Charitable Giving Can Be ‘Win-Win’ For Donor and Recipient

Fortunately, many ways exist for one to donate to charitable organizations and leverage the financial advantages of doing so.  Today’s blog, then, will be the first in a series describing some options available to make charitable giving a “win-win” situation.

I need to make one thing clear at the outset: For those with little or no desire to donate to a charity, the strategies discussed in this and my next few blogs likely will not be attractive.  However, for those with “charitable intent,” one or more of these creative options may have real appeal.

Let’s start with a typical situation.  Say a person plans to sell some stocks, or real estate, or even one’s business.  This often happens as one nears retirement and seeks to liquidate one or more assets to create a source of income.   Many times, the seller will face tax payments based on the financial gain realized by that asset over the years.  This means a net amount less than the full value of the asset.

Here, then, is one option.  The asset could be donated to a favorite charity, which then could sell the asset without paying taxes on the amount received.  In return, the charity would make annual payments to the donor and his or her spouse for the rest of their lives, at which point the remainder of the funds would go to the charity or foundation.

What’s the advantage to the donor?  Very possibly, the annual income would be higher because the sale of the asset was higher.

For example, a person sells real estate for $1 million, pays capital gains taxes, and is left with a net of $800,000.   Further, let’s say the person intends to draw 4% of the funds annually, which would be $32,000.  However, if the charity were to sell the asset for $1 million and pay no taxes, it could pay the donor 4% a year, or $40,000.  A term limit is generally set on the agreement but, over time, this could result in a significant amount of additional income for the donor.

This option is called a Charitable Remainder Trust, and the payment to the donor may be in the form of an annuity (fixed amount) or a unitrust (fixed percentage).

The next blog will pick up on other options and strategies designed to leverage charitable giving.