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Charitable Giving

Giving to charity can be overwhelming. We all want to “do good” and support our favorite causes, and most of the time it’s easier just to write a check instead of volunteering. Before you write the check, however, consider making a tax-wise gift that could actually put more in your charity’s and your pockets.

Gifts of stock

Yes, it’s really easy to write a check, but it may be to your advantage to give stock to your charity.

Let’s say you bought ten shares of Google stock for $200/share and now it’s appreciated to $550/share. That’s a $3,500 profit! What if you want to give some of your profit to charity?

You could sell the stock, pay the capital gains taxes (approximately 25%) and then give half of the proceeds to charity. You’d give approximately $1,300 to charity and keep $1,300 for yourself. You’d also get an income tax deduction of up to 35% depending on your tax bracket.

Alternatively, you could just give five of the shares directly to charity. The charity then sells the stock without paying capital gains tax. Therefore, the charity will get a donation worth $2,750 and you will receive more than double the tax deduction. You have kept five shares for yourself, and after capital gains taxes will still net $1,300. Or, if your goal was to give charity approximately $1,300, then you could give only three shares to charity, and keep seven for yourself. In any event, you come out ahead, with just a little more paperwork and some planning before December 31.

Does your favorite charity accept donations of stock? If not, and your donation is big enough, you may be able to convince them to open a brokerage account for this purpose. If the charity is not willing or able to accept stock, consider creating a Donor Advised Fund at the Silicon Valley Community Foundation, and they can handle a lot of the paperwork for you.

Charitable Remainder Trusts

Many larger charities will accept gifts of real estate, and you will enjoy the same tax benefits as that of appreciated stock. But, what if you are uncomfortable with giving all of your $1 million office building to charity? What if you need the income from the property today, but would be happy to leave some of the proceeds to charity at your death? A Charitable Remainder Trust may work for you.

A Charitable Remainder Trust (CRT) is an irrevocable trust that provides a steady income stream to the donor during his lifetime, and then distributes the balance of the trust to charity following the donor’s death. Because it’s a charitable trust, the donor can place highly-appreciated property (including real estate) into the trust and sell that property without paying capital gains tax. The donor also receives an income tax deduction for the benefit that will ultimately go to the charity.

Under federal law, the donor must take out at least 5% of the trust annually as income, but the income to the donor must be small enough to ensure that at least 10% goes to charity following the donor’s death. Calculating the maximum amount that the donor can take annually depends on the donor’s age and the federal interest rate in the month the trust is created. Typically, a CRT is set up as a “unitrust”, which allows the donor to get more income each year, provided the trust’s growth rate is higher than the income stream to the donor. Alternatively, if the donor wants a consistent amount of income, the CRT can provide an “annuity”, which gives the donor the same amount each year, and the charity will get the benefit if the trust grows faster than the annuity rate.

The donor can act as the trustee of his own CRT, and can reserve the right to change charities if he develops different interests by the time of his death. A CRT can also be pretty flexible in investments once the initial asset is sold. But, a CRT is not for everyone. Anyone acting as a trustee of a CRT should work with a good accountant who understands how to prepare income tax returns for charitable trusts. Also, the donor can’t just deplete the trust if needed for emergencies; the donor can only get the income percentage set up in the trust document. If the donor thinks that he may need the cash for a larger purpose, he’d probably do better setting aside a percentage of the asset for charity, and purchasing a flexible commercial annuity for himself.

Gifts of Retirement Accounts

You probably know that when you reach 70 ½ you must begin making withdrawals from your IRA or 401(k) plan. The minimum withdrawal is based on your life expectancy, and begins with about 1/27 of the value of your account. But, each year, you will have to take a larger and larger percentage of the retirement account, with the ultimate goal of depleting the entire account by your death. Each withdrawal is considered ordinary income and will increase your income taxes.

If you haven’t received all of your retirement account by your death, your heirs will receive the account, but they too will have to pay income taxes on the withdrawals. If you have a large estate, the account could be subject to both estate taxes (45%) and income taxes (up to 35% + 9.3% California). Even though there is a credit on the estate tax return for the income taxes, it’s still a huge tax bite!

Before you leave very little of your retirement account to your heirs, and a LOT to the IRS, consider naming charity as the beneficiary of your account. The charity doesn’t pay estate or income taxes, so it will receive the full value of your retirement plan. If you’re in the highest tax brackets, your children will actually lose very little. Instead of selecting a single charity as the beneficiary, you could name a Donor Advised Fund to receive the retirement account. Like a private foundation, your children will meet annually to select charities to benefit from the Fund. Your children would not receive the financial benefits of the retirement account, but instead would enjoy the opportunity to continue to work together to select charities that reflect your family’s values.

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