Tax Reduction Strategies and Philanthropic Sensibilities

Like most wealthy individuals, you'd probably like to pass as much of your estate as possible to your heirs. At the same time, you may have one, or many, charitable interests to which you'd like to donate money. To find the balance, considering a structured philanthropic giving strategy for your estate is a must.

With the right approach, you can help reduce your estate taxes and be gratified in knowing that you're contributing to something you care about. Moreover, as you contribute to the substantial annual philanthropic giving in the U.S., you have more ability to control what happens with your assets and how they're used.

The first step requires evaluating your future cash flow needs, taking into account inflation and your long-term goals. Once you determine an amount, you should consider increasing it by 20% to 50%, to be safe. Afterwards you can decide how much you'd like to donate. Charitable donation options fall along a continuum: the more complex, the greater the potential tax-savings and the more ability you have to control your gifts. To pinpoint a strategy that will work best for your estate and your interests, consider the following options:

Straight charitable giving. Donations in their simplest form, this method comes down to writing a check. While the gifts are 100% income tax-deductible (subject to AGI limitations) from your itemized income tax, they don't affect the value of your estate.

Life insurance gifts. You can direct the payout from a policy to charity. With a revocable beneficiary designation, you can change the terms, but you won't receive a tax deduction. With an irrevocable beneficiary designation, the terms can't be changed, but you gain a tax deduction for the premium, making this the preferred choice for estate planning.

Appreciated property donations. By donating part of your appreciated property, you may be able to eliminate some capital gains taxes. This strategy is recommended for highly appreciated stock or real estate, or a large art collection.

Split-interest gifts. Available as a charitable remainder trust (CRT) or a lead trust, these options are mirror opposites:

• A CRT is an irrevocable donation useful for any type of gift, including cash that you donate in trust to a charity and then receive as an upfront income tax deduction. In return, you receive a payment from the trust either for a term of years or the life of the non-charitable beneficiary. After that interest terminates, the charity receives the remainder.

• With a lead trust, the charity becomes the income beneficiary during your lifetime. After your death, the assets revert to your heirs. Lead trusts are especially appropriate for reducing the value of stock in a business, while ensuring that the asset reverts to your family.

Structured giving. There are many strategies for ensuring that your legacy extends beyond your lifetime. Three giving vehicles to consider are:

• Donor-advised funds allow you to make recommendations for how the money will be used, but the final decisions are made by the independent organization. Tax deductions up to 50% of your adjusted gross income (AGI) are allowed. Generally, gifts must range from $25,000 to $100,000.

• Supporting organizations permit you to appoint people to the board of directors. The tax deduction allowed is also up to 50% of your AGI. Generally, gifts must range from $200,000 to $1 million.

• Private foundations provide you with the most control over how your gifts will be allocated, though tax deductions may be only 30% or less of your AGI. Generally, gifts should be in excess of $1 million.

In the end, when it comes down to being philanthropic, there's no hard-and-fast rule about how to do it. It's simply about how much time and money you can commit to charitable activities.

Any discussion pertaining to taxes in this communication may be part of a promotion or marketing effort. As provided for in government regulations, advice, related to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code. Individuals should seek advice based on their own particular circumstances from an independent tax advisor.

[ Return to Financial Planning]   [ Home ]   [ Return to Tax Reduction Strategies ]