Enhancing Your Estate Plan Using Charitable Contributions


Federal income, gift, and estate tax laws support America’s charitable contribution tradition by providing significant tax benefits to donors. Although studies have shown that donors are not primarily motivated by tax considerations, there are many charitable contribution strategies that donors should consider to optimize an estate plan.  

Charitable Remainder Trusts (CRT)

Charitable remainders trusts, or CRTs, are excellent vehicles for charitably inclined taxpayers who want to create an income stream for a period of years or life, defer their income taxes, create an income tax deduction, and reduce federal estate tax exposure. CRTs are tax-exempt entities, so assets held in these trusts are not subject to income tax.

Two Categories of CRTs

  • Charitable Remainder Annuity Trust (CRAT): Provides a fixed annuity payment to the non-charitable beneficiary. Because a CRAT makes a fixed payment, they cannot accept additional contributions.
  • Charitable Remainder Unitrust (CRUT): Provides a fixed percentage payment based on the fair market value to the non-charitable beneficiary. A CRUT, however, can accept additional contributions, and the minimum percentage payout with a CRUT is 5%.

CRUT Example

A 65-year-old who is charitable wishes to generate a lifetime income stream on funds that grow tax free and will ultimately benefit the donor’s favorite charity. The donor transfers $1 million to a 15-year CRUT in 2023 that pays out 5% each year. The donor will receive a charitable income tax deduction in the year the CRUT is funded, and after 15 years, the remaining value in the CRUT will pass to their favorite charity and will not be included in the donor’s taxable estate.

Charitable Lead Trusts (CLT)

The Charitable Lead Trust (CLT) can be thought of as the reverse of the CRT because the charitable organization receives the income payments, and the remaining amount is distributed to the non-charitable beneficiary. CLTs are excellent vehicles for charitably inclined individuals who have no need for a current income stream from the contributed assets and are looking to provide a current benefit to a charity, generate an income tax deduction, reduce federal estate tax exposure, and ultimately pass the assets onto certain non-charitable beneficiaries.

A CLT can either be a “grantor” trust or a “non-grantor” trust.  If the CLT is a “grantor” trust, the taxpayer reports the CLT income on his or her tax return and will pay the income tax liability on that income.  If the CLT is a “non-grantor” trust, the CLT files its own income tax return and pays the income tax liability.

As with CRTs, there are both Charitable Lead Annuity Trusts (CLATs) and Charitable Lead Unitrusts (CLUTs).

CLAT Example

We return to the 65-year-old donor, but this time the donor wishes to provide an annual income stream to their favorite charity and reduce their estate tax exposure. The donor transfers $1 million to a “grantor” CLAT that pays out 5% each year for 15 years. The donor will receive a charitable gift tax deduction in the year the CLAT is funded while the charity will receive annual distributions of $50,000 (5% of the $1 million gift) for 15 years and the remaining value in the CLAT will pass to the donor’s heirs.

Private Foundations

A private foundation is a nonprofit charitable entity created and controlled by the donor. The donor is tasked with ensuring that the foundation follows IRS regulations to maintain its nonprofit status. Private foundations are required to make an annual distribution equal to roughly 5% of their prior year’s average net investment assets. Unlike a public foundation, which receives its funding from the general public, a private foundation usually has one source of funding, typically an individual, family, or corporation.

Funding a private foundation will provide a charitable income tax deduction for any amount contributed up to 30% of the donor’s adjusted gross income (AGI).  Any amount above this limit can be carried over for 5 years.  In addition, donors may also be able to avoid paying capital gains taxes by donating highly appreciated assets to a private foundation.  Also, when assets are contributed to a private foundation, they are excluded from the donor’s estate and are not subject to either federal or state estate taxes.

Gifting Appreciated Property

Rather than gifting cash to a charitable organization, a more tax advantageous strategy is to donate appreciated stock to avoid capital gains tax that would be due on the sale of the stock. For example, assume a donor wishes to make a $100,000 gift to charity. The donor has a stock that was purchased for $20,000 and is now worth $100,000.  If the donor sold this stock, they would incur $80,000 of taxable gain income. If the donor gifts this stock to charity, they will avoid the capital gains tax entirely. The limit on a charitable deduction for stock held more than one year is 30% of Adjusted Gross Income (AGI).  Any amount above this limit can be carried over for 5 years.

Finding ways to enhance an estate plan using charitable contributions can be a complex process depending on everyone’s circumstances. Schedule a meeting with your MAI Wealth Advisor to discuss the best strategies that will benefit you.

Information as of November 9, 2023.

Please consult your legal advisor who is licensed in your state and specializes in estate planning to determine how this information may apply to your own situation. The opinions and analyses expressed herein are subject to change at any time. Any suggestions contained herein are general, and do not consider an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Distribution hereof does not constitute legal, tax, accounting, investment, or other professional advice. Recipients should consult their professional advisors prior to acting on the information set forth herein. In accordance with certain Treasury Regulations, we inform you that any federal tax conclusions set forth in this communication, were not intended or written to be used, and cannot be used by any taxpayer, for the purposes of avoiding penalties that may be imposed by the Internal Revenue Service.

We look forward to learning about your financial goals.