The income tax savings generated by such annual charitable gifts rarely serve as the primary catalyst for such gifts. However, the federal income tax savings (and state income tax savings in most states) are significant and certainly serve as a valuable incentive for people to make charitable gifts. In fact, charitable giving and resulting income tax savings have been a foundational aspect of tax policy in our country since the inception of the federal income tax back in 1913.
However, recent tax law changes have – for better or worse – made it more difficult for people to receive any additional income tax savings from annual charitable gifts under $25,000/year. This is largely because the standard deduction, which all taxpayers receive each year regardless of any charitable gifting, doubled on January 1, 2018. In 2020, the standard deduction for a single person is $12,400, and for a married couple is $24,800.
To understand the impact of the larger standard deduction, it is important to know that the charitable income tax deduction is one of the so-called itemized deductions. Every year all taxpayers have the option to claim the standard deduction or their itemized deductions. For example, if you are married and made $8,000 of charitable gifts (and no other itemized deductions) in a given year, then you should certainly claim the $24,800 standard deduction. In this example, claiming the standard deduction will save you $5,376 in taxes (at the 32% income tax bracket), however, you will not receive any additional tax savings from your charitable gifts of $8,000.
Currently, there are very few solutions available for annual givers to charity who would like to receive additional tax savings from their charitable gifts. The most common recommendation is for annual givers to “bunch” two, three, five, or more years of their typical amount of annual charitable gifts into a single lump sum payment in a single year. While this will work, bunching is not congruent with their preferred manner of giving to charity on an annual basis. Moreover, in many cases, such givers are not financially capable of making a large single gift to charity.
There is, however, another well-established solution that surprisingly few annual givers (and professional advisors) know about, even though it presents a compelling solution for annual givers. For over 40 years, federal tax laws have authorized an annual giving tool that will generate a very large deduction, which is based on the promise to make annual charitable gifts in the future for a specified number of years. In the vast majority of cases, the immediate charitable deduction generated by this annual giving tool is between 90% to 95% of the sum of all the annual gifts to charity! This large deduction is allowed because the applicable IRS rules utilize a basic present value approach to determine the accelerated charitable deduction and the applicable IRS interest rate remains at historically low levels.1
The technical name of this well-established annual charitable giving tool is a reversionary charitable lead annuity trust, which is intentionally designed to be a grantor trust for federal income tax purposes. For brevity sake and for purposes of the remainder of this article, it is also commonly referred to as an “iCLAT.”2
Let’s take a look at a simple example. Assume that Grace and Andrew, a married California couple in their 50s, regularly give $20,000 each year to their two favorite local charities and their church. They plan to continue making their typical level of annual gifts to charity for at least the next 10 years. If they decide to make their typical annual gifts for the next 10 years through an iCLAT, then they will receive a year 1 charitable deduction of $91,318, which is 91.3% of total payments to charity over such 10-year term! This deduction will save $29,200 in federal income taxes and, since they are California residents, $11,870 in state income tax savings, totaling $41,070 in combined federal and state tax savings. Conversely, if Grace and Andrew continue to make their gifts from their current bank account, then they will not receive any additional tax savings over the next 10 years!
Think about that, with an iCLAT, they will save over $41,000 in taxes for simply continuing to make their accustomed level of charitable gifts for the next 10 years!
An iCLAT works best for those annual givers who fall in one of these two ideal categories:
1st Ideal Category: Annual givers who have a large ordinary income event of at least $250,000 in a particular year from a large bonus, Roth IRA/401k conversion, large distributions from a IRA/40k or other retirement plan, stock options, restricted stock compensation arrangements, sale of business, large contingency fees (such as attorney fees) or large commissions.
2nd Ideal Category: Annual givers who are currently earning a high level of income, such as executives, doctors, attorneys, veterinarians, accountants, engineers, professional athletes, architects, etc. but plan to retire in the next few years.
Note, if you decide to research charitable lead trusts on the internet or you happen to discuss them with your financial advisor, attorney, and/or accountant, then keep in mind that there are other types of charitable lead trusts, which are not only more commonly known than the iCLAT, but also significantly more complex. Therefore, most information and professional knowledge concerning charitable lead trusts only pertain to the traditional (and more complex) form of charitable lead trust – and not to the iCLAT, which is much simpler to understand, establish, and administer. So, don’t get confused if you discover this after conducting some research on your own.
Traditional charitable lead trusts are primarily used to save future estate taxes, which only impact the very wealthiest of families these days.3 However, qn iCLAT is an entirely different story. Since it is solely designed to save income taxes, and not estate taxes, it is beneficial to a much larger number of people, particularly to those who already give charity on a recurring annual basis.
In conclusion, the iCLAT is a compelling annual giving strategy to consider in the current income tax environment. This is certainly true for those who currently give on a recurring annual basis (or plan to do so in the near future) and want to receive additional income tax savings from their generosity in the current year. If you are interested in learning more about the iCLAT, then please visit www.iclat.net or simply contact Mr. Gornto at firstname.lastname@example.org or (844) 464-2528.
1 The applicable IRS 7520 rate for January 2020 is only 2.0%.
2 iCLAT is another name for a what is commonly referred to as a reversionary charitable lead annuity trust. iCLAT® is a registered trademark of Effectual Giving, LLC.
3 In 2020, the applicable federal estate tax exemption amount is $11,580,000 per individual ($23,160,000 for married couples).
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Brad Gornto has practiced law throughout Florida in the areas of complex estate & charitable planning, business law, probate and trust administration, and income tax planning for over twenty years. In addition to his active law practice, Brad is also the President and Founder of Effectual Giving, LLC, which is a consulting firm that assists charities, philanthropic families, and allied professionals across the country in the actual implementation of planned giving recommendations. Brad earned his undergraduate degree from Florida State University, his law degree (J.D.) from the University Of Florida College Of Law, and his Masters in Taxation (LL.M.) from the University Of Miami School Of Law. Brad currently volunteers as a member of the Florida State University Foundation, Inc. Planned Giving Advisory Council and the President of the Charitable Gift Planners of Central Florida.