Charitable Giving Tax Considerations and Entity Structures

By Abbie M. B. Everist

Abbie M. B. Everist is a national principal in BDO’s National Tax Office, Private Client Services practice serving as an estate, gift, trust, and generation-skipping transfer tax subject matter expert. She also serves as the vice chair of the ABA generation-skipping transfer tax committee.

Charitable giving is a component of most people’s lifetime or testamentary goals. For ultra-high-net-worth individuals, there may be more complex factors to consider when advising on charitable giving. Some items to consider are the assets to be donated, the donors’ ages and health, the amount they want to gift, and the timing of the gift. From a tax perspective, there are income tax rules, estate tax deductions, and generation-skipping transfer (GST) tax implications to balance with the donor’s wishes for the assets, the family, and the charity.

Individual Income Tax

Most charitable contributions reduce the taxable gross estate of the donor, regardless of whether the contribution was made during life or at death. Making charitable contributions during life may provide the added benefit of an income tax deduction. At death, giving charity income in respect of decedent (IRD) assets means the charity will receive assets that do not get a step-up in basis, but the charity, as an income tax exempt entity, pays zero income tax. Testamentary bequests of non-IRD capital assets to taxable beneficiaries results in an efficient preservation of assets post death.

Reviewed below are individual lifetime charitable giving planning considerations.

Durable Power of Attorney

In case the donors become incapacitated during their lifetimes, it is a good idea to document their intent and the ability of the named agent to continue or accelerate charitable giving to achieve the donor’s charitable goals while providing tax benefits. A well-drafted durable power of attorney expressly stating the goals of the incapacitated individual will help enable the agent to carry out and complete those goals despite the principal’s legal incapacity. Even in the absence of expressly defined charitable goals, an agent under a broad durable power of attorney could review testamentary documents and the donor’s donation history to glean the charitable intent.

Lifetime Charitable Deduction Limitations and Carryforwards

The income tax deduction for charitable contributions for an individual is limited each year to a percentage of the taxpayer’s adjusted gross income (AGI). Internal Revenue Code (I.R.C. or Code) § 170(b). The AGI percentage limitation depends on the type of property donated, the type of charitable organization, and how the charitable organization uses the property. Qualified organizations that are nonoperating private foundations that do not distribute all contributions annually usually have deductions limited to 20–30% of AGI. Id. § 170(b)(1)(B), (D). For decades, cash contributions to most other qualified organizations have benefited from a 50% of AGI limit, which is currently increased to 60% through 2025 under the Tax Cuts and Jobs Act (Pub. L. No. 115-97), with noncash contributions still at the 50% limit. Deductions for donations of long-term capital gain assets to qualifying organizations are limited to 30% of AGI, but the donor may elect to use a 50% limit if asset basis is used to compute the applicable deduction. Id. § 170(b)(1)(A), (C).

Unused charitable contribution deductions are carried forward, normally for up to five years. Id. § 170(d). If an individual passes away and is not able to use all lifetime charitable contribution deductions on the final personal income tax return, the excess deductions will be lost. If donations are made jointly (each spouse contributing one-half) and there’s a carryforward, the carryforward will be split, with half needing to be used on the decedent’s final return and the other half carried forward on the surviving spouse’s returns, as applicable. Treas. Reg. § 1.170A-10(d)(4)(iii). If a spouse is not in great health and there is a potential charitable deduction carryforward, consider making fewer donations from assets titled in that spouse’s name.

Taxpayers should be wary of investments in real estate entities that claim a charitable contribution deduction for the donation of a conservation easement or in significant excess of the investment amount.

Income in Respect of Decedent Assets (Retirement Assets)

IRD is normally taxed at ordinary income rates but includes only limited types of income, most commonly compensation and pretax retirement accounts. For pretax retirement accounts, in general, an individual beneficiary (other than a surviving spouse) must make required minimum distributions annually, and the full amount of the account must be withdrawn 10 years after the death of the contributor. Funding charitable donations with IRD assets will reduce income tax liability because qualifying charities do not pay income tax and noncharitable beneficiaries will get the assets that receive a basis step-up at death and have less taxable gain when later sold.

