Giving to the Minnesota Dental Foundation
There are many different ways to give assets to Minnesota Dental Foundation and to other charities, each with their own income and estate tax benefits. Most charitable gifts can either be made during the donor’s lifetime, which provides an income tax deduction, or they can be made at death, which provides an estate tax deduction. For gifts to most charities, the income tax deduction is limited to 50% of the donors adjusted gross income. The estate tax charitable deduction is unlimited. Here are some of the more common ways to give to charity (click on the item to learn more about some of the advantages and disadvantages and the income and estate tax benefits of each type of gift):
CASH
STOCK OR OTHER HIGHLY APPRECIATED ASSETS
RETIREMENT ASSETS
LIFE INSURANCE
RESIDENCE
CHARITABLE TRUSTS
CASH
Cash gifts are the primary way that the majority of individuals satisfy their charitable intent. During lifetime, making a cash gift is as easy as writing a check to the charity, filling out a pledge form, or checking off a box in a dues statement. At death, charitable gifts can be made in a will or trust by making a special gift of a specified dollar amount or percentage of the estate to a particular charity or charities.
Many donors establish a pattern of lifetime giving to charities by giving cash gifts. Cash gifts provide many benefits to donors. Cash gifts are easy and convenient. They provide an immediate financial benefit to the charity. If made during lifetime, cash gifts allow the donor to take an immediate income tax deduction in the amount of the gift. If made at death, charitable cash gifts can help reduce any estate tax that may be due. Cash gifts can also provide the donor with recognition of the gift from the charity and the public both during life and after death.
STOCK OR OTHER HIGHLY APPRECIATED ASSETS
Another fairly simple way to satisfy charitable intent is to gift stock or other highly appreciated assets directly to a charity. This is an alternative to selling the highly appreciated assets and donating the proceeds of the charity as a cash gift. Gifting highly appreciated assets directly to a charity can provide a donor with a significant income tax savings if the gift is made during the donor’s lifetime. If a donor chooses to give stock or other highly appreciated assets that have been held for more than one year, the donor can take a tax deduction of the current value of the stock or the asset[1]. In this scenario, the charity gets the benefit of the full value of the stock or the asset, and the donor avoids paying the capital gains tax it would have occurred if the donor had sold the stock or asset and donated the proceeds to charity.
RETIREMENT ASSETS
At Death
Gifting an IRA or other qualified retirement plan to a charity at death will allow the charity to get the full benefit of the tax deferred assets without them being subject to income taxes would be imposed if the assets were left to an individual. If an individual has been named as the beneficiary of a tax deferred asset, that individual would have to pay income tax on the assets while he or she withdraws the assets from the account. Depending upon the size of the estate, these assets might also be subject to estate taxes, potentially leaving the heirs with 40% or less of the total amount of the property in the qualified retirement plan. When the tax deferred assets are left to charity, the charity does not have to pay income tax or estate taxes on those assets and can receive the full benefit of the assets immediately upon the death of the donor.
To make the charity the beneficiary of retirement assets, all that is needed is to fill out a change of beneficiary form. Again, the benefit of this type of gift is that it allows the donor to change the beneficiary designation as charitable intentions change over lifetime.
During Life
Through 2009 there is special legislation that allows Americans age 70 1/2 to make tax-free IRA contributions to most charities. There are special rules with regard to this temporary tax law change. You can make a gift up to $100,000 by transferring IRA assets directly to the charity. You do not have to pay income taxes for withdrawing the amount to be transferred to charity and you get a charitable deduction of up to $100,000 to offset income. This is a temporary provision and is a great way for individuals who have a high net worth, are charitably inclined, and have substantial assets in tax deferred amounts, to move assets to charity in a tax efficient manner.
Normally, in order to make a gift to retirement plan assets during the life or a gift in excess of $100,000 during 2009, the donor must withdraw the money from the plan, and pay the required income tax, and then make a donation to charity. This is a far less elegant solution and more costly from a tax perspective, but still an option for those who want to precisely control the amount and timing of a gift going to charity.
