In addition to the various techniques for benefiting your family described above, you may want to consider creating a private foundation to implement your charitable planning. The private foundation could be the recipient charity of distributions from the charitable remainder trust, described above. You might also want to consider creating a private foundation to conduct your charitable giving. First, as you may know, it is generally more advantageous to make charitable gifts during your lifetime rather than at your death because a lifetime charitable gift can generate an income tax deduction as well as remove gifted assets from your estate. A bequest to a charity at death will only generate a charitable estate tax deduction.
Certain limits apply to income tax charitable deductions. The limits depend on the type of charity and the type of property donated. Favorable deduction rules apply to certain types of charities, often referred to as “60 percent charities.” Donations to 60 percent charities are, in most instances, deductible up to 60 percent of the donor’s contribution base (essentially, adjusted gross income). The most common 60 percent charities are donor-advised funds churches, non-profit schools and hospitals, and public charities such as the Red Cross or United Way.
The term “30 percent charities” refers to all charities which are private foundations not qualifying as 60 percent charities. Gifts to 30 percent charities are deductible up to 30 percent of the donor’s contribution base.
The IRS also limits charitable deductions based on the type of property donated. More than likely your donation will consist of long-term capital gain property which is subject to a limitation of 30 percent of the contribution base (essentially adjusted gross income) if donated to a 60 percent charity. In the case of gifts of long-term capital gain property to 30 percent charities, the gift is only deductible up to 20 percent of the donor’s contribution base. If your gift consists of stock that is traded on an established securities market, and therefore is considered to be “qualified appreciated stock”, your charitable deduction should be 100 percent of the fair market value of the donated property (up to the 20% of the donor’s contribution base cap), and you will not have to recognize the unrealized capital gain.
However, in either case, if donations exceed the contribution base limits, there is a five- year carry-forward of the disallowed portion of the deduction. Your estate will not get all of the carry-forward income tax deduction if you die before you have used up all of the deduction. In addition, if your adjusted gross income exceeds certain levels, you may be subject to additional limitation on your deductions.