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Charitable Giving

Many people like to benefit a charity while alive or when they are gone. It can be a school, church, or particular cause that they are interested in. The office of the Minnesota state Atty. Gen. has a charity search function on its website.  GuideStar is another useful source of data on nonprofit organizations.

There are several ways to accomplish charitable giving -

The simplest and most straightforward is to make an OUTRIGHT GIFT to the charity, either while living or postmortem. The advantages to making a gift while living are that it is at least partially deductible for income taxes, and you get to see the benefit of your gift. Leaving a gift to charities in your will is 100% estate tax deductible.

Making a GIFT OF LIFE INSURANCE or designating the charity as the beneficiary of life insurance adds substantial leverage to your gift. This can enable a donor to make a large future gift for the cost of current premiums. Use of an IRREVOCABLE TRUST to own life insurance (ILIT) may be appropriate in larger estates where estate taxes are a substantial issue.  They are frequently used to replace the wealth given to a charity in order to benefit heirs of the estate without estate taxation. This is called a WEALTH REPLACEMENT TRUST.

There are two types of donor trusts to benefit charities that are sanctioned by the IRS: CHARITABLE LEAD TRUSTS and CHARITABLE REMAINDER TRUSTS. The CHARITABLE LEAD TRUST allows you to minimize the estate taxes on property eventually to be transferred to heirs. For a set period of time (either based on the life of a person or for a specific number of years) a charity receives income from the trust. The property is transferred to the eventual heirs at the expiration of the specific time.

With the CHARITABLE REMAINDER TRUSTS the reverse is essentially true. They donor retains the income from property until death when it is transferred to the charity. This gives the donor current income tax deduction based on the remainder value interest going to the charity. This avoids capital gains tax on the appreciate property. The downside is this may limit the family inheritance. However, this removes the property from the estate for estate tax purposes.

There is another method to retain income from property but still have it go to a charity at death. This is called a POOLED INCOME FUND. This is a fund managed by a charitable organization. The donor cannot be the trustee. It does produce a current income tax deduction, and the income is variable and will be based on the value of the assets. However, not all charitable organizations are eligible to establish pooled income funds.