Everyone has their own reason for gifting their assets or a portion of their income to charitable organizations. Some find comfort in helping others who are less fortunate, while others simply want to share their good fortune. Many of the institutions of art, sciences and education are supported in large part by those who want to give something back in appreciation for their contributions to the community or the individuals themselves.
Presently, the tax code offers significant incentives for gifting one’s assets or income. Tax deductions are given for current contributions and, for estate owners, charitable gifts can reduce the size of the estate to help minimize estate taxes.
Since 2010 when Traditional IRAs were able to be converted to Roth IRAs without the income restraints, we have coupled stacking charitable gifts into a Donor Advised Fund with a Traditional to Roth IRA Conversion, thereby mitigating most of the tax of the IRA to Roth IRA conversion, while merely stacking up gifts that our clients were used to making annually anyway. In other words, for clients that were typically giving away $10,000 annually, we suggested they deposit $100,000 into a Charitable Donor Advised Fund, and we still manage those funds inside that Charitable fund, yet the contribution to same qualifies for an income tax deduction in the year of the gift (in MOST cases). This served to offset the additional income that the IRA to Roth IRA conversion necessitated, thus giving us a beautiful Estate Planning strategy with the Roths, all the while, still benefitting the same charities that the client was used to donating to. The monies CAN be distributed from the Charitable Donor Advised fund at ANY time, either lump sum, or annually, within certain standards, so the combination strategy worked brilliantly, if I don’t mind saying so myself!
Alternatively, some individuals will simply choose to designate a charitable beneficiary in their will to benefit the organization after their death. However, by using various charitable gifting techniques, a donor may be able to benefit the charity while living without having to sacrifice the income that an asset can generate. At Empowered Retirement, Inc., we understand how properly structured charitable gifts can provide current benefits for both you, and the charities you support; we’re here to help you and your charities.
Charitable Remainder Trust
This is a type of remainder trust that enables the donor to transfer an asset while retaining the right to the income it generates. The asset becomes the “remainder” which is owned by the charity. Remainder trusts, if properly structured, can qualify for a current tax deduction. There are three types of remainder trusts:
Unitrust: In a unitrust, the income the donor receives is based on a percentage of the current fair market valuation of a trust asset. Each year, as the asset is valued at year end, the new quarterly income amount gets paid out to the donor. Again, the amount of income is stated (and paid) as a percentage of the Charitable Remainder Trust’s December 31st value, which, of course, changes each year.
Annuity Trust: Instead of a percentage of the asset value, the donor is paid a fixed amount annually.
Pooled Income Fund: Donors can pool their donated assets in a fund that is operated by the charitable organization. The donors then receive a proportionate share of income from the fund that is paid throughout their lifetime. Payments can vary each year based on the valuation of the underlying assets in the fund.
Charitable Lead Trust
Also known as an Income Trust this vehicle transfers the income rights to the charitable organization. Generally, the income rights are assigned for a specified period of time after which the remainder passes to the donor.
Charitable planning involves tax issues that should be discussed with a qualified tax or financial professional.
For more information on charitable planning, please contact us today.