Last year brought with it several unexpected challenges due to the COVID-19 pandemic, including economic, social, and financial hardships that have left many in a position of extraordinary need. The impact of the pandemic has been disparate across demographics, affecting certain groups more than others. As a result, now, perhaps more than ever, is an opportune time for those with resources to consider charitable giving as a part of their estate and financial planning. Below is a brief summary of key provisions of the CARES Act related to charitable giving as well concise overviews of a few of the most common vehicles used to do so.
CARES ACT
The increased standard deduction provided under the Tax Cuts and Jobs Act ($12,400 for individuals and $24,800 for married couples filing jointly in 2020) has triggered a significant drop in taxpayers electing to itemize deductions and, unfortunately, in charitable donations. In order to encourage charitable giving and provide relief to those in need, however, congress provided tax incentives with the March 27, 2020, passage of the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”).
The CARES Act provides donors an above-the-line deduction of up to $300 for contributions made to qualified 501(c)(3) public charities. Another significant change temporarily allows donors who take itemized deductions on their income tax returns to deduct up to 100% of their adjusted gross income (“AGI”) for cash contributions to qualified public charities, rather than the 60% allowed in previous years. Cash contributions in excess of 100% of a donor’s AGI can also be carried forward for up to five years and deducted later. It is important to note that donor advised funds, supporting organizations, and private foundations are not considered qualified public charities. In addition to making outright charitable gifts, donors may also consider alternative strategic approaches that allow for greater tax benefits and a more significant impact to result from their donation.
DONOR ADVISED FUND
A donor advised fund (“DAF”) is an account created and maintained within a qualified 501(c)(3) public charity and used for charitable giving. A donor’s contributions to a DAF are immediately eligible for an income tax deduction of up to 60% of the donor’s AGI for cash contributions, and 30% for other types of donations (e.g., securities, real estate, and business interests). A donor can recommend how funds should be invested and distributed, but legally surrenders all control of the contribution.
CHARITABLE REMAINDER TRUST
A charitable remainder trust (“CRT”) is an irrevocable trust designed to provide an income stream to the trust beneficiary during their lifetime, and, upon the beneficiary’s death, the remaining trust estate is distributed to the charity or charities named in the CRT. If the trust is funded during the grantor’s/settlor’s lifetime, the grantor/settlor will receive an income tax deduction (which they can carry forward for up to five years) that will vary based on the amount gifted to the CRT, the length of the CRT, and the amount distributed out of the CRT. Any assets held in a CRT are excluded from the donor’s estate for estate tax purposes, and there is no taxable capital gain associated with the transfer of the asset to the CRT.
PRIVATE FOUNDATION
A private foundation is an independent legal entity funded by an individual, family, or corporation for the purpose of supporting charitable activities through grants and other gifts. A private foundation is exclusively controlled by its donor and a board of directors. A donor’s contributions to a private foundation are immediately eligible for an income tax deduction of up to 30% of the donor’s AGI for cash contributions, and 20% for other types of donations (e.g., securities, real estate, and business interests). A donor retains control in determining how the foundation assets can be invested and spent and which charities the foundation will support.
CONCLUSION
Charitable giving provides an opportunity for individuals to significantly impact causes that are meaningful to them while simultaneously providing income and estate tax benefits. Many additional considerations and elements factor into structuring any of the charitable giving options described above. And depending upon an individual’s tax and estate objectives, even more ways exist to make suitable charitable gifts. Please consult with an experienced estate planning attorney to assist with the proper selection and implementation of the charitable giving option that is appropriate for you or your clients.
