October 2004 "Giving Your Taxes To Charities"
PLANNING FOR WEALTH AND SECURITY
By Attorneys Jennifer and Jeff Hawkins
GIVING YOUR TAXES TO CHARITIES
Some people have the opportunity to use tax dollars to help their favorite charities such as churches, colleges, and children’s hospitals. An entire segment to estate planning is dedicated to the process of helping people give money to charities and take advantage of the related tax benefits. This article describes how charities and contributors can help each other out.
You can deduct the value of any money that you put into a church collection plate from the taxable income for that year. For a person in the 15% tax bracket, a $100.00 gift will actually only cost him $85.00, because the remaining $15.00 will be money that he would have otherwise paid to the federal government as income tax. Therefore, he would give the charity $85.00 and the federal government would give $15.00, for a total gift of $100.00.
A tax payer in the higher income tax brackets of 25%, 28%, 33%, and 35% get much greater participation from the federal government in their charitable giving. Not only will the government’s share of income taxes go to the charity, but the donor gets significant death tax benefits as well. High income tax bracket tax payers often accumulate wealth faster than other people and the federal estate tax brackets of 45% to 48% can take big bites out of their children’s inheritance. Fortunately, charitable gift strategies help these people preserve their wealth by giving large portions of it to charities.
Preserving wealth by giving it away doesn’t sound possible does it? The fact is that this kind of strategy has been used successfully by wealthy families like the Kennedys and Rockefellers for generations. Although Bill Gates and Donald Trump can use these strategies with greater effect than most of us, you don’t have to own a yacht or a private jet to follow their lead.
One of the simplest strategies for charitable giving is a charitable remainder trust (CRT). In this strategy, a donor gives land, stock, or money to a trustee in exchange for a guaranteed income for life. The donor gets an income tax deduction for the value of the gift, minus the value of the income guaranty. A life insurance policy is purchased as a final step in the plan to replace the value of the donated asset for the donor’s family after his death. Many donors can pay for all or most of the cost of their life insurance policies from the tax savings that would otherwise have been paid to the United States government in income taxes.
Similar strategies help people protect retirement plans, valuable stocks, and valuable real estate from taxation. In general, if you would owe significant tax dollars after selling stock or land or withdrawing money from a retirement account, those assets could be used very effectively in a CRT.
Too few individuals, attorneys, and charities understand these relatively simple opportunities. Churches, community foundations, and other charitable organizations could increase their funding significantly if they understood these tools better and explained them to their supporters clearly. With some coordination and public education, many churches and other charities could increase their financial strength through these powerful estate planning systems.
THIS ARTICLE IS NOT LEGAL ADVICE. ALWAYS CONSULT AN ATTORNEY DIRECTLY BEFORE RELYING UPON THIS ARTICLE OR CHANGING AN ESTATE PLAN.
© 2004 by HAWKINS LAW PC, Estate, Trust & Business Attorneys. All rights reserved.