Charitable Giving: When Doing Good Is Also Good for Tax and Estate Planning
Citi Personal Wealth Management
Giving to charity can be as simple as writing a check or donating old clothes and furniture. But as you give, you might also be looking to save on taxes and meet estate-planning goals.
There's a fistful of more sophisticated strategies that can help you do just that. But before using any of the strategies mentioned below, you may want to consult a qualified tax specialist or estate-planning attorney.
If you have property that has increased in value, whether it's stocks, mutual funds or even real estate, you can give it outright to a charitable organization—and potentially enjoy three tax benefits.
First, you could avoid the capital-gains tax that might be due if you sold the property. Second, you could get an income-tax deduction based on the property's fair market value. Finally, you could shrink the size of your estate and thus the potential hit from federal and state estate and gift taxes.
Keep two caveats in mind. First, before donating large sums, talk to your Financial Advisor to make sure you have enough for your financial goals. Second, if you have investments that have declined in value, you should consider selling them yourself, because that way you may get the benefit of the tax loss.
With charitable gift annuities, you hand over cash or property to the charity of your choice and, in return, get regular income for life, plus a partial tax deduction. The size of the income stream depends on a variety of factors, including the amount of the gift, your age and—if it's a joint-and-survivor annuity—the age of your spouse.
A gift annuity will likely give you less income than a conventional immediate-fixed annuity bought from an insurance company. Still, you may find the gift annuity appealing because, if you die fairly early, your premature death should benefit the charity, not an insurance company. Please keep in mind that gift annuities entail expenses and fees.
Charitable remainder trusts
Many colleges, churches, arts organizations and other charities would be happy to help you set up a charitable remainder trust. The strategy: You leave property or money to a charity, but continue to receive income from it while you are living.
You can decide how much income you will receive, based on a percentage of the property's initial net fair market value. As the grantor, you avoid capital-gains tax on the donated assets. After your death, the trustee distributes the balance of the trust's assets to the charity you chose. Keep in mind that the gift is irrevocable, but you may have some control over how the assets are invested. Also, trusts entail fees and expenses, so the income may be less than what you may have received had you not set up the trust.
There are two types of charitable remainder trusts. With a charitable remainder annuity trust, you get a current income-tax deduction and you're paid a fixed dollar amount for life or for a specified number of years. Once you have made a trust contribution, you can't add to it, but you can always create new charitable remainder annuity trusts.
The other type of charitable remainder trust is the charitable remainder unitrust. This trust gives you the same tax benefits as the annuity trust, but you can make additional contributions and your deduction is calculated each time you make a contribution. Because the annual distributions can change based on its value, the unitrust can provide a hedge against inflation, unlike the annuity trust.
Charitable lead trusts
You might think of a charitable lead trust as the mirror image of a charitable remainder trust. Once again, you can donate low-basis assets, receive a charitable deduction and avoid capital-gains taxes on the donated assets.
But in this case, the charity—not you—receives annual payments from the trust for the rest of your life or for a specified number of years. Whatever remains in the trust will be passed to you or your heirs. Any appreciation in the value of the trust's assets, after payments to the charity are made, will pass to you or your heirs free of gift or estate taxes, although the generation-skipping tax may apply in some situations.
The charitable lead trust also comes in two varieties: an annuity trust, where the charity receives a fixed payout, and a unitrust, in which the payments are based on the value of the trust, which is recalculated each year.
Several investment firms and community foundations can help you establish these funds. You get a tax deduction of a percentage of adjusted gross income for cash and 30% for appreciated items, including securities. If your donations exceed a certain percentage, you can carry over the excess deduction for up to five years.
While the gift is irrevocable, you can make recommendations as to when and how the funds will be distributed. Also, because the checks come from the fund, you can remain anonymous, if you wish. Please keep in mind that donor-advised funds entail fees and expenses.
People with substantial assets might consider a private foundation. While the tax benefits aren't as great, you maintain full control over investment management, as well as controlling which charities benefit. Keep in mind that a private foundation requires ongoing administrative costs, including a separate tax form that has to be filed each year.
- This Communication is prepared by Citi Private Bank (CPB), a business of Citigroup,
Citi). Not all products and services are provided by all affiliates or are available at all locations. CPB personnel are not research analysts, and the information in this Communication is not intended to constitute
research,as that term is defined by applicable regulations. to footnote reference 1
, which provides its clients access to a broad array of products and services available throughout Citigroup, its bank and non-bank affiliates worldwide (collectively,
The information provided is solely for informational and educational purposes. It is not an offer to buy or sell any of the securities, insurance products, investments, or other products named.
Citigroup,and its affiliates do not provide tax or legal advice. To the extent that this material or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Any such taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.
These strategies may not be successful or achieve their objectives and are not suitable for everyone. Results may vary.
It's important to understand that an annuity is a long-term, tax-deferred investment that is designed for retirement. An annuity should not be made in IRA if the sole purpose is for tax deferral because an annuity itself allows for tax deferral. Its value and rate of return will fluctuate with the performance of the investment options you choose within the annuity. An annuity allows you to create an income stream that can be fixed or variable. The performance of investment options within the annuity are subject to investment risk, including the potential loss of the money you've invested, and subject to the claims-paying ability of the issuer. An annuity has contract fees and charges.
This document is made available for general guidance only. The information contained herein is not intended to be a comprehensive discussion of legal or tax advice of the strategies or concepts described herein. Interested clients should consult their tax and/or legal advisors. This document contains a summary of rules and planning techniques that are complex and subject to change. Although information in this document has been obtained from sources believed to be reliable, Citigroup and its affiliates do not guarantee their accuracy or completeness and accept no liability for any direct or consequential losses arising from their use. The information contained herein is subject to change without notice.
CGMI), member SIPC. Insurance products are offered through Citigroup Life Agency LLC (
CLA). In California, CLA does business as Citigroup Life Insurance Agency, LLC (license number 0G56746). CGMI, CLA and Citibank N A. are affiliated companies under the common control of Citigroup Citi, Citi with Arc Design and other marks used herein are service marks of Citigroup or its affiliates, used and registered throughout the world.