Charitable Giving Strategies That May Pay You Back

It appears that American generosity is built to withstand adversity. Although total U.S. charitable giving fell by nearly 4% in 2009 — perhaps the most economically difficult year since the Great Depression — individuals cut back on their giving by less than one-half of 1%.1

This says a lot about what is important to charitable givers. During a time when many consumers and organizations were looking for ways to cut expenses, individual donors apparently decided that giving was not an expense worth cutting. In a survey of wealthy individuals from around the world, Americans were more likely than Europeans or Asians to say that the ability to give to charity was one of the benefits of wealth.2

Where do Americans get their penchant for philanthropy? Although Americans may indeed be generous, it would be an oversimplification to say that they lead the world in philanthropy because they are more generous. U.S. tax law treats charitable giving more favorably than do tax laws in many nations. One example is the way in which certain types of charitable trusts can be used to help reap even greater tax benefits.

Charitable Remainder Trust

A properly structured charitable remainder trust provides the opportunity to receive tax benefits and a potential income from an asset donated to charity. A grantor who places money, securities, property, and/or other assets in a charitable remainder trust can designate an income beneficiary, even if it is the grantor himself (or herself), to receive payment of a specified amount (at least annually) from the trust. Upon the grantor’s death, the trust assets are transferred to the designated charity and won’t be counted as part of the grantor’s estate for estate tax purposes. The grantor may also qualify for an income tax deduction on the estimated present value of the remainder interest that will eventually go to charity.

Charitable Lead Trust

A charitable lead trust takes a nearly opposite tack. The grantor places an asset in an irrevocable trust on behalf of a designated charity, and any income generated by the asset during the trust period goes to the charity. After the trust period, the remaining trust assets are passed to the grantor or the grantor’s designated beneficiaries. This eliminates current capital gains taxes on the donated assets, a valuable benefit when the donated assets have experienced high appreciation. This strategy also could potentially reduce estate taxes because the trust assets are no longer considered part of the grantor’s estate.

Keep in mind that donations to both types of charitable trusts are irrevocable; therefore, the assets cannot be withdrawn once the trusts are formed. Also, some charitable organizations may not be able to use all possible gifts. It is prudent to check first. The type of organization you select can also affect the tax benefits you receive.

The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate conservation professional and your legal and Naperville tax advisors before implementing such strategies.

Giving to a good cause and benefiting your family’s financial situation are not necessarily mutually exclusive. An examination of your charitable giving desires and financial situation may reveal some overlooked opportunities.

1) Giving USA Foundation, 2010
2) The Wall Street Journal, May 24, 2010

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Friday, February 25, 2011