If you have a taxable estate – currently that means assets exceeding $2 million dollars. If you’re married and have properly funded trusts $4 million dollars – the easiest, simplest way to pay zero estate tax is to leave the taxable portion of your estate to charity.
Before you immediately eliminate this idea from consideration give this some thought.
What is an appropriate inheritance for your children and/or other family or friends?
Will it really require more than $2 million (or $4 million if you’re married) to accomplish this?
If not, I would encourage you to make arrangements in your beneficiary designations and estate documents, to have any part of your estate subject to estate tax go to charity.
What’s that you say, you don’t want to leave a significant chunk of money to any single charity? Not to worry, you can leave funds to your own family charitable fund. Technically they are called donor advised funds. Here’s how they work:
A Donor Advised Fund is a type of charitable giving program that allows you to get most of the benefits of your own family foundation without any of the legal expenses or hassles of setting up your own foundation!
They are often times marketed or promoted as Charitable Gift Funds. Most major mutual fund companies offer this type of program. Here’s how it works;
You make a contribution to your Donor Advised Fund and set up a “Foundation Account” that you name — such as, “The Smith Family Fund” — and claim an immediate tax deduction.
You’re eligible (assuming you itemize your tax deductions) to take an immediate tax deduction for each contribution. Because the Donor Advised Fund is an independent public charity, contributions usually qualify for larger tax deductions than those you’d get from setting up your own foundation!
Donate appreciated stocks, mutual funds or real estate by contributing assets with unrealized long-term capital gains directly to your Donor Advised Fund. Instead of selling the assets and then donating the proceeds, you can give more to charity and claim even bigger tax savings.
Example: Donating Appreciated Assets
| Sell securities and donate proceeds to charity | Contribute securities to the Donor Advised Fund |
|
| With a direct donation to the Donor Advised Fund, you save an EXTRA $12,150 on your federal income taxes and your favorite charity(s) receive $9,000 more. | ||
| Current fair market value of asset (Such as stocks, Mutual Funds or Real Estate) |
$100,000 | $100,000 |
| Tax Paid* (15%) (Assumes a cost basis of $40,000, and long-term capital gains of $60,000) |
$9,000 | $0 |
| Charitable Contribution/Deduction** | $91,000 | $100,000 |
| Value of Charitable Deduction Less Capital Gain Taxes Paid* Assumes donor was in the 35% federal income tax bracket |
$22,850 | $35,000 |
* Assumes all realized gains are subject to the maximum federal long-term capital gain tax rate of 15%. Does not take into account any state or local taxes, if any.
** Availability of certain federal income tax deductions may depend on whether you itemize deductions. Charitable contributions of capital gain property held for more than one year are usually deductible at fair market value. Deductions for capital gain property held for one year or less are usually limited to cost basis.
This is a hypothetical example for illustrative purposes only. State and local taxes, the federal alternative minimum-tax and limitations to itemized deductions applicable to taxpayers in higher-income brackets are not taken into account.
You ‘donate’ the actual asset to your Donor Advised Fund instead of selling the assets and then donating the proceeds. Your Donor Advised Fund then sells the asset and invests the proceeds. You can recommend how funds are invested including recommending use of your own investment advisor.
Your Donor Advised Fund can accept many types of assets such as Cash, Publicly traded stock, including control person, lock-up, and other restricted stock, Mutual fund shares Publicly traded bonds, Pre-IPO shares under certain circumstances and real estate.
Paperwork and Administration is very simple
The ‘community foundation’ that provides your Donor Advised Fund has already put all the legal documents in place. No need for you to hire an attorney or pay any legal fees!
They also take care of all the tax and accounting paperwork required by the IRS. No need pay a CPA!
Your Donor Advised Fund verifies the IRS public charity status before sending your grant.
Based on your specific recommendations, a cover letter is sent to each charity specifying the special purpose of the grant.
Recommend how your contributions are invested
You advise how the assets of your Donor Advised Fund are invested, including choosing your own investment advisor/manager.
Although the vast majority of grants recommended by donors are honored by the Donor Advised Fund, you should note that certain types are restricted by law.
Designate and Customize Your Grants
You (or your family members) recommend grants from your Foundation Account to the charities you wish to support. You have the option of being ‘recognized’ or remaining anonymous.
Recognize. Your grant recommendation can be “acknowledged” to you, another person, or to the name you gave to the Foundation Account, such as The Smith Family Fund. You can even recommend that the grant be made anonymously, if you prefer.
Designate. You can recommend that the grant be used for a “special purpose,” in memory or in honor of someone. The grant can be “restricted” so that it will go toward a specific use at the charity, such as a building campaign.
Schedule. Your grant recommendation can be set up as an ongoing remittance or “scheduled grant.” Such as monthly, quarterly, semi-annually, and annually.
Build a charitable legacy
Whether your goal is to foster a family giving tradition or to continue providing support to charities beyond your lifetime, your Donor Advised Fund lets you name both individuals and/or charitable organizations as “successors.”
Individuals
By recommending one or more individual successors, you pass on your Foundation Account to someone, giving them the privilege of recommending grants and the opportunity to make contributions. The successors can then pass your Foundation Account to the next generation, creating a never ending charitable legacy.
Charitable Organizations
You can recommend one or more of your favorite qualified charities as the successors to your Foundation Account. Upon your death, the designated organizations will receive the lump sum proceeds of the Foundation Account.
