FEATURE – Millions of Americans choose to give back to their communities by making donations to their favorite charities each year. In fact, according to the Giving USA Foundation and Center of Philanthropy at Indiana University, charitable contributions totaled more than $316 billion in 2012.
While gifts of cash are probably most common, many individuals find that it is beneficial to make charitable gifts in other ways. When determining a giving strategy, it’s important to keep in mind that there are annual limits on the amount you can claim as a charitable deduction for tax purposes, depending on the types of charities you donate to and the type of assets gifted.
Direct gifts of appreciated securities
This method conserves the donor’s cash while helping to avoid capital-gains tax on the sale of the appreciated security. Generally, you may deduct the market value of the securities on your current-year tax return.
Direct gifts of life insurance
You may choose to transfer a life insurance policy to an organization if the coverage is no longer required. If the policy has a cash value, the organization may be able to borrow funds from the policy and you may be entitled to an income tax deduction in the amount of the policy’s value.
Charitable remainder trust
This technique lets you make a charitable contribution of assets into a trust in which the assets can be sold without generating current capital-gains tax. You may receive an income stream from the trust during your lifetime and receive a current income-tax deduction based on the present value of the future benefit to an organization. The organization receives the assets in the trust, usually upon the donor’s death.
Charitable lead trust
A charitable lead trust does not generally entitle the donor to an income tax deduction in the year the trust is established. However, any income generated by the donated assets will be reported by the trust and not the donor. The trust is then entitled to a charitable deduction for any income it pays out to the charity. Unlike a charitable remainder trust, a charitable lead trust does not help you avoid capital-gains tax. The benefit of the trust is in the ability to give the assets to heirs at a substantially discounted value.
Charitable gift annuities
In this arrangement, the organization promises to pay the donor a constant income stream in exchange for a charitable gift. A portion of the value of the gifted assets is tax-deductible to the donor.
Private charitable foundations, supporting organizations and community foundations
Creating a foundation lets your family control the allocation and investment of contributions made to an organization. The entire contribution must be used for the foundation’s charitable purposes. You may structure a private foundation as a corporation managed by a board of directors or as a trust managed by trustees.
To help you determine what giving alternatives may be a good fit for your personal, financial and overall tax situation, talk with your financial advisor and tax or legal professionals for guidance in initiating a giving strategy.
Written by Dustin Schofield for St. George Health and Wellness magazine and St. George News.
This article by Wells Fargo Advisors is provided courtesy of The Schofield Group Investment Management in St. George. To learn more about the financial benefits of charitable giving, please call 435-674-3601.
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