Creative Giving: Philanthropy with Pizazz

Jan 20, 2018 Willow Creek Wealth Management Posted in Articles, Featured

Giving to a charity is easy, right? Write a check, send it off to your favorite 501(c)(3) organization, and get a full deduction for the amount on your tax return, up to 50% of your adjusted gross income. Though this is correct, there are more advantageous and rewarding ways to help the causes closest to your heart. For instance, instead of giving cash (which is basically what you’re doing when you write that check) you could try a more tax-friendly approach: give stock or mutual funds that have gone up in value during your ownership. You get a deduction equal to the full value of the securities at the time of donation, rather than how much you originally paid for them.

Charitable Remainder Annuity Trust

If you want your donation to provide income during your lifetime, consider a charitable remainder annuity trust (also called a charitable remainder unitrust), where you put money in a trust set aside for your favorite charity. Over the rest of your life you receive income each year. When you die, or the term of the trust ends, the remaining trust assets are forwarded on to the designated charity or even your own Donor Advised Fund where your heirs can be appointed successor donor and continue your philanthropic work. In each case, there is a tax calculation, based on the assets and the income you receive, which determines how much of a deduction you will get when you make the donation to the trust. And, you postpone paying capital gains on the property you contribute. The annual income from the trust is taxed first from ordinary income, capital gains, other income and then principal – a very tax-efficient approach.

How Does a Unitrust Work?

Let’s say you have $1 million worth of real estate originally purchased for $200,000. If you sold these properties, you would owe capital gains taxes on the $800,000 of appreciation, plus recapture of the annual depreciation deductions. Now let’s suppose instead, that you donated this property to a charitable remainder unitrust. The unitrust would sell the properties for $1 million and reinvest that money in stocks, bonds, or mutual funds. Under this arrangement, you might get income in the first year of $60,000 (6% of the trust amount), avoid $120,000 in capital gains taxes, and receive an immediate tax deduction based on IRS calculations for the expected remainder gift to charity. If the investments in the trust were to earn 7% a year annually (no guarantee, obviously), then the value of the trust would increase (less the 6% you withdraw annually), over the next 20 years, to just under $1.5 million, at which time the full amount would be donated to the charity. Overall, you might receive roughly $1.2 million in income over that same 20-year time period. Again, this figure depends on the earnings inside the trust.

Donor-Advised Fund

Finally, some families are creating a charitable inheritance, where the parents donate to a donor-advised fund, receive their tax deduction, and the donor-advised fund invests the assets to grow until the fund is told where they should be distributed. The children are designated as the advisor-donor to those assets, giving them the right to instruct the donor-advised fund where to make donations. It’s a simple, creative way to provide the adult children with an opportunity to determine their own charitable inclinations. The bottom line here is that giving can be more rewarding and more interesting than simply writing a check.