How to Plan Charitable Donations and Their Benefits

When planning your legacy, you might consider donating life insurance to charity. Almost any charity or organization can be designated as the beneficiary of your life insurance policy. However, confirming that your chosen charity can accept such donations is important. By naming a charity as the beneficiary of your life insurance, you may also enjoy significant tax benefits, particularly if the organization is tax-exempt. This approach ensures that your philanthropic goals are met efficiently and effectively.

Various strategies can elevate your philanthropic impact, from donating life insurance to charity to setting up a charitable life insurance trust. These methods allow you to support your favorite causes significantly. Understanding each type of giving helps you tailor your donations to align with your financial and charitable goals.

Donations From Your Current Income

Giving from your current income means you're supplying a donation that can be a one-time or recurring amount. Religious tithing (where a percentage of a person's income is given to a church, mosque, synagogue, temple or other religious institution) can also fall under this category. Donations to charities and houses of worship are tax deductible, so be sure to maintain detailed records of your gifts that you can submit to the Internal Revenue Service (IRS) at the end of the year.

Deferred Gifts

Deferred gifts provide a pathway for contributors to plan their charitable giving in ways that can also offer financial benefits during or after their lifetime:

Bequests
A bequest is a directive in a will that determines where specific assets should go. Charities can be listed as the beneficiary of a bequest.

Charitable Remainder Trusts
This type of deferred gift is a tax-exempt irrevocable trust (meaning the trust stipulations can't be changed without the beneficiary's permission) that helps the grantor reduce their taxable income. The trust disperses income to the beneficiary — the charity — over a set amount of time. When that period is over, the remainder of the trust is issued to the charity.

Life Insurance
Donating a life insurance policy to charity is a great way to get more bang for your buck. Your beneficiary will typically get an exceptional return on investment for the amount paid in premiums toward your policy, making it an excellent option for charitable giving. You have a couple of options for your donation:

• You can choose to maintain ownership of the policy, which gives you the flexibility to use the policy's cash value for living expenses, and/or you can withdraw your donation from the charity if your feelings about it change. This option allows you to receive an estate tax deduction after you die.
• You can transfer ownership of the policy to the charity so that it can either be maintained by the charity or liquidated. This option allows you to receive a charitable tax deduction for the policy itself and for the premiums you pay in the future if the charity chooses to maintain the policy.

Gift Annuities
A charitable gift annuity is a way for donors to receive tax deductions, a fixed annual income and a sizeable return on their cash assets. It works like this: You enter into a contract with a charity in which you donate a sum of money in exchange for a fixed income every year for the rest of your life. Any money left over is then given to the charity in full. The income is typically a much higher rate of return than the funds would make in a money market or savings account, and the charity gets the benefit of having liquid funds sooner than it would from a bequest in a will.

In-Kind Gifts

An in-kind gift is a donation that usually takes the form of a physical asset, like equipment, vehicles, real estate, goods or supplies. For example, organizations like Goodwill and The Salvation Army take in-kind donations that they sell in their thrift stores and use the profits to provide services to financially disadvantaged people. The donations can be deducted from your taxes at the end of the year based on the item's fair market value. Goodwill has an online donation value guide to help with these calculations, and most places that accept in-kind gifts offer donation receipts that you can submit with your tax documents.

Vehicles can be incredibly useful donations because of their utility and financial value. However, the process of donating and figuring out the tax benefits can sometimes be challenging to navigate.

The Process

The process of donating a vehicle can take several forms, including:

• Giving the vehicle to the charity to be used for its operations
• Allowing the charity to sell the vehicle and use the proceeds to support its efforts
• Donating the vehicle so that the charity can refurbish it and give it to someone in need

The donated car also doesn't necessarily need to be in working order. You or the charity can take it to a pick-and-pull and donate/use the sale proceeds for its mission. The charity could also repair the vehicle and either use it for its operations, sell it and use the proceeds or give it to someone who needs it.

The Benefits

If you donate your car to a qualified charity — which is defined as an IRS-approved, "exempt status" or 501(c)(3) organization — you may be eligible for a sizeable tax deduction, which in some cases may be the full amount of a car's fair market value. In the past, receiving a tax deduction for the full fair market value of a vehicle donation used to be easier. However, the IRS has toughened up its standards in recent years and explained in October 2016 that donors may claim a deduction of the vehicle's fair market value only under the following circumstances:

• The charity makes a significant "intervening" use of the vehicle, such as using it to deliver meals on wheels.
• The charity makes a material improvement to the vehicle, i.e., major repairs that significantly increase its value and not mere painting or cleaning.
• The charity donates or sells the vehicle to a needy individual at a significantly below-market price, if the transfer furthers the charitable purpose of helping a poor person in need of a means of transportation.

If you're interested in making a tax deduction for your donated vehicle, be sure to document everything and get receipts from the charity before the end of the year.

Where to Find Car Donation Centers

Some services, like Donate a Car, help donors select a charity and then assist that charity with the sale of the donated car so that the profits can be used for its charitable efforts. However, if you'd rather work with the charity directly, many nonprofits have dedicated web pages that contain instructions for how they handle car donations. Another option, and arguably the easiest way to get the maximum tax deduction, would be to sell the car yourself and donate the cash proceeds.

Whether you donate a life insurance policy to charity, establish a charitable life insurance trust or use other methods of giving, understanding the tax implications is essential. Properly structured donations can reduce your taxable income, potentially enhance your tax returns and lessen your future estate taxes, ensuring your philanthropic efforts are as beneficial to you as they are to your chosen causes.

It can be hard to distinguish a scam email, phone call or piece of mail from an authentic one, especially when the sender uses emotional language in their request. It is important to take precautions to ensure your charitable contribution counts.

When considering charitable contributions, such as donating life insurance to charity, setting up a charitable life insurance trust or giving money or in-kind gifts, it’s important to conduct due diligence. Familiarize yourself with the signs of fraudulent activities and thoroughly check before committing any resources. This vigilance ensures that your intention to support a worthy cause does not inadvertently support fraudulent entities.

The chaos following a natural disaster is often when scam artists decide to make their move. However, criminals aren't the only thing to be wary of. Even legitimate attempts to help after a natural disaster can be misguided or inefficient. These tips will help you make informed decisions when donating money after a disaster.

• The Better Business Bureau's Wise Giving Alliance is a charity watchdog group that allows consumers to look up reports that show if a charity is accredited and verified as tax-exempt by the IRS.
• The Federal Trade Commission offers a list of signs that a charity might be a scam.
• The IRS website explains the differences between gift taxes and estate taxes.
• Charity Navigator's article on the tax benefits of giving provides information about what tax deductions you may be eligible for.
• The IRS exempt organizations search tool can help you determine whether a charity is recognized as a tax-exempt nonprofit.
• The Donate a Car organization helps you sell your vehicle and donate the proceeds to a charitable cause you believe in.
• Learn how bail funds can be a charitable option to help specific individuals who cannot afford bail.