Charitable Gifts

If you are a single person, widow, or widower with an estate over the applicable exclusion amount ($2,000,000 in 2007 and 2008) or a married couple with a combined estate of more than twice the applicable exclusion amount ($4,000,000), there will be estate taxes due on your death or on the second death for combined estates over $4,000,000. The tax rate will start at 45% for 2007. The benefits of charitable giving should not be overlooked. If your choice is paying 45% or more of your assets to the federal government to do with as they choose or using those assets to leave a legacy benefiting your community or your favorite charity, the choice may not be difficult. By leaving the assets to charity, you retain control over their use. You can specify which organizations receive the assets and how they are used.

A charitable gift has a number of different tax benefits depending on whether the gift is made during life or at death. A charitable gift at death removes the gifted assets from the donor's taxable estate and the gifted property goes to the charity without any reduction for estate taxes. Charitable gifts made during life are not subject to gift tax. Lifetime gifts also provide the donor an income tax deduction and remove the gifted property from the donor's estate. The income tax deduction is for the full market value of the gifted asset at the time of the gift, not what you paid for it or your basis in it. Gifts of money made to a public charity are deductible up to 50% of your adjusted gross income for the year of the gift. Gifts of appreciated property such as stocks or real estate offer the dual savings of a tax deduction for the full fair market value of the gift and avoidance of capital gains tax on appreciation. Gifts of appreciated property are deductible up to 30% of your adjusted gross income for the year of the gift. If you can't use the full value of a charitable deduction in the year of the gift, the excess can be carried over for the next five years.

Lifetime gifts of real estate can be gifts of all the donor's interest in the property or a gift of the remainder interest. Gifts of a remainder interest in real property remove the property from the estate of the donor and allow the donor to keep possession and use of the property during his or her life. The donor receives an income tax deduction in the year of the gift for the value of the remainder given to charity. The value of the remainder is determined by subtracting the value of the retained life interest from the property's total value. The value of the retained interest is calculated using IRS tables to determine the donor's life expectancy and the value of a retained interest for the period of the life expectancy. A charitable gift of a remainder interest can be used for residences and farms or ranches where children do not want to take over and payment of estate taxes would require a sale of the property.

Lifetime gifts of life insurance offer special advantages. A donor can make a larger gift to charity with lower cost by using the leverage of insurance. If you have a life insurance policy that you no longer need, consider giving the policy to a charity. When you transfer ownership of the policy to the charity, the cash value of the insurance can be taken as an income tax deduction for the year of the gift. All future premium payments made by you will also be income tax deductible. Cash values of the insurance can be used by the charity while you are alive and death payments will go to the charity without delay for will or trust administration at your death.

Conservation easements are another method of giving a partial interest in property during lifetime or at death. A conservation easement is a grant by the owner of the land of a restriction on the future development or use of the property. The restriction could be to preserve the land for recreation or educational use, protect natural habitat, preserve open space for scenic enjoyment of the general public, or preserve a historically important land area or structure. The gift of the easement must be to a non-profit organization or a government entity. If the easement is created under a will or trust at death, the value of the property included in the estate is reduced by the value of the easement. If the easement is a lifetime gift, there will be a lifetime income tax deduction and a reduction in the estate tax value of the property at death. There is an additional estate tax exclusion for conservation easements, which is provided in addition to any income tax deduction or estate tax value reduction provided by the easement. An amount up to 40% of the value of the property reduced by the easement may be excluded from the taxable estate, up to a total of $500,000.