Long-Term Capital Gain Assets

Long-term capital gain assets may be favored as lifetime gifts because the taxpayer is generally allowed a charitable deduction at the asset’s fair market value without having to recognize capital gains. I.R.C. § 170(b)(1)(C). The fair market value of the donated asset is reduced by ordinary income items, such as depreciation recapture. Id. § 170(b)(1)(C)(iv).

Many high-net-worth families have significant ownership interests in closely held businesses. These are often the most complex assets to donate because they are affected by many of the issues discussed in this article. For example, gifting business interests that may be sold by the tax-exempt organization shortly after donation should be reviewed to help prevent application of the assignment-of-income doctrine, described in the section on donoradvised funds below.

For tangible personal property that is not used by the charity in a way related to its mission, the deduction may be limited to basis unless the donee certifies that the intended use is no longer possible. Id. § 170(e)(1), (7). This is especially important when the donor is considering donating artwork or other museum-quality pieces. Donors often require, as a condition to the donation, that the donated tangible personal property be held for a period of three years. Although many individuals loan pieces to museums while retaining ownership, loans do not typically qualify for a charitable deduction, but they may reduce administration costs of holding the art personally for the loan period. Id. § 170(f)(3)(A).

Real estate is another asset that donors may wish to contribute. A deduction equal to the fair market value of the property should be available, presuming the donor holds the real estate for investment purposes for more than one year and not as inventory. A donation of encumbered property will involve bargain sale treatment if the debt exceeds the basis. In computing the gain on the bargain sale, the basis must be allocated proportionately between the gift and sale portions of the transaction. Treas. Reg. § 1.1011-2(b).

A gift of a partial interest in real estate, in general, will result in no deduction unless the donation falls within certain specified exceptions. Typical exceptions include (1) a contribution of an undivided portion of the taxpayer’s entire interest, (2) a donation of a taxpayer’s entire interest in the property, (3) a donation of a remainder interest in a personal residence or farm, (4) a donation to a charitable remainder trust, (5) a donation to a charitable lead trust, and (6) a qualified conservation easement. I.R.C. § 170(f)(2), (3). If the qualified donation is for a partial interest in the property, the qualified appraisal must be for the actual partial interest donated to adhere to the strict interpretation that the Internal Revenue Service (IRS) applies to the substantiation of charitable contribution deductions. Treas. Reg. § 1.170A-13(c)(2)(i)(A).

Taxpayers should be wary of investments in real estate entities that claim a charitable contribution deduction for the donation of a conservation easement or in significant excess of the investment amount. The Department of the Treasury and the IRS recently issued final regulations identifying certain syndicated conservation easement transactions as “listed transactions”— abusive tax transactions that must be reported to the IRS. These final regulations are consistent with Notice 2017-10, which had previously identified certain syndicated conservation easement transactions as listed transactions and confirmed in Treas. Reg. § 1.6011-9.

Digital assets are becoming a popular alternative investment. Some digital assets may be difficult to value if they are thinly traded, a problem that is alleviated for commonly traded digital assets, such as Bitcoin. Nevertheless, the IRS considers digital assets— including cryptocurrency—noncash property that is not a marketable security. Because of this classification, donors should donate digital assets held more than one year. Furthermore, all the applicable substantiation requirements—including a contemporaneous written acknowledgment from the charitable organization, a qualified appraisal, and the filing of Form 8283, Noncash Charitable Contributions— must be met to qualify for an income tax charitable deduction.

Donations of patents and other intellectual property receive a different and unique treatment under the tax law. The initial deduction is limited to the lower of basis or fair market value. Often, the basis in the intellectual property will be quite low. Assuming the charity is notified, however, the donor may take additional charitable deductions for up to 10 years based on a certain declining percentage of the “qualified donee income” received or accrued by the charity with respect to the donated intellectual property. Taxpayers who own intellectual property such as patents, copyrights, trademarks, trade names, trade secrets, and other similar property and wish to share the profits with charities should consider this unique opportunity. I.R.C. § 170(m), (e)(1)(B)(iii).

There are many strategies, and nuances within those strategies, available for donating long-term capital gain assets to benefit charities. Because of these complexities, donors should work closely with their advisors and planned giving personnel at the recipient charities to arrive at viable solutions meeting the needs of the donor and their favorite charitable causes.

