U.S. Tax Code Encourages
Charitable Giving
When you give outright gifts of cash or other assets, you receive an immediate tax deduction, a component of the tax structure with which almost everyone is familiar. There are also two simple, yet creative, ways to donate and still retain the income of your assets: Charitable Remainder Trusts and Charitable Gift Annuities.
You also get tax deductions with these two methods of giving. Simply, they allow you to contribute cash or property, and they pay you an income for life.
A further advantage of Charitable Remainder Trusts or Gift Annuities is that you could use the income to purchase life insurance, which can become an inheritance for your heirs.
CHARITABLE REMAINDER ANNUITY TRUST
For example, Edna Inman, age 73, gives $50,000 to establish two permanent funds in her community foundation - $25,000 to benefit the local hospital and $25,000 to benefit the humane society. She had always intended to leave the money to them in her will. Instead of a bequest, she gives her money in the form of a Charitable Remainder Annuity Trust. (The charities do not receive direct benefit from these funds until the death of the donor.) The percent return on a charitable remainder trust may vary but must be at least 5%. The percent return is determined when the trust is established. Edna and her community foundation agree on a 6% return rate, so her income from her $50,000 gift is $3,000 annually for life.
Edna also receives a $29,510* charitable deduction (calculated on the basis of her age and rate of return), which she can spread over 5 more years if it is more than she is permitted to claim in the year she donated.
If Edna makes the gift with stock, she will also avoid capital gains tax on any appreciated value of that stock.
*Based on an 8.0% federal midterm interest rate and quarterly payments.
CHARITABLE REMAINDER UNITRUST
A Charitable Remainder Unitrust is very similar to a Charitable Remainder Annuity Trust except the trust assets are revalued annually. Therefore even though the percent of return remains constant, the payment amount to the beneficiary can vary. Additional contributions may be made to a unitrust.
CHARITABLE GIFT ANNUITY
A Charitable Gift Annuity is another way to make a donation and still receive income. A Charitable Gift Annuity is a contractual agreement between a donor and a charitable organization in which the donor transfers cash or property in exchange for a life income for himself/herself and/or other persons.
A gift annuity pays a fixed amount annually based on the donor's age at the time of the gift (the older the donor, the higher the percent of return). And part of each year's payment is tax-exempt income for the rest of the recipient's average life expectancy.
The community foundation, upon the death of the donor (or beneficiaries), uses the annuity to create a permanent fund, the income of which supports the causes or agencies of the donor's choice.
CHARITABLE LEAD TRUST
One other popular gift form, a Charitable Lead Trust, differs from Charitable Remainder Trusts and Charitable Gift Annuities in that the charity benefits immediately from the trust's annual income while the donors or their heirs subsequently receive the assets.
A Charitable Lead Trust names one or more charities to receive a specified percent annually for a period of time, and then the trust assets are returned to the donors or their heirs. When properly planned, this often avoids substantial federal estate taxes.
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