Types of Charitable Planning and Their Tax Benefits

Charitable Planning

Charitable planning is gaining popularity not just for those with philanthropic desires, but also for those looking to take advantage of certain tax benefits that charitable planning may provide. The creation of a charitable trust is one popular form of a charitable gift. Charitable trusts are created for religious, scientific, literary, or educational purposes, when an individual has charitable intent, yet also seeks to provide a benefit for non-charitable beneficiaries. The major benefit of utilizing charitable trusts is that it provides the donor with an income tax deduction based on the type of trust used and the value of the gift. Similarly, there is an estate tax benefit since the value of the assets gifted into the charitable trust can be removed from the donor’s estate for estate tax purposes.

There are two types of charitable trusts, each one used for a different purpose. The first type of charitable trust is a Charitable Remainder Trust (a “CRT”). A CRT is an irrevocable trust which generates an income stream to either the donor, or beneficiaries of the donor, for a certain period of time, with the remainder being distributed to one or more charities. A CRT can be in the form of a Charitable Remainder Annuity Trust, whereby the income beneficiaries receive a fixed annuity each year, or a Charitable Remainder Unitrust, whereby the income beneficiaries receive a percentage of the trust assets each year. CRTs are preferred in situations where an individual seeks an income stream for himself or others but ultimately wishes to benefit a charity.

The second type of charitable trust is a Charitable Lead Trust (a “CLT”). A CLT works in an opposite fashion of the CRT, as it is an irrevocable trust that generates an income stream for one or more charities, with the remainder being distributed to individual beneficiaries chosen by the donor. A CLT is preferred in situations where an individual does not need an income stream, and wishes to take advantage of receiving an immediate income tax deduction. Regardless of whether a CRT or a CLT is used, the trustee of the trust has a duty to act in good faith and invest the assets prudently, while treating the individual and the charitable beneficiaries equally.

An alternative approach to charitable planning is through the use of a charitable foundation. A charitable foundation is an organization that is established by an individual to support various charities. The organization is managed by a Board of Directors, who is responsible for accepting charitable contributions, investing the assets, and making distributions to charitable organizations. Once a foundation is established, the entity can apply to be classified as a 501(c)(3) private foundation with the Internal Revenue Service, which will classify the entity as tax-exempt. A foundation is more flexible than a charitable trust in the sense that it can make contributions to public charities, as well as grants to individuals and scholarship programs. Additionally, family members can participate in the operation of the foundation or serve on the Board of Directors. Most importantly, it creates a lasting legacy for the donor.

Overall, there are many different options for those interested in charitable planning, each with its own benefits. Contact Katz Chwat, P.C. to discuss which option is best for you.

Posted in: Tax, Estate Planning