Donating money or valuable assets to charitable organizations can provide immediate tax benefits while also giving you a sense of pride in contributing to the world. A substantial donation can not only reduce your tax burden but also diminish your taxable assets. Another benefit is that by donating to charitable organizations, you can create some income for your retirement.
When donating to qualified charitable organizations, you may be eligible for tax deductions. You can search for the organization you wish to donate to using the Employer Identification Number (EIN) on the website of the Internal Revenue Service (IRS) in the United States. Tax-exempt organizations are usually classified as 501(c)(3). Verify the information carefully as some organizations may have had their tax-exempt status revoked. Only certain eligible charitable organizations can set up trusts.
Once you donate to a charitable organization, you cannot reclaim the money, so careful consideration is necessary before making a donation.
While the primary purpose of donating to charitable organizations is to help them, there are ways to receive fixed income from your donations. There are two main ways to generate income from your donations.
Setting up and funding a charitable gift annuity benefits both the charitable organization and the donor. The organization can immediately utilize a portion of the funds, and upon the donor’s death, they will receive the remaining funds in the account. Sometimes, donations can be as low as $5,000.
Donations to charitable gift annuities can take various forms. You can donate real estate, collectibles, publicly traded securities, artwork, and other assets. You can also donate the required minimum distribution (RMD) from retirement accounts, but the 2024 limit for donations from individual retirement accounts (IRAs) is $53,000. Donations from individual retirement accounts do not qualify for tax deductions as the money has not been taxed.
Certain assets should not be placed in charitable gift annuities. Sheffield Estate Planning advises against including the following assets in such annuities: S Corporation (S Corp) stock, partnership interests, limited liability companies, employee stock options, your primary residence, and mortgaged real estate.
When donating highly appreciated assets, the full market value of the assets will be preserved. Selling these assets will not diminish their value.
Since some funds will be returned to you, you cannot fully deduct the amount of your donation for tax purposes. Fidelity notes that tax deductions depend on factors such as the number of beneficiaries, their ages, life expectancies, and how much they will receive over their lifetimes.
Payments are typically made to donors on a quarterly basis. According to Investopedia, donors will receive these payments throughout their lifetime.
Monthly payment amounts may not be as high as traditional annuities because the primary purpose of the donation is to assist charitable organizations. Nevertheless, these payments will continue until the donor’s death, even if the total payout exceeds the initial donation amount.
When establishing a charitable gift annuity, you can designate a second individual or organization to receive the income. They can start receiving income immediately or you can set it up for them to receive income after your death.
Another method to donate to charitable organizations and receive lifelong steady income is by creating a charitable remainder trust. This trust must be irrevocable, meaning once established and funded, the donor cannot retrieve the funds or assets placed into it.
Donors can determine how many beneficiaries receive payments regularly from the trust. They can also designate themselves as beneficiaries. These payments will continue for a fixed period or for the lifetime of the beneficiaries. After the last beneficiary’s death or when the period ends, the remaining funds will be donated to designated charitable organizations.
The IRS stipulates that after the payment period ends, at least 10% of the donation amount (net fair market value) must be given to the designated charitable organization. You can choose more than one charitable organization to receive the remaining assets.
One form of charitable remainder trust is the Charitable Remainder Unitrust (CRUT). According to NerdWallet, the amount the beneficiaries receive annually can vary depending on the value of assets in the trust, which are revalued each year. The annual payments to beneficiaries must fall between 5% and 50% of the fair market value of the trust assets. Donors can make additional contributions to the trust.
A Charitable Remainder Annuity Trust (CRAT) is similar to a CRUT, but the annual payments to beneficiaries are predetermined at the creation of the trust and must also distribute a percentage of the trust’s assets value, ranging from 5% to 50%. Once the trust is established, donations cannot be added.
Forbes Advisor indicates that most distributions from charitable remainder trusts are taxable. All trust income is reported on the K-1 schedule (Form 1041), detailing the beneficiaries’ share of income, deductions, and credits. Taxes may need to be reported as income, capital gains, or in other forms.
When incorporating a charitable remainder trust into retirement income and estate planning, it is advisable to hire a lawyer due to its complexity and the frequent changes in laws. They must also understand the related laws of the state in which you reside.