Tax Benefits of Giving
Tax benefits that come from establishing a fund provide a winning situation for donors and The Foundation. Confusion over tax laws frequently makes potential philanthropists hesitate to follow their desire to donate. The Foundation provides straightforward explanations of tax strategies based on the type of gift you are considering.
The Internal Revenue Service supports your philanthropy in several ways, including the options to:
- Take immediate federal tax deductions
- Avoid capital gains
- Lessen or eliminate estate taxes
The Foundation will help you decide which of the following gifting strategies is most beneficial for you, your family, and your charitable interests:
- Charitable Gift Annuities (CGA)
- Charitable Remainder Trust (CRT)
- Pooled Income Fund
- Charitable Lead Trust
Charitable Remainder Trust (CRT)
Assets are transferred irrevocably to a trust that either retains the assets or sells them free of tax; the trust then invests and distributes income to the donor or to a beneficiary identified by the donor. You choose the trust payout percentage (5% annually minimum), the trustee, and the term of the trust (lifetime or a period of years not exceeding 20). In addition to the income stream, you receive an income tax charitable deduction, bypass capital gains and reduce your estate taxes. There are two types of CRTs, the Charitable Remainder Unitrust and the Charitable Remainder Annuity Trust.
Charitable Remainder Unitrust (CRUT)
Income will vary because the trust is valued at the beginning of each year. The payout percentage remains the same, but the income may increase or decrease depending on the trust earnings at the close of the year. Additional contributions may be made to a CRUT at anytime
Example:
Mr. and Mrs. Jones, ages 68 and 64, purchased stock 15 years ago that has significantly increased in value. They initially paid $400,000 for shares that are now worth $1 million. Both are involved in education and would like to make learning opportunities available to more young people.
The Joneses create a CRUT with their stock, electing a 7% annual payout from the trust. They will pay no tax on the $600,000 gain and will receive an income tax deduction of $268,590. The Joneses will also receive an income for their lifetimes, with $70,000 in the first year. Moreover, the Joneses state in the trust that when the assets come to The Foundation after their lifetimes, those assets will establish the Jones Family Scholarship Fund that will provide educational support for the youth of the future.
Charitable Remainder Annuity Trust (CRAT)
Annual income remains constant and no additions may be made to the trust.
Example:
Mabel Smith is 81. For 35 years she was a social worker who counseled women in abusive situations. In each of those years she purchased a small amount of stock, the return from which augmented her salary. Today the stock yields very little.
Mabel creates a CRAT with stock that has a current value of $500,000 and provides an annual income of $15,000. She chooses to have the trust pay a return of 8%, which increases her annual income to $40,000. Even though Mabel paid only $200,000 for the stock, she will pay no capital gains tax. In addition, Mabel receives an income tax deduction of $292,295. The assets remaining in the trust after Mabel's lifetime come to The San Diego Foundation to establish the Mabel Smith Fund, which will support programs that offer assistance to abused women.
Pooled Income Fund
Assets are transferred irrevocably, combined with the gifts of many others, and managed by a trustee in a "pool." Donors receive an income for life, an income tax deduction, estate tax savings, and they bypass capital gains. The income is based on performance of the investment and the donor's share of the earnings of the pooled assets.
The San Diego Foundation Pooled Income Fund III is managed by City National Bank, whose management fee is .75% annually, taken from the principal. The minimum age for donors is 50 and the minimum contribution is $5,000.
Example:
John Doe, 65, makes a gift of stock that has a value of $90,000 to Pooled Income Fund III. John initially paid $10,000 for the stock.
Since the Fund currently yields 6.6%, John receives an initial quarterly income of $1,494. He pays no tax on the $80,000 capital gain and qualifies for an income tax charitable deduction of $34,273.
After John's lifetime, the value of his units in the Fund come to The San Diego Foundation, and are added to the Fund of John's choice.
Charitable Lead Trust
This trust permits an individual to provide an immediate income source to charity for a selected number of years, eventually transferring assets to family members with great reductions in gift and estate taxes.
Example:
Chester Smith contributes stock valued at $1.2 million to a trust that will distribute 7% annually ($84,000) to The San Diego Foundation for 10 years. After that time, Marcia, his daughter, receives the remaining assets in the trust.
Chester immediately qualifies for a gift tax deduction. Instead of paying tax on a transfer of $1.2 million to his daughter, the taxable gift is reduced to $626,045. Over the 10 years, The San Diego Foundation will receive $840,000 and after 10 years Marcia will receive the remaining assets plus any growth that may have occurred. If the stock appreciated by 2%, Marcia receives that growth amount ($328,934) free of tax.
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