Two Charitable Options to Give More Strategically in the New Year

Even though 2020 and 2021 have been a challenge for everyone in very personal and different ways, I believe that one commonality we all share is that these unusual times have reminded us to cherish what we do have and review/revise our life priorities.

One of those priorities might be allocating a contribution toward a cause important to you in order to help those less fortunate (such as food security). Others may wish to support the community in other ways by giving to church, synagogue, school or other institution. As you consider your charitable giving priorities for 2021, I’d like to briefly explain why split interest trusts or charitable gift annuities might be good options to pursue. Both options enable you to create or maintain cash flow from an asset or assets while at the same time satisfying a charitable objective – a win-win!

Split Interest Trusts

A charitable remainder trust (CRT) is a type of split interest trust. A CRT provides an annual stream of payments to one or more noncharitable beneficiaries for a term of years or for life. When the noncharitable interest expires, the remainder passes to charity.

CRTs are often funded with highly appreciated assets. The assets are transferred into the CRT and sold. There is no tax due on the sale because the CRT is exempt from tax. The trust then has the cash to make the required annual distributions to the non-charitable beneficiaries.

The grantor of the CRT who has funded the trust receives a charitable contribution deduction in the year the CRT is funded. The contribution amount is the present value of the charitable remainder interest and is calculated based on IRS provided actuarial factors. A CRT is often called a split interest trust because of the noncharitable beneficiary and the charitable beneficiary each have an interest in the trust.

There are many other types of split interest trusts. Some of these split interest trusts are attractive when interest rates are high and some when interest rates are low.

Charitable Gift Annuities

Many charitable organizations offer charitable gift annuities as an option for their donors. A charitable gift annuity benefits the donor in much the same fashion as a split interest trust. The annuity provides a stated return for the non-charitable beneficiary. The charitable contribution that is taken in the year the charitable gift annuity is purchase is calculated using IRS actuarial assumptions.

As an example, I serve on the board at Deerfield Episcopal Retirement Community as treasurer. In my case, if my wife and I chose to set up a charitable gift annuity in 2020 with Deerfield, giving a gift of $50,000 yields 3.9% ($1,950 annually), a charitable deduction of $10,088 the first year and tax-free portions of each payout through year 2044. In the meantime, Deerfield will distribute the annual payout (based on my age) for as long as I live – regardless of the market and even if I outlive the balance of the gift.

“If you have family or charitable causes to which you’ve already committed your estate, the gift annuity allows you to use cash or stock as a gift now, and ultimately, after your death the remainder of the gift will go directly to the fund you’ve chosen,” said Michelle Wooley, Deerfield’s director of philanthropy.

As move toward year-end 2021 and should you have questions, I’d be happy to speak with you further about either of these charitable options or answer any other questions you might be considering for your philanthropic endeavors.

Moreover, if you are donating material goods – be it art, property, etc. – read my article outlining key IRS guidelines to follow when it comes to these types of donations.

Happy holidays and cheers to 2022!

Larry HarrisLarry Harris, CPA, CFP®, PFS
Director of Tax Services

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