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Originally published in the Times Reporter, New Philadelphia in May 2008.
Every day we make decisions on whether or not to make a financial contribution to our favorite charities. These types of gifts include cash gifts, gifts of securities, or gifts of real estate. You should also consider making charitable gifts in your estate plan. These types of gifts include: cash bequests, gifts of securities, or gifts of real property in your will or revocable living trust; naming a charity as a beneficiary of your retirement accounts; or establishing a charitable trust. In order for a gift to a charity to be eligible for either an income tax deduction or an estate tax deduction, you need to make sure that the organization is an IRS tax exempt organization. Please see www.irs.gov/Charities-&-Non-Profits/Search-for-Charities to determine if a charity is tax exempt.
The simplest way to leave assets to a charity is by a gift in your will or revocable trust. This gift can be a specific dollar amount or a percentage of your assets. Since this gift can be amended or revoked at any time, you do not receive any current income tax benefits; however, upon your passing, your estate would receive an estate tax charitable deduction.
Naming a charity as a beneficiary of your retirement accounts (IRA, 401k, or annuity) is made on your beneficiary designation form for that particular retirement asset. Since this beneficiary designation can be amended or revoked, you receive no current income tax benefit; however, upon your passing, your estate receives an estate tax charitable deduction. These are great assets to pass to a charity because the charity will not pay any income tax which a non-charitable beneficiary would pay. If a child inherits this type of asset, he or she may only net 30% of the asset, whereas a charity would net 100% of the asset.
A charitable remainder unitrust (“CRUT”) is a trust into which an individual makes a contribution of property in exchange for an income interest payable for the life of one or more non-charitable beneficiaries. On the death of the donor, the trust assets pass to the charitable organizations named in the trust document. A CRUT qualifies for an immediate income tax deduction and an estate tax deduction upon your death.
The greatest advantage of using a CRUT is that the donor does not recognize gain or loss on the transfer of assets to the trust. The trust itself is exempt from income tax, so it too avoids recognizing any taxable gain. The result is that an individual can transfer appreciated property to a CRUT and the trustee can sell the property and reinvest it without any capital gain.
For example, Mr. Jones, age 65, inherited shares of stock in a local bank from his father in 1954 which was then worth $50,000. While the stock is now worth $300,000, its dividend yield is only 2%. Mr. Jones would like to sell the stock, but the capital gains tax would be $50,000. By creating a 7% CRUT, Mr. Jones can transfer the bank stock to the trust where it can then be sold free of any capital gains tax with the full $300,000 reinvested. Instead of receiving a $6,000 dividend as he did when he owned the stock, he would receive $21,000 from the CRUT. In addition, Mr. Jones is entitled to an immediate income tax deduction of $107,000 which he can use in the current year and carry forward any unused portion of the deduction for up to five years. The $300,000 will not be taxed in his estate, saving as much as $21,000 in Ohio estate taxes and as much as $135,000 in Federal estate taxes.
Finally, upon Mr. Jones’ passing, the entire amount of assets in the CRUT pass to the charities which Mr. Jones names in the CRUT.
If you are charitably inclined, please consider your church or another area charity when developing your estate plan.
NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.