Legacy building can be part of your estate plan, and this can include giving to charities. An act of giving can certainly be rewarding to you on a personal level, but it can also have some positive financial ramifications.
Charitable donations can be deducted from your annual tax return as long as the entity or organization that you donate to has attained tax exempt status with the Internal Revenue Service. This is one of the tax advantages, but giving to charities can also provide estate tax efficiency for those who need it.
At the time of this writing in 2013 the exact amount of the federal estate tax exclusion is $5.25 million. It could be somewhat higher next year as an allowance for inflation is added.
Those who are in possession of assets that exceed this amount do in fact need to take steps to mitigate their estate tax exposure.
Charitable Giving and the Estate Tax
The first estate tax benefit of any type of giving is the simple fact that you are reducing the value of your estate when you give to charity, so there’s simply less there to tax. This is true regardless of the way that you decide to give.
You often hear about foundations such as the Rockefeller Foundation or the Bill and Melinda Gates Foundation. While these names are synonymous enormous wealth, you don’t have to be in this type of company to start a private foundation.
There are a surprisingly high number of private foundations in the country, and most of them do not have permanent staffs. The majority are working with budgets that don’t reach the seven figures.
Donor Advised Funds
Donor advised funds are another possibility. A donor advised fund enables you to provide support for multiple different charities while only dealing with a single entity.
Your accounting is simplified, and the administrative costs are relatively low.
In addition to the tax deduction that you receive, contributions of appreciated securities are not subject to capital gains tax.
Giving to charities through the creation of charitable trusts is also an option for many people who have significant financial resources.
A charitable remainder trust involves you as the grantor receiving annuity payments throughout the term of the trust. The charitable beneficiary that you name when you create the trust assumes ownership of the remainder at the conclusion of the term.
With a charitable lead trust you have the reverse situation. The charitable beneficiary receives payments out of the trust for the duration of the term. After the term expires a non-charitable beneficiary that you choose is entitled to the remainder.
If you fund the trust with highly appreciable securities there could be a tax-free transfer of assets to the non-charitable beneficiary.
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Ryan M. DenmanandDennis D. Duffy
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