Seasons greetings! With the holidays upon us, along with the looming end of the tax year, our thoughts have turned to charitable gifting as a way to help those in need, by diverting a portion of potential tax payments to an organization that supports a worthy cause.
We discussed charitable gifting a few days ago on our weekly radio show on 1220 KDOW (noon on Saturdays). As mentioned, the most important aspect of charitable gifting is your intention. We believe a 70/30 split of intentions is the appropriate perspective to have when considering charitable giving as a means of reducing your tax liability.
In other words, 70% of your intention to give to charity should be to contribute to a worthy cause that benefits others, while only 30% of your intention should be to avoid capital gains taxes. The bottom line is that you cannot legally keep the money you owe Uncle Sam, you can just divert some of it elsewhere based on your desire to serve the community in a more direct fashion.
With the economy still not in high gear, now is a great time to donate to a not-for-profit organization, because non-profit operating budgets have been slashed in the last few years, so your support is surely needed and will be greatly appreciated. You can also establish your own charitable trust fund to serve your community in a very specific manner.
A few options for charitable gifting are available:
- Direct Gift: the quickest and easiest way to give to charity is through a direct donation. Just write a check or make a secure online contribution. Be sure to acquire a letter of confirmation from the organization for your financial records and tax filing purposes.
- Charitable Trust: three types of trusts are available to distribute funds in different manners:
- Charitable Remainder Trust – you transfer ownership of assets, such as stocks or valuable art, to the trust, which sells them; you specify income you receive annually from fund.
- Charitable Unit Trust – you specify the percentage of the total value of the fund you want back annually (maximum $20K).
- Charitable Lead Trust – the fund provides a stream of income annually to the charitable organization; your heirs receive the remainder upon your demise
- Private Foundation: you establish a not-for-profit organization that operates as a business; entity is registered with the state’s Office of the Attorney General; long-term strategy that requires minimum expenditures annually; need to keep business dealings with organization at “arms length” to avoid perception by IRS of “self dealing.”
- Donor-Advised Fund: stock ownership is transferred to a brokerage account (e.g, Charles Schwab, Vangaurd) that is managed by the fund; you deduct fair-market value of stock each year and use the fund again in the following year; hands-free compared to private foundation, because Donor-Advised Funds do not operate like a business – you just decide how much and to whom you want to donate. We like this type of fund, because it does not operate like an independent business and therefore involves less effort and management than other options.
The legal and financial details of charitable giving can be complicated and cumbersome, which is why you should seek qualified financial advice and legal counsel before you make any decisions that have a major impact on your tax returns. The types of red flags the IRS looks for to find fraud include tax filings that are noticeably different than in recent years.
If you are taking a new strategic approach to your tax calculations that involves significant charitable giving for the first time, you should carefully comply with all of the laws and regulations that pertain to your transactions and filings.
Here are a few useful links to information on the IRS.gov website:
- Tax Information for Charities & Other Non-Profits
- Life Cycle of a Private Foundation
- Charitable Trusts
- Donor-Advised Funds Guide Sheet
If you are thinking about charitable gifting as a short-term or long-term tax strategy, here are a few things to consider:
- It is a good way to lower capital gains on highly-appreciable assets.
- You should involve your whole family in the decision and process.
- Some of the options require considerable advanced planning, so they may not work for the 2011 tax year, if you have not started the process already.
- Watch out for self-dealing, even if you do not intend to personally gain from a transaction.
- Choose a trustee to manage the charitable entity. Carefully balance the trustee’s authority between too much and too little control. Don’t tie the trustee’s hands to impede decision-making, but do make sure the trustee is not taking sudden tropical vacations beyond their means or investing in too-good-to-be-true stocks or schemes.
The Law Offices of Connie Yi, P.C. is uniquely qualified to help you make beneficial decisions regarding the complex issues of charitable gifting, because Connie Yi is a San Francisco Bay area charitable planning and capital gains tax law attorney, as well as a highly-experienced Certified Public Account. Connie can work closely with your family to determine the best financial options for current members and future generations, as well as your community.
To schedule a free consultation with Connie Yi about your family’s charitable giving and estate planning, contact us. For your convenience, we have four conveniently located offices in the Bay area: San Francisco, San Mateo, San Jose, and Pleasanton.