Many taxpayers already know the tax benefits of making gifts to qualifying charitable organizations during the tax year. The value of the donation may be deducted from the taxpayer’s gross income on an individual income tax return, thus resulting in a smaller tax bill.

Taxpayers may not be as familiar with the benefits of charitable giving with regard to estate taxes. The value of bequests to charity made in an individual’s will or trust may be deducted from the estate tax bill, provided that the bequests meet certain requirements. Not all estates are subject to estate tax, but for those that are responsible to pay estate taxes, the charitable deduction can be a considerable benefit. Estates valued at $5.120 million or more are subject to federal estate tax in 2012. The State of Oregon taxes estates valued at $1 million or more in 2012. Estate taxes are the responsibility of the estate and will be paid from estate funds.

Federal law provides that donations to the following organizations are eligible for the tax benefit: 1) any contribution for a public purpose made to the federal, state, county, city or other government agency; 2) nonprofit charities registered as “501©(3)” organizations; 3) veterans organizations; and 4) employee stock ownership plans subject to certain conditions.

There is no limit to the estate tax charitable deduction. All or part of the taxpayer’s estate may be left to a qualifying charitable organization.

Taking advantage of the charitable estate tax deduction can be as simple as a bequest in the individual’s will or trust. For example, a donor may leave 90% of his estate to his adult daughter in his will, and 10% to the Oregon Humane Society, a 501©(3) organization. The value of the 10% gift received by the Oregon Humane Society may be deducted from the estate tax return.

Many larger charities have professional staff people who are familiar with charitable bequests and can provide assistance in making the gift. However, only an attorney is qualified to provide legal advice regarding estate planning.

There are more sophisticated ways of making charitable donations that can reap estate and income tax benefits. Some large charities have programs like charitable gift annuities. During the individual’s life, he or she makes a donation directly to the charity. In exchange, the charity then agrees to pay a monthly income stream to the donor (or other beneficiary) during the remainder of his or her life and the funds remaining at the individual’s life will go to the charity. The portion that will ultimately go to the charity is allowed as a charitable estate and income tax deduction.  Those considering a charitable gift annuity should consider the credit worthiness of the charitable organization and whether or not the arrangement makes financial sense. Once the gift annuity is made, the individual loses control over those funds.

For individuals with large estates with significant charitable intentions, they may also consider establishing charitable trusts. These trusts, called charitable lead trusts or charitable remainder trusts, can be designed to meet the donor’s mutual goals of providing a benefit to a loved one, as well as a charity.

Alternatively, those with large estates may consider establishing a private charitable foundation. The benefit of establishing a foundation is that management of the foundation stays in control of the donor, the donor’s family or another person trusted by the donor. Generally, donations to private foundations are generally eligible for the income tax and estate tax charitable deduction. The rules regarding private foundations are similar to those governing 501©(3) charities.

If you are interested in taking advantage of the favorable tax treatment of charitable giving, consult with your estate planning attorney.

An experienced estate planning attorney makes all the difference in making sure you and your family are making proper legal planning decisions. Contact the Estate Planning attorneys with the Law Offices of Nay & Friedenberg in Portland, Oregon at (503) 245-0894 to set an appointment.