The will to give is strong in many business owners and executives and in Americans of all types. As a society, we cherish the right to give to the charitable institutions of our choice, and the tax code favors such gifts.

The will to give is what we refer to as "charitable intent." We want to give. Often, the biggest hurdles to giving are that we do not know how to give or we assume that our family will suffer as a result of our giving.

Our goal here in this short article is to show you a few ways savvy clients make charitable gifts that benefit the charity and their families at the same time. This is possible because of the tremendous tax benefits the IRS grants for charitable gifts. Before we examine the ways to use charitable giving to reduce income taxes, let's take a look at the basic tax rules regarding charitable giving.

Direct gifts

Direct gifts are made to a charitable organization for their immediate use. The federal tax code provides for current income tax deductions for gifts to charities that have qualified under 501(c)(3) as a charitable organization. The tax rules governing charitable giving are rather complex. Our explanation will be rather simplistic but should give you a basic understanding.

The IRS distinguishes between "public charities" (universities, hospitals, churches and so forth) and "private charities" (private family foundations are the most common). What's the difference? If the gift is given to a public charity, you can deduct the amount of the gift as an itemized deduction up to a maximum of 50 percent of your adjusted gross income (AGI). If the gift exceeds this amount, you can apply the excess as deductions against future years' income for five years.

If the gift is to a private charity, then you can only deduct a maximum of 30 percent of your AGI, but any excess can also be applied forward five years. Let's see how public and private charities differ in the case study of Charitable Carole.

Charitable Carole: Give to the foundation or to the alma mater?

Carole is a retired entrepreneur who created a small private family foundation a few years ago to give something back to the community. She involved her children in the foundation and realized some significant tax benefits.

Now Carole has $50,000 worth of highly appreciated stock she doesn't need to support her retirement needs. As a result, she would like to make a gift to charity. Her annual AGI is only $30,000 per year from the consulting work she does. Carole is considering whether to give the stock to her family foundation or to her alma mater.

If she gifts the stock to the foundation, she will only be able to deduct $9,000 per year from her tax return (30 percent of AGI). If she gifts to the university, she will be able to deduct $15,000 (50 percent of AGI).

Because she can only carry the deduction forward five years, she'll only be able to apply $45,000 worth of deductions using the family foundation, but she'll be able to use all $50,000 of deductions if she gifts to the university

Indirect gifts

Indirect gifts are often called "split interest" or "planned" gifts because some of the benefit from the gift is for the benefit of the charitable organization and some of the benefit of the assets being gifted will be retained by the grantor (or donor) and his family.

The real beauty of charitable giving from the family perspective is that the IRS also allows tremendous tax benefits for indirect gifts — those left to charity through a trust or annuity. In fact, the IRS also allows deductions for indirect gifts through irrevocable charitable remainder or lead trusts, and through charitable gift annuities, which provide lifetime income to the donor as guaranteed by the charity and monitored by the state.

By using an indirect gift, charitable planning can truly be a win-win-win situation: You win, your family wins, and your favorite charities win

Common charitable giving scenarios

The following are the three most common charitable giving scenarios, where it makes financial sense for a family to consider charitable planning because of the tax benefit.

1. Sale of a highly appreciated asset

Many affluent people, especially those over 50, hold highly appreciated assets — usually real estate or stocks that have grown enormously in value over time. Even more problematic is when there are few assets making up the bulk of someone's net worth. This is often the case when there is a closely-held family business.

Regardless of the asset, you may want to sell the asset but don't want to pay the capital gains tax, thus reducing the after-tax value of the asset by up to 20-37 percent, depending on state tax rates. Through the use of charitable planning strategies, you may be able to unlock some of the appreciation and significantly reduce the capital gains tax while benefiting a favorite charity as well.

2. Need to generate family income from investment assets

The past five years have seen significant growth of personal wealth in the form of portfolio appreciation. However, when clients seek to reshuffle their asset allocation to produce more income and diversify their portfolios, they will be hit with a substantial tax on their gains.

By giving to a charity, you have the chance to be creative in your approach to convert paper gains to cash flow, save taxes and turn nondeductible items into tax-deductible ones while addressing charitable objectives at the same time.

3. Estate planning

The most powerful benefits of charitable planning can be enjoyed when used as part of a multidisciplinary financial plan. As you'll learn in other articles, when you die, your family could pay as much as 40 to 60 percent in federal and state estate taxes, plus income tax on IRD (income with respect to decedent) assets such as pensions and IRAs.

Charitable giving mediates many of these taxes.

The most common charitable tool: CRT

Let's assume you have one highly appreciated asset you would like to sell but are reluctant to do so because of the significant capital gains taxes you would owe. At the same time, you are looking for ways to reduce your current year's taxable income and would like to receive an ongoing income stream. Moreover, you would like to diversify your overall investment portfolio.

Usually, this would mean selling that highly appreciated asset, paying the high taxes and reinvesting with a substantially reduced amount. In this situation, the charitable remainder trust (CRT) may be an ideal option for you. Used properly, a CRT can potentially:

• Reduce current income taxes with a sizable income tax deduction.
• Eliminate immediate capital gains taxes on the sale of appreciated assets, such as stocks, bonds, real estate and just about any other asset.
• Increase your disposable income throughout the remainder of your life.
• Create a significant charitable gift.
• Reduce estate taxes that your estate might have to pay upon your death, thus leaving more for your heirs after your lifetime.
• Avoid probate and maximize the assets your family will receive after your death.
• Protect your highly appreciated property from future creditors.

Think of a CRT as a tax-exempt trust that provides benefits to two different parties: the individuals receiving income and the chosen charity or charities. The "income beneficiaries" (usually you or your family members) typically receive income from the trust for either their lifetimes or a specified number of years (20 years or fewer). At the end of the trust term, the chosen charity will receive the remaining principal to use for its charitable purposes.

The CRT's cousin: CLT

When it comes to charitable trusts, CRTs seem to get all of the attention. But the cousin of the CRT, the charitable lead trust (CLT), also can provide significant charitable and tax benefits, particularly in an environment of lower interest rates.

With a CLT, also called a charitable income trust, you transfer cash or income-producing assets to the trust. The trust then pays out income earned by the assets to a designated charity or charities. The payout may be an annual fixed-dollar amount set at the time of the transfer — called an annuity trust — or an amount based on a percentage of the assets in the trust at the time of each annual payout — called a unitrust.

At the end of a specified number of years, the remaining assets in the trust are distributed to the noncharitable beneficiary, usually someone other than you or your spouse. It could be your children, grandchildren, other family members or a trust for the benefit and protection of any of these heirs. This timing is, in effect, the opposite of the CRT, in which the donor receives current income from the trust assets and the assets go to the charity at the end of the designated time.

Gift tax may be due at the time the assets are transferred to the trust, because noncharitable beneficiaries (your family) will ultimately receive the assets. However, this can often be planned so that no gift tax will be due.

This is because (1) the gift is discounted, as the beneficiaries won't receive the gift for some time; and (2) you receive a gift-tax deduction because a charity is receiving the income from the assets (the deduction is based on the amount transferred into the trust and the amount of time the assets are to remain in the trust).

Furthermore, the gift won't be taxed at all if its discounted value is less than your remaining applicable gift tax exclusion.

Conclusion

If you have a charitable intent and want to reduce current income taxes, capital gains taxes or even estate taxes, then you should seriously consider charitable panning techniques. Often, you and your family will stand to benefit as much as the charity itself. The right team of advisors can help you understand the costs and benefits of charitable planning and manage all of the complex issues.