Articles: Three ways to leave gifts to charity
Giving to a charity through your estate can create a lasting legacy, yet this concept is not limited to the super-rich and famous. There are several possible tax-wise ways to accomplish your goals.
How can you do it? Consider these three basic techniques:
- Direct gifts: The easiest way to donate through an estate is to make an outright gift by will. Direct gifts do not provide any income tax benefits, but they reduce the size of your taxable estate. Upon death, the estate-tax exemption can shel- ter up to $5 million of assets bequeathed to non-spouse benefi- ciaries from estate tax (indexed to
$5.25 million for decedents dying in 2013 and $5.34 million in 2014). In addition, the estate of a surviving spouse may utilize the unused por- tion of a deceased spouse's exemption under a "portability" provision. The direct gift technique gives your estate even more flexibility.
- Retirement plan assets: Donating assets in a retire- ment plan account is another relatively simple way to give assets to a charity. All you have to do is to designate each charitable recipient as a beneficiary on your plan docu- ments. Because charitable organizations are exempt from income and estate taxes, the charity receives the full value of the amount transferred. Keep other assets for your heirs.
- Split-interest gifts: The third technique is more compli- cated than the other two. With a split-interest gift, you open up a trust and fund it with a lifetime gift. As a result, you are entitled to a charitable deduction at the time of the transfer. This enables you to retain some rights to the assets. Nevertheless, you still reduce the size of your taxable estate and avoid potential capital gains tax on assets transferred to the trust.
Split-interest gifts can take several forms. Here are a few variations on the theme:
~ With a charitable remainder trust (CRT), you transfer assets to a trust and name an income beneficiary, such as yourself or your spouse, to receive either a fixed payment or percentage payment for the trust term (subject to certain limits). The beneficiary pays tax on the income received from the CRT. When the trust expires, the assets go to a designated chari- ty or charities. As the donor, you are entitled to a tax deduction in the year of the transfer.
~ A charitable lead trust (CLT) takes the reverse track from a CRT. In this case, the charity is the one receiving annual income from the trust while the remainder goes to your heirs at the end of the trust term. Note that a CLT may be prefer- able to a CRT if you do not need current income. Again, the donor is entitled to a current tax deduction for a charitable contribution.
~ Finally, a pooled income fund (PIF) is a trust maintained by a charity. In effect, it is like a CRT, with the charity admin- istering the trust. As with a CRT, the donor may receive annual income, with the remainder going to charity. PIF contributions qualify for a current tax deduction.
Which of these three techniques, if any, is best for you? It depends on your personal circumstances. Be sure to talk matters over with your family before you determine a course of action.
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