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Maximizing Your Charitable Giving

Thursday, February 27, 2014

Philanthropy is an important objective for many families.  For some, accomplishing their philanthropic goals is done via testamentary giving.  And while giving should be done from the heart and not for tax purposes, there are methods of charitable giving that can satisfy the donor’s charitable wishes and save taxes at the same time.

This article will explore how those families with modest wealth, i.e. net worth between $3 million and $10 million, can maximize the tax benefits of their charitable giving.

First some background.  Generally speaking, the Internal Revenue Code allows a deduction for income tax purposes for contributions to charity during lifetime and an estate tax deduction for amounts given to charity at death.  However, there is no income tax deduction available for testamentary bequests to charity.  So for an individual whose estate is less than the estate tax exemption, any bequest to charity will achieve no associated tax savings.

For example, Joe is an 83-year-old widower whose net worth is $3 million.  Joe’s will provides for a $50,000 bequest to City Hospital Foundation, a qualified charitable organization.  Upon Joe’s death the executor of Joe’s estate issues a check for $50,000 to the foundation.  Because Joe’s estate is less than the estate tax exemption and will not be subject to the estate tax, his bequest doesn’t result in any estate tax savings. Additionally, his estate will not receive an income tax deduction for the bequest (the specifics of estate income taxation are beyond the scope of this article, but estates may only take a charitable deduction for income tax purposes against amounts that are included in the estate’s taxable income.  Joe’s bequest is a specific bequest and is deemed to be from the principal of the estate, not the income.)

What Joe should consider is instead of waiting until his death, contribute the $50,000 to the foundation during his lifetime.  By doing so, the foundation gets to use money now to further its charitable objective without having to wait.  The $50,000 is more valuable currently than it would be if Joe waits until his death and the time value of money has eroded it.  Another benefit is that Joe will receive an income tax deduction for the contribution.

If Joe is concerned about potentially depleting his funds during lifetime, he could consider the use of a charitable remainder annuity trust.  Joe would establish and fund a trust that would provide him with an annuity for his lifetime.  After Joe’s death the remainder of the trust’s assets would pass to the foundation or any other charity designated by Joe.   Joe would receive an income tax deduction in the year he funds the trust for the present value of the remainder interest.  (The rules for the establishment, funding and administration of charitable trusts are complex and strict.  Be sure to seek counsel from a knowledgeable accountant and attorney.)

Charitable giving should be made to help a worthwhile organization fulfill its charitable purpose, not for tax reasons.  But where tax savings can be had, one should take advantage of them.  Those individuals and families who want to leave money to charity should consider ways they can achieve their charitable objectives while also reaping tax benefits.


Thomas E. Bazley, CPA
Adamson + Co., P.A.