With recent improvements in the financial markets, your clients may be more inclined to open their hearts and their wallets for charitable giving.
It’s a win-win-win proposition—the charity gets its needed funds and the donor wins twice: he satisfies his social conscience and reduces his tax bill. Fortunately, there are many ways to donate, and with some planning, you can help clients find a strategy that suits their personal situation.
In addition to cash contributions, your clients may make contributions in kind. Because these are deemed to be FMV dispositions, capital gains or losses may be realized and the donation amount is the value of the property transferred. And there’s preferential tax treatment for the donation of publicly traded securities: the resulting capital gain is excluded from income. Securities with accrued losses can be donated as well; there’s no special tax treatment, but the capital loss will be allowed.
Comparable savings apply to certain donations of securities acquired under employer stock option plans.
But warn your clients about donating recently acquired property. If such property was acquired within three years of making the gift (or ten years if one of the main reasons for acquiring the property was to make the gift), the amount is the lesser of the donor’s cost and the value of the property at the time the gift is made. Exceptions include gifts of securities, inventory, Canadian real estate and gifts made on death.
Note: providing a charity with free services or the rent-free use of property is not an eligible gift for tax purposes.
Donating life insurance to a charity is a good way to transform affordable premium payments into a substantial future donation. Gifting an existing or new policy to a charity gives rise to a donation amount equal to the cash value at the time the donation is made. This provides an immediate tax benefit.
Your client can then make annual gifts to the charity to fund the premiums, or pay premiums directly. In either case, the premiums paid represent an eligible donation.
For a larger future donation credit, your client can name a charity as the beneficiary of an insurance policy. The donation amount in the year of death will be the insurance proceeds, which can be claimed in the deceased’s terminal tax return, where it can offset the potentially significant income tax liability that arises on death.
Charitable remainder trusts
Another way to make a substantial gift of property but keep the income from the property donated is to establish a charitable remainder trust.The donor keeps the right to receive income from the property during his or her lifetime and the charity, as the residual beneficiary, receives the property remaining in the trust on the donor’s death. The gift’s value, available in the year the property is transferred to the trust, is the discounted current value of the property using the life expectancy of the donor and a current interest factor.
A similar strategy can be used for the donation of real property without the need for a trust. If you have clients with grown children who are considering leaving their homes to charity, a current gift of a residual interest in the property provides a current creditable donation (at a discounted value), but your clients retain lifetime use of the property.
Finally, if your client anticipates a significant taxable monetization event, such as the sale of a business, consideration should be given to using a public or private foundation to achieve long-term philanthropic objectives. The tax benefit is available when the gift is made to the foundation, but funds are directed to charities over a number of years in the future.