Lifetime Planned Gifts Increase the Tax Savings

Summer 2014Articles The Gazebo

When people hear planned giving, they usually think of bequests and other gifts to charities that take place after death designed to minimize estate and inheritance taxes. But lifetime planned charitable gifts can produce significant income tax savings which in many cases exceed the potential estate and inheritance tax savings.

For estate and inheritance tax purposes, there is an unlimited charitable deduction. This means that any amount left to a charity under your will is fully deductible for federal and state purposes. In effect, estate and inheritance taxes can be viewed as voluntary, since they can be totally avoided through charitable gifts.

Of course, your children and grandchildren might take a different view. They would probably prefer paying some inheritance tax to being disinherited in favor of charities. After all, the Pennsylvania inheritance tax rate is only 4.5 percent on children and grandchildren. And while the federal estate tax rate is 40 percent, it only applies to estates in excess of $5.34 million in 2014 ($10.68 million for married couples). So if you have an estate worth $1 million, there is no federal estate tax savings for leaving your estate to charity, and if your beneficiaries are children and grandchildren, the Pennsylvania tax savings is only $45,000. In situations where there is no federal estate tax, the primary motivation for charitable gifts is benefiting the charity rather than securing the state inheritance tax savings. For example, if you want to make a $100,000 to your favorite charity, the $4,500 inheritance tax savings is a nice bonus, not the impetus for the gift.

Now enter the income tax. The top federal income tax rate is 39.6 percent. For federal income tax purposes, gifts to public charities, such as the Bucks County Community College Foundation, are deductible for up to half or your taxable income each year. Gifts in excess of this amount can be carried forward for up to 5 years. The Pennsylvanian income tax rate is 3.07 percent, but unfortunately, Pennsylvania does not allow you to deduct charitable gifts for income tax purposes.

In the above example, where the donor is considering making a $100,000 bequest to charity, suppose instead the gift is made during lifetime. The federal income tax savings could be as much as $39,600. In addition, because the lifetime gift reduces the size of the donor’s estate, there will still be a $4,500 Pennsylvania inheritance tax savings even though the gift is not made by Will. So by making the gift during lifetime instead of after death, the tax savings could be as much as $44,100.

The donor might say that it is easier to part with the $100,000 after death, since someone else gets to write the check, and the donor still has the use of the funds during lifetime. But the $100,000 gift does not need to be made in a single lump sum payment. For example, the gift could be made in $10,000 increments over 10 years. The tax savings would be the same. The donor has the added benefit of seeing the gift being put to good use during his or her lifetime. Plus the charity has the opportunity to recognize the donor’s generosity directly to the donor during his or her lifetime. These benefits help make the lifetime gift a win-win for the donor and the charity.