3 Ways to Give to Charity Before Writing a Will
Show your support while receiving unexpected benefits
Ric Edelman is a nationally acclaimed financial adviser, best-selling author and talk show host and has been providing financial advice to consumers for 25 years. His radio show, The Truth About Money, airs in 50 major radio markets around the country.
Today’s tax laws offer you many ways to support charities while giving you benefits you might not have expected — such as tax deductions and extra income from the assets you’ve donated.
Here are a few ideas you might not have considered.
Perhaps you want to make a donation so you can get a tax deduction this year but you haven’t yet identified which charity to support. Or perhaps you like the idea of setting up a foundation but want to avoid the hassle and costs of doing so. In either case, a donor-advised fund might be for you. With these programs, you donate cash, stocks, bonds and other securities to a managed fund specifically set up for this purpose. Unlike most professionally managed funds, these are designated as charitable organizations and thus entitle you to a tax deduction when you invest. Gifts can be as little as $10,000.
Once you invest (which is an irrevocable donation, by the way), you maintain control over how the money is invested.
The money remains invested until you decide when some or all of it is to be distributed to a charity. The money can be distributed over time and to multiple charities. You can even give to different charities each year. There are little to no start-up or administrative costs, and you get a larger tax deduction than when you donate to a foundation. (Donors can deduct up to 50 percent of adjusted gross income for cash contributions and up to 30 percent for appreciated securities; foundation deductions are limited to 30 percent and 20 percent, respectively. Deductions in excess of your adjusted gross income can be carried over for up to five years.)
Donor-advised funds are not legally bound to follow your recommendations (although as a matter of practice they generally do). Also, they will charge fees for their services (which are paid from the funds you’ve donated).
Charitable Gift Annuities
You donate assets to a single charity. These assets then become the irrevocable property of the charity, and the money becomes part of the charity’s general fund. In exchange for your donation, you receive monthly income for life; when you die, the payments stop and the charity keeps the remaining money.
Part of your donation is tax-deductible, and part of the income you receive is tax-free. Be sure to speak with a tax adviser to understand the implications of your gift.
Charitble Remainder Trusts
You establish a trust and name a charity as its beneficiary. You then fund the trust with some of your assets, such as stocks, bonds or real estate. You get a tax deduction in the year you make the gift, because your decision is irrevocable. Next, the trust converts the assets it has received into income-producing ones, if they aren’t already. (If you donated land, for example, you might have the trust sell the property and buy bonds.)
The trust must distribute at least 5 percent of its initial value each year. You decide who gets the income, how much they get and for how long — and you can name yourself if you want. Assuming you take the income for as long as you or your spouse live, the charity will receive whatever’s left at the second death.
Of course, whatever assets you give to the trust won’t go to your kids as an inheritance. If that bothers you, you can instruct the trust to buy an insurance policy on you and your spouse equal to the size of your gift, naming your children (or whomever) as beneficiaries. Premiums will be paid from the income produced by the trust’s assets, and upon your (or your spouse’s) death, the children will receive the insurance proceeds. And because they will be receiving their inheritance from insurance, not your estate, the cash passes to them free of income taxes, estate taxes and probate. A CRT lets you donate to charity while retaining income and preserving inheritances. It requires careful coordination with legal, tax and financial advisers.
Each of these ideas involves a lot of fine print.
Contact your financial and tax advisers for help with implementing any of these ideas.
This article is excerpted from Ric Edelman’s Inside Personal Finance. Ric's firm has won more than 75 financial, business, community and philanthropic awards, and currently manages $7 billion for more than 16,000 clients nationwide. For more about personal finance, visit Ric online at RicEdelman.com. The ideas expressed in this article are solely the opinion of the author, and do not express or imply endorsement of any individual, organization or product.
Copyright ©2012. Reprinted with permission. All rights reserved.