Tax-Advantaged Giving
How to Avoid Capital Gains and other Taxes Through Giving
The first way to avoid capital gains tax is to give the appreciated property to heirs at your death. When the property owner dies, appreciated property receives a stepped-up basis to the value at the date of death.
The second is to give the property as an outright gift to charity. When the charity sells the property, it pay no tax on the sale.
The third way is through the use of a charitable trust. The appreciated asset is transferred to a trust now with the agreement naming that charity will receive the principal at the termination of the trust (at death or at the end of a designated period of years). During the trust term, income is paid to the donor or other designated individuals.
The asset donated to the trust can be sold by the trustee and the proceeds reinvested with no recognition of capital gains tax at the time of transfer or at the time of sale. The only time capital gains will ever be taxed is when they are distributed in the form of income, and that tax will be in lieu of ordinary income tax, usually at a lower rate.
What about Estate and Gift taxes?
While the tax credits have increased to a point that most will not be subject to gift and estate taxes, those who do owe the tax have the same options. You can pay the taxes, or the taxes can be postponed or avoided through various types of trusts.
A charitable trust can be used to eliminate estate tax on any estate, regardless of size. Property is placed into a trust with income payable to charity for a period of years. At termination of the trust, remaining property is distributed to personal beneficiaries. With proper design of the length of time and percentage of income payout, it is possible to avoid tax on an estate of any size.
Interested in learning how charitable strategies can help you reduce or eliminate capital gains, estate and gift taxes? Our Practical Guide to Giving Generously can help show you positive solutions to your tax concerns.
When is the Best Time to Give?
“Is it better to make charitable gifts during lifetime or wait until after death?“ The answer to this question is different for each individual, as both options have distinct advantages.
When a gift is made during lifetime, you may receive an income tax charitable deduction today, and still retain the right to use your property for life. Why would the government allow an income tax deduction today, if a charity cannot use the property until your death? Tax law allows you to deduct the present value of your future gift, because the gift is guaranteed through an irrevocable agreement.
You can also avoid capital gains tax. When you own property that has increased substantially in value, selling that property results in a tax on the appreciation, or capital gain. The cost is not limited to the actual tax. You also forfeit use of those tax dollars for your lifetime.
If it was possible to sell appreciated property, avoid the tax, and have use of the full value of the property for your lifetime, would that not be a significant advantage? Some charitable gift agreements allow you that advantage.
You can also avoid probate. Many individuals have established estate plans that include a Revocable Living Trust for the avoidance of probate. Consider that making a transfer of property to ministry during your lifetime will also avoid the costs or delays of probate, though you maintain the right to use the property.
Charitable gifts during lifetime may have some perceived disadvantages. For example:
1. The loss of control.
In many charitable agreements you can reserve the right to serve as your own trustee. The property is not distributed outright to the charitable organization at the time of transfer, it is held in trust for your benefit. However, you must be comfortable with the fact that the terms of the trust control some aspects of investment and distribution during the trust term.
2. Lack of ability to consume.
If you would need consumable assets for nursing care or final medical expenses, a gift during lifetime might be perceived as a disadvantage or as an advantage. If extensive medical expenses are incurred and you survive that illness, then you will still need income for living expenses. The trust or charitable agreement will provide that income. However, the principal assets transferred to the agreement cannot be consumed.
3. Future inflation.
Some charitable gift agreements may mean your income is fixed for life—with no increase over time. While many prefer knowing exactly what they will receive, others may perceive this to be a negative factor.
Is it better to make charitable gifts during lifetime or wait until death? It is important to carefully consider the advantages and disadvantages, and the only right answer is the one that meets your planning needs and stewardship goals.
Qualified Charitable Distributions
Before the end of the year, do you still need to receive a Required Minimum Distribution (RMD) from your Individual Retirement Account or other retirement plan? If required distributions are creating additional taxable income for you, you may want to consider giving that income to ministry.
If you are at least 70 ½ years old, you can make a gift from your retirement plan directly to ministry, avoiding additional taxable income. We have prepared a special eBook, A Guide to Charitable Giving Through Your Retirement Accounts, to show you how to turn a tax burden into a blessing.
Please click here to download the Guide. As always, the Guide is free and you are under no obligation.