You do not have to be Bill Gates or Warren Buffett to make a difference in the world now and after you are gone. Most of our clients are very interested in philanthropy and ways to maximize the many advantages that the Internal Revenue Code provides to encourage charitable giving. If your estate plan does not include philanthropy now, or if you wish to consider additional charitable giving during your life or after your death, you may want to give consideration to one or more of these techniques.

Outright Gift to a Public Charity. The most common and simple technique available to benefit charity is to make an outright gift. A gift to a qualified charity during your life will result in an income tax deduction for donors who itemize their deductions. The deduction for gifts of cash to public charities is generally limited to 50 percent of the donor’s adjusted gross income (AGI) for the taxable year in which the gifts are made. A specific outright bequest to a charity in your will reduces your taxable estate dollar for dollar, providing a 100 percent deduction for estate tax purposes. The main advantage of an outright gift to a public charity is its simplicity.

Donor-Advised Fund. A donor-advised fund, which is a separate charitable account held in your name at a financial institution or community foundation, permits a charitable deduction upon the initial funding of the account, but the donated funds are paid to charity over time. The custodian of the donor-advised fund is structured as a public charity, and therefore the donor may use the 50 percent limitation on AGI for cash gifts. The custodian handles all of the administration (e.g., tax returns) and charges a fee for its services. Each donor has a designated bookkeeping account from which the donor can recommend to the custodian how, when and to which charities the funds should be distributed. The donor generally has no control over the investment of the assets and does not have an enforceable legal right to require that the funds be distributed pursuant to the donor’s request.

Private Foundation. A private foundation is a charitable entity that allows the donor to maintain a level of control over both how the donor’s charitable intent will be met and how the funds are invested. Unlike a public charity, which is funded by the public at large, the private foundation is usually created, funded and controlled by a family. In the case of the typical family foundation, the income tax deduction is generally limited to 30 percent of the donor’s AGI for cash gifts. Private foundations offer the donor and the donor’s family a high degree of control and continued involvement in the donor’s charitable giving. However, private foundations are subject to rigorous rules governing their operation, and compliance must be carefully monitored, which can make administration expensive and time consuming. Unlike a donor-advised fund that currently has no minimum distribution requirement, a private foundation must distribute at least 5 percent of its assets each year to charities.

Charitable Lead Trust. A Charitable Lead Trust (CLT) is an irrevocable trust created during lifetime or by a testamentary trust at death in which the income (or "lead") interest is paid to a charity for a fixed term and the principal remaining at the end of the term, if any, is distributed to individual beneficiaries. Under a CLT, the charitable beneficiary or beneficiaries receive a certain dollar amount or a fixed percentage of the net fair market value of the trust assets determined and payable annually. The initial gift to the CLT will generally use a portion of the donor’s gift tax exemption (or gift tax will be due to the extent the taxable gift exceeds the donor’s available gift tax exemption) based on the present value of the remainder interest that is deemed to pass to the individual beneficiaries upon the creation of the CLT. At the end of the charitable lead interest, the entire trust principal will pass to individual beneficiaries designated by the donor (generally family members), or trusts for their benefit, without further gift or estate tax.

Charitable Remainder Trust. A Charitable Remainder Trust (CRT) is essentially the reverse of the CLT. A CRT is an irrevocable trust created during lifetime or at death, pursuant to which a fixed percentage of the net fair market value of the trust’s assets or a fixed dollar amount is paid at least annually to one or more individual beneficiaries (usually the grantor of the trust) for a term of years or for the life of the non-charitable beneficiary. At the end of the initial trust term, the remaining principal in the CRT must either remain in trust exclusively for, or be paid outright to, a qualified charity. Generally, CRTs are less favorable in times of low interest rates. However, as a result of a recent IRS pronouncement, the use of CRTs will be more available even as interest rates remain low.

Charitable Gift Annuity. A charitable gift annuity is a contractual arrangement between a donor and a charitable organization, pursuant to which the donor transfers cash or other assets to a charity in exchange for payments for life. The fact that the annuity is paid by a charitable organization does not make the payments tax exempt, but an income tax deduction may be available in the year of the initial transfer based on the value of the annuity versus the consideration paid for the annuity.