Donating to charity is a great way to support a cause that matters to you. Your contribution can make real change, providing resources and opportunities to those in need. However, this act of kindness goes beyond simply giving back.
With proper planning and guidance, charitable contributions can enhance your financial plan, providing tax cuts while generating income.
It probably sounds too good to be true. How can you possibly save money and make money at the same time? The answer is through a charitable remainder trust (CRT).
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
How a charitable remainder trust works
A CRT is an estate and financial planning tool primarily designed to reduce your taxable income. This tax-exempt irrevocable trust fund allows you, the trustor, to make contributions that are eligible for a partial tax deduction. These contributions can be cash, property, private business interests and stocks.
Once these contributions are made, the trust will then pay one or more noncharitable beneficiaries for a specified time that cannot exceed 20 years, or the life of noncharitable beneficiaries. You can structure the trust to disperse payments annually, semiannually, quarterly or monthly. Once that time expires, or the trustor dies, the remaining funds will go to the designated charity(s).
When it comes to taxes, eligible donations are tax-deductible so long as the recipient is a 501(c)(3) charitable organization, according to the IRS. The type of deduction you receive depends on the trust’s type, term, projected income payments being paid to the charity and the interest rates set forth by the IRS. There are also different deductions available for different assets being donated, and each has its limitations.
For example, cash deductions generally cannot exceed 60% of your adjusted gross income (AGI). So, if your AGI is $70,000, you can deduct up to $42,000 in cash donations. If your deductions exceed this amount, you can typically carry over the extra amount — deducting it in future tax years.
Noncash items carry their own deductions. If you’re donating appreciated assets such as real estate, stocks, artwork or other valuable goods, you can deduct the fair market value from your taxable income. Donating appreciated assets allows you to avoid capital gains tax, cutting down the tax bill you would get if you were to sell the items.
Another donation option available to you is an IRA charitable rollover. This method, also known as qualified charitable contributions (QCDs), allows you to transfer funds directly from your IRA to the qualified charity of your choosing, thus excluding it from your taxable income. However, since it is a retirement account, you must meet a few requirements to get the tax benefit. The funds must go directly from the IRA to the charity. You cannot withdraw the money first and then donate it. You must also be at least 70½ to donate. There are limitations to how much you can transfer. According to the IRS, qualified owners can transfer up to $100,000 to charity, tax-free, each year.
How to claim these deductions
With the exception of IRAs, the key to claiming these deductions is to itemize them when you file your taxes. You’ll also need to prove that you actually made these donations in order to claim them once you file, so be sure to keep your receipts. Donations of more than $250 require a receipt.
In addition to various tax benefits, CRTs can provide some benefits to the estate planning process. Since these trusts cannot be modified or terminated without permission from the charitable beneficiary, the trustor is effectively giving up ownership rights of the assets transferred to the trust and the trust itself. This means the trust will not be included in the probate process once the trustor dies. The CRT is also exempt from estate taxes and can be transferred to the listed beneficiary immediately.
Making charitable contributions creates a win-win scenario for both you and the charity of your choice. Charitable donations allow you to support causes that are important to you while simultaneously creating an income stream and tax cuts. Note that the tax benefits, income stream and estate planning ease a CRT can provide you are dependent on your situation.
If you’re thinking about incorporating this giving strategy into your portfolio, do some research. Identify a cause that is important to you, then consider meeting with a financial adviser. They can help you establish a CRT that works for you, maximizing your tax deductions and income stream.
Related Content
- Six Charitable Giving Strategies: Feel Good and Cut Your Taxes
- DAFs vs. Private Foundations: Which Giving Strategy Is Right for You?
- How to Maximize Your Impact With Strategic Philanthropy Tools
- Retirees: Make Your Money Last With Stable Income Strategies
- How You Can Tackle Health Care Costs in Retirement
-
Greed, Fear and Market Volatility: A Financial Adviser's Guide to Keeping Emotions Out of Investment DecisionsDon't panic! And don't be so confident in the stock market that you overlook risk. Instead, be logical. Your retirement security could depend on it.
-
Want a Financial Adviser Who Shares Your Faith? Look for One With a CKA DesignationFinancial professionals with a Certified Kingdom Advisor certification are committed to integrating biblical principles with sound financial advice.
-
Greed, Fear and Market Volatility: A Financial Adviser's Guide to Keeping Emotions Out of Investment Decisions
Don't panic! And don't be so confident in the stock market that you overlook risk. Instead, be logical. Your retirement security could depend on it.
-
Want a Financial Adviser Who Shares Your Faith? Look for One With a CKA Designation
Financial professionals with a Certified Kingdom Advisor certification are committed to integrating biblical principles with sound financial advice.
-
10 Ways to Stay Safe From Grandparent Scams and Other Fraud, Courtesy of a Financial PlannerScams are increasingly hard to detect, and anyone can be fooled, from older people to educated professionals. Here are 10 ways to avoid becoming a victim.
-
This Is How the Student Loan Bubble Is Primed to Pop, From a Student Funding ExpertFueled by easy money, inflated tuition and high default rates, the student loan bubble mirrors the 2008 subprime mortgage crisis. We could be headed for a potential financial collapse. What can we do?
-
More Than Money: The Hidden Toll of Financial Abuse of Older AdultsFinancial abuse from schemes involving tech support, government impostors, false sweepstakes, grandchild hoaxes and online shopping issues can cause thousands of dollars in losses.
-
I'm a Financial Planner: Here Are Three High-Impact Ways to Make a Difference With Your DollarsThe world often feels out of control, but here are three ways to use your money — through investments, charitable giving and political donations — to help create a more just and sustainable future.
-
The Unsung Hero of Aisle 5: A Tale of Forgotten Change and Compassion at the SupermarketThis supermarket manager went above and beyond to help when a child forgot her change at the checkout counter. You might be surprised at some of the complications that supermarkets face when it comes to customers' forgotten change.
-
Train, Integrate, Retain: A Strategic Playbook for Adviser OnboardingsBuild a thriving practice by training new advisers with clear goals, structured processes and consistent mentorship for strong team growth.
