Charitable Giving – Shift focus from estate tax to income tax planning

Feb 6, 2015 9:29:18 AM



Good news for the world of philanthropy: Charitable giving is, once again, on the rise. It dipped sharply during the recent recession; however, in the last couple of years, individual giving has increased in both current and inflation-adjusted dollars. We’re still not back to pre-recession levels, but the trend in charitable giving has been and continues to be positive. (Source:  National Center for Charitable Statistics) For estate planning professionals and their clients, it’s an appropriate time to revisit charitable giving with a view toward identifying new opportunities and assessing how a charitable giving plan works within the broader estate planning strategy. 

While it’s too early to assess the full impact of ATRA on charitable giving, with a federal tax exemption today of nearly $11 million for married couples, it’s clear that for many estate planning professionals and their clients the attention has shifted from transfer tax planning to income tax relief, asset protection, business succession and other family legacy matters. Given these shifting priorities, it’s no surprise that charitable giving’s role is shifting as well. 

Nonetheless, there are a variety of tax-advantaged vehicles available to individuals, allowing them to make a real contribution to the social good. High income earners – especially clients who own highly-appreciated assets – should consider a specific type of trust especially suited to those with a passion for philanthropy: the Charitable Remainder Trust.

A Charitable Remainder Trust (CRT) is a special form of irrevocable trust that provides benefits to multiple parties: the donor, the individuals receiving income from the CRT and the qualified charity. Typically, the client will donate a highly appreciated asset(s) to the CRT. In return, the donor will receive income or other trust distributions back from the trust during the donor’s life. It’s possible to structure these “noncharitable” distributions to also benefit the donor’s spouse or kids, depending on whether the trust meets strict IRS rules for viability. At the end of that noncharitable term, the remainder of the trust is distributed to the charity or charities selected by the grantor.

The donor receives an income tax charitable deduction, and the highly-appreciated assets in the CRT are sold free of capital gains tax (because the CRT is tax exempt). The qualifying charity may be adjusted over time, and may even be a private charitable foundation established by the grantor, allowing future generations to guide the family’s philanthropic activity.

My advice: Make charitable giving a part of your estate planning checklist. Discuss charitable strategies with your high income or net worth clients to see how charitable giving can support their income tax and estate planning goals. For clients who are seeking to reduce their tax burden while making the most of highly appreciated assets, a Charitable Remainder Trust is certainly one way of doing well while doing good. 

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