The Kapsak Law Firm, Attorneys and Counselors at Law, Longmont, Colorado

Home

How Many Ways Can I make a Gift to Charity?
Bruce Alan Danford, esq.

There are many ways to make a gift to a charity. The way most of us are familiar with is an annual pledge or an outright gift. But what if I want to give something to charity but I need the money to do something else also? Can I make a gift now which will continue on for many years? Can I give some money which will earn income and only the income be used by the charity thereby allowing the principal to continue earning income far into the future eventually exceeding the initial gift? Could I make a gift to the charity which earns money for the charity for a number of years and then the initial amount is returned to me? How about could I make a gift to somebody (child, friend, relative) who would get the earnings for a number of years and then the money would go to the charity? Can I leave money to the charity in my will? The answer to all these questions is YES!

A charitable gift can aid in your retirement planning, your estate planning, and your current tax planning. I will address each of these questions in general in the following paragraphs but please remember this is only meant to be for general information. Always, always check with your attorney or accountant for any specific results you may desire before attempting any of these strategies. Before I address these questions, a little background information may help.

Our society favors charitable giving. The most visible sign of societal support for charitable gifting are the various tax deductions available. There are several reasons for these tax deductions. The House Committee on Ways and Means in one of its few statements regarding charitable tax deductions stated in 1938:

The exemption from taxation of money or property devoted to charitable or other purposes is based upon the theory that the Government is compensated for the loss of revenues by its relief from financial burden which would otherwise have to be met by appropriations from public funds, and by the benefits resulting from the promotion of the general welfare. HR Rep. No. 1860, 75th Cong., 3d Sess. (1938)

The tax laws allow charitable deductions for income tax under Internal Revenue Code (IRC) §170, estate tax IRC §2055, gift tax IRC §2522. Some of the laws and regulations work against each other intentionally excluding a contribution deduction from being taken for two or more of the taxes at the same time.

A charitable remainder trust (CRT) is an irrevocable trust formed with two distinct parts (interests) to it. The two interests are the income interest and the remainder interest (the amount left over). The income interest is where the donor or another person (or persons) designated by the donor receives an amount from the property for life or a number of years. After the income interest period is over the remainder goes to the charity. A typical CRT could be as follows:

Bob is 80 years old and very committed to his charity. Bob started working at an early age and thinks everyone should be self-sufficient by age thirty. Bob has only one grandchild who he loves very much and wants to make sure the grandchild is provided for now and until the child reaches the age of thirty. Bob places a sum of money in a trust with instructions a fixed annuity amount (or a percentage of the trust assets) be given to the grandchild every year until the child reaches age thirty. After the grandchild reaches age thirty the balance left in the trust is to be given to Bob's favorite charity. Bob receives a current income tax charity deduction and a gift tax deduction.

A provision could be made in Bob's will to accomplish the same thing if Bob is worried about needing the money himself before he dies. There is a veritable alphabet soup of types of Charitable Remainder Trusts ie. CRAT, CRUT, NICRUT, NIMCRUT and FlipCRUT. All have different estate tax, gift tax, generation skipping tax, and income tax implications. The nice thing about such a variety is there is a wide enough range to generally accomplish whatever the donor wishes.

A charitable lead trust (CLT) is almost the opposite of the charitable remainder trust. In a charitable lead trust the charity gets use of the money first with the remainder then going to the beneficiary. The income tax advantages can make a CLT beneficial to the donor as well as the charity.

Mary is a very, very successful executive. She makes an excellent salary and as part of her employment contract is receiving a very large bonus this year. Mary does not need the bonus money at this time because of her excellent salary but she will need it in about twenty years after she has retired. Mary can form a charitable lead trust, put the money in the trust as the trust corpus and designate the income for twenty years to be paid to her favorite charity. Mary receives a charitable tax deduction on her income taxes equal to the present value of the estimated income of the trust. In the example we used 20 years because at the current allowed rates twenty years would be about the amount of time necessary to allow the present value of all the income to equal the contributed corpus amount. The charity would receive the income for the next twenty years and Mary would receive the corpus back in twenty years.

There may be other factors to consider such as the tax on the yearly earnings of the trust but the above example gives the basic framework. The charity received a steady income stream for twenty years, which allowed the charity a measure of security in their planning and budgeting.

Does the idea of a charitable remainder trust (CRT) sound interesting but the expense and bother of administering a trust sound just a little more complicated than you would like? A pooled income fund may be just the manner of gifting for you. Similar to a CRT, income is paid to the beneficiaries and then the remainder is paid to the charity. However, there are some important differences. One difference is the time period for the income interest can only be for the life or lives of beneficiaries. A CRT can be for either a number of years (say 20 years) or the life or lives of the beneficiaries.

A pooled income fund is just that, the funds are pooled. Say Bob, Fred, and Alice all want to receive income for life and then have the remainder go to the Red Cross. They could all set up individual CRTs (a CRT can not have commingled funds). Unfortunately the expense of administering each trust may eat away any income if the amounts they put into the trust are not sufficiently large. However, a pooled income fund does permit commingling of funds and therefore, because a larger amount can be administered, an economy of scale can be realized saving on costs and thereby allowing more to pass as income to the beneficiaries. This same commingling (pooling) also allows larger amounts to be invested. Larger investment amounts can result in greater percentage yields.

There are many, many ways to gift to a charity. Some can help an defer or completely eliminate taxes. In this brief article I have not explored the gifting of appreciated assets, qualified retirement plan benefits, IRAs, gift annuities, or many other possible manners of gifting to a favorite charity. There are many possible gifting methods which can ensure the charity of a needed gift while affording the donor with possible tax benefits.

Bruce Alan Danford, esq.
Mr. Danford is an estate planning attorney with an Illinois CPA Certificate, a Masters in Taxation, and a Juris Doctorate currently working at The Kapsak Law Firm, LLC and can be reached at (303) 651-9330.

Material presented on The Kapsak Law Firm, LLC, website is inteneded for informational purposes only. It is not intended to be professional advice and should not be construed as such. Use of this website is not intended to create an attorney-client relationship with The Kapsak Law Firm, LLC, or any member or affiliate thereof.
© 2 0 0 2 - 2 0 0 7 K a p s a k L a w F i r m , L L C A l l r i g h t s r e s e r v e d.