Tax Article - Charitable Giving Strategies

Charitable Remainder Trusts

These trusts are set up to provide a stream of income to a beneficiary for a period of years or their lifetime. The funds that remain at the end of period of years or the beneficiary's life will go to charity. This vehicle allows an immediate charitable deduction for income or estate tax purposes equal to the present value of the remainder interest. The trust is tax-exempt. Appreciated assets transferred to the trust can be sold tax-free by the trust thus delaying the payment of taxes on the sale of appreciated assets.

Charitable Lead Trusts

These irrevocable trusts provide an income interest to a charitable beneficiary for a period of years then the property reverts to the donor or a designee after that period is over. The trust is used when the donor is sufficiently wealthy to give up an income stream from the property for a period of time. The trust is not tax-exempt. The income from the trust may continue to be taxed to the grantor if the property reverts to the grantor. Therefore, this type of vehicle allows a current donation without losing assets and potentially transferring property to a family member at a reduced estate or gift tax cost.

Private Foundations

This is a charitable organization usually established by a single source such as a family or a company. A private foundation needs to distribute 5% of its net assets every year to charity. The remainder is held by the charitable organization. The donor is allowed to be a foundation officer who can control the investments and the selection of the charitable beneficiary. Any investment income earned by the private foundation is taxed at 2%. These are good vehicles for high net worth individuals with a high-income year. The charitable donation is deductible when made even though the foundation may use the funds to make gifts for an extended period of time. It also allows donors to continue to have control over who gets the money.

Donor Advised Funds

This is an alternative to a private foundation. It is also known as a charitable gift fund and is usually run by a large investment firm. The contributions are tax deductible when made and recommendations can be made to the donor advised fund as to the charity they should distribute the money to. It allows the donor to take time to decide on the recipient but get the deduction in a potentially high tax year. The cost of these funds are significantly less than the cost of a private foundation.

Pooled Income Funds

These funds are similar to charitable remainder trusts. However, these trusts are established and operated by a public charity. The donor contributes property to the trust in exchange for a lifetime interest and receives a current income tax deduction. The donor cannot be a trustee and they must retain a lifetime interest income. Each beneficiary must be entitled to receive a prorata share of the annual income based on the rate of return earned by the fund. Therefore, there is investment risk associated with this vehicle.

Charitable Gift Funds

This is a usually a contract between an individual and a tax-exempt organization such as an educational institution. A gift is made to the charity in exchange for a guaranteed income stream for the life of the individual. The deduction for charity is available in the year the property is donated. The payout from the charity is fixed. This avoids the investment risk that a pooled income fund will experience. However, the payout will usually be pegged to a lower rate to insure that the charity receives a significant benefit.

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