The amount donated will generate a tax credit on your final tax return. Ordinarily, the maximum amount of donations on which a credit can be claimed is 75% of net income. In the year of death and the preceding year, however, the limit is 100%. A charitable bequest may be an attractive solution if your estate is likely to have a substantial tax liability.
Donate stocks or stock options
By donating stock that has increased in value from the time you bought it, you’ll pay tax on only 25% of the capital gain, instead of the regular inclusion rate of 50%. The same holds true for stock options, as long as you donate the shares within 30 days of exercising the option and the strike price is not less than the market value of the share at the time the option was granted.You will still qualify for a charitable tax credit based on the asset’s fair market value, and your charity will receive the full value of the stock.
Donating the stocks directly is much more tax-effective than selling the stock and then donating the proceeds.
Set up a charitable gift annuity
You may make a lump-sum gift to your charity, which then purchases an annuity from an insurance company on your behalf. In return, you may receive a tax receipt for a portion of the lump sum — depending on your life expectancy and the level of income you choose — and guaranteed annuity payments from the insurer for life.
Donate life insurance
You may realize an immediate tax benefit by transferring ownership of a new or existing permanent life insurance policy to a charity and naming it as the policy’s beneficiary. The tax credit you receive will be based on the policy’s cash surrender value less any outstanding policy loans. If you continue to pay the annual premiums, you can claim them as a charitable donation.
Under new legislation, you can also directly designate a charity as the beneficiary of a life insurance policy that you own. In this case, you won’t receive a charitable tax credit for the premiums paid every year, but your estate will be able to claim a charitable tax credit based on the amount of the policy proceeds.
Set up a charitable remainder trust
You may donate cash or property to a trust, and receive an immediate tax credit based on the amount of the donation and your life expectancy. This credit will help offset the taxes related to any taxable capital gain triggered by transferring into the trust any property that has appreciated.
You’ll continue to receive income from the trust throughout your life. Upon your death, the charity receives the capital remaining in the trust. Keep in mind that once you’ve set up a trust, it’s irrevocable. In addition, there are normally professional set-up and administration fees involved, so this choice is best suited for larger charitable gifts.
Like all strategies that affect your estate, charitable gift planning is best pursued with the assistance of an estate and tax planning specialist.
