5 Ways to Give to Charity
Charitable donations can be a tremendous way to leave a legacy as part of an estate plan. They can also come with powerful tax advantages. Here are five ways to give to charity that will both enhance donation amounts and reduce tax burden:
- Outright Donation. Money or assets given to charity are a common way to aid a specific cause. From a tax perspective, they lower your taxable income in the year of the donation. Normally this is done at fair market value, however there are a few exceptions.
- Charitable Bequest. Rather than donating during life, a charitable bequest is a donation made by will. By outlining a gift in a donor's will, the gift is "taken off the top" of the deceased's estate once they pass. The donor also reserves the right to revoke the donation if they change their mind before they die.
- Charitable Remainder Trust (CRT). In a charitable remainder trust, a donor places assets into a trust for the benefit of the specified charity. The placement is irrevocable, however the assets can then be exchanged for other "income producing" assets. This income is then distributed back to the donor for the rest of their life. When the donor passes, the assets are gifted to the specified charity. This is a powerful tool for families with low basis stock. By using the remainder trust capital gains tax can be avoided completely, and the donor still collects an income stream.
- Charitable Lead Trust (CLT). This is essentially the opposite of a charitable remainder trust. In a CLT an asset is still placed in trust, however any income produced is distributed to the stated charity. When the donor passes, the asset is then either added back to the estate or gifted elsewhere. CLT's can also be constructed for finite periods, such as five or ten years, rather than until the donor's death.
- Donor Advised Funds. For people seeking a charitable deduction, but unsure what organization to assist, a donor advised fund might be best. Donor advised funds provide such a deduction, and allow for donors to distribute their gifts at a later date. They can also be invested in the interim.
There are many more options available for charitable giving when it comes to estate planning. The important points are to start early, and identify an organization you're both passionate about and that can manage donations effectively. Nothing is worse than a wasted donation due to ineffective management.