3 Tax Planning Strategies that Cost You Little But Provide Immediate Tax Savings

With so many of my high net worth clients being philanthropically inclined, there’s nothing I like better than a good tax savings strategy that ties into their charitable activities.

Typically, charitable contributions will result in a reduction of your net worth and usually involve giving up control over the contributed property. If only there was a way to make contributions without giving up immediate control AND still generate immediate tax benefits! Well, here are three ideas that can do just that.

1. Conservation Easements

Taxpayers who own real property and wish to preserve its associated resources might be able to take advantage of the tax benefits related to the gifting of conservation easements.

The 2015 Protecting Americans from Tax Hikes Act allows owners of real property to make a gift of a permanent easement on their property to a land trust or similar organization interested in land conservation, while getting the benefit of a immediate tax break.

The easement will restrict the present and future owners from developing the property, and the tax deduction will equal the difference between the value of the property immediately before and immediately after the easement is placed.

Except for the restriction on the property, the owner can continue to enjoy the use and benefits of the property as before. It should be noted that these easements are available to owners of real estate even if they have no current intention of developing their property.

2. Charitable Remainder Trusts

Charitable remainder trusts, also known as CRTs, are tax planning vehicles that allow grantors to contribute assets, usually highly appreciated, to a trust. In exchange, they will receive an annual payment back from the trust for a specific period of time, and the remainder interest in the trust will go to qualifying charities chosen by the grantor.

The funding of a CRT is a nontaxable event, and the grantors will receive an immediate charitable deduction. In addition, the CRT provides significant income tax deferral benefits, and the grantors can name themselves as trustees and remain in control of the trust corpus during the term of the trust.

3. Private Foundations 

Private foundations are tax-exempt organizations that can receive contributions from donors and generate immediate income tax deductions.

Let’s look at a typical scenario. A taxpayer creates and funds a private foundation in a year where he or she has an unusually high income tax liability that can be sheltered in part by the contribution to the private foundation, and may not want to make an outright gift to a public charity. The private foundation will allow the grantor to receive an immediate income tax deduction without giving up control of the assets contributed to the private foundation.

The grantor and/or his family can serve on the board of the private foundation, and designate in future years which charities will receive the required distributions from the private foundation, which usually equal 5% of its net asset base.

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