Trust. You could make the charity a beneficiary of your Will or your Living Trust. In the document you can state whether you want the bequest to be used for a specific purpose or added to the charity's general fund.

2. IRA/401(k). Make the charity the beneficiary of your IRA, 401(k) or other retirement plan. This can also result in income tax savings as long as the charity is the only named beneficiary of that particular plan.

3. Bank Account. Set up a bank account naming yourself as Trustee for the charity. As long as you retain the bank book the money belongs to you and only goes to the charity upon your passing.

4. Life Insurance. List the charity as the beneficiary of a life insurance policy. If you also transfer the life insurance policy to the charity during your lifetime by making the charity the owner of the policy then premiums you pay on the policy will become income tax deductible.

If you wish to make a gift to the charity during your lifetime, there are ways to make your gift that could result in income tax savings. In addition, with proper planning your gift can become a source of income to you which can help with your retirement planning.

In choosing your gift, because charities are exempt from income taxes, gifts of appreciated property are ideal.

For example, John and Jane Smith own some investment real estate worth $220,000 with a basis of $20,000. If the Smiths sell the real estate they would have to pay a capital gains tax.

Fair market value of the property $220,000

                                         Basis 20,000

                                        Gain $200,000

                              Capital gains tax 20%

                                 Tax on gain $40,000

The Smiths would realize from the sale of their property

                      Fair market value $220,000

                 Capital gain taxes paid 40,000

                                   Net gain $180,000

If the Smiths donate the land directly to the charity, the charity can then sell the real estate for $220,000 without income tax consequences. The Smiths have saved $40,000 in income taxes allowing their gift to the charity to be that much higher. In addition, the Smiths income tax deduction for their charitable gift will also be higher allowing a greater income tax savings for the Smiths.

There are a variety of ways you can make gifts to a charity during your lifetime.

A. Outright gift. You can either give money or transfer an asset directly to the charity. If you are transferring an asset, especially real estate, you have to discuss it with the charity first.

B. Gift of a future interest in real estate. You can change your Deed to real estate you own so that you retain a life estate in the property (the right to use and control the property during your lifetime) and the charity is the owner of the future interest. Upon your passing the charity then becomes the owner of your real estate without the property having to pass through Probate.

C. Charitable Gift Annuity. You make a gift to a charity and then the charity pays you a fixed income for your life and/or the life of your spouse.

D. Charitable Remainder Trusts. Your gift is placed in an Irrevocable Trust. You receive the income from your gift during your life and the charity receives the principal of the Trust upon your passing.

E. Charitable Lead Trusts. You transfer income producing assets into the Trust. The charity is the income beneficiary for your life or for a predetermined length of time. At the end of the period any remaining Trust assets are distributed to your named beneficiaries. This type of Trust can also result in lower estate taxes.

If you are interested in Charitable Gift Annuities or Charitable Trusts and your charity is not in a position to set up an annuity or you do not want to set up a Trust, then we highly recommend that you work with organizations such as the Community Foundation of Western Massachusetts (www.communityfoundation.org). The minimum amount necessary to set up a permanent fund with the Community Foundation is $10,000 which can be paid over a number of years. Your fund will receive professional management and your charity will benefit from your generosity.

If you would like to discuss your estate plan including Charitable Gifts, contact us for a convenient appointment.

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