Charitable gifting not only enables you to fulfill your philanthropic inclinations but can also support your broader estate planning objectives. Beyond its social significance, the charitable deduction can potentially mitigate federal gift and estate taxes.

People contribute to charitable endeavors for all kinds of reasons. Some are driven by a deep-seated devotion to a cause, while others feel a moral obligation to support the less fortunate. Altruism, generosity, and a sense of societal responsibility also factor into the desire to donate.

Whatever the underlying motivation may be, charitable giving is inherently gratifying, offering a sense of fulfillment and purpose. However, such donations may also double as estate planning tools.

By leveraging charitable donations, individuals can achieve several key estate planning objectives. Firstly, donating assets to philanthropic causes enables you to distribute your property in a tax-efficient manner. By reducing the taxable value of your estate through charitable deductions, you can potentially minimize the amount subject to estate taxes, thus optimizing the overall tax burden borne by your beneficiaries.

Secondly, you may relegate the remainder of your assets to a lower tax bracket by directing a portion of your estate to charitable organizations. This can prove particularly advantageous in scenarios where the size of the estate surpasses certain tax thresholds.

In these instances, charitable giving represents a convergence of philanthropy and astute estate planning. Whether motivated by a desire to effect positive change or a pragmatic approach to wealth management, charitable gifting remains an indispensable tool for individuals seeking to leave a lasting impact on society and their familial legacy.

Qualifying for a Deduction

Certain conditions and requirements must be met to qualify for this deduction:

• You must make the transfer, either during life or at death by will, rather than your executor or heirs.
• The property must be transferred to a qualified charity for a charitable purpose. A qualified charity includes:
  • The United States, any state, the District of Columbia, and any local government.
  • Specific religious, scientific, or charitable organizations.
  • Certain veterans organizations.
  • Certain fraternal organizations.
  • An employee stock ownership plan if the transfer is a qualified gratuitous transfer of qualified employer securities.

The IRS publishes a list of charitable organizations that explains which gifts or bequests will qualify for this deduction. The IRS does not define what a qualifying charitable purpose is. However, it has issued letter rulings that discuss what has been allowed or disallowed, and it has privately ruled that charitable purpose means the same for gift tax and estate tax purposes as it does for income tax purposes. Generally, a charitable purpose means a public purpose, not a private one.

Depending on the year you die, the gift or bequest must be included in your estate for estate tax purposes. The deduction amount is the value of the property transferred, but the amount cannot exceed the value of the property required to be included in your estate.

You must be a U.S. citizen or resident when you make the gift. A charitable deduction is allowed for nonresident noncitizens, but only certain categories of charities qualify.

Generally, the gift must be a present interest. A present interest means that the donee (the person or organization you give to) has the unrestricted right to the immediate use, possession, or enjoyment of the property or the income from the property from the moment you make the gift.

The deduction is not available for gifts of future interests in property. Future interests include reversions, remainders, and any other delayed interest that postpones the commencement of the use, possession, or enjoyment of the property or income from the property.

Gifts of future interests may qualify for the deduction if the gift is structured as a partial interest gift. Partial interest gifts (property rights given to both charitable and non-charitable interests, e.g., a trust paying income to charity with the remainder going to non-charitable beneficiaries) may qualify for the deduction if the donated property is transferred to an IRS-approved form of charitable trust, such as a charitable lead trust, charitable remainder trust, or pooled income fund.

For lifetime gifts, the charitable deduction is allowed for the year in which the gift is made for federal gift tax purposes. You don't need to file an annual gift tax return if all gifts made for a given year fully qualify for the charitable deduction.

Special Rules 

The charitable deduction is limited to the amount of the transfer actually made. Special rules apply if the transfer to charity first must bear a portion of any estate taxes because of the calculation difficulties that arise. Estate taxes are a function of the charitable deduction, and the charitable deduction is a function of the estate taxes.

The interrelated computation can be avoided by providing a specific bequest to the charity instead of a gift from the residuary estate.

Charitable IRA Rollover Gifts

Donors over the age of 70½ can make tax-free charitable distributions of up to $100,000 directly from their IRAs each year.

Donors who have reached age 70½ can direct amounts (subject to the aforementioned $100,000 limit) to charity in satisfaction of their minimum required distribution as long as the following requirements are met:

• The donor is age 70½ at the time the gift is made.
• The charitable gift is made directly from an IRA to the charity.
• An individual can give a maximum of $100,000 per year. A spouse can give an equal amount from their IRA.
• Individuals can make gifts of any amount to as many charities as they desire as long as the total does not exceed $100,000 per year.
• The gift cannot be made in exchange for a charitable gift annuity or to a charitable remainder trust.
• The gift cannot be made to a private foundation, donor-advised fund, or supporting organization (as described in IRC Section 509(a)(3)).

A Financial Advisor Can Help

If you're interested in setting up a charitable deduction, it helps to have expert help. Contact Mark Vergenes at Mirus Financial Partners to ensure your contributions qualify as deductions.