Many of the law firm’s estate planning clients in Riverside, San Bernardino, San Diego, Los Angeles, and Orange County have a desire to benefit society through charitable giving or philanthropy. The charitable giving may be current or it may occur in the future.
Some of our clients are looking to benefit charity right now and receive an income tax deduction. While this can involve something as simple as a gift of cash to your favorite charity, there are more tax-efficient ways to give. For instance, instead of giving $100,000 cash to your favorite charity, you could give the charity real estate or a stock or other investment worth $100,000. You would get a full charitable deduction for the $100,000 value, even though you may have only paid $20,000 for the real estate or stock. Depending on your tax bracket and other factors, a California resident could save as much as $48,000 in federal and state income taxes from the donation. Plus, you would avoid paying capital gain taxes on the appreciation above the $20,000 purchase price of the stock or real estate.
Charitable IRA Rollover
Another alternative for charitable giving is the Charitable IRA Rollover. Prior to Congress’s approval of Charitable Rollovers in December of 2015, a person who wanted to make a lifetime donation of an IRA to charity would first have to cash in the IRA. Then the cash from the IRA could be donated to charity. Because the IRA had to be liquidated, the owner of the IRA would have to pay income tax on the value of the IRA. He or she would then receive a charitable tax deduction for the amount to charity. But because of how the rules work, often the charitable deduction did not offset the income that had to be reported. That is no longer the case with Charitable IRA Rollovers. None of the IRA proceeds that are donated to the charity are reportable as taxable income.
Charitable Remainder Trusts
A Charitable Remainder Trust is a special type of trust approved by Congress in which the taxpayer donates cash of property to a trust. The trustee pays the taxpayer a designated amount each year. The amount paid can be fixed (annuity) or it can be a percentage of the value of the trust each year (uni-trust). Let’s look at two examples. In both examples the taxpayer contributes $100,000 to the trust. The length of the trust can be for the life of the person setting up the trust or other designated persons (subject to IRS rules) or the trust can last for a fixed number of years, not to exceed twenty years. At the end of the trust term, anything assets remaining (the remainder) are distributed outright to the designated charity. Thus, the name Charitable Remainder Trust or CRT.
In the first example the taxpayer set up a Charitable Remainder Annuity Trust or CRAT with a 5% distribution amount. Five percent of $100,000 is $5,000, so the trustee of the Charitable Remainder Annuity Trust would distribute a $5,000 annuity distribution to the taxpayer for the life of the trust. The distribution would never vary.
In the second example the taxpayer set up a Charitable Remainder Uni-Trust or CRUT with a 5% distribution amount. Because the trust is a uni-trust, the distribution amount is a percentage of the trust balance at the end of each year. The CRUT is initially funded with $100,000, so the trustee will distribute $5,000 in year one. Let’s say the trust balance at the end of year 1 is $90,000. There, the trustee would distribute $4,500 to the taxpayer in year 2. If instead the balance was $110,000, the trustee would distribute $5,500 to the taxpayer in year 2. If the trust can be invested in a manner to grow at a rate greater than the amount of the distributions and trust administration expenses each year, the amount distributed to the taxpayer would increase each year. But in those years in which the trust portfolio loses value, the taxpayer’s annual distribution would be less than the year before.
Charitable Remainder Trusts are often used to defer paying capital gains taxes. In this hypothetical, the taxpayer contributes his or her apartment complex in Riverside to the CRUT. After contributing the property to the CRUT, the trustee sells the apartment for $1 million. As the owner, the sale proceeds are paid to the CRUT. The trustee invests the $1 million. There is no capital gain tax paid because the Charitable Remainder Uni-Trust is a charity. The income and profits from the reinvested sales proceeds are used to pay the taxpayer his or her annual uni-trust distribution. The taxpayer not only avoided paying the capital gain tax on the sale of the $1 million apartment, he or she would get a tax deduction for a portion of the value of the donation to the trust. The charitable deduction would be based on interest rates the time of the donation, the age of the taxpayer or the time selected before termination of the CRUT, and other complicated rules set forth by Congress and the IRS.
Other Philanthropic Strategies
There are many other charitable planning strategies. Some strategies can be used while you are alive. These provide you an immediate charitable income tax deduction and the opportunity for your donation to be put to good use. Other strategies benefit the charity at your death.
One strategy is the gift of a remainder interest in residence or vacation property. Another popular technique for persons with very large estates that are subject to estate taxation is the Charitable Lead Trust or CLT. This trust is basically the opposite of a Charitable Remainder Trust. Other charitable planning techniques include gift annuities, donor-advised funds, private foundation and conservation easements. Call Riverside estate planning and tax attorney Dennis Sandoval to schedule your appointment to discuss your philanthropic desires and how best to achieve them.
Contact a Southern California Charitable Planning Attorney Today
If philanthropy is an important aspect of your daily life, why shouldn’t it play a comparable role in your estate plan? Our Certified Estate Planning, Trust, and Probate Law Specialists can assist you in the development of a charitable component within your overall estate plan that reflects your belief in philanthropy while simultaneously maximizing the tax advantages of charitable gifting.
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With office locations throughout Southern California, Sandoval Legacy Group, a Division of Holstrom, Block & Parke, offers representation for Estate Planning, Special Needs Planning, Trust Administration, Probate, and Conservatorships in Riverside, San Bernardino, Orange, San Diego, and Los Angeles County.