Year End Charitable Planning

By: Randall A. Denha, J.D., LL.M.

The year-end is approaching, but you still have time to work on your 2022 tax planning. Often, the biggest concern at year end is with the timing of the gift and the various rules for determining when a charitable deduction may be taken. At this time of year, the typical donor is trying to combine his or her philanthropic goals with his or her tax reduction goals. That is, the donor wants to make sure he or she obtains the tax benefits resulting from the charitable gift on the current year’s income tax return rather than on a future return. At the end of the year, this goal may be complicated by certain conditions that must be met for the gift to be deemed to occur in the current year. These conditions may vary with the type of asset involved in the contribution.

Planned charitable gifts range from simple (gifts of cash or specific assets) to more complex techniques to benefit you and the charity. Note that year-end giving season itself has an IRS-enforced hard stop: charitable gifts must be delivered by December 31 in order to be deductible for the 2022 tax year.

Date of delivery not only determines the year of deductibility, but also, for assets that fluctuate in value (such as stock), the value of the donation and, when relevant, the holding period (short or long-term). But while the date by which delivery must occur is clear, “delivery” itself doesn’t mean the same thing for all gifts. More on that later in this piece.

The following is a brief review of the giving options, beginning with the minimum-planning techniques along with some particulars about the timing and structure of the gifts.

Show Me the Money – Cash Gifts

The simplest charitable giving technique is an outright gift of cash. Cash gifts provide immediate support to the charity and may provide tax-deductible benefits to you—a charitable income tax deduction equal to the amount given, subject to annual deduction limitations. Keep in mind that a lifetime gift of cash (and other assets) allows the charity to recognize you during your lifetime and allows you to witness the gift being used for its intended purposes. 

We’ve assembled a list of common gifts below and their corresponding “date of delivery” under IRS rules:

• Credit card donations are treated as delivered when the charge is made.
• Check donations are treated as delivered on the date of mailing, unless they are post-dated. Post-dated checks are not delivered until the date marked. Recommend that your donors use certified mail to establish the date of mailing for their records.
• Text message donations are delivered on the date the text message is sent if the donation is charged to the donor’s phone or wireless account.
• Pay-by-phone account donations are considered delivered on the date the financial institution pays the donated amount to the charity, which would be reflected on the statement sent to the donor by the financial institution. 

Tangible Personal Property

Some items of tangible personal property have specific title documents that can be endorsed and delivered to the donee to affect the charitable gift. Automobiles have title certificates, for example, Boats and airplanes also have title documents but it should be kept in mind that local law may have special rules for the transfer of these items. If the tangible personal property does not have a title document, the donor should create a careful record to show the timing of the gift. The charitable substantiation rules may provide evidence of the timing of the gift as will actual delivery of the tangible personal property to the charity, but the donor should also consider using a signed and notarized letter as additional evidence of the time of the gift.

All Right, Show Me the Stocks – Gifts of Stock

Another outright gift technique is a gift of stock, bonds, or mutual funds. Charitable gifts of stock can be particularly beneficial if the assets are highly appreciated. Marketable stock is easily transferred and usually easily valued. You can avoid capital gains tax on the increased value of appreciated stock by gifting the stock to charity. And, of course, you may be entitled to a charitable income tax deduction. The charity, as a tax-exempt entity, will not incur tax on the gains when it sells the stock.

Donations of stockmust be unconditional and accompanied by a properly endorsed stock certificate.

• If hand delivered, the donation is delivered on the day the organization receives the stock.
• If mailed, the donation is delivered on the day the mailing is postmarked (provided such donation is received in the “ordinary course of the mails”). The delivered-when-mailed rule only applies to the U.S. Postal Service, not to private couriers. 
• If delivered to the donor’s broker, the donation is delivered on the day the stock is transferred to the donee’s name on the books of the corporation.

Patience – Gifts of Life Insurance Proceeds

Designating a charity as a beneficiary of a life insurance policy is a simple and inexpensive way to make a large gift to a charity. You name the charity as the beneficiary of the policy (or designate the charity to receive a percentage of the proceeds). During your life, you continue to pay the premiums, but the policy proceeds received by the charity will not be included in your estate for estate tax purposes.

Instead of naming the charity as a beneficiary, you can transfer ownership by assigning all rights and ownership interests in the policy to the charity and delivering the policy itself to the charity. You can agree with the charity to continue to pay the premiums on the policy and receive an income tax deduction for the donation of premiums paid on the policy.

Location, Location, Location – Gifts of Real Estate

Real estate likely constitutes an important part of your wealth but may not produce income on which you rely. Further, the appreciation in the value of the real estate is likely not a source of support. If your real estate investments are not producing income, that investment asset may be an attractive asset for charitable giving. A gift of real estate may be made outright by simply signing and recording a deed that names the charity as the new owner. Gifts of real estate to a charity can be made as part of your estate plan. Real estate donations are delivered on the day the organization receives a properly executed deed. Further, if the deed is required to be recorded to pass title, the donation is delivered on the day the deed is recorded.

What about Options on real estate? Options, or promises to sell specified property at a certain price in the future, are treated similarly to pledges and are deductible in the year the option is exercised, not the year the option is first offered. The total amount of the donation is the fair market value of the property on the date the option is exercised (minus the exercise price).

