Being charitable - without going broke.

• Author: Bier, Rivka

"[A] very rich person should leave his kids enough to do anything but not enough to do nothing," said Warren Buffett to Fortune; see Loomis, "Warren Buffett Gives It Away" (7/10/06), available at http://money.cnn.com/magazines/fortune/fortune_archive/ 2006/07/10/8380864/index.htm. Buffett's unprecedented recent commitment to donate approximately 85% of his wealth has raised the question: what is the ideal time for charitable giving? Should one dispose of one's wealth while still alive, or in one's estate?

Deduction Overview

Individuals and corporations: Sec. 170(a) allows a deduction for "any charitable contribution ... payment of which is made within the taxable year" to certain tax-exempt, nonprofit organizations. Sec. 170(c) defines "charitable contribution." Under Sec. 170(b), the deduction is available to individuals and corporations. Contributions made by an individual during life are subject to limits, however; cash contributions are fully deductible (net of any goods or services received) and are generally limited to 50%, (30%, in certain cases) of the contributor's adjusted gross income (AGI). Contributions of appreciated capital gain property are generally deductible at fair market value (FMV) on the date of contribution and are limited to 30% (20%, in certain cases) of AGI; see Sec. 170(b)(1).

Trusts and estates: For a trust or estate, Sec. 642(c)(1) provides that "there shall be allowed as a deduction in computing its taxable income ... any amount of the gross income, without limitation, which pursuant to the terms of the governing instrument is, during the taxable year, paid for a purpose specified in section 170(c)."Thus, for the trust or estate to take a deduction, the distributee charity must meet the same requirements as one receiving a deductible contribution from an individual or corporation, but the deduction available to a trust and estate is unlimited.

Timing: Timing is essential when strategizing to gain the maximum tax benefit from a charitable contribution. The tax benefit of the deduction for an individual during life is computed as the contributor's marginal income tax rate multiplied by the deduction, plus the future tax benefits resulting from the reduction in the contributor's estate. An estate will only benefit from a charitable deduction if there is a taxable estate and the Federal estate tax is still in effect. Under current law, the Federal estate tax will phase out in 2010 and revert to 2001 law in 2011...