When giving, make sure to give yourself a tax break

Jewish law requires charitable giving. From Torah to Talmud to Maimonides, we are instructed to care for our community. Fortunately, the Internal Revenue Code also recognizes the importance of charitable giving, providing tax deductions for gifts made to charities during one’s lifetime and at death.

As with many tax laws, the charitable giving laws are complex; this article is designed to provide guidance.

During difficult economic times, one may wonder whether one can afford to make charitable gifts. One answer, given our tradition: “How can we afford not to care for our community when it is in crisis?”

A second answer is that giving at a particular time must be governed by an individual’s own circumstances. If you are retired and living on retirement accounts that have dropped significantly in value, or have lost your job, are caring for a parent, or have a child in college, the economic demands can be enormous and funds may not be available for charitable giving.

The need is great and if some cannot give currently, it requires those who can to look even deeper into their pocketbooks to determine how they can best help.

The following are standard techniques by which to make charitable gifts.

• Cash and other property. Sub-ject to limitations, annual gifts to charities of cash or other property are tax deductible.

If you want to transfer assets other than cash or publicly traded securities to a public charity, review the tax consequences of the gift with your tax adviser before you make the gift. You do not want to be surprised by the unintended consequences of a gift.

• IRAs. The recent “bailout” legislation included a provision allowing individuals over age 70 to make gifts in 2008 and 2009 of up to $100,000 from their IRAs to public charities.

• Charitable Remainder Trust. A donor establishes this type of trust with assets that have appreciated in value, which could be property. The donor continues to use the property and/or receives an annual percentage payout during his or her lifetime (or for a term of years), and the charity is the remainder beneficiary.

The donor also receives a tax deduction when he or she establishes the trust. The older the donor and the lower the percentage payout, the higher the charitable deduction. The younger the donor and the higher the percentage payout, the lower the deduction.

This type of trust allows an individual to sell a single asset inside the trust, have income tax deferred and then invest the proceeds inside the trust in a diversified manner. The donor pays income tax on the distributions he receives from the trust. On the donor’s death, the assets in the trust are distributed to the charity named by the donor in the trust.

• Charitable Lead Trust. This type of trust provides for a distribution to charity for a term of years, after which time the assets in the trust are generally distributed to the donor’s children or grandchildren as the remainder beneficiaries.

The purpose of this type of trust is to make a gift to one’s family at a discounted value, while at the same time benefiting charity.

• Charitable Gift Annuity. This vehicle is established by a donor gifting property to a charity in exchange for an annuity for the donor’s lifetime. Based on the donor’s age and the annuity amount, the donor receives a deduction for a portion of the gift.

A portion of each annuity payment is subject to income tax. On the donor’s death, the amount remaining in the annuity is retained by the charity. A gift annuity can be established with a relatively small gift.

It is important to understand that in establishing and managing any of the above vehicles, changes in interest rates have a large impact on the performance of the vehicle. A percentage payout from any of these vehicles that cannot be supported by the growth in the trust or annuity assets could result in insignificant assets being distributed to the remainder beneficiary or, in the case of the gift annuity, to the donor.

Accordingly, these vehicles need to be established with financial modeling of changed circumstances as part of the planning process.

• Donor-advised Funds. A donor establishes a donor-advised fund at a community foundation, such as the Jewish Community Endowment Fund (today Fidelity and Schwab also offer donor advised funds, but my bias favors community foundations, which were established solely for charitable purposes and not as profit-making ventures by large investment firms).

The donor typically transfers appreciated assets to the community foundation and receives a charitable deduction. The community foundation invests the assets. Each year the donor advises the community foundation to make distributions of at least 5 percent of the value of the assets in the donor’s fund to one or more charitable organizations, subject to approval by the community foundation board. A donor advised fund gives a donor the benefits of a private foundation without the expense of managing a foundation or managing assets.

• Private Foundation. A private foundation is a separate corporation established by a donor to make charitable gifts. The donor must obtain tax exempt status for the foundation. The donor is responsible for the operations of the foundation and the investment of the foundation assets.

A donor transfers appreciated assets to the foundation and receives a charitable deduction, although the deduction is slightly limited compared to the deduction available for gifts to a public charity. Five percent of the foundation’s assets must be distributed to charities each year. Because there is complexity involved in establishing and operating a private foundation, I recommend that a private foundation be established with not less than $5 million.

Donor advised funds and private foundations are excellent vehicles for teaching the next generation about the importance of philanthropy to the family. These vehicles permit the transmission of the family’s values in meaningful ways.

• Bequests. In addition to the various lifetime giving techniques described above, charitable gifts are frequently contained in wills and revocable trusts. An individual simply advises his or her lawyer that he or she would like to make a gift to charity upon death.

A gift to charity at death is 100 percent deductible on the decedent’s estate tax return. An IRA can be left to charity upon the death of the IRA participant. Such a gift is 100 percent estate and income tax free.

These are just a few of the vehicles available to individuals to make gifts during their lifetimes and on their deaths. Because these vehicles are complex, it is important to work closely with one’s attorney and accountant to gain a comprehensive understanding of how they work.

And particularly important is how they work in times that are economically volatile.

Ellen I. Kahn is the managing partner of Sideman & Bancroft, LLP, San Francisco. She specializes in estate planning and trust administration and advises clients on charitable giving as part of their overall estate plans. She is a former Wexner Heritage Foundation Fellow, and currently sits on the boards of the Breast Cancer Fund and Mt. Zion Health Fund.