1. There are numerous ways to accomplish charitable giving. These include:
- Outright lifetime charitable gift.
- Bequest to charity at death.
- Lifetime or testamentary charitable lead unitrust or annuity trust.
- Lifetime or testamentary charitable remainder unitrust or annuity trust.
- Gift of remainder interest in personal residence or farm to charity.
- Creation of a family private foundation.
- Establishment of a donor-advised fund at a community foundation or financial institution.
- Creation of a supporting foundation to benefit a particular public charity.
- Inclusion of charities as beneficiaries in a generation-skipping "dynasty" trust.
3. A key consideration is whether and to what extent the underlying capital and control over the assets should remain with the family.
4. Bequests or other testamentary transfers are usually the least attractive because there is no income tax advantage.
5. Charitable lead trusts are usually regular taxable trusts, but they do get an unlimited income tax charitable deduction for the amounts of gross income paid to charity. Charitable remainder trusts are tax-exempt as long as they have no unrelated business taxable income.
6. In a spousal situation, the creation of a lead trust at the death of the surviving spouse is frequently the most desirable approach. A long-term lead trust with a sufficiently high payout rate can eliminate a gift or estate tax on the assets or at least significantly reduce the taxes. For example, a 25-year lead unitrust with a 10 percent payout would today produce a 91 percent charitable deduction. In simplified terms this means that the transfer taxes on each $1,000,000 placed in such a trust would be reduced from $550,000 to less than $50,000.
7. For real estate or another nonincome-producing asset that is likely to be sold in the near future, a "flip" charitable remainder unitrust can be attractive as a way to avoid the capital gains tax on the sale while producing an income stream for the donor and the donor.s spouse for their lives.
8. Use of charitable lead and charitable remainder trusts and private foundations bring into play very onerous self-dealing rules that effectively prohibit sales, loans, and other transactions with the family or family owned entities no matter how favorable the terms may be.
9. Income tax deductions are subject to certain limitations depending upon the nature of the assets used to fund the charitable giving arrangement. There are no such limitations for estate and gift tax purposes.
For further information see our Charitable Giving and Tax Exempt Organiations practice and our Charitable Giving Handbook.
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