Matter & Substance
  November 4, 2015

Charitable Giving as Seen Through an Estate Planning Lens

One of the most effective estate planning tools is also one of its most rewarding - charitable giving. If you happen to be charitably inclined, there are a plethora of techniques to choose from. The challenge is matching your charitable wishes while maximizing your tax savings. In the final blog in observation of NEPAW, we will be reviewing effective strategies for charitable giving both during life and after death.

Inter vivos gifting

Gifting during your lifetime has the advantage of allowing you to see the benefits of your donation. Options for gifting during your lifetime include:

  • Cash gift -This is the easiest of the options from a donation standpoint, and also the least complicated from a tax perspective since it includes the lowest number of phase-outs and has very few specific guidelines to be met. Cash donations can also typically be deducted up to 50% of Adjusted Gross Income ("AGI"), making it a great option for maximizing the potential tax benefit.

  • Gift of appreciated stock - This can be an appealing option for taxplayers with highly appreciated stock, but it is also an option surrounded by stricter regulations and can take more planning than a standard cash gift. Deductions for gifts of appreciated stock are limited to 30% of the taxpayer's AGI and are based on the FMV of the stock at the date of the gift, potentially pushing a portion of the tax benefit into the following years.

  • Gift directly from your IRA - This option can appeal to taxpayers who are over 70 1/2 years old and are subject to the minimum required distribution rules imposed by many IRAs. Though this option is not a permanent provision of the tax law, it was extended for 2014 and is typically part of the annual tax extenders. In effect, taxpayers in this situation can reduce their income of up to $100K per spouse, rather than an itemized deduction subject to phase-outs.

More sophisticated options available for charitable giving during life include: donor advised funds, private foundations, and charitable split interest trusts. These options should be carefully planned with your tax advisor.

Testamentary gifting

Post-mortem charitable gifting provides the benefit of having a lasting impact on the charity of your choice. These typically take more planning than gifts made during life. Options for setting up post-mortem gifting include:

  • Specific bequest -A specific bequest represents a gift of a piece of property that can easily be distinguished from other property within the estate, and is established through a testamentary document such as a will. A risky disadvantage of this option is that no other item can be sustituted if the specified item no longer exists, so careful planning is required for proper execution.
  • Percentage of residue -This is a gift of a percentage of the assets that remain in an estate after all other expenses and bequests have been satisfied. This method gifting has the advantage of ensuring everything outside of the gift is properly handled before the dollar amount of the gift can be determined.
  • IRA beneficiary -The option exists to name a charity as the beneficiary of your IRA. Due to the fact that individuals receiving inherited distributions from IRAs may pay significant taxes on the amount received, this can be an appealing option. Since a public charity can withdraw pretax amounts stored in a traditional IRA without paying income tax on the distribution, there is a large tax savings associated with naming a charity as the beneficiary of such an instrument.

More sophisticated techniques of making post-mortem gifts exist. These include using charitable split interest trusts and private foundations, both of which are surrounded by complicated tax law and should be discussed with your tax advisor.

With careful planning, you can ensure the proper beneficiary receives the most tax advantageous type of asset while all your charitable goals are met.