Gifts to charity in general can be outright gifts or can be through trust funds. Things to keep in mind when gifts are made to charities:
- Gifts to charity can reduce the amount of income tax you pay during the year the gift is made.
- Charitable gifts of tax deferred accounts (i.e. Standard IRA, 401-k and annuities) results in estate and income tax benefits. A retirement account may be subject to an effective tax rate of 75% when distributed to individual heirs (who therefore receive only 25% after tax) whereas a charity pays no tax so 100% goes to the charitable purposes intended.
- You can reduce the amount of estate tax with a gift to charity at death. What is not generally recognized is the an inheritance to family members can increase when gifts are made to charity due to the ability to deduct those charitable gifts from estate and income tax.
Gifts to charity in trust can be made “with strings attached”.
There are two aspects to any trust fund: who gets the current income (which is referred to as the “lead”) and who gets what is left when the trust ends (which is referred to as the “remainder”). These trusts can continue for a period of years or continue throughout the lifetime of the grantor of the gift.
- A charitable lead trust (referred to as a CLT) is one in which the charity receives current income (the lead interest) and the remainder interest is transferred back to the grantor of the gift when the term of the trust expires. Grantors will often simultaneously gift their remainder interest to family members to take advantage of the present day value of that future interest.
- A charitable remainder trust (referred to as a CRT) is one in which the grantor of the gift receives current income and the remainder interest is transferred to the charity when the term of the trust expires. Grantors will often create trust funds to hold life insurance to offset the distribution to the charity and use the tax deductions and increased income to pay for the insurance premium.
- If the income payments are a set amount then the trust is an annuity-trust: referred to as a CLAT or CRAT.
- If the income payments are a variable amount based on the market value of the trust then the trust is an uni-trust: referred to as a CLUT or CRUT. No less than 5% income can be distributed to the grantor of a gift.
- The value of the amount to be transferred to the charity must be no less than 10% of the initial value of asset to be contributed.
- Income tax deductions are achieved depending on the type of trust and the amount contributed and/or retained.
- Gifts of low basis assets are commonly used with CRTs. The charity sells the asset (pays no tax on the sale) and then makes the 5% distributions based on the higher net sales proceeds.
- Assets subject to debt cannot be contributed to these trusts. Therefore, any debt must be paid in full prior to contribution to the trust.
- Annuity trust do no allow for more than one contribution. Uni-trust permit multiple contributions using the same trust.