The Internal Revenue Code allows you to make a charitable gift of a remainder interest in your personal residence. You can fulfill your charitable goals by entering into a life estate agreement with the charity. This agreement allows you to continue living in your home for as long as you desire while transferring a remainder interest to the charity. You remain responsible for the upkeep, maintenance, and taxes associated with the property. You may be entitled to a charitable income tax deduction equal to the value of the remainder interest transferred to the charity (if you otherwise qualify to claim the deduction). Be careful that the charity has a written policy for accepting gifts of real estate to address all the aspects of real estate ownership.

More Patience – Gifts of Retirement Assets

A gift of assets from a retirement account may be a favorable plan because of the significant tax savings. At your death, family members who inherit retirement assets may owe both estate and income taxes on the assets. To avoid this double tax hit, you may want to consider making a charitable bequest of these retirement assets.

Any amount given to charity from a retirement plan account by testamentary transfer will not be subject to income tax, and the entire amount of the gift will be available to the charity to use for its mission. Subject to several rules governing retirement plans, you can make a gift of retirement assets to a charity during your lifetime by withdrawing proceeds from your retirement plan and gifting the funds. These withdrawn proceeds, however, are subject to income tax, which may be offset by a charitable income tax deduction. Special rules apply to charitable gifts from IRAs, which may make such gifts attractive for tax planning and charitable giving purposes.

Charitable Bequests In The Estate Plan – Post-Mortem Gifts (Estate Planning)

Naming a charity as a beneficiary under your will or trust allows you to continue your charitable intent while also providing for loved ones. The gift may be a specific dollar amount or a percentage/fraction of your assets remaining at death. Of course, you may also leave all your assets to one or more charities. Gifts by bequest or devise may be for unrestricted purposes or restricted for a specific purpose.

Pledges

Pledges are deductible with respect to the year they are fulfilled, not the year the pledge is first made. Additionally, if a pledge is fulfilled after a donor’s death, the pledge is deductible as a debt of the donor’s estate (unless the pledge was non-binding and is fulfilled only in accordance with the donor’s will).

Donor Advised Fund (DAF)

To create a donor advised fund (DAF), you make an irrevocable gift to a fund or account established in your name with a sponsoring organization over which you or your family have advisory rights regarding investments and distributions. Sponsoring organizations can include charities, community foundations, and financial institutions. Like a CRUT (see below), you may make additional contributions to the DAF. Though you can recommend the charities to which grants should be made at the desired times, the sponsoring organization has the ultimate authority over distributions.

A donation to a DAF does entitle you to an immediate tax benefit. Further, you avoid paying capital gains tax on any appreciated assets contributed to the fund. A DAF is simple to establish and may only require a minimal contribution. The sponsoring organization is responsible for administering the fund, including all filings with the IRS. With a DAF, you trade a lack of control for simple creation and relief from administrative burdens.

Share the Wealth – Charitable Remainder Trusts

Now for more complexity. A charitable remainder trust (CRT) allows you or loved ones to retain an income stream while making a gift to charity. With a CRT, you create an irrevocable trust from which you or your loved ones receive annual payments during your life or for a term of years not to exceed twenty years. At the end of the term, the remaining trust assets go to the charities specified in the CRT. A charitable remainder trust provides you a charitable deduction equal to the value of the charity’s interest, determined using IRS tables.

Charitable remainder trusts may be set up as a charitable remainder annuity trust or a charitable remainder unitrust.

With a charitable remainder annuity trust (CRAT), you select a specific sum of money to be paid at least annually to you or other designated individuals. These current beneficiaries receive consistent payments throughout the term of the trust, which provides stability, but the payments will not increase with the value of the trust assets. With a CRAT, the remainder interest passing to the charity benefits from the appreciation in the principal.

A charitable remainder unitrust (CRUT) also pays a fixed percentage of the fair market value of trust assets to the donor or loved ones at least annually. The net value of the trust assets, however, is revalued each year, and unlike a CRAT, during the term of the CRUT you may contribute additional assets to the charitable remainder unitrust. The distributions to the current beneficiaries increase or decrease as the value of the trust assets changes. Thus, the charitable remainder unitrust lacks the certainty of the charitable remainder annuity trust. With a CRUT, the appreciation in the assets is shared between the current beneficiaries and the charity. Thus, the charity will receive a smaller remainder interest with a CRUT.

A charitable remainder trust is an excellent tool for the transfer of appreciated stock and the diversification of a low-basis portfolio. Because the charitable remainder trust is exempt from taxes, capital gains tax will not be owed upon the sale by the trustee of appreciated assets held by the trust.

Charitable Lead Trust

A charitable lead trust (sometimes referred to as charitable income trust) is designed to accomplish the same planning goals as the charitable remainder trust, by providing for both the charity and you and/or your loved ones, but in the reverse order. You contribute property to an irrevocable trust from which a designated charity receives payment of income for a specified term or someone’s life. At the end of the term, the remaining trust assets are distributed to you and/or your loved ones. A charitable lead trust may be established during your lifetime or at your death. Like charitable remainder trusts, charitable lead trusts can be set up as an annuity trust or a unitrust. Depending on the trust terms, the charitable lead trust may entitle you (or your estate) to a tax deduction. A grantor-type charitable lead trust may be particularly advantageous in years when the donor’s income is significantly higher than his or her income is expected to be in future years. In other words, creation of a grantor-type charitable lead trust could allow the donor to have a charitable income tax deduction in the year when he or she is in the higher tax bracket and the deduction would be recovered in later years when the donor is in a lower tax bracket.