Legal Vehicles for Charitable Giving
Charitable giving doesn’t mean just passing out cash. Not if you want to do it the smart way, anyway. US law has created certain legal vehicles that offer significant tax benefits to those who choose to take advantage of them.
Following are some of the most popular vehicles for charitable giving:
A Charitable Remainder Trust (CRT) is a tax-exempt trust into which you may deposit your assets. Once you transfer your assets into a CRT, you can receive income payments, plus a tax deduction for the value of the assets that you contribute in any given year. You can take both of these benefits for up to 20 years.
Perhaps more importantly, you get tax-free compounding of the assets that you place into your CRT. This can add up to a huge tax benefit if you choose to place highly appreciable assets such as stock portfolios into your CRT. Your CRT assets pass to your charitable beneficiaries only upon your death. As with other trusts, there is no need for probate proceedings.
In a Donor Advised Fund, you make a gift to a public charity in lump sum. You are free to add additional donations over the remainder of your lifetime. The charity manages these assets, while you advise it on how to use them. As long as you continue donating to the charity, your advice is likely to carry considerable weight.
You can take an income tax deduction for any year in which you make a gift--the initial donation plus any additions. Fund assets appreciate. And there are no capital gains or estate taxes on your contributions.
In a Life Estate Gift, you retain the use of your home during your lifetime, but leave it to the charity or other non-profit of your choice after you die. Under this arrangement, the beneficiary owns your home from the day you make the gift, but you will still have the legal right to live there until you die. You can take an income tax deduction on the value of your home, and you can avoid capital gains tax on any appreciation in value.
In a Life Insurance Gift, you donate the proceeds of a life insurance policy to charity. This might make sense if, say, at some point you discover that the utility of your life insurance policy is outweighed by the estate tax consequences.
You can also take an income tax deduction for the amount of the policy’s cash value in the year that you make the donation. The charity can either wait until you die to receive a lump sum donation, or withdraw from the policy’s cash value before you die.
In a Pooled Income Fund, your donated assets are pooled with the assets of other donors. This arrangement works something like a mutual fund, in the sense that you buy units in an investment pool, and you claim a variable return based on interest and dividends. This vehicle offers an income tax deduction, and it also helps you avoid capital gains tax.
The remainder of the assets that you donate is left to your beneficiary (or beneficiaries) when you die.
The foregoing list only scratches the surface of all of the possible charitable giving arrangements. Discuss your goals and circumstances with your lawyer to determine which option is right for you.
Masumi Patel Can Help You Optimize Your Estate Plan
Masami Patel has been practicing California trusts and estates law for more than 15 years now. During that time she has learned that most estate planning lawyers simply do not give enough individual attention to their clients’ cases, resulting in wasteful “do-overs” at best and unintended estate consequences at worst. This kind of unprofessional behavior simply does not happen at the Law Office of Masumi Patel.
Contact us by calling (310) 316-4533 or by filling out our online contact form to get the process started. We will be happy to answer your questions so that we can explore your options together.