Gifts with Strings Attached

'Tis the season to give money away. Is it possible to donate--and reap some financial benefits yourself? Glad you asked.

Jean Chatzky
Photograph: Levi Brown

Sure, giving feels good, particularly at this time of year. And it feels even better when your donation pays off for you, too. "Both you and the cause can benefit," says Stacy Palmer, editor of the Chronicle of Philanthropy. "That’s how philanthropy in this country was born." Whether it’s by establishing an annuity linked to a charity, minimizing the future taxes on your estate or giving your kids an advantage in the college-application process, there are many ways to give and get simultaneously. Here’s how to maximize both your gift and your reward.

Giving to charity
Charitable giving has always been associated with two types of getting back. First, there’s the tax deduction you receive for making a donation. To take this, you must give to a recognized 501(c)(3) not-for-profit organization (check its status), and you must itemize when you file your taxes. You also need documentation: For any gifts of $250 or more, the IRS requires a receipt from the organization. For donations under that amount, to claim a deduction, you must have a canceled check, a credit card statement or a receipt from the charity.

The second way to get something back when you give to an organization is by establishing a charitable annuity or a charitable remainder trust. In both cases you donate a sizable amount of money or property, and the charity agrees to pay you a set sum say, 6 percent of your donation every year until your death (how that income will be taxed will vary according to your age and the way the annuity was funded). The bonus? You can take the tax deduction for the donation now. A charitable annuity is easy to set up; often the organization’s staff can walk you through the transaction. A charitable remainder trust, however, requires an attorney to handle the paperwork because it is customized to your wishes: You may be able to control how the gift will be used or hold on to your donated property until you die. And you may give different types of assets, such as cash, stocks that pay dividends (which you can continue to receive), artwork, even a house that you want to stay in.

Both the charitable annuity and the charitable remainder trust are useful in a bad economy, Palmer says, because you can get a tax deduction for giving away assets you’re having trouble selling, like wine collections, art or real estate. The receiving organization can sell them at a bargain price (either now or after your death, depending on your wishes).

Giving to your children
We give money to our kids for lots of reasons. We may want to help them buy their first home, start a new career or put their own children through college. We also do it for estate-planning purposes--to keep money in the family by making sure our heirs pay as little tax as possible on the assets they inherit.

Some background: In 2010 the estate tax was briefly phased out. But it will come back in 2011 (except in cases where one spouse receives assets from the other; gifts of that kind will continue to be tax free and have no limits). As I write, the 2011 estate- and gift-tax exemption will be $1 million, meaning that every individual will be able to pass on $1 million in total assets during life or at death without burdening the recipients (who mare or may not be family members). Any money you leave over $1 million, even if you're doling out small amounts to numerous people, will be taxed up to 55 percent. These numbers will probably change, however. The Obama administration would like to increase to $3.5 million the tax-free limit on assets that you can bequeath, and cap the tax rate for any excess at 45 percent; we're not likely to know the rate until after press time.

But you can lower that future tax bill by making annual gifts. Individuals can give as much as $13,000 in cash or other assets every year to any other individual without filing a gift tax return. If you and your spouse have two kids, each of you could pass $13,000 a year to each child—and in one easy transaction funnel $52,000 out of your estate and into their bank accounts. Do this 10 years in a row and it will add up to more than half a million dollars, plus any future appreciation, that won’t be subject to tax upon your death.

First Published December 1, 2010

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