Tips for Tax-wise Charitable Giving

Estate Planner May-June 2006

For many people, estate planning isn’t just about reducing taxes and providing for their loved ones. You also may want to share your estate with one or more of your favorite charities. Charitable giving can satisfy several important goals, including leaving a legacy and instilling a sense of social responsibility in your heirs.

As you ponder your philanthropic strategies, saving taxes may not be your biggest priority. But it makes sense to consider the tax implications of various approaches to charitable giving.

Souping up lifetime charitable donations

Tax planning allows you to benefit the organizations you care about at a lower cost to you and your family. It also may enable you to leverage your charitable dollars by providing greater benefits to charity without increasing your cost.

Say, for example, you’re in the 35% tax bracket and plan to donate $100,000 to your favorite charity. If you donate cash, the “cost” of your gift is $65,000 – $100,000 less the tax-savings you would enjoy by taking a $100,000 deduction on your income tax return (assuming your write-off isn’t reduced by charitable deduction limitations).

Suppose, instead, you donate $100,000 worth of publicly traded stock you bought five years ago for $50,000. In this case, the cost of your gift is $57,500 because, in addition to getting the income tax deduction, you avoid the 15% capital gains tax on the stock’s $50,000 in appreciation. The charity still receives the full $100,000 value, but, by donating stock instead of cash, you save an additional $7,500.

Tax-smart charitable bequests

It’s not unusual for people to name charities in their wills, either by making outright bequests to charitable organizations or by contributing assets to a charitable trust. One of the benefits of making charitable gifts at death is that your estate can claim a charitable deduction for estate tax purposes.

But what if the value of your estate is within the federal estate tax exemption (currently, $2 million) so that you have no federal estate tax liability? In that case, you may be better off leaving the money to your kids and asking them to make the donation. These lifetime gifts may qualify for income and gift tax deductions.

Let’s suppose Allen wants to share $100,000 of his $2 million estate with a charity. If he names the charity in his will, he won’t generate any estate tax savings, because he has no estate tax liability (assuming the exemption is still $2 million or more when he dies). Now, suppose Allen leaves the $100,000 outright to his daughter, who’s in the 33% income tax bracket, and asks her to donate the money to the charity. By making the donation and taking a charitable deduction, Allen’s daughter enjoys $33,000 in income tax savings.

This strategy allows Allen to make the same gift to charity, but also provides a significant benefit to his daughter. Bear in mind that his daughter has no legal obligation to carry out his request, but a donor’s wishes typically are respected.

Potential state tax savings

The examples above show just a few of the many ways that tax planning can help you achieve your charitable giving goals in a cost-efficient manner. It’s also important to consider the potential impact of state income and death tax savings on your planning, because lifetime gifts reduce the value of your estate.