Charitable Planning: The Joy of Giving

The National Center for Charitable Statistics recently reported individual taxpayer charitable deductions in the United States reached a total of $162 billion in 2004 -- a 13% increase from 2003!

Although there are many ways to give to charity, here are two great options: 1. charitable distributions from an IRA, and 2. the Charitable Remainder Trust.

The Pension Protection Act of 2006 (PPA) has introduced a new way for individuals to use their IRA to make a charitable contribution while eliminating any tax liability on their gifts.

Prior to the PPA, all taxpayers were required to first include the IRA charitable contribution in their taxable income on their returns and then claim the contribution as a charitable deduction further down on that return. However, due to IRS tax code rules, this deduction often failed to offset all of the taxable income liability incurred.

The PPA completely solves this problem by excluding up to $100,000 per year of otherwise taxable traditional or Roth IRA distributions from income if the following conditions are satisfied:

1. The distributions must be made in 2006 or 2007 2. The distribution must be made directly from the IRA trustee to the charity 3. The IRA owner must be at least 70 1/2 on the transfer date 4. The distribution would otherwise be a taxable distribution 5. The distribution cannot be from a SEP or a SIMPLE IRA 6. The distribution must qualify for a charitable deduction under IRS rules 7. The maximum exclusion from gross income is $100,000

The PPA provides an excellent way to contribute retirement plan assets to charity. Consult your CPA or accountant about this charitable option.

Creating a Charitable Remainder Trust (CRT) is another terrific option for the charitably inclined.

CRTs are tax-exempt trusts governed by the Internal Revenue Code and its corresponding Treasury Regulations. Because a CRT agreement commits the donor (or contributor) to eventually giving the trust assets to a charitable organization, the IRS rewards this commitment by granting several tax benefits:

1. Forgives capital gains taxes on the sale of appreciated assets contributed to the trust 2. Grants the donor an immediate charitable tax deduction 3. Permits the trustee to invest and diversify the sales proceeds in a tax-free investment environment similar to an IRA 4. Allows the donor to serve as trustee and control the trust's investments, and 5. Eliminates estate taxes on trust assets that pass to charity after the donor's death.

Sound good to you? Well then, here's an example of how a CRT works:

To illustrate, Ron and Nancy would like to sell $600,000 of appreciated, non-dividend paying stock, which they purchased in 1985 for $100,000, to get some much needed retirement income from it. If they sold the stock outright, the IRS would take $75,000 off the top of their $500,000 they earned on their investment due to capital gains. So, the $500,000 shrinks to $425,000 in one stroke. Needless to say, Ron and Nancy are not happy about these prospects.

If they wish, Ron and Nancy could have a qualified attorney draft a CRT for them to specify that they will receive 8% of the value of the trust's assets each year while one or both of them are alive.

In this example, if the appreciated stock was transferred to the CRT, their tax results improve dramatically. First, there is no immediate tax realized on appreciated assets transferred to the trust, so the entire $600,000 in stock now inside the trust can be sold tax-free and reinvested. Second, Ron and Nancy would receive an immediate charitable tax deduction in the year they transfer their stock to their trust. Third, the trustee of the CRT would pay them an annual taxable income of $48,000 (based on the trust's $600,000 value). Finally, upon both their deaths, if their estate is subject to estate tax, the CRT assets would be removed from it in calculating the amount of this tax.

As you already know, there is much pleasure in charitable giving. And, as you can see, there is even more pleasure in giving well, which can be acquired through proper planning.