Trust Income Tax

Non-grantor trusts are entitled to charitable deductions, but the deduction for trusts differs significantly from the deduction for individuals. In general, the charity must be a beneficiary of the trust and the contribution must come from trust income. Although allowable trust charitable deductions are usually not subject to income limits, the deductions have more carryforward limits and are restricted from offsetting certain types of income. Including charitable beneficiaries provides flexibility; however, trust modifications or terminations may require state attorney general input, as many states see themselves as having a stake in protecting charitable interests. Depending on the grantor’s intent and family wishes, this option may allow significant income tax deductions.

Charitable Deductions

For a trust to deduct charitable contributions, specific language must be included in the trust document pursuant to Code § 642(c)(1), which allows qualifying Code § 170(c) charitable organizations to receive trust distributions (usually discretionary), and charitable distributions must be made from trust income. Based on these requirements, simple trusts do not qualify for a charitable donation if all income is required to be distributed to a noncharitable beneficiary. I.R.S. Priv. Ltr. Rul. (PLR) 8446007 (July 31, 1984). By contrast, if the requirements are met, the trust may receive a charitable income tax deduction, usually with no income limitations. Trusts are also subject to compressed tax brackets, so contributions from trusts also may make sense from an income tax perspective depending on the needs of beneficiaries.

Charitable Deduction Limitations and Carryforwards

As mentioned, one benefit of trusts making charitable contributions is that trusts are usually allowed charitable deductions against gross income without percentage limitations like individuals and corporations. I.R.C. § 642(c)(1). A couple of exceptions where trusts are subject to the percentage income deduction limitations are trusts treated as taxable private foundations and electing small business trusts (the S corporation portion of income). Id. §§ 642(c)(6), 641(c)(2)(E)(ii)). There are two additional restrictions on trust charitable deductions, which may not offset (1) unrelated business income or (2) qualified small business stock gain exclusion. Id. §§ 681(a), 642(c) (4). Further, most trusts may not carry over any unused charitable deduction; thus, planning so that deductions are available to offset income would be necessary if that’s a priority (exceptions for specific nonexempt charitable and split interest trusts pursuant to Treas. Reg. § 1.642(c)-4 may apply).

Charitable Giving Entities

Aside from direct giving, there are a handful of commonly used giving structures with their own benefits and drawbacks. Charitable trusts may provide tax benefits and incentives to donors but also are subject to the selfdealing and excess business holding rules detailed in the private foundation section.

Charitable Trusts

Charitable trusts offer a great opportunity to provide an income stream to an annuitant and the remainder to a beneficiary. The payment period may be for a term of years or for a measuring life (or lives). Charitable trusts may offer a charitable deduction to the grantor at funding and may provide for either set annuity payments based on the value of the trust at funding (CRAT or CLAT) or varying unitrust payments recalculated each year (CRUT or CLUT).

Charitable Remainder Trusts: In charitable remainder trusts, as the name implies, the charity is the remainder beneficiary, usually with the grantor receiving payments during the trust term. If the trust duration is for a term of years, the maximum term is 20 years. The grantor receives a charitable deduction for the actuarial value of the remainder interest to charity when the trust is funded. Annual payments must be between 5% and 50% of the initial trust funded amount or annual value with a charitable remainder of at least 10%. Charitable remainder trusts use a tiered accounting method whereby distributions are first from ordinary income, then from current capital gains and undistributed prior years’ capital gains, next from other current income and undistributed prior years’ other income, and finally as a return of principal. I.R.C. § 664(b).

Often a charitable remainder trust will be funded with a highly appreciated asset. The trustee will sell the asset and, because a charitable remainder trust itself is income tax exempt, the tax on the gain will be deferred until distributions are made to the annuity beneficiary. In essence, the charitable remainder trust operates as an income deferral planning technique, with the added benefit of having a charitable objective. When funding a charitable remainder trust with an appreciated asset ultimately to be sold by the trustee, tax advisors should be cognizant of the assignment-of-income doctrine (discussed below in the donor-advised fund section) to avoid application of the doctrine.

Published in Probate & Property, Volume 39, No 3 © 2025 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.

