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Can charitable giving be a tax strategy in estate planning?

On Behalf of | Jul 20, 2015 | Estate Tax

Can charitable giving to a nonprofit actually have a financial benefit to donors or an estate plan? According to a recent article, that answer is yes. 

Specifically, financial gifts might allow an individual to reap tax benefits, in addition to ensuring a steady income during retirement. If a charity is named as the beneficiary on an individual retirement account, for example, those assets are excluded from the donor’s taxable estate. That, in turn, may reduce the amount that familial beneficiaries may have to pay in estate taxes.

A trust can also be used to accomplish charitable giving. Appreciated assets can be transferred to the trust, resulting in an income-tax deduction in the year of contribution. In fact, the deduction can also be carried forward to offset future income if it exceeds the donor’s income in that year. Best of all, the donor will avoid paying capital gains taxes on the appreciation of the assets that were transferred to the trust. The trust can sell the assets without consequence to the donor. Finally, a donor can also receive an annual income payment from the trust, based upon formulas set up by the Internal Revenue Service.

So what type of trust can accomplish this objective? The answer is a charitable remainder trust, which has two subcategories. One type is a charitable remainder unitrust, which pays a fixed percentage of the trust principal. Notably, the principal is revalued each year. The other option is a remainder annuity trust, which pays a fixed amount for life. When the term expires, the assets in the trust will go to the charity.

Source: CNBC, “Donations: The gift that keeps on giving for donors,” Shelly Schwartz, July 16, 2015


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