TRUST & ESTATE PLANNING

Answers to Your Year-End Charitable Giving Questions

Fiduciary Trust Forum

09.20.2016 - Gail E. Cohen

Making a charitable contribution can be a rewarding experience, both emotionally and financially. In this Fiduciary Trust Forum, General Trust Counsel Gail Cohen answers your questions about the potential tax benefits of philanthropy—just in time for year-end tax planning.

Q. How much of my contribution this year will be tax-deductible?

GAIL: In general, the answer depends largely on your adjusted gross income (AGI), what kind of property you are giving, and the type of organization that will receive the gift.

In the simplest example, if you are giving cash to a public charity, you may claim up to 50% of your AGI as a charitable donation. So, for example, if your AGI is $100,000 you can donate $50,000 in cash and claim the entire $50,000 as a deduction.

If you are donating appreciated property to a public charity, the deduction limit is lower, at 30% of your AGI. And, if you donate to a private foundation instead of a public charity, deduction limits are also lower—you can claim 30% of your AGI for cash donations and 20% when donating securities.

Q. Why would I donate securities instead of cash?

GAIL: Despite the lower deduction limitations for securities—30% of your AGI for public charities and 20% for foundations—donating appreciated stocks offers other advantages.

The full fair market value of the shares you give away can be claimed as a tax deduction, even if your cost for those securities was much lower, as long as you held them for greater than one year. For example, if you invested $1,000 in a stock that is now worth $2,000, you could claim the current value of $2,000 as a deduction. You will not pay capital gains taxes on that stock, and neither will the charity.

Q. Can I make a tax-deductible contribution this year that will be available for distribution to specific charities in the future?

GAIL: There are ways to make a tax-deductible gift to charity in a given year that will allow you to specify the charitable recipients in the future. One way is to use a donor advised fund and another way is to use a private foundation.

Donor advised funds are public charities and you can claim up to 50% of your AGI for cash donations and 30% for securities. Donors can make the gift today to a donor advised fund, and the assets can be donated by the fund to public charities that you suggest in the future.

This becomes a valuable tool for taxpayers who are facing a large tax obligation in years with unusually high levels of income. For example, we recently worked with a client who sold her business and was facing a substantial tax bill. But because her philanthropic goals were already established—she was donating $10,000 every year—we recommended stepping up those contributions by putting $100,000 in a donor advised fund. Indeed, she was able to fund a donor advised fund within a few days, which happened to fall between Christmas and New Year’s Day, and claim a charitable deduction for the contribution on her income taxes for the current year—thereby reducing the overall tax burden generated by the sale of her business.

Q. Do private foundations offer similar features?

GAIL: A private foundation can also offer flexibility if you can’t immediately decide which charity to support. However, the tax-deductible limitations for private foundations are lower than they are for donor advised funds, they may carry higher administrative expenses and you’ll be required to distribute at least 5% of the foundation’s holdings every year.

This can be challenging if you have a large foundation, where 5% may represent more money than you are comfortable donating to charities in a given year. To address this issue, a technique that has been gaining popularity recently is creating both a private foundation and a donor advised fund. In years when you don’t want to name specific charities for all 5% of the private foundation distribution requirement, you can give all or a portion of the 5% to your donor advised fund and still satisfy the 5% rule.

Q. When do charitable trusts make sense?

GAIL: There are two basic types of charitable trusts: Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs). It is important to keep in mind that today’s low interest rate environment affects both.

CRTs provide you or your beneficiaries with a stream of income over the life of the trust and turn over the remaining assets to a charity at the end of the trust’s term. How much of your contribution to a CRT is tax-deductible depends on the contribution’s present value, which is determined by an IRS calculation that is influenced by prevailing interest rates.

Generally speaking, low interest rates like the ones we have today reduce the present value of the remaining assets, and therefore reduce the amount you can claim as a deduction. In other words, a lower value means you won’t get as high of a charitable deduction because the calculated value of the gift may be quite small. The IRS requires the trust to pass along at least 10% its assets.

CLTs work the opposite way, making annual contributions to a charity and distributing the remaining assets to beneficiaries at the end of the trust’s term. You can deduct the present value of the amount the CLT distributes to charity. Lower interest rates work in favor of CLTs by increasing the calculated present value of the donated assets, thereby increasing your potential tax deduction.

In addition, any appreciation of the trust assets above and beyond the IRS-calculated interest rate is considered a tax-free gift to your beneficiaries. When rates are low, the opportunity to generate such excess return can be especially great.

Q. When is the best time to make a charitable donation?

GAIL: Although many people include bequests in their wills, giving directly to charity during your lifetime can be much more beneficial from a tax perspective. You’ll retain your income tax deduction, which otherwise would be foregone, while also removing the assets from your estate for estate tax purposes.

One way to include a charity in your will while also receiving an income tax benefit is to ask your surviving spouse to make the donation. If you want to leave a gift to the Museum of Art, for example, your will might stipulate that you leave $10,000 to your spouse, if he or she survives, with the request that he or she donate that amount to the Museum of Art. If your spouse doesn’t survive you, then you would give $10,000 to the Museum of Art.

This way, your spouse can claim an income tax deduction by making the gift during his or her lifetime. Of course, this is a non-binding request, so you’ll want to be confident that your spouse will honor your wishes. If the circumstances lend themselves to this approach, we recommend it often. 


This communication is intended solely to provide general information. The information and opinions stated are as of September 2016, and may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.


IRS Circular 230 Notice:
Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.

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