How to Lend a Hand and Save Taxes
Compliments of The Litherland, Kennedy & Associates, APC, Attorneys at Law
Written By: The American Academy of Estate Planning Attorneys
With the proliferation of 24-hour news, it seems impossible to turn on the television, chat on social media, or pick up a newspaper without hearing about yet another natural disaster that has left people hurt, hungry, homeless, or worse. Whether the cause is a tsunami in Indonesia, a deadly disease epidemic in Africa, or a hurricane here in the United States, the pleas for help are all essentially the same – “Send assistance right away!” Few people can watch such devastation and destruction without feeling considerable empathy and at least a twinge of guilt; however, we also frequently feel powerless to do anything for victims that are halfway across the country much less on the other side of the world.
The good news is that there are ways you can help. A seemingly endless number of charities provide disaster relief as well as ongoing assistance to victims here at home and across the globe. The American Red Cross, for example, provides disaster relief around the world. Doctors Without Borders brings medical care to parts of the world where it would otherwise not exist. Giving a donation to reputable, established charities such as these ensures that your gift will be put to good use. Moreover, your charitable gifting can provide you with tax savings and be structured in such a way that it provides for your loved ones.
Making the decision to act is only the first – yet most important – step. Once you have decided to help by making a charitable gift, you then must decide what type of gift to make and how you wish to structure the gift. Gifts of cash are clearly the easiest gifts to make. By gifting cash instead of other assets, however, you may miss out on an opportunity to diminish your own personal tax obligation in the best way possible.
Gifting appreciated property, for instance, in lieu of cash often allows you to deduct the full fair market value of the property. How does this benefit you? You will not incur a capital gains tax obligation if you gift the property to charity instead of selling it. Imagine you own real property valued at $100,000 that was originally purchased for $50,000. In the normal course of business, you would potentially be liable for capital gains taxes at the rate of 20% on the realized gain from the sale of the property. In this case, you would be liable for taxes on the gain of $50,000. At the 20% tax rate, you would incur a $10,000 capital gains tax obligation upon the sale of the property. By gifting the property, however, you are able to deduct the current fair market value of $100,000 instead of paying capital gains taxes on the gain. In essence, you gain a tax deduction, avoid a tax liability, and know that you made a meaningful donation to a worthy cause.
Another alternative to donating cash is to create a Charitable Lead or Charitable Remainder Trust. A Charitable Lead/Remainder Trust combines charitable and non-charitable gifting in one Trust by allowing you to name both a charitable and a non-charitable beneficiary. Along with gifting to charity, your estate will benefit by reducing the value of your taxable estate for federal gift and estate tax purposes. If you elect to create a Charitable Remainder Trust, the Trust pays out a fixed dollar amount, or a fixed percentage, to a non-charitable beneficiary for a specific period of time. At the end of that time period, the assets remaining in the Trust are distributed to the charitable “remainder” beneficiary. Conversely, a Charitable Lead Trust pays out to a charitable beneficiary first with the remaining assets belonging to a non-charitable remainder beneficiary at the end of the specified payout period.
If you have decided to make a charitable gift and you want to ensure the benefits of your generosity are maximized, don’t wait. Consult with an experienced estate planning attorney today.