Many charities and advisors are fearful that the Tax Cuts and Jobs Act of 2017 (“TCJA”) will mean a precipitous drop in charitable giving. Some in the charitable community have even predicted that annual charitable giving will drop by $30 Billion! It should be remembered, however, that many surveys indicate that Americans don’t give just because of tax savings. Since a $30B drop would cause tremendous upheaval, charities, donors and their advisors should examine new and creative solutions to help donors keep giving and save on their taxes.
For taxpayers who give and want our government to share in the cost, traditional planned giving vehicles can help. A very simple solution after TCJA is to “bunch” itemized deductions into one year, thereby providing the donor with sufficient itemized deductions to exceed the $12,000 standard deduction amount (or $24,000 if married filing joint). Other techniques such as donor advised funds, private foundations and even charitable remainder trusts, can help deliver significant bunching of charitable deductions into one year. The IRA Charitable Rollover also is an important vehicle for those aged 70 ½ and over. In my opinion, the IRA Charitable Rollover is the way, truth and life for charitable giving after age 70 ½. I only wish that Congress would consider lowering the age.
Another interesting idea to add to this arsenal of TCJA responses is the non-grantor trust. Non-grantor trusts are a traditional estate planning vehicle, often used to move assets outside of an estate for the benefit of the next generation. A non-grantor trust results in the trust paying tax on its earnings at trust tax rates. However, income within a non-grantor trust that is distributed to a beneficiary is generally deductible to the non-grantor trust, and is taxed at the beneficiary’s income tax rate. If the beneficiary is a tax-exempt charity under IRC Section 501(c)(3), the charity’s tax rate is zero, and the donor accomplishes the same effect as a charitable deduction.
For example, let’s say a donor contributes $10,000 to a non-grantor trust, and the trust earns 4% annually. This means that the trust would have annual income of $400. If the trust pays all $400 to a IRC Section 501(c)(3) charity, then it is deductible to the trust and the trust pays no income tax. As a tax-exempt entity, the charity also pays no income tax. The donor has accomplished the same as making a direct $400 cash contribution to the charity, since the $400 earnings are not taxed to the donor, and not taxed inside the trust. Thus, although the donor would not get a charitable deduction for the $10,000 trust contribution, the donor has avoided state and federal tax on $400 of income and awarded $400 to charity, essentially the same as a $400 charitable income tax deduction.
The non-grantor trust idea can be complicated. First, it will be necessary for an irrevocable non-grantor trust to be created. A lawyer should be retained to draft the trust. Second, the donor should consider what happens to the corpus at the end of the trust. Some donors may consider making a lifetime contribution into this non-grantor trust, and at the donor’s death, the trust could end and distribute the corpus to the donor’s selected charity, similar to a bequest. Similar to the bequest, a trust distribution to charity would not be taxed in the donor’s estate. Third, if the trust corpus is not to be distributed to charity, the donor will probably need to file a gift tax return and use part of his or her $11.2M lifetime exemption from the estate and gift tax.
Another downside to the non-grantor trust is that the trust will have to file an annual tax return on IRS Form 1041. For a donor who is willing to “do it yourself”, this Form 1041 filing would be very simple. If a donor does not want to prepare Form 1041, then it would not be difficult for the donor’s CPA or another tax preparer to handle a simple 1041.
Finally, a trustee must also be found to manage the trust, and many banks and trust companies will not want to get involved with a very small trust. Commercial trustees usually have minimum fees, and it generally does not make much sense to use commercial trustees unless trust assets exceed $250,000 or even more. Therefore, many donors, if they are creating a non-grantor trust for a small amount, will need to consider being their own trustee. Successor trustees should also be named, especially if the trust is to continue after the death of the donor.
While this idea is not for everyone, it is a relatively simple idea where even a middle-class family losing a charitable tax deduction could replicate the same with a non-grantor trust. All hope is not lost after TCJA and donors, charities and their advisors alike should examine creative ways to continue charitable giving on a tax-effective basis.
Note: This provides general information regarding matters of interest to tax-exempt organizations. Such information is neither legal advice nor legal opinion concerning particular situations. If legal advice or opinion is required, legal counsel should be consulted.