How Can My Charity and I Both Benefit from My Gift?
While many domestic partners have done some estate planning, few have truly created an estate plan as a couple. For example, most people name a beneficiary on their retirement accounts or insurance policies, but fail to name a back up or contingent beneficiary. As I tell my clients, it is important to have a back up just in case it’s a tie!
When domestic partners select secondary beneficiaries, they typically select a sibling, parent, niece, or nephew to receive the bulk of their assets. In many cases, however, parents and siblings are already financially stable. As for nieces and nephews, I attended a presentation by Larry Jacobs who said it best: do you really want to make someone else’s children rich? Probably not.
The other danger is that you and your partner might not tie. If you pass away first, will your partner continue to pass all of his/her assets on to siblings, parents, nieces, and nephews? If so, then your assets will go to his/her family rather than your own. I suggest that you and your partner take some time to decide how you would like to leave your legacy.
If helping others is one of your financial goals, consider tools and strategies that may help you maximize your ability to donate both today and after you have passed away. These strategies not only provide a benefit to your charity of choice, but they also can provide a benefit to you and your estate.
How Can My Charity and I Both Benefit from My Gift?
One popular estate planning technique is planned giving. You could receive an immediate income tax deduction. With a properly structured gift, you could realign your investment portfolio without paying capital gains tax on appreciated property. Another strategy may allow you to pass your estate on to your heirs while avoiding both probate and estate taxes.
Cash Donations
When helping to support a charity, most people choose to donate cash. Donations to charities registered with the IRS are usually tax deductible for those who itemize their deductions. The reason this method is so popular is because it is the easiest way to donate, but this option might not be the most economical way for you to support your favorite charity.
Your deduction for an outright gift will equal the value of your gift up to certain generous limits. You can carry forward any gift amount that exceeds these limits for up to five years.
Donating Appreciated Assets
In addition to cash contributions, consider donating appreciated assets, including securities if you have owned them for at least a year. The donated asset is assessed at full fair market value. You can take a tax deduction and avoid payment of capital gains taxes on the security.
For example, let’s assume that you own a share of stock that you purchased for $40 and it is currently worth $100. If you sold that stock for income purposes or to rebalance your portfolio, you would have to pay capital gains tax on the $60 of growth you received. If you held the stock for over a year, then you could have to pay up to 15% of your total gain in capital gains taxes. While paying $9 in taxes to sell one share of stock may not seem that bad, imagine if you sold 100 shares and had to pay $900!
Instead of selling your stocks or mutual funds, you could donate them to your favorite charity. The donation could be tax deductible and help you avoid paying capital gains taxes.
Donor-Advised Funds
Another way to give is through a donor-advised fund. Here’s how it works: You contribute cash, stocks or certain other assets, which are in turn invested in one or more investment options. The investment company manages the investment options to potentially increase the value of the initial contribution and produce a steady income stream. You can recommend eligible charities for grants from the fund over a period of time while taking an immediate tax deduction.
Advanced Strategies
Trusts may also play a role in a giving plan. They could help charities while benefiting you now and your heirs later. One popular option is a charitable remainder trust (CRT). By using a charitable remainder trust, the Trustee can sell highly appreciated gifted investments and reinvest the proceeds to generate income without paying capital gains tax. Thus, a properly planned gift could enable you to realign your investment portfolio without incurring any current income taxes. That could allow you to diversify your holdings and even increase your cash flow.
A CRT can be funded with a variety of assets, including stocks, bonds, mutual funds and real estate. The trust provides you with income for a specified time period, after which assets are transferred to the charity of your choosing. You will receive a tax deduction based on the amount the charity is estimated to receive after expenses.
Another possibility is acharitable lead trust. It provides a stream of income to a charity for a specific period. Upon dissolution of the trust, your heirs would potentially receive the remaining assets free of estate taxes.
The only thing you can’t do is take back your gift. You can’t start selling assets and then pocket the money. But depending on the strategy you select, you might be able to change the charity that will eventually receive your gift.
Making a donation to a qualified organization provides some very attractive benefits. There are other ways to leverage your assets to benefit others while helping you pursue your financial objectives. Discuss your options with your financial advisor, your estate planning attorney, and tax professional.
Whatever gifting strategy you choose, planned giving can be very rewarding. It’s wonderful to see your gift at work while receiving tax benefits on your donation.
Normally when I first discuss the need for clients to include their pets into their estate plan, they think I’m crazy. My wife and I, however, view this as a very serious issue. We feel that our dog, Fenway, is a part of our family. If we passed away while he was alive, we would want to make sure he was cared for by someone who is capable of and who wants to care for him.
This article is for informational purposes only and is not intended to provide specific advice to any individual. Consult your legal, tax, and/or financial advisor to determine what is appropriate for your situation.
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