A specific type of CRUT is a net income makeup CRUT (NIMCRUT) with or without a flip provision. Id. § 664(d) (3)(B). A NIMCRUT is typically used when there are business interests or real estate held by the charitable remainder trust. The NIMCRUT will distribute the lower of the fixed unitrust percentage or the trust net income with makeup distributions later, potentially after a sale or family event. Adding a flip provision to a NIMCRUT will generally turn off the net income provisions at the occurrence of an event to become a regular CRUT.

Practitioners should be mindful that the IRS has included a transaction involving CRTs as a listed transaction, which is reportable to the IRS. The listed transaction involves CRTs that borrow against trust assets to prevent annual distributions from being taxable based on underlying trust holdings. Treas. Reg. § 1.643(a)-8. To combat this practice, the regulations treat this as a sale of the pro rata portion of the underlying trust assets.

In practice, the unitrust (as opposed to the annuity trust) offers more flexibility because additions may be made, and the document may use NIMCRUT and flip provisions. Some grantors would rather have the certainty of fixed annuity payments that a CRAT is required to distribute. As with any planning, grantor preferences and the facts and circumstances should be reviewed to provide the grantor with the best along with a “Newman’s Own private foundation,” discussed below. options to achieve their goals while providing tax efficiencies.

Charitable lead unitrusts (CLUTs) make payouts to a charity based on a percentage of the assets held in the trust, valued annually. CLUTs are beneficial because they allow for the allocation of GST exemption at funding based on funding value. Depending on how much GST exemption a grantor has remaining, many planners will set the CLUT distribution rate to the charity to create a near zero remainder for estate, gift, and GST purposes.

Charitable Lead Trusts: Charitable lead trusts pay the charity the annuity or unitrust amount, with the term limited only to a life in being at trust creation (potentially subject to a state’s rule against perpetuities) and the remainder normally going to children or trusts for the benefit of the grantor’s family. One other major difference between a remainder and a lead trust is that with a lead trust the grantor must choose grantor or non-grantor status for income tax purposes. A grantor trust will allow charitable deductions, with the inclusion of income during the charitable term in the grantor’s personal income tax return. I.R.C. §§ 170(f)(2)(B), 671–679. Additionally, if the grantor passes and the charity has received less than the charitable deduction to the grantor, the grantor will be subject to recapture rules based on a formula of excess deduction. Treas. Reg. § 1.170A-6(c)(4). A grantor CLT is one of the couple of charitable entity types that may hold S corporation shares,

Charitable lead annuity trusts (CLATs) pay set amounts. Although annual payments are typically consistent, there are a couple of CLAT options that help create a higher remainder interest for family beneficiaries. One of these modified structures is an increasing rate CLAT, whereby the amount of the annuity payment starts low and goes up each year by a set percentage (20% was approved in PLR 201216045). I.R.S. Priv. Ltr. Rul. 201216045 (Jan. 23, 2012). A second, more aggressive type of CLAT structure is the shark fin CLAT, named after the graphical representation of the periodic payouts under this method. Under this structure, the payments start out very low, with larger payments made towards the end of the CLAT term. The IRS has not provided any guidance on this method, so a taxpayer’s risk tolerance should be reviewed and documented before it is recommended for implementation.

Donor-Advised Fund: A donor-advised fund (DAF) is a separate account or fund managed by a sponsoring organization, usually a community fund or investment advisory firm that holds these types of accounts, whereby the donor expects to advise on investments or distributions. I.R.C. § 4966(d)(2) (A). Contributions to a DAF are treated as donations to public charities for AGI limitations and are immediately deductible, even though a charity may not receive the funds until a future year. Id. § 170(b). Normally the agreement between the donor and the sponsoring organization allows input from the donor (and maybe future members of the family) on when and where to send donations, but the sponsoring organization is not legally bound by the recommendations, restricting the amount of current and legacy control over the investments and donations. A DAF is not required to file its own Form 990, usually has lower associated administrative costs, and is not currently subject to distribution requirements. DAFs are subject to the self-dealing and excess business holdings rules that apply to private foundations, discussed below.

