In order to preserve the favorable tax treatment associated with making charitable gifts, certain rules and limitations apply when making gifts outright to a charity or when establishing a CRT.
For example, an income tax deduction for a gift made directly to a charity or trust is based on the donors adjusted gross income (AGI). That is, in the year that the gift is made, the donor can take a deduction up to an allowable percentage of AGI. Any excess deduction not taken in a given year can be carried over to subsequent years, up to five additional years, subject to the same percentage limitations.
In addition to AGI limitations, the type of charity to which the gift is being made, as well as the type of asset that is being transferred is taken into account.
For example, if a donor has an AGI of $300,000 and has made a gift of $100,000 cash to a public charity, then his deduction in the year of the gift is the full $100,000. That is, a gift to a public charity allows a donor to take a deduction limited to 50% of AGI, unless it is capital gain property.
If the gift were $100,000 of public stock, then up to $90,000 of deduction could be taken since stock is subject to 30% of AGI, not 50%. Note that the actual AGI used to calculate the deduction is a circular computation and should take into account the income generated from the deduction, increasing the amount of the permissible deduction.
Moreover, if a CRT is set up specifically to benefit public charities only, then the more favorable 50% AGI limitation applies. However, if the CRT can have discretion to choose what type of charity the remainder is to benefit, the less favorable 30% of AGI limitation applies at the time the gift is made to the trust, regardless of whether the actual charitable beneficiary is a public one or not.
Chart 2 summarizes the general deduction rules but does not include various and important exceptions.
Reproduced from National Underwriter Life & Health/Financial Services Edition, December 2, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.