Charitable giving is a great way to reduce income and estate taxes while increasing your control over how your money is used. When you give to charity organizations in Ohio or nationally, you can take a charitable tax deduction either off your income taxes or estate taxes. Every dollar you donate to a qualified charity is a dollar that the government can’t control. Charitable giving also reduces the taxable portion of your estate so that fewer taxes are assessed to begin with, leaving more for your heirs.
What many people don’t realize is that there are strategies for donating that can do more for you and your heirs than just reduce your tax bill. In Ohio, the planned giving attorneys at Gudorf Law Group use a variety of tools to help clients give more to charity, their heirs and themselves. The tools and strategies recommended for each client depend on their goals for charitable giving, their goals for their estate, their resources and other factors. Below are some of the tools we commonly use.
Charitable Gift Annuities
Charitable gift annuities are arrangements in which an individual gives a gift to charity and the charity commits to making a quarterly or annual annuity payment back to the donor for the remainder of their life. The arrangement is such that money, including appreciation on the gifted assets, remains after the donor’s death and the charity keeps this remainder. This is an ideal way to receive a charitable tax deduction and ensure a continued income stream during retirement. Tax deductions are equivalent to the total value of the gift less the total of the annuity payments to the donor. Additionally, a portion of the annuity payments is exempt from income taxes.
Charitable Remainder Trusts
Charitable remainder trusts are similar to gift annuities except that the assets are held by a trust and the trustees control investment of the assets and administer the trust. The trust makes annuity payments to the trust’s beneficiaries (the donor or their heirs) for a specified period of time, which may or may not be connected to the donor’s life span. When the annuity period is over, the remaining assets, including appreciation, are transferred to the charity. Tax deductions are equal to the final amount to be received by the charity.
Charitable Lead Trusts
Charitable lead trusts work just like charitable remainder trusts except that the charity receives the annuity payments (which are considered the “lead” interest) and the trust’s beneficiaries receive the remainder. Charitable tax deductions equal the total of annuity payments the charity receives.
Donor Advised Funds
Unlike the previously mentioned strategies, a donor advised fund permits charitable giving to multiple charity organizations in Ohio or elsewhere. The funds are donated to a public foundation which administers the fund, including deciding how to invest the assets and which charities to make grants to. The donor, or his assignee, reserves the right to advise the fund administrator on which charities to give to. Donors don’t have to worry about the hassles of administering the fund while still having a say in how the money is distributed. While the administering foundation is not legally bound to follow donors’ recommendations, they do so whenever possible.
A private foundation is another way to give to multiple organizations. But rather than let a public foundation control the funds, a private foundation with its own board of directors is created to administer the funds. A private foundation gives the donor more control but someone must take on the tasks of investing funds, selecting grant recipients, qualifying applicants and carrying out other administrative details. Additionally, private foundations must follow numerous requirements and are more expensive to operate than a donor advised fund or a charitable trust. Because of the costs and requirements, the Ohio planned giving attorneys at our firm generally only recommend this charitable giving strategy for individuals with more than $10 million to give away.
Life Estate Agreement
A life estate agreement is a great vehicle for someone to donate their home or family farm land to charity and receive a tax break for it but not have to surrender the property until after their death. Ownership of the property is transferred to a charity organization in Ohio with the agreement that the donor can continue living on and using the property until the donor’s death. Usually any income or other benefits generated by the property goes to the donor while he or she is alive. The donor receives a tax deduction equal to the charity’s remainder interest.
Bargain Sale to Charity
A bargain sale is a donation of property that allows the donor to recoup some of the property’s value. Essentially, the donor agrees to sell the property to a charity for a price significantly below its market value. This charitable giving strategy is often employed when the donor can’t afford to donate the entire value of the property, the property is debt encumbered, or the charity can’t afford the full price of the property. The donor/seller receives a charitable tax deduction equal to the difference between the full market value and the price paid by the charity. Additionally, no capital gains tax is paid on the portion of the appreciation that goes to charity.
A conservation easement is an agreement between a land owner and a land trust or government agency that restricts how a piece of land will be used in order to achieve a conservation goal, like preservation of wetlands. The agreement is binding on all future owners of the land and the trust or agency agrees to enforce the agreement. A conservation agreement usually reduces the fair market value of the property because development is restricted. A charitable tax deduction is available for the decrease in fair market value resulting from the easement.
Which charitable giving strategy is right for you?
While a simple explanation of each of these charitable giving strategies is provided here, each of them have many more rules, advantages and disadvantages. In some cases, multiple strategies may be combined or augmented to achieve the desired result. In Ohio, the planned giving attorneys at Gudorf Law Group, LLC, can help you determine which charitable giving strategies and which charity organizations in Ohio best meet your needs. Arrange a free consultation with our Ohio planned giving attorneys by calling 1-877-483-6730.