Save Taxes, Send Aid
Compliments of the Slaton Schauer Law Firm, PLLC.
Written By: The American Academy of Estate Planning Attorneys
Edited By: Andrew T. Slaton-Freeman
I. Disaster Strikes
June 1st is almost here, and hurricane season is upon us again. Few people can watch such devastation, destruction, and loss of life without feeling both considerable empathy and at least a twinge of guilt; however, we may also feel powerless to do anything for victims who are halfway across the United States… much less victims of disasters across the world.
II. Help Arrives
The good news is this: you can help. Both local and national charities provide a combination of immediate disaster relief and ongoing assistance to disaster casualties. The American Red Cross, for example, provides disaster relief both within our borders and around the world. Doctors Without Borders brings medical care to parts of the world where it would otherwise not exist. The ad hoc “Cajun Navy” rescued victims during Hurricane Harvey and focuses on disaster recovery in southern states. Giving a donation to reputable charities ensures that your gift will be put to good use. As a bonus, your charitable gifting can provide you with tax savings and can even provide support 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 lower your own personal tax obligation in the best way possible.
III. Gifts of Property
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. Consider the numbers: let’s say you own real property valued at $100,000 that was originally purchased for $50,000– a very smart purchase! 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 1) gain a tax deduction, 2) avoid a tax liability, and 3) know that you made a meaningful donation to a worthy cause.
IV. Charitable Trusts
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.
By the time you have read this article it is probable that another disaster has filled the news cycle. If you have chosen to make a charitable gift and want to ensure the benefits of your generosity are maximized, don’t wait. Consult with an experienced estate planning attorney today, and see how your donation can make a difference.