Charitable Giving

Charitable giving is a way to “give back” to organizations that you feel could benefit from your financial assistance after you die. The government provides incentives to give to charity throughout your lifetime and via your estate after you die. These benefits include:

Current tax deductions
Significant reductions in capital gains and estate taxes due upon your death

Some of the best ways to add charitable giving to your estate planning strategy are:

Donating assets
Setting up charitable trusts
Giving to charity through life insurance

Donating Assets

In exchange for donating assets (cash, stocks, bonds, or other property) directly to charity while you’re alive, the government allows you to deduct the full value of the donated assets from your annual tax return. Though the immediate tax benefit may seem alluring, there are three reasons why outright gifting of assets may not be the best choice:

You give up your ownership of the assets permanently.
You no longer receive the benefits of holding the assets, such as dividend payments.
You lose the prospect of allowing the assets to grow until you die.

Charitable Trusts

Charitable trusts, generally called charitable remainder trusts (CRTs), offer grantors the option to donate assets to charity upon death and receive income and tax benefits during their lives. CRTs also help reduce the size of your taxable estate by shielding portions of your assets from future estate tax. CRTs have two types of beneficiaries:

Income beneficiaries: Receive income the trust generates during your lifetime or for a specified term
Death benefit beneficiaries: Receive the remainder of the trust following either the end of the trust term or the death of the income beneficiaries

There are two main types of income-producing charitable trusts: charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTs). Each has its own advantages and disadvantages.

Type of Trust		Description
CRAT		Used to generate a fixed amount of income from existing assets during one’s lifetime, with the provision that the underlying principal will go to charity upon death. This type of trust works well for older grantors because it provides a reliable fixed stream of income.
CRUT		Used by younger grantors who may need income that can grow with time. These trusts provide income that can rise each year based on formulas tied to the investment performance of the trust’s assets. CRUTs may also lose value during a down market. Like CRATs, CRUTs generally pay the remaining principal to the charity upon the death of the grantor. CRUTs can last for several years or a lifetime.

Though both CRUTs and CRATs are irrevocable, you can usually change the charitable beneficiary at any time if your trust retains that right.

Tax Breaks and Benefits of Charitable Trusts

Both CRUTs and CRATs provide significant tax benefits.

Avoiding capital gains tax: The difference between what you paid for an asset (such as a stock) and its value upon sale—the capital gain—is not taxable if you place the asset in a CRUT or CRAT. Normally, the capital gain is subject to capital gains tax of 15–35%.
Avoiding estate tax: Because assets in the trust are out of your estate, they are not subject to estate taxes—yet you receive the income (which is taxable).
Getting tax deductions if you’re subject to the alternative minimum tax: Taxpayers can still receive tax deductions for assets given to charitable trusts even if they are subject to the alternative minimum tax (AMT). The AMT is a separate tax system that removes deductions and tax credits and forces taxpayers with many deductions to pay set minimum amounts of tax. Charitable contributions are one of the few deductions not currently eliminated for taxpayers subject to the AMT.

At minimum, a CRAT must distribute annually at least 5% of the initial fair market value of the trust at the time the CRAT is established. Fair market value means that the trust’s assets must be valued as if they were to be sold currently, not at the value they had at the time they entered the trust. Federal law requires that 5% of this value then be paid to the income beneficiaries of the trust. CRUTs therefore must distribute annually at least 5% of the trust principal. Fair market value is the value on the date the trust is revalued, which happens annually.

Charitable Giving through Life Insurance

It’s possible to designate a charity as the owner and beneficiary of insurance policies you hold. When you die, the charity receives the death benefit—the lump sum paid by the insurance company upon the policyholder’s death. You can also give the charity the money required to pay the policy’s premiums and in turn receive an income tax break for that donation while you’re still alive.

Charitable giving through life insurance may not be allowed in states that require beneficiaries to have an insurable interest in your life—a reason to want you alive rather than dead, such as a need for your income or care giving.

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