Some grantors may wish to incorporate the use of a DAF into a presale business transaction, hoping for a fair market value charitable deduction of the business interests, with the charity receiving business sale proceeds exempt from tax. One major issue with this type of fund is ensuring that the transfer to the DAF or directly to the charity is independent from the sale for anticipatory assignment of income purposes. The assignment-of-income doctrine has been applied to these cases, with recognition of income taxed to those who earn it (the donor), even when a purchase agreement hadn’t been executed when the donor didn’t bear risk that the sale would not close. Est. of Hoensheid v. Comm’r of Internal Revenue, T.C. Memo 2023-34 (Mar. 15, 2023); Rev. Rul. 78-187. If the transactions are not deemed to be independent, the income from the sale of the business interests owned by the charity may be allocated to the grantor; the IRS may simultaneously try to deny the charitable deduction for contributing the interests.

Funding DAFs with business interests may be a good way to further a donor’s goals, but strict compliance with the IRS’s requirements and avoidance of the assignment-of-income doctrine are necessary for donor-favorable results.

Private Foundations: Private foundations may offer families flexibility and control over investments and distributions; however, the flexibility is balanced by being subject to more regulations and compliance requirements. Most family private foundations are classified as nonoperating foundations and do not operate charitable programs.

Private foundations are required to file Form 990-PF annually, which will add to the foundation’s administrative costs. Form 990-PF is a public document, and various websites will post the tax returns online for anyone to review. Some donors may not like the disclosure requirements that allow publication of the names of a foundation’s officers and their compensation, and the foundation’s assets, contributions, expenses, and distributions. Donor contributions to a private foundation are generally limited to 30% of AGI, reduced to 20% of AGI for the donation of an appreciated capital asset. I.R.C. § 170(b)(1)(B), (D).

Private foundations are subject to 5% distribution requirements and a net investment income excise tax of 1.39%. Id. §§ 4942(a), 4940(a). Private foundations are required to distribute annually 5% of their assets’ average 12-month fair market value, determined under a reasonable and consistent method, for charitable purposes within 12 months after the tax year. If a foundation fails to distribute the required amount, it will be subject to a 30% excise tax for the current and subsequent years until the deficiency is corrected. Potentially, the foundation could be subject to an additional 100% excise tax if the deficiency is not corrected within 90 days of receipt of a notice from the IRS. Id. § 4942(a), (b).

The 5% annual minimum distribution amount includes deductions for grants paid, the purchase of charitableuse assets, reasonable charitable-related expenses (except for investment management fees or other investmentrelated expenses), a reduction of 1.5% for cash presumed held for charity, and a credit for excise taxes paid on investment income. Id. § 4942(d). Excess distributions made above the required distribution amount for a given year may be carried over for up to five years to help satisfy future distribution requirements. Id. § 4942(i).

A private foundation may have reasons not to make the full 5% distribution in a given year; the foundation may avoid the excise tax on undistributed income if the amount is set aside for a specific project. This set-aside requires prior IRS approval, so it is not normally a preferred method, unless it is a large amount set to be paid out over a period of up to five years. Id. § 4942(g)(2).

Private foundations are subject to self-dealing and excess business holding rules. DAFs also are subject to these rules. Self-dealing encompasses most transactions between the private foundation or DAF and a disqualified person. Examples of self-dealing include selling or leasing property; lending funds; furnishing goods, services, or facilities; and paying compensation to a disqualified person, in addition to other transactions, each with its own nuances. Id. § 4941(d). Disqualified persons are:

• Trustees or directors, officers, and managers with substantial similar authority.

• Substantial contributors.

• Family members of each disqualified person.

• An owner that is a substantial contributor that has more than 20% profit interests, voting power, or beneficial interest.

• Entities with more than 35% of the interests owned or for the benefit of a disqualified person. Id. § 4946. The term “substantial contributor” is defined to include the creator of the foundation or fund and other contributors who made contributions of $5,000 or more if that exceeds 2% of the total bequests received since inception. Id. § 507(d)(2).

