Tax & Creative Strategies

“You must pay taxes, but there's no law that says you gotta leave a tip". - Morgan Stanley Advertisement

Keeping giving motives in perspective, many people give regardless of any tax advantages.  If they are truly passionate about a cause; they give from the heart.  For them, the practice of charity has become an integral component of their very being; they have achieved the “Journey Beyond Self”.

Even so, tax, estate and creative planning ideals can be very important elements in a giving and gifting plan.  After all, one way to increase charitable giving is by reducing taxes.  A major tax planning goal here would be to divert dollars that would otherwise go to the government to the charity of your choice with little or no reduction to the estate of your children, or if there is, finding ways to replace it.  If we're successful in doing this, everyone wins.

The reason for the tax preferences to begin with is to promote charitable initiatives in the private sector.  In many cases this can be done more efficiently by individuals than by transferring all of societal needs to the government.  Those with higher taxable incomes and net worth should certainly take advantage of these techniques.  Keep in mind that whether given during lifetime or after death, charitable gifts are eligible for a tax deduction, but only if made to a “qualified charitable organization”.

“Mankind was my business; charity, mercy, forbearance, and benevolence, were, all, my business.  The deals of my trade were but a drop of water in the comprehensive ocean of my business!” – The Ghost of Jacob Marley, A Christmas Carol by Charles Dickens

Following is a very brief discussion of the more prominent giving vehicles that help avoid taxes.

Gifts of almost any type of asset may be given to a charity, including cash, securities, real estate and life insurance.  There are also different vehicles that can be employed in charitable giving programs.  There are income and estate tax benefits associated with these vehicles.  The exact benefit depends upon variables such as the type of charity, the giving vehicle utilized, the type of asset being given, and your AGI (adjusted gross income). 

Following is a brief discussion some of the more prominent giving instruments: 

Donor Advised Funds

These are probably the fastest-growing charitable giving vehicles in the United States because they provide one of the easiest and favorable tax advantaged ways to give.  It is a charitable investment account that you can invest cash, securities, or other assets and you are generally eligible to take an immediate income tax deduction.  Even though the tax deduction is received up front, donations may be made over time while the investment account grows tax free. 

Pooled Income Fund

This is a type of charitable trust established and maintained by a non-profit organization.  Contributions are irrevocable and donors may receive an immediate partial tax deduction based on their life expectancy and anticipated income stream, but they must pay income tax on the income stream from the fund each year. 

Charitable Gift Annuity

This is where an asset is given directly to the charity in return for an unsecured promise by the charity to pay a guaranteed fixed sum each year for the life of one or more beneficiaries.  

Charitable Remainder Trust (CRT)

A person is able to convert appreciated, low-yielding assets into a sizeable income stream and at the same time avoid potential capital gains on appreciated property.  When the trust ends, the remaining assets will be disbursed to one or more charities.  The grantor receives a tax deduction for the present value of the remainder interest that goes to the charity.  There are two types: the charitable remainder annuity trust and the charitable remainder unitrust. 

Private Foundation

It is a charity set up as a corporation or a charitable trust.  It must apply for its tax exempt status and is usually administered by one or more people.  Due to its complexities and operating costs, it might be more appropriate for a donor making substantial gifts. 

Charitable Life Estate

This is a way to make charitable gifts without giving up the assets today.  For instance, you could deed your home to the charity, but retain the right to live in it for your lifetime. 

Note: it’s recommended that you discuss these with a qualified financial advisor and that you utilize experienced tax and legal professionals to implement these tax planning vehicles.

• You have appreciated and/or non-liquid property or ventures and would like them to produce an income in a tax advantaged manner. Since they are illiquid and/or would result in a significant tax burden, if sold, they provide no financial benefit either to you or the causes you believe in. 

• You are no longer able to itemize contributions to your church or qualified charities. 

• You are facing significant income taxes due to the sale of a business or due to a jump in taxable income. 

• You are a high income individual and would like to lower your tax bracket and tax liability. 

• You would like to help your church or qualified charities now, but not at the expense of your children’s inheritance. What if you could do both while, at the same time benefiting from an income or estate tax standpoint. 

• You have a high net worth and would like ideals on how to reduce or eliminate estate or gift taxes. 

• You would like recommendations from an income tax perspective regarding the best way to benefit your church or qualified charity.