Over the years, charitable giving has run the gamut from simple gifts of cash to the formation of complex charitable trust structures. In difficult times or where the disparity between classes of wealth is particularly in the spotlight, greater pressure is placed on the wealthy to contribute more to charitable causes. Other events, such as the raising or lowering of taxes can affect charitable giving. Most recently, key provisions of the Tax Cuts and Jobs Act of 2017, including the virtual doubling of the standard deduction and estate tax exemption as well as elimination of the phase-out of itemized deductions, will further shift the focus on charitable giving to high-net-worth individuals and reduce the tax incentive for moderately wealthy individuals. The following are a few vehicles and concepts that high-net-worth donors and some moderately wealthy donors should be considering.

Gift Bunching Combined With DAFs

Because the standard deduction is now $24,000 per couple, many Americans will no longer be itemizing deductions. Accordingly, as the charitable deduction is an itemized deduction, such individuals will be less motivated by tax savings when it comes to charitable giving. One option for individuals who had historically given a certain dollar amount (or percentage of earnings) to charity each year that would now be less than the standard deduction (or otherwise having a reduced benefit) is to give several years worth of payments in a single year. To avoid having to give all of such amount to charity in that particular year, such individual could set up a donor advised fund (“DAF”) either with a local community charity (such as a United Way) or with a financial institution-sponsored fund and give the aggregate amount to the DAF. In this case, the individual would receive a charitable income tax deduction in the year of contribution to the DAF but then have the funds contributed to the DAF distributed to charities in subsequent years in the annual amounts given by the donor in years past. (Although donor advised funds are not required to follow the direction of the donor, they generally will, so long as the recipient fits within the parameters of the DAF sponsor.)

Grantor Charitable Lead Annuity Trusts—CLATs

Another planning technique designed to generate a substantial charitable income tax deduction for the current year, yet postpone actual distributions to charity, is the grantor charitable lead annuity trust or “CLAT.” In the case of a grantor CLAT, one or more charitable organizations receives a series of periodic payments (generally on an annual basis) for a number of years from a trust, after which time, the remaining amount left in the trust is paid to non-charitable beneficiaries, generally family members or trusts for their benefit, free of gift and estate tax. An income tax deduction for this stream of annuity payments is actuarially determined and taken in the year the CLAT is funded. The grantor CLAT is similar to the gift bunching-DAF technique described above, however an individual or corporate trustee chosen by the donor, and not a public charity, is in charge of actually making the charitable payments as well as managing trust assets. A back-loaded (or accelerating) CLAT annuity, where payments increase by a given percentage each year (up to 20 percent) can potentially be more effective for leveraging gifts to family members because principal is preserved within the trust for a longer period of time, allowing more growth and income to accrue for the remainder beneficiaries.  

Holistic Tax And Estate Planning

Historically, family limited partnerships (or family LLCs) and charitable vehicles operated in parallel universes with each having separate assets, goals and purposes. Wealthy individuals can maximize the efficiency of charitable giving while retaining control over investments and reducing taxes by integrating such charitable vehicles with FLPs or FLLCs. The pooling of assets in an FLP or FLLC by multiple estate planning vehicles (including insurance trusts, GRATs, dynasty trusts and charitable trusts) may prevent the trustee of a CLAT, for example, from having to incur short-term capital gains, or invest in high-yield bonds (taxable at high rates) to satisfy the trust’s demanding cash flow commitment. Further, by pooling family assets (including trust assets) with charitable trust assets, even significant fluctuations in asset values (or an unstable stock market or real estate market) may not substantially disrupt the charitable trust’s payout structure or the donor’s overall long-term investment strategy. Instead of funding a charitable trust directly with investment assets, the donor would contribute the assets to an FLP or FLLC and then contribute an interest in the entity to the charitable trust. The individual retains control over the entity’s investments by retaining certain voting rights over management, whether voting units in an FLLC or the general partner interest, directly or through the use of a corporation or FLLC as a general partner. In certain cases, the business entity itself can be the grantor and create and fund the charitable entity.

Almost Charitable LLC

Perhaps the most interesting current technique is actually no technique and produces no immediate charitable deduction. This is the use of a standard LLC as a centralized charitable giving fund. In this case, an individual forms an LLC and funds it with cash or other assets that he ultimately plans to give to charity. Since the individual is simply contributing assets to a business entity, he receives no immediate charitable income tax deduction and annual taxable income from the assets continues to be taxable to him through the LLC as a pass-through entity. The individual retains total control over the assets and avoids all of the investment restrictions or payout requirements applicable to charitable vehicles. When the individual desires to make a charitable donation or can otherwise utilize a charitable deduction, the LLC makes the donation and passes through the deduction. This technique is essentially a generalized charitable pledge and received significant attention when Mark Zuckerberg and his wife, Dr. Priscilla Chan, created a Delaware LLC (called the Chan-Zuckerberg Initiative) at the end of 2015. Although they graciously committed to transfer approximately 99 percent of their shares of Facebook stock (worth approximately $45 billion at the time), ultimately pledging to pass this wealth on to philanthropic endeavors over their lives, their promise was viewed as a publicity stunt since they were not bound and could unwind the LLC at any time. Nonetheless, others feel this is a good trend in that it earmarks money for charitable causes and will likely increase charitable giving since the individual has psychologically set aside that money. This concept was also used by Laurene Powell Jobs, the widow of Steve Jobs (the Emerson Collective) and Pierre Omidyar, the founder of eBay (the Omidyar Collective).  

Seth Kaplan is a shareholder in Gunster’s Private Wealth Services group. He concentrates his practice in the areas of planned giving, charitable trusts, personal income taxation and estate planning for high-net-worth individuals