Giving away hard-earned cash/stock/etc. to charity is one of the most rewarding investments you can make. As well, those who give to others are usually rewarded in the form of tax breaks. Financially speaking, charitable donations can be an important part of your estate, tax, and financial planning. In this post, we will dive into some of the best options when it comes to charitable giving.
Qualified Charitable Distributions
According to the IRS, a qualified charitable distribution is “an otherwise taxable distribution from an IRA (other than an ongoing SEP or SIMPLE IRA) owned by an individual who is age 70½ or over that is paid directly from the IRA to a qualified charity.” In other words, if you’re over 70½ and contribute to a qualified charity from your individual retirement account, you will not need to pay income tax on that distribution. An important thing to note here is that it’s often better to transfer the funds directly to the charity from your IRA as opposed to making a withdrawal and then transferring the cash. Custodians like Charles Schwab will send a check to the address on your account but make the check payable to the charity. It is important to keep a copy of the check for your tax records.
After a donation is made, this amount is excluded from your taxable income, thus less tax is paid at the end of the year. This donation is treated differently than regular withdrawals from your IRA.
What is A Charitable Trust?
According to howstuffworks.com, a charitable trust is defined as “a set of assets that a donor signs over or uses to create a charitable foundation.” These assets are then held and managed in the trust for a specific amount of time with donations going to a charity. The income from the trust can be distributed in the form of an annuity (permanently specified amounts every year) or a unitrust (annual payments based on a percentage of the trust’s value each year, thus subject to change.)
The two main types of charitable trusts are remainder trusts and lead trusts.
- Charitable Remainder Trust (CRT). A charitable remainder trust is a “split-interest” giving vehicle that allows you to make contributions to the trust that are eligible for a partial tax deduction. The tax deduction is based on the CRT’s assets that will pass to charitable beneficiaries.
You can name yourself or someone else to receive a potential income stream for a term of years or for the life of one or more non-charitable beneficiaries, then name one or more charities to receive the remainder of the donated assets after the end of the term.
The assets are held in the name of the donors for a specified amount of time and are generally given to the charity after the donors have passed. For example, the biggest charitable trust in the world, the Bill and Melinda Gates Foundation, will donate all of the assets to charities before the 50th anniversary of Bill’s and Melinda’s death.
There are two types of CRTs:
- Charitable remainder annuity trusts (CRATs) distribute a fixed annuity amount each year, and additional contributions are not allowed.
- Charitable remainder unitrusts (CRUTs) distribute a fixed percentage based on the balance of the trust assets (revalued annually), and additional contributions can be made.
- Charitable Lead Trust (CLT). The other type of charitable trust is a lead trust. The lead trust is essentially a mirror image of the CRT with one main difference. In a CRT, the charity receives the remainder while the non-charitable beneficiaries receive the income stream. A CLT is the opposite; the charity receives an income stream during the trust term with the remainder going to a non-charitable beneficiary. The CLT income can be in the form of an annuity or unitrust as well.
To clarify, any interest that comes from the trust’s assets goes to the charity, and when the trust expires, the assets revert back to a party of the donor’s choosing, usually their heirs or beneficiaries.
Benefits of A Charitable Trust
- Income tax deductions. With a charitable trust, you have the potential to take a partial income tax charitable deduction when you fund the trust which is based on a calculation of the remainder distributed or the estimated income to be received by the charitable beneficiary.
- Tax exemption. The charitable trust’s investment income is exempt from tax. This makes a charitable trust a good option for asset diversification.
In summary, charitable giving will not only benefit others but also you as a taxpayer. It’s usually a win-win for both parties as charities will receive much-needed funding and the donors receive access to tax breaks.
We hope that you found this helpful in understanding what options you have when it comes to charitable giving. If this is something you wish to further pursue, contact us to discuss your situation.