Almost all charitable organizations
have one thing in common. They rely
on donor support to carry out their tax-exempt
purposes. However, attracting donors and
receiving sufficient funds to continue operations
year-to-year is often challenging and timeconsuming,
requiring valuable resources that an
organization might or might not have. Following
is a guide for charitable
organizations that want to
elevate their pitch to potential
donors by highlighting the tax
planning benefits available to
your charitable organization
and the donor.
Income Tax vs. Estate Tax
It is important to understand
which type of tax most
concerns the donor. In most
instances, it will be the immediate benefits: “Will I
get an income tax deduction from this donation,
and how much will it save me in income taxes?” But
focusing solely on the immediate benefits ignores
the value of a proper charitable giving provision
within an estate plan.
The donors most sought after, those with
significant assets, likely have an estate that is or will
be subject to estate tax. With the current estate tax
rate at 40 percent and the estate tax exclusion (the
amount that can pass to a decedent’s heirs free
of estate tax) set to be cut in half in 2026, these
high net worth individuals are likely to consider
charitable planning as a means of mitigating or
eliminating future estate taxes.
Understanding the Assets
Not all assets are equal when it
comes to charitable giving. For
example, donating a minority
interest in a closely held
corporation may not provide
the same charitable deduction
benefits as a gift of publicly
traded securities. In addition,
the gift of the closely held
corporation generally results in greater complexity
for the charitable organization, often leading to
compliance issues that a nonprofit might not have
the resources to address properly.
Donors often are willing to use retirement funds for
charitable giving. Retirement fund distributions are taxable at ordinary income tax rates, whether
received by the original owner of the fund or a
beneficiary. Retirement plans are also subject
to estate tax if the owner has a taxable estate.
The ultimate tax rate on inherited retirement
funds can exceed 40 percent. As such, the
donor can generate significant tax savings by
leaving retirement funds to a charity, generally
higher than tax savings achieved by donating
other estate assets.
During life, a donor meeting the age
requirements can also make a qualified
charitable distribution from their retirement
plan directly to a charity and exclude the
distribution from income. Because those
distributions will count as part of their
required minimum distribution, donors can
get a greater overall tax benefit by using this
strategy for their charitable giving.
Nonprofits that understand and can discuss
the tax consequences of donating different
kinds of assets to both the donor and the
charitable organization will go a long way to
protecting the organization and impressing
the donor. Organizations should have a written
policy that addresses the types of donations
they can and will receive. This will help
guide discussions with potential donors
and provide guidelines for minimizing risk to
the organization.
Charitable Trust Strategies
Many high-net-worth individuals explore
using trusts to accomplish some of their
charitable giving. These types of trusts can
provide both income tax and estate tax
savings to the donor and can also provide
a significant benefit to the charitable
organization beneficiary if structured and
funded correctly. Two types of charitable
trusts are generally used; a Charitable
Remainder Trust (CRT) or a Charitable Lead
Trust (CLT). A CRT has a non-charitable
beneficiary during the term of the trust,
with the remainder payable to a charitable
beneficiary. A CLT is the reverse, with a
charitable beneficiary during the term of the
trust and the remainder payable to a noncharitable
beneficiary.
Charitable Remainder Trust: Donors
preferring to receive income tax benefits
generally use a CRT. The donor will typically
fund a CRT with low-basis assets that
the CRT will then generally sell. The gain
recognized on the sale will then pass to the
non-charitable beneficiary over the term of
the CRT, which allows the non-charitable
beneficiary to spread the tax effects of the
gain over multiple years instead of in one
year. Often a charitable organization will
help manage a CRT, on the one hand, to
relieve some of the administrative
burdens, but also to maintain greater
control over the trust investments to
ensure a greater remainder value for
the organization.
Charitable Lead Trust: Donors generally
use a CLT for estate planning purposes
either to limit future appreciation and
“freeze” the value of the assets included in
the gross estate or to provide a charitable
benefit without giving away an incomeproducing
asset. Donors can claim an
income tax deduction for a portion of the
transfer to the CLT, but if they do they will
essentially recapture that deduction in
future years when they will be responsible
for paying income tax on the earnings of
the CLT. If they do not claim an income
tax deduction, then the CLT itself claims a
charitable deduction when payments are
made to the charitable beneficiary.
Payment Terms:
Both a CRT and a CLT can be structured
either as an annuity or a unitrust. An annuity
is calculated when the trust is funded, and
the income beneficiary—the non-charitable
beneficiary of a CRT or the charitable
beneficiary of a CLT—will receive the same
amount each year for the term of the trust. The
annuity is generally calculated to allow for a
residuary payment to the remainder beneficiary
when the trust terminates, but if the trust assets
lose value over time, the annuity payments may
fully deplete the trust assets.
A unitrust payment helps to hedge against a
potential loss in the value of the assets in the
trust. The unitrust payment is a percentage,
typically between five and ten percent,
calculated annually using the fair market
value of the trust assets as of a defined date.
This means that the annual payment owed to
the income beneficiary will either increase or
decrease as the assets of the trust increase or
decrease. In other words, it puts all beneficiaries
on the same side, benefitting if the assets are
properly invested to allow for future growth.
Other Considerations
Many, if not most of the families we work
with who are charitably inclined, want a
charitable legacy that will carry on through
the generations. They are often provided
with the option of creating their own private
foundation or contributing to a donoradvised
fund, allowing all family members
to plan for charitable giving together.
While these recommendations will provide
them with a method for maintaining their
charitable giving into the future, they are
not the only options that can and should be
provided to donors. One often overlooked
option is to find a charitable organization
whose exempt purpose resonates with
the family and help fund an endowment
that can provide a lasting income stream
to the organization. If fundraising for an
endowment is done properly, and the
organization can speak to the family’s desire
to have a charitable legacy that will continue
for years, then both the donor and the
organization benefit.
