How to use Split Interest Gifts
What is a Split Interest Gift?
A Split Interest Gift is when a donor makes a gift to a qualified charity and retains the right to a portion of the gift. Typically, the gift is divided into lifetime income and asset value at death. The majority of donors retain income during their lifetime. At the donors’ death, the charity receives the residual assets underlying the lifetime income. Donors receive a partial tax deduction for their gift which is based on their age and applicable IRS tables.
What types of Split Interest Gifts are there?
There are two major types of Split Interest Gifts: Charitable Gift Annuities and Charitable Remainder Trusts.
What type of Split Interest Gift is best for me or my client?
Every donor is unique. Legacy works with donors and their advisors in determining the best type of gift for each donor situation. Contact Legacy for a custom illustration of a Split Interest Gift to compare options.
The Tax Advantages of Split Interest Gifts
A Split Interest Gift results in an immediate income tax deduction to offset current taxes up to a certain amount based on the adjusted gross income. This may offset the immediate income resulting from liquidating an asset. Any surplus deduction may be carried forward up to five additional years until used. The amount of the deduction is based on the future value of the ultimate gift to charity.
Eliminate Death Income Tax
By incorporating proper legal and tax planning with a Split Interest Gift, it may eliminate the tax at death resulting from Income in Respect of a Decedent (IRD) on the distribution of certain tax deferred assets used to fund the Split Interest Gift.
Removal From Estate
A Split Interest Gift removes the gifted asset from the taxable estate, thus completely eliminating estate taxes. (Estate taxes are a separate and additional tax from income tax.)
Capital Gains Avoidance
A Split Interest Gift works with many types of taxable assets such as highly appreciated real estate, investment portfolios, and business interests. Using a Split Interest Gift with Legacy completely eliminates capital gains tax on the sale of such assets.
A Split Interest Gift can be made with a variety of non-cash assets including real estate, closely held business interests, artwork, and so forth. The asset is sold by Legacy and the income stream will be based on the net proceeds of sale.
Tax Advantaged Income
The income paid by a Charitable Gift Annuity will be tax advantaged in a number of ways.
- A portion of the income will be tax free (representing the return of the initial contribution).
- A portion may be taxed at the lower capital gains rate if an appreciated asset other than an annuity was used to fund the Charitable Gift Annuity. The capital gains income on the sale of an appreciated asset is amortized over the life expectancy of the Donor.
- All other income from the Charitable Gift Annuity will be taxed as ordinary income.
Tax Free Money For Heirs
If wealth replacement is part of the strategic plan, the heirs will receive the benefits income tax free. With appropriate estate planning, these benefits may also be estate tax free.
Tax Exempt Social Capital
The residual funds at the Donorʼs death and all subsequent earnings in the family foundation are exempt from taxation and available to bless the whole world through grants to third party charities and Legacy Charitable Initiatives.