It shouldn’t come as a surprise that most charitable giving occurs during the last three months of the year, motivated both by altruism and pragmatism. The holiday season encourages generosity, while the desire to maximize charitable deductions spurs a flurry of year-end donations.
While most people tend to give directly to nonprofit organizations, there are a number of charitable giving vehicles that offer unique benefits. Some enable you to receive charitable deductions this year, while letting you decide when and where you want to donate the assets at a later time. Others offer partial charitable tax deductions but generate current income for you or members of your family for a length of time before the remainder is given to charity. In this article, we’ll take a high-level look at three popular options that you may have time to establish in 2018.
A donor-advised fund is a public charity that combines the tax benefits of direct giving with grant-recommendation capabilities similar to those of private foundations.
- Many donor-advised fund accounts can be funded with as little as $5,000.
- Fund accounts can be funded with gifts of cash, stocks, bonds or mutual funds. Some accept gifts of privately held or restricted securities.
- Fund donations receive the same charitable deductions as direct donations to a public charity.
- You can avoid paying capital gains taxes on appreciated gifts that are liquidated within the Fund.
- Fund assets are generally invested in mutual funds to enable the account to grow over time.
- In some cases, your advisor can manage the investments in your account.
- You can recommend grants be made to qualified public charities on a timetable of your choice.
- Members of your family or other designees (such as an advisor or attorney) can be given the authority to recommend grants.
- Most offer online access to account information and grantmaking.
- Investment options may be limited.
- The Fund’s trustees must approve all grant recommendations.
- Most Funds charge administrative fees, which may reduce the amount available for grants.
Charitable Remainder Trusts
A charitable remainder trust (CRT) combines partial charitable deduction benefits with the income generation of an irrevocable trust. As a Grantor, you fund your CRT with cash, securities or other assets. Income generated by the CRT is distributed to you or other beneficiaries over a specified length of time. At the end of this period, all remaining money is distributed to a designated public charity or charities.
- A CRT is often used to receive and liquidate gifts of restricted or privately held securities, life insurance and real estate as well as cash and public securities.
- You can avoid paying capital gains taxes on gifts of appreciated assets that are liquidated within the CRT.
- Beneficiaries can receive income from the CRT for life or for a period of up to 20 years.
- CRTs are irrevocable trusts that cannot be terminated by the grantor.
- Generally, CRTs are funded with cash or assets valued at $250,000 or more.
- Grantors may have little control over the CRT’s investments. In some cases, however, the grantor’s financial advisor may be given the authority to manage the investments.
- CRTs offer partial income tax deductions for the grantor based on complex calculations encompassing the length and type of the trust, estimated income payments and IRS assumptions about interest rates and the trust’s potential growth potential.
- CRTs must distribute between 5%-50% of their value to beneficiaries each year.
- At least 10% of a CRT’s value must always be reserved for remainder interest.
- Income to beneficiaries is taxable.
- CRTs may have significant setup costs and ongoing administrative fees.
- You must specify the charitable remainder beneficiaries when the trust is set up. Changing these beneficiaries may require legal counsel and additional trust administration fees.
Pooled Income Funds
A pooled income fund is a commingled vehicle with certain similarities to a charitable remainder trust. Donors receive partial charitable deductions, and designated beneficiaries receive current income from the Fund, with the remainder distributed to a charity or charities upon their death.
- You can fund your account with gifts of cash or public securities. Some accept gifts of restricted or privately held securities, life insurance and real estate.
- You can avoid paying capital gains taxes on gifts of appreciated assets that are liquidated by the Fund.
- You or other designated beneficiaries receive income generated by the Fund’s investments over your lifetime.
- When a beneficiary dies, his or her remaining interest is distributed to one or more designated charities.
- Unlike CRTs, pooled income funds do not need to maintain a minimum level of remainder interest.
- Account minimums generally start at $20,000.
- Your donations are combined with those of other donors, giving you limited control of how your assets are invested.
- Partial charitable tax deductions are based on the gift's fair market value, the beneficiary's or beneficiaries' ages and the Fund's estimated rate of return.
- Income to beneficiaries is taxable.
- Fund administration fees may reduce the amount of both current income and remainder interest.
Are any of these options right for you?
If you want to receive a 2018 charitable tax benefit for starting any of these vehicles, you should allow a least a month to establish and fund an account. However, it’s important not to let this end-of-year deadline rush you into a decision.
Your specific tax concerns, income needs, estate planning priorities and charitable giving goals need to be carefully considered before you choose any of these options. That’s why it’s important to consult with your accountant or tax or trust attorney to gain a deeper understanding of these vehicles’ benefits, costs, and limitations.
You may also want to invite your financial advisor to participate in any meetings or calls with these individuals to address investment-related issues.
©2018 Canby Financial Advisors