Nongrantor trusts can help you make charitable gifts that provide greater tax benefits than you would receive for individual donations. Although you do not give to charity simply for the tax deductions, it is wise to make the most of the money you have. Individual and trust donations differ — and their differences can guide you in making charitable giving decisions.
Generally, you are permitted to deduct charitable donations for federal income tax purposes only if you itemize (as opposed to taking the standard deduction). There was a limited tax break for nonitemizers who made cash gifts to charity in 2020 and 2021, but it has expired.
Itemized charitable deductions for cash gifts to public charities normally are limited to 50% of adjusted gross income (AGI) and cash gifts to private foundations are limited to 30% of AGI. However, the Tax Cuts and Jobs Act increased the limit for cash gifts to public charities to 60% through 2025.
Noncash donations generally are limited to 30% of AGI for donations to public charities and 20% for donations to private foundations.
If you donate appreciated long-term capital gain property to a public charity, you are generally entitled to deduct its full fair market value, but with the exception of publicly traded stock, deductions for similar donations to private foundations are limited to your cost basis in the property.
Deductions for ordinary income property — including short-term capital gain property — are limited to your cost basis, regardless of the recipient.
Making charitable donations from a nongrantor trust may have several advantages over individual donations. These include the ability to claim a charitable deduction even if you do not itemize deductions on your individual income tax return and the ability to deduct donations to foreign charities.
Nongrantor trusts can deduct up to 100% of their gross taxable income, free of AGI-based percentage limitations. In addition, trust deductions can be more valuable than individual deductions because the highest tax rates for trust income kick in at much lower income levels. For example, in 2022, trusts reach the highest tax bracket (37%) at only $13,451 of income.
A Few Caveats
If you are contemplating making a charitable donation from a trust, there are a few caveats to keep in mind. First, your trust instrument must authorize charitable donations. Also, your donation must be made from (that is, traceable to) your trust’s gross taxable income. This includes donations of property acquired with such income, but not property that was contributed to the trust. And, unlike certain individual charitable donations, deductions for noncash donations by a trust generally are limited to the asset’s cost basis.
Note that special rules apply to trusts that own interests in partnerships or S corporations, as well as to certain older trusts. (Generally, these are trusts created on or before October 9, 1969.)
Keep Your Options Open
In general, the ability to make charitable donations from a nongrantor trust appeals to individuals who cannot benefit from itemized deductions because they have run up against income limits or other restrictions. You may also want to look at trusts that are designed to make charitable donations. These trusts provide certain tax benefits and may offer other features, such as a lifetime income stream.
Contact a Hantzmon Wiebel team member to discuss options for your individual circumstances and charitable objectives.
© Copyright 2022 Thomson Reuters.
Disclaimer of Liability
Our firm provides the information in this article for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisors. Before making any decision or taking any action, you should consult a professional advisor who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this blog are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability and fitness for a particular purpose.