Who could have imagined that the United States government, the same entity that is consumed with taxing and spending, would be an observant Jew’s most effective partner and ally in fulfilling the mitzvah of tzedakah? And I’m not referring to the familiar tax deduction one receives when making a cash donation to a community charity, yeshiva or synagogue. That is important, but it doesn’t begin to scratch the surface of the myriad of ways that the current tax code helps taxpayers of every income level to make significant gifts to their favorite community organizations and often minimize or eliminate income tax, capital gains tax, and/or estate taxes if they utilize charitable gift planning. Charitable planned gifts include: gifts of life insurance and appreciated property such as stocks or real estate, gifts of IRA’s and pension assets, charitable remainder trusts, charitable lead trusts, charitable gift annuities and bequests.
Sounds complicated, you say. Sounds expensive. Sounds like something only millionaires need to think about. Wrong on all counts. While the actual gift structure can be technical, the gift concepts are not hard to understand, and the cost is usually minimal compared to the gift amount and the tax benefits to the donor. Donors at every income level can participate.
Beginner’s Guide to Charitable Gift Planning:
Gifts of Appreciated Property-Stocks
A very simple, yet often overlooked gift technique. Directly donating appreciated stock to charity (instead of liquidating it first and donating the proceeds) gives the donor an income tax deduction for the appreciated value, avoids capital gains tax, and the charity receives the larger, appreciated amount.
Gifts of Life Insurance
There are three ways to gift life insurance: designating the charity as the beneficiary (no tax benefit), donating an existing policy (income tax deduction = cash value), or allowing the charity to own and be the beneficiary of a policy on your life, and making annual donations to cover the premiums (income tax deduction = annual donation for premium). A donation of life insurance is a great way to maximize the dollar value of your gift.
Charitable remainder trusts
In a charitable remainder trust the donor places appreciated property into a trust and receives income. Upon expiration of the trust term the remainder goes to the designated charity. The donor’s income tax deduction is equal to the present value of the remainder gift, any appreciation is sheltered from capital gains tax, and the asset is removed donor’s estate and avoids any estate taxes. A donor could take this vehicle to the next level and use the income to pay premiums on a life insurance policy that designates the charity as a beneficiary.
Charitable lead trusts
A charitable lead trust is used when a donor has an asset that is not really used during his or her lifetime, usually a vacation home, but is one he or she wants heirs to have. The charity will be entitled to the income from the property, which will hopefully continue to appreciate to the benefit of the trust beneficiaries to whom it will be distributed upon expiration of the trust term. Charitable lead trusts have a complicated set of rules governing the type and amount of the charitable tax deductions allowed, but given the right set of circumstances it can benefit both the charity and the donor.
Gifts of IRA and pension funds
Although presently only testamentary (made by bequest in a will) gifts of these assets are eligible for favorable tax treatment, which avoids income and estate tax, gifts of these assets can be an important part of charitable planning for a donor with a varied portfolio. Otherwise, the income tax on the undistributed income and the estate tax would greatly reduce the value of these gifts to heirs.
Charitable Gift Annuity
This gift is popular with seniors/retirees who wish to make gifts to charity but can’t give up needed income. That is because the allowable interest increases with the age of the donor at the time the annuity is established. For example, a 75 year old would receive a fixed 7.1%, an 80 year old would get a fixed 8.05, and an 85 year old will receive a fixed 9.5%. The income is guaranteed for life, and upon the demise of the donor, the designated charity receives the remainder.
Last, but certainly not least, making a bequest (a designation in your will) to charity is probably the most effective and least costly way to make a charitable planned gift. The charity could receive specific amount, a certain asset (such as the IRA or pension asset), a percentage of the estate, or a part of the residuary. Even those with modest incomes can leave a legacy.
(Note: Each person’s unique financial situation will determine which gift(s) to use and their benefit(s). A lawyer or accountant specializing in charitable gift planning should be consulted.)
The giving of tzedakah is a beautiful and personal mitzvah that should be done in order to fulfill the mitzvah and help our fellow Jews directly and through worthy community and charitable organizations. However, making ‘Uncle Sam’ your partner in tzedakah and taking advantage of the many tax benefits established to support and encourage charitable giving will serve only to enhance the quality and quantity of your gifts to charity.