The autumn harvest and holiday seasons are popular times for giving to charity. In addition to cash donations, there are a variety of tax-efficient ways a savvy donor can accomplish his or her philanthropic goals using appreciated securities (i.e., stocks, mutual funds, etc.).
Consider the following charitable planning strategies
Charitable Gift Annuity
A gift annuity allows a donor to receive a stream of fixed income payments after making a significant one-time gift to a charity. The donor makes a gift of appreciated securities to a charity and takes a charitable income tax deduction for the actuarial value of the gift. The charity is able to sell the appreciated securities, without paying capital gains tax and, in return, promises to pay the donor a lifetime stream of taxable income in fixed periodic payments. The donor must keep in mind that those payments are fixed in nature, and thus vulnerable to inflationary effects.
Charitable Remainder Unitrust
Using a similar strategy to a gift annuity, a donor may establish a charitable remainder unitrust (CRUT) for the benefit of a charity and transfer appreciated securities to that trust. The CRUT may then sell the appreciated securities and invest the proceeds, without incurring capital gains tax. The donor may receive a lifetime stream of taxable income from the CRUT, paid in periodic installments. In addition, for the year in which the gift is made, the donor receives a charitable income tax deduction for the actuarial value of the trust assets that will pass to the charity upon the donor’s subsequent death. By the terms of the CRUT, the donor's stream of income is adjusted annually to reflect changes in the value of the CRUT's assets, thereby providing the donor with the potential for protection against the effects of inflation.
Qualified Charitable Distributions
If appreciated securities are held in a Traditional IRA, current tax laws permit qualified charitable distributions (QCDs). Donors who have attained the age of 70 ½ must take required minimum distributions ("RMDs") from their Traditional IRAs annually. Due to the favorable income tax status of an IRA, there is no capital gains tax realized by the IRA when appreciated assets are sold in order to make distributions, but distributions are taxed as ordinary income. By making a QCD, the tax laws permit the donor to redirect all or part of his or her RMD amount (up to $100,000 annually) to a designated charity. The amount paid directly to charity is excluded from the donor's taxable income. A donor's tax advisor should be consulted before using any of these strategies to assure that the plan remains appropriate in light of any changes in tax laws affecting charitable deductions. These are just a few of the wonderful charitable planning techniques available. For more information, please contact one of our wealth management professionals.