Why Do People Make Charitable Contributions?
A bit of fragrance always clings to the hand that gives roses.
– Chinese proverb
If you were to ask 100 people to explain why they contribute to causes and organizations they care about, you might get 100 answers – most of which could be distilled into five words: It makes me feel good!
Our donors often are people who have found success in business or a career and now find it appropriate to give something back, to perpetuate something meaningful. The “joy of giving” can be experienced at many levels and satisfied through a variety of gift plans. You might consider leaving a legacy with a gift through your will or revocable living trust. You also can provide assistance from your estate without necessarily changing your will: Life insurance, IRAs and other retirement accounts and even bank deposits and CDs can be paid at death for our benefit through simple beneficiary designations. Or you might consider an important gift that reserves lifetime income for yourself or a family member, then benefits our programs. We hope you will call our office if you would like more information about gift planning, or would like to inform us about gifts you have already arranged through your estate plan.
Magnify the Value of Your Year-End Gifts
People give for many reasons – primarily personal satisfaction. Many of our friends choose to make gifts at year’s end, for reasons that have little to do with taxes. But their heartfelt generosity can be magnified significantly when donors take advantage of the tax savings Congress provides to encourage charitable contributions.
Gifts by check or credit card. Every dollar you contribute before January 1 will be deductible, up to 50% of your adjusted gross income, if you itemize deductions (excess deductions can be carried over to future years). But there are even better ideas:
Stocks that have grown in value. Investors can increase the impact of their giving by contributing marketable securities, including mutual fund shares, that have grown in value and have been owned more than one year. Donors can deduct their original cost, plus any increase in value, without owing capital gains taxes or the new 3.8% tax on investment profits.
U.S. saving bonds often lie forgotten in a desk drawer or safe deposit box. But bonds can be cashed and the proceeds contributed to assist our programs. Charitable deductions can offset tax on any interest that must be reported.
Old life insurance policies that are no longer needed to protect a young family or pay estate taxes can be repurposed to assist our programs.
Gifts that “give back” lifetime income. Charitable gift annuities can provide deductions plus payments that are 70% to 80% tax free during a recipient’s life expectancy.
- IRA gifts, if you are eligible. Donors over 70½ can make IRA gifts up to $100,000 in 2013. Charitable deductions are not available, but gifts count toward satisfying minimum IRA distributions, which can reduce donors’ taxable incomes – even if they don’t “itemize.” Please call our office if you are considering, or have made, such a gift this year.
Perks and Pitfalls of Joint Ownership
It’s fairly common for individuals, especially married couples, to own many of their assets in “joint names” – homes, cars, bank accounts, brokerage accounts, etc. Joint ownership arrangements usually provide for “right of survivorship,” meaning the person who lives longer automatically becomes sole owner of the entire property, without going through probate. Joint ownership can present disadvantages, however. What would happen to the assets if both you and your joint owner died within a short time of each other – and neither had made a will? Each joint owner should have a will that avoids having these assets distributed according to inflexible state intestacy laws.
Older parents sometimes name a son or daughter as joint owner of checking or savings accounts, with the thought that he or she will receive the account at death. But a bankruptcy proceeding against the son or daughter could freeze the account and deny access to the parent or child for a period of time. A safer plan might be to leave the account by will, living trust or pay-on-death (POD) designation, which would protect the funds while the parent is alive.
Joint ownership also may present tax disadvantages. When you leave highly appreciated stocks, real estate or other assets to someone through a will or living trust, any capital gains tax liability disappears at death and your beneficiary receives a new basis in the assets – “stepped up” to the date of death value. With jointly owned property, however, your co-owner typically receives a stepped-up basis in only your half of the property, with some exceptions. Too much jointly owned property can also make it harder for attorneys to set up trusts in estate plans to reduce or avoid state and federal estate taxes.
Joint ownership of assets certainly has a place in estate and financial planning, but should not be entered into without a good deal of thought – and some guidance from professional advisers.
Bonds May Offer Gift Opportunities
Bonds are interest-paying IOUs that corporations and government agencies offer to people who are looking for fixed-income investments. Bonds may also represent an opportunity for tax-wise philanthropy. Let’s look briefly at different types of bonds and how you might consider them in your plans to benefit worthwhile causes and organizations.
Corporate bonds. Generally, you can deduct the full fair market value of any corporate bonds you give to qualified organizations. You pay no capital gains tax on your paper profit and gifts are deductible up to 30% of your adjusted gross income. (Deductions may be reduced if a sale or redemption of the bond would result in ordinary income.) Like other appreciated assets, gifts of bonds generally are deductible up to 30% of adjusted gross income, with a five-year carryover for excess deductions.
Municipal bonds. State and municipal bonds that pay tax-exempt interest can be contributed to charity in the same manner as corporate bonds. Donors sometimes use tax-free bonds in special giving arrangements that provide them with income for life (that generally remains tax exempt) plus substantial income tax charitable deductions.
Tax-exempt bonds can also be used in a special gift technique called a charitable lead trust that provides income temporarily to organizations you select. The bonds would be returned to you when the trust ends, but you would be entitled to an income tax charitable deduction in the year the trust is established. Note: If desired, you could arrange for the bonds to pass to children or others when the trust ends, with gift tax savings added to your income tax benefits.
U.S. Savings Bonds. Savings bonds cannot be contributed to charity during life; however, U.S. savings bonds are an excellent subject for a tax-favored bequest to charity at death. Savings bonds are a category of “tax-burdened” property (technically called “income in respect of a decedent”) that donors should bequeath to charity and thereby avoid tax problems for other beneficiaries. Any buildup of interest in the bonds is includable both in the donor’s gross estate and in the estate’s taxable income (or in the income of the heir who receives the bonds). Charities usually do not pay income taxes and therefore would keep every dollar of such tax-burdened bequests. Furthermore, a bequest of bonds can create both an estate tax charitable deduction and an income tax charitable deduction for the estate.
The materials contained on this website are intended only to show some ways by which you can make a charitable gift or bequest and thereby minimize federal tax liabilities, as authorized by the Internal Revenue Code. All examples are of a general nature only and should not be applied to your specific situation without first consulting your attorney or other advisers.