LIFE INSURANCE
At Death
Life insurance policies can also be gifted to charities. Using life insurance for gifting purposes can be either straightforward or somewhat complicated, depending up whether the donor is trying to get a lifetime income tax deduction. If a donor is not concerned about the lifetime income tax charitable deduction for the gift, he or she can simply name the charity as a beneficiary of the life insurance policy. This technique, while not providing any lifetime income tax benefit, can still provide a significant estate tax benefit to the donors’ estate in the form of a charitable deduction against any estate taxes that may be due upon the donor’s death. The only paperwork required to make the charity a beneficiary of a life insurance policy is a change of beneficiary form. One of the advantages of making a charity a beneficiary of a life insurance policy is it allows the donor the flexibility to change their beneficiary designation at any time.
During Life
In order to get a lifetime charitable deduction on your income taxes, the donor would need to gift the life insurance policy itself, and the charitable deduction will be roughly equal to the cash surrender value or the total cost of the premiums, whichever is less. This technique is a bit more complicated, and can involve creating an irrevocable life insurance trust, but it can also provide an additional tax benefit to the donor by permanently removing the value of the life insurance policy from the donor’s estate.
RESIDENCE
If a donor is interested in making a gift of his or her primary residence while still living in it, a donor can establish a life estate in the residence. In order to create a life estate, a donor deeds a remainder interest in the house to the charity now, and retains the right to life in the house for life. At the donor’s death, the charity would come into full ownership of the home and could sell the house and use the proceeds however the charity sees fit. For making this gift during life, the IRS allowed a donor an income tax deduction, and the value of the house is removed from the donor’s taxable estate.
CHARITABLE TRUSTS
With charitable trusts, they can either be established during the donor’s lifetime, which provides an income tax deduction, or they can be established at death, which provides an estate tax deduction. There are two major types of charitable trusts, Charitable Remainder Trust (CRT) and Charitable Lead Trust (CLT). The usefulness of the different types of charitable trusts vary depending upon where interest rates are and the estate and gift tax rates in effect.
Charitable Remainder Trust (CRT)
With a Charitable Remainder Trust (CRT), the donor sets up a trust, appoints a trustee, and then transfers assets to the trust. There are two types of CRTs, a Charitable Remainder Uni-Trust (CRUT) and a Charitable Remainder Annuity Trust (CRAT). With either type of trust the donor retains for an individual or individuals an amount between 5 and 50% to be paid out of the trust each year to the individuals (which could be the donor) designated by the donor. The donor receives a charitable deduction based upon the value of the remainder interest in the trust. The term of the charitable remainder trust can be anywhere from 2 to up to a maximum of 20 years. The larger the remainder amount that is left to the charity, the larger the income tax deduction the donor receives.
With a Charitable Remainder Annuity Trust (CRAT), the amount that is distributed each year to the individuals is established the day the donor makes the transfer to the trust. This amount does not change even if the value of the assets in the trust significantly increase or decrease. With a Charitable Remainder Uni-Trust (CRUT), the amount that is distributed to the individuals designated by the donor fluctuates each year and is established on a given date. Usually it’s a percentage (such as 7%) and will increase with the increasing or decreasing value of the trust assets.
Charitable Lead Trust (CLT)
The other major type of trust is a Charitable Lead Trust (CLT). With the CLT, the donor sets up a trust, appoints a trustee, transfers assets to the trust, and designates a charity to receive either an annuity amount or a uni-trust amount for a term of years. After the term of years expires, the balance is transferred to individuals that the donor specifies. The donor gets an immediate income tax deduction for the value of the stream of payments that are transferred to the charity. CLT can either distribute an annuity (CLAT) amount or a uni-trust (CLUT) amount to the charity.
[1] For appreciated stock held for less than one year, only the cost basis can be deducted.