What Kind of Charitable Donor Are You?
Presented by David Berman
Charitable giving is an important piece of many individuals’ estate plans. Beyond the tax advantages
offered by charitable donations, many people have personal reasons for choosing to include charities in
their estate plans. A number of vehicles are available to facilitate charitable giving, apart from a straight
gift of cash or property to an institution. To help you decide how to incorporate charitable giving into your
estate plan, let’s look at some of the most popular options.
Donor-Advised Funds
A donor-advised fund is managed by a public charity for the purpose of distributing funds to other
charities. The donor makes gifts to the fund throughout their lifetime and may make suggestions
regarding the distribution of the assets to specific charities. The fund is in no way obligated to abide by
the donor’s suggestions, however (although they often do). Additionally, the fund has complete discretion
over how the contributions are invested. Again, the donor may make suggestions, but investment
decisions are ultimately in the hands of the fund.
A contribution to a donor-advised fund is generally tax-deductible in the year it’s made. If cash is donated,
the maximum deduction is typically capped at 60 percent of the donor’s adjusted gross income (AGI). If a
donation of highly appreciated assets is made, the deduction is typically capped at 30 percent of the
donor’s AGI.
A donor-advised fund may be an excellent vehicle for those who wish to donate a moderate to large
amount of capital. The startup costs are usually low, and the minimum donation is generally $5,000.
With many of these funds, the donor can advise the fund to make grants to multiple charities or to a single
charity. Additionally, many funds do not have a minimum annual grant amount, which means that the
donor’s principal may grow tax free over time.
Charitable Remainder Trusts
Generally, gifts to charity in which the donor retains a partial interest are not eligible for income tax, gift
tax, or estate tax charitable deductions. One exception to that rule is the charitable remainder trust.
Charitable remainder trusts allow the donor to receive income from the trust for the donor’s lifetime, the
lifetime of another, or a period of up to 20 years. At the end of the specified lifetime or term, the remaining
trust assets are distributed to a charitable remainder beneficiary. The greatest benefit of these trusts is that
the donor can take advantage of the immediate tax benefits of making a charitable donation while continuing
to use the assets, as the donor may deduct the present value of the charitable remainder interest.
There are two forms of charitable remainder trusts, each with its own requirements:
- A charitable remainder annuity trust (CRAT) is created by an irrevocable transfer of cash or
property. The trust document specifies an annual annuity amount to be paid to the income
beneficiary or beneficiaries over their lives or a specified period of time. The annuity amount must
be between 5 percent and 50 percent of the value of the original trust principal each year and
must be paid out even if there is no income, which means that the trustee may need to dip into
principal at times. At the end of the specified annuity time period, the remaining trust assets,
which must be at least 10 percent of the initial fair market value of the trust principal, pass to a
designated charitable institution. It’s important to note that additional contributions may not be
made to a CRAT. - A charitable remainder unitrust (CRUT) is also created by an irrevocable transfer of cash or
property. Unlike a CRAT, however, a unitrust amount is paid to the income beneficiary or
beneficiaries each year based on a specific percentage of the trust assets, which are revalued
annually. As a result, the income distributions from a CRUT may vary from year to year. The
unitrust amount must be between 5 percent and 50 percent of the trust value, and additional
contributions may be made over the lifetime of the trust. At the end of the trust term, the
remaining trust assets are paid to a charitable remainder beneficiary. The value of the remaining
trust assets must be at least 10 percent of the fair market value of all the property transferred to
the trust, determined at the time the asset is contributed.
Charitable Lead Trusts
A charitable lead trust (CLT) is, in some ways, the converse of a charitable remainder trust. A CLT pays
trust income to a charitable beneficiary for a specified term and then distributes the remaining assets to a
noncharitable remainder beneficiary. The charitable distributions can be made based on a fixed annuity
amount or a variable unitrust amount.
There are two types of CLTs, only one of which results in a current income tax charitable deduction:
- A nonreversionary lead trust names someone other than the grantor as the remainder
beneficiary, and there is no federal income tax deduction upon its creation. - A grantor lead trust, on the other hand, reverts to the grantor or their spouse as the remainder
beneficiary and does qualify for an immediate income tax deduction based on the present value
of the annuity or unitrust payments to the charitable institution. This type of CLT can be a useful
tool for individuals looking to shelter property from federal gift and estate taxes while taking an
immediate income tax deduction.
Private Foundations
By establishing a private foundation, a donor can retain complete control in carrying out their charitable
intentions. A foundation is typically created by a single donor or family, or, in some cases, by a
corporation. The donor or donors have the power to direct grants to a particular charitable organization
or organizations.
Private foundations are governed by a very strict set of rules to ensure that the organization actually
carries out a charitable purpose. A foundation may be subject to various excise taxes if it fails to adhere
to guidelines.
Although private foundations offer donors the greatest level of flexibility and control over charitable gifts,
they are costly to establish and administer. Additionally, the annual contribution limits are lower for
foundations than for many other charitable vehicles. Generally, donors can contribute cash gifts to a
maximum of 30 percent, rather than 60 percent, of their AGI; contributions of appreciated property can be
made to a maximum of 20 percent, rather than 30 percent, of AGI.
This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although
we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional
tax advisor, or lawyer.
Generally, a donor advised fund is a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution the organization has legal control over it. However, the donor, or donor’s representative, retains advisory privileges with respect to the distribution of funds and the investment assets in the account. Donors take a tax deduction for all contributions at the time they are made, even though the money may not be dispersed to a charity until much later. Because you receive the tax benefit immediately, your contribution is irrevocable, which means your assets cannot be returned to you for any reason.