O'Connor: Giving back has its rewards

Millions of Americans choose to give back to their communities by making donations to their favorite charities each year.

In fact, according to the Giving USA Foundation and Center of Philanthropy at Indiana University, charitable contributions totaled more than $316 billion in 2012.

Qualifying organizations are those that have been granted tax-exempt charity status by the IRS and include churches, religious organizations and various organizations that promote education, health and other social services to benefit the general public.

While gifts of cash are probably the most common gift, many individuals find that it is beneficial to make charitable gifts in other ways. When determining a charitable-gifting strategy, it’s important to keep in mind that there are annual limits on the amount you can claim as a charitable deduction for tax purposes, depending on the types of charities you donate to and the type of assets gifted.

• Direct gifts of appreciated securities. This method conserves the donor’s cash while helping to avoid capital-gains tax on the sale of the appreciated security. Generally, you may deduct the market value of the securities (determined at the time of the gift) on your current-year tax return.

• Direct gifts of life insurance. You may choose to transfer a life insurance policy to an organization if the life insurance coverage is no longer required. Transferring the policy to an organization may provide benefits for you and the organization. If the policy has a cash value, the organization might be able to borrow funds from the policy, and you might be entitled to an income-tax deduction in the amount of the policy’s value.

• Charitable remainder trust. This technique lets you make a charitable contribution of assets (property or securities) into a trust in which the assets can be sold without generating current capital-gains tax. You may receive an income stream from the trust during your lifetime and receive a current income-tax deduction based on the present value of the future benefit to an organization. The organization receives the assets in the trust, usually upon the donor’s death.

• Charitable lead trust. This type of trust is the opposite of a charitable remainder trust. An income stream is provided to the charity, while you transfer the remaining interest to your family. A charitable lead trust does not generally entitle the donor to an income-tax deduction in the year the trust is established. However, any income generated by the donated assets will be reported by the trust and not the donor. The trust is then entitled to a charitable deduction for any income it pays out to the charity. Unlike a charitable remainder trust, a charitable lead trust does not help you avoid capital-gains tax. The benefit of the trust is in the ability to give the assets to heirs at a substantially discounted value.

• Charitable gift annuities. In this arrangement, the organization promises to pay the donor a constant income stream – an annuity – in exchange for a charitable gift. A portion of the value of the gifted assets is tax deductible to the donor. 

• Pooled income funds. A charitable nonprofit organization can create and maintain a pooled income fund consisting of assets contributed by many different donors. An organization pays the net income the fund earns to the various donors in proportion to their respective interests in the fund. The income depends on the fund’s performance and is taxable to donors.

• Private charitable foundations, supporting organizations and community foundations. Creating a foundation lets your family control the allocation and investment of contributions made to an organization. The entire contribution must be used for the foundation’s charitable purposes. You may structure a private foundation as a corporation, managed by a board of directors, or as a trust, managed by trustees.

To help you determine what giving alternatives might be a good fit for your personal financial and overall tax situation, talk with your financial adviser and tax/legal professionals for guidance in initiating a charitable-giving strategy.

• Timothy J. O’Connor is a certified financial planner and first vice-president/investment officer at Wells Fargo Advisors LLC in Woodstock. He has been a financial adviser for more than 26 years and specializes in all phases of retirement income planning. Reach him at or 815-337-9470. Timothy and his entire family wish you a safe, prosperous and healthy holiday season.  

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