At different stages in our life we have different priorities. Somewhere along the line we begin to think in terms of helping others rather than accumulating more wealth. Let’s look at the basics.

Donating cash or other assets to a charity is deductible by you. If it’s a non-cash donation the amount of deduction is the fair market value of the property given. It doesn’t matter if the value is higher or lower than your cost. Let’s look at a possible scenario.

Let’s say that you purchased Alpha Great Technology stock several years ago for $1,000 and it’s now worth $500,000 and you desire donate it to your favorite charity. If you sell the stock, you will have capital gains tax on the profit which could be over $100,000 (federal and state taxes), greatly reducing the amount available to donate. But if you donate the stock without selling it, there is no taxable event to you and the charity now has the full $500,000 (or whatever amount you contributed) and you get a deduction for an equal amount. There is no tax on the sale of the stock by the charity. To restate the rule, the deduction is the fair market value of the property donated. The amount deductible in the current year may be limited, but any unallowed deduction is carried over to the next year. There are other technical considerations but remember, this article is keeping it simple.

Now, let’s talk about making such a contribution and receiving income in return. A charitable remainder trust (CRT) is a special type of nonprofit entity set up by you in which you make contributions. The income earned by the CRT is not taxed and distributions can be paid to you. This can be a high as 10% of value of the assets on hand. But let’s say the amount is determined to be 8%, which would be about $40,000 per year. This is taxable to you, but may be sheltered by the $500,000 deduction, which will most likely span several years due to annual limitations on the deduction. Upon your death the assets in the CRT are then distributed to the charity or charities you designate when setting up the trust. So what you have done is to set aside your desired contribution into the CRT which pays you tax sheltered income, while you are alive. Your favorite charity gets the donation upon your passing, achieving the objectives that you determined today.

This article is intended to be basic. There are many variations on what is discussed here and many solutions can be used in conjunction with each other. Hopefully you can see the power in creative and careful planning. The rules get complex and you must stay within the rules that govern type of planning instrument you choose. This simple, yet powerful, educational article is your first step in understanding how planning can be of great benefit to all concerned.

Depending on your philanthropic desires, the size of your estate and other things unique to you; objectives that many times are thought not possible can be achieved. You can achieve great success with your giving, still leave an estate for your heirs, create income and divert money from taxes to organizations that are doing a great job of achieving their mission which is alignment with your desires.

Next time we’ll discussed donor advised funds and private foundations.

Jim Colville is a CPA with over 35 years of experience.. His wealth of knowledge allows him to more than meet the needs of our aging population. Jim can be reached at 858 682 9668 or email directly to Jim@JimColvilleCPA.com

 

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