Everyone has their own reason for gifting their assets or a portion of their income to charitable organizations. Some find comfort in helping others who are less fortunate, while others simply want to share their good fortune. Many of the institutions of art, sciences and education are supported in large part by those who want to give something back in appreciation for their contributions to the community or the individuals themselves.
Presently, the tax code offers incentives for gifting of one’s assets or incomes. Tax deductions are given for current contributions and, for estate owners, charitable gifts can reduce the size of the estate to help minimize estate taxes.
Often times, an individual will designate a charitable beneficiary in their will to benefit the organization after the individual dies. By using charitable gifting techniques, a donor may be able to benefit the charity while living without having to sacrifice the income that an asset can generate. Understanding how properly structured charitable gifts can provide current benefits for both the donor and the charity could be important for the charitably inclined.
Donor Advised Funds:
A donor advised fund (DAF) is a charitable account that's managed by a nonprofit—typically a charitable organization founded by a financial services company, a community foundation or a university. You decide when and how much to contribute to the account and can direct grants to 501(c)(3) charities that are in good standing with the IRS. The custodian vets charities for IRS eligibility and sends out grants at your request. The custodian also manages the investment of the charitable assets based on your preferences. Some custodians offer a choice of investment pools and allow independent investment advisers to manage the assets of larger accounts. The custodian keeps complete records of contributions and grants for tax purposes, allowing you take a strategic approach to philanthropy.
Donor-advised funds have grown at a surprising rate despite slow economic growth in recent years. In 2012, assets under management grew by $7.21 billion, an 18.9% increase from the previous year.1 DAFs' growing popularity isn't surprising—they offer donors a tax-smart opportunity to give to their favorite charities with relatively low costs. Accounts can start as low as $5,000 or as high as $1 billion and deliver tax benefits for a wide range of gifts—from cash and appreciated securities to closely held shares and property. One of the most notable features of DAFs is how they uncouple the timing of the charitable tax deduction from the granting, which lets donors make one tax-deductible contribution at year-end and grant to charities of their choice on their own schedule. Donors can also maintain a level of privacy around their giving if they desire.
Charitable Remainder Trust
A remainder trust enables the donor to transfer an asset while retaining the right to the income it generates. The asset becomes the “remainder” which is owned by the charity. Remainder trusts, if properly structured, can qualify for a current tax deduction. There are three types of remainder trusts:
Unitrust: A unitrust the income the donor receives is based on a percentage of the current fair market valuation of a trust asset. Each year, as the asset is valued, the income is adjusted based on the new valuation.
Annuity Trust: Instead of a percentage of the asset value, the donor is paid a fixed amount annually.
Pooled Income Fund: Donors can pool their donated assets in a fund that is operated by the charitable organization. The donors then receive a proportionate share of income from the fund that is paid throughout their lifetime. Payments can vary each year based on the valuation of the underlying assets in the fund.
Charitable Lead Trust
Also known as an Income Trust this vehicle transfers the income rights to the charitable organization. Generally, the income rights are assigned for a specified period of time after which the remainder passes to the donor.
Charitable planning involves tax issues that should be discussed with a qualified tax or financial professional.
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