Part 2: Achieving Your Charitable Giving Goals

Key Takeaways:

• It is important to understand the various charitable vehicles along with the tax benefits associated with each. 
• These options could also help you achieve your tax, estate and legacy planning objectives. 
• Your Wealth Advisor and Comerica Team can assist you with your philanthropic endeavors. 

This is part 2 a 3-part series of articles on Charitable Giving. Read part 1 and part 3.

Charitable giving is often guided by a desire to support a specific charitable cause or organization, and that support is often provided in the form of a direct cash gift. However, you can use a variety of charitable vehicles to support the causes and organizations most important to you. These options could also help you achieve your tax, estate and legacy planning objectives. Broader wealth planning goals, such as retirement, cash flow and legacy planning, may also be met with the right combination of assets and charitable giving strategies.

Which Charitable Vehicle Should You Use?

Gifting assets to charity during your life is not only rewarding, but state and federal governments encourage charitable giving by offering income tax deductions. Charitable contributions mitigate the burden on the government to provide a social safety net, so governments permit donors to offset some of their taxable income based on both the type of asset contributed and the vehicle used for the charitable contribution. Just as some assets are more tax efficient, some charitable vehicles provide a larger charitable deduction than others.

Donors often use charitable split-interest trusts to accomplish charitable giving goals. These trusts are essentially a conduit for charitable giving – dividing the trust’s income interest and remainder interest between charitable beneficiaries and non-charitable beneficiaries. The two types of charitable split-interest trusts are charitable lead trusts and charitable remainder trusts. These charitable trusts are not 501(c)(3)s themselves. But contributions to these trusts may still produce tax deductions because some portion of the trust assets will be distributed to charity, now or in the future.

"Charitable giving may be accomplished during your life and after your death in a variety of ways. Thoughtful analysis and planning – supported by your advisors – presents opportunities to achieve multiple personal wealth and legacy planning goals, including supporting your favored charitable organizations or causes."

This variety of charitable vehicles presents you with a decision on which assets to contribute as well as the charitable beneficiary best aligned with your charitable objectives and your broader tax and wealth planning goals. Each of the following offer benefits and compromises, so understanding the nuances is an important part of your decision-making process.

Direct gifts to public charities: A direct gift describes simply writing a check or donating an asset directly to the public charity’s general fund. Some charitable organizations may permit you to allocate your contribution to a specific purpose or program administered by the charity. Direct gifts generally provide a greater charitable deduction because governments reward charitable contributions that are currently available to the charity, rather than deferred receipt of funds more common with charitable trusts and grant-making private foundations. Charities generally prefer direct gifts because they receive the entire contribution at once, have unilateral discretion over the funds and may incorporate the contribution in their budgeting process. Nonetheless, direct gifts might not be aligned with your broader charitable giving and tax planning goals.

Donor Advised Funds (DAFs): Donor advised funds are 501(c)(3) charitable trust funds generally administered by financial institutions, community foundations or national public charities. DAFs produce charitable deductions equivalent to direct charitable gifts, but you should note that DAFs are not eligible to receive qualified charitable distributions. DAFs function as grant-making vehicles in that any charitable contributions you make to a DAF are deposited in this general charitable trust fund but are earmarked for future distribution to an operating charity, accounting for input and guidance provided by the donor. DAFs typically require your contributions to the DAF be distributed to operating charities within a period of years, which may vary by DAF. Donors often find DAFs appealing when they are undecided about which causes or organizations to support, are concerned about making large one-time contributions, or want to accelerate their charitable income tax deduction but prefer to defer making some or all their distributions to future years.

Private grant-making foundation: A private foundation is a 501(c)(3) that does not qualify as a public charity because it is established and controlled by a single individual or family. While private foundations may be either operating or non-operating, non-operating grant-making foundations are more common. The primary benefit of a private foundation is the donor’s ability to control the foundation, but that control comes at a cost. Contributions to private foundations produce significantly smaller charitable tax deductions, and operating expenses associated with private foundations are substantial. Thus, forming, funding and operating private foundations generally only makes sense for significant contributions when the donor is willing to take on the responsibility of operating the foundation and to receive smaller charitable deductions to have control over the charitable vehicle.

Charitable split-interest trusts: There are two common types of charitable split-interest trusts: charitable lead trusts (CLTs) and charitable remainder trusts (CRTs). There are different varieties of both trusts, but the basic mechanics are the same. These charitable split-interest trusts create two interests: first, a charitable interest, which represents the present value of the assets that the charity will receive, and second, a remainder interest, which represents the value of the assets that the non-charitable beneficiaries of the trust will receive. The income interest – the amounts distributed from the CLT and CRT during the term of the trusts – may be structured as a designated amount determined at formation of the trust or as percentage of the value of the assets.

• Charitable Lead Trust (CLT): A CLT distributes amounts to charity for a term of years or for the life of the grantors. At the end of the trust term, the remaining assets are distributed to non-charitable remainder beneficiaries that you designate. If the CLT is structured as a grantor trust, you may immediately deduct the present value of the future payments that will be made to the charitable beneficiary. The present value of the charitable payments and remainder interest is an actuarial calculation that determines your charitable deduction. The trust’s income is taxed to you during the term of the trust. When the trust term ends, the remaining assets are distributed to the non-charitable you designate. If the CLT is structured as a non-grantor trust, you will not receive a charitable income tax deduction, but the non-grantor CLT may be a good option to reduce gift or estate taxes.
• Charitable Remainder Trust (CRT): A CRT distributes amounts to a non-charitable beneficiary for a term of years (not greater than 20) or for the life of the grantors. At the end of the trust term, the remaining assets are distributed to charitable beneficiaries that you designate. Contributions to a CRT generate an immediate income tax deduction. The present value of the payments the non-charitable beneficiary receives and the charitable remainder interest is an actuarial calculation. Any taxable income on assets owned by the CRT is not taxable to the non-charitable beneficiary until distributed to the non-charitable beneficiary, which makes the CRT a potentially powerful income tax deferral vehicle.     

Which charitable vehicle should you use?

Charitable deductions are calculated based on the fair market value or the adjusted basis of the asset contributed, as determined by the asset contributed and the charitable vehicle to which the asset is contributed. Once the deductible value of the contribution is determined, the amount of the deduction permitted in the current year is limited based on a percentage of your adjusted gross income in the year of the contribution. To the extent that you are unable to fully deduct your charitable contribution in the current tax year, you may carry-forward the unused amount for five years before the used amount expires. The table below summarizes the charitable deduction based on the asset contributed and the charitable vehicle.

Comparing Charitable Tax Deductions by Asset and Charitable Vehicle