Essentially, any proposed transaction—direct or indirect—between a private foundation or DAF and a disqualified person should be reviewed first by tax advisors or counsel to ensure it doesn’t run afoul of these rules. Failure to comply with the rules may give rise to a 10% excise tax on the disqualified person, a 5% excise tax of the amount involved payable by a foundation manager who knowingly participated in the transaction, a 200% excise tax for failure to correct within the taxable period, and potentially a 50% excise tax imposed on the foundation manager for refusing to make a correction. Id. § 4941(a), (b).

Private foundations and DAFs are not permitted to own excess business holdings, unless the business meets the Newman’s Own exception, discussed below. Excess business holdings are defined as the amount of stock or other interest in a business enterprise that exceeds the permitted holdings. A private foundation is generally permitted to hold up to 20% of the voting stock of a corporation, minus the percentage owned by all disqualified persons, with two exceptions:

• If the private foundation, together with the disqualified persons, does not own more than 35% of the voting stock of a corporation and it is determined that a third party has effective control of the corporation; or

• The private foundation does not hold more than 2% of the voting stock and value of all corporation shares outstanding.

Id. § 4943(c)(2). The tax on a private foundation or DAF for owning business interests that exceed the allowable thresholds starts at 10% if the interests are held at the end of the taxable year. Id. § 4943(a). If the holdings continue to exceed the threshold and the 10% tax has been imposed, an additional tax of 200% also may be imposed. Id § 4943(b). The private foundation or DAF normally has a five-year period to dispose of the interests if acquired other than through purchase. Id. § 4943(c)(6). This is generally the case with closely held business interests donated to the charitable entity, so the five-year grace period usually applies. In addition, the IRS may allow an additional five-year extension period to dispose of the excess business holdings if it was an unusually large gift that prevented reasonable disposition of all the holdings within the initial five-year period and there were diligent efforts to reduce the holdings during that time. Id. § 4943(c)(7).

An exception to the excess business holdings rule is referred to as the Newman’s Own exception. A Newman’s Own–type private foundation is also an allowable S corporation shareholder, although corporate income still will be subject to unrelated business income tax and capital gains on the sale of the shares. Paul Newman wanted all his business profits to go to charity, but, at the time, the excess business holdings tax prevented this. The Newman’s Own exception, or “independentlyoperated philanthropic business,” is now codified in Code § 4943(g) to allow for-profit businesses to operate solely for the benefit of charity. This rule was enacted as part of the Bipartisan Budget Act of 2018 (Pub. L. No. 115-123) but is limited to use by private foundations, so the structure will not work with a DAF, charitable and split-interest trusts, or supporting organizations.I.R.C. § 4943(g)(5).

The general requirements of the Newman’s Own exception are as follows:

• The private foundation must own 100% of the business’s voting stock and the interest must have been acquired by the private foundation other than by purchase;

• The business must distribute all net operating income to the private foundation within 120 days after the close of the taxable year (it may retain an operating reserve);

• The donor or family member may not be a director, officer, trustee, manager, employee, or contractor of the business;

• A majority of the private foundation board may not be directors or officers in the business or family members of the donor; and

• There may not be an outstanding loan from the business to the donor or family member.

Id. § 4943(g). A significant hindrance to this exception is the lack of control that the donor and the donor’s family may have over both the business and the private foundation, but it may be advantageous if the donors meet all requirements and are committed to the structure.

Charitable Limited Liability Company: Charitable limited liability companies (LLCs) are a newer structure type that has been associated with abuse but may offer benefits that some donors may prefer over other options. The benefits of using a charitable LLC include filings that are private (standard Form 1065, which is not subject to public inspection); the fact that the family controls the investments and distributions, so they may use it for legacy purposes; and fewer restrictions on asset holdings than other entity types, with no required annual charitable distributions.

Using charitable LLCs also has drawbacks, including increased IRS scrutiny of fraudulent uses, the inclusion of the donor’s ownership interest in their estate, and the fact that charitable LLCs are not tax-exempt entities, so the charitable deductions flow through to members when made to the charity and not when funds are contributed to the LLC. Abuses of this structure may involve a donor gifting nonvoting membership interests to a charity for a large donation deduction, then taking a loan from the LLC at the applicable federal rate, limiting the investment return, and potentially even going further to have family trusts buy back the interests from the charity at the now lower value. If used correctly, charitable LLCs may offer a viable charitable giving structure for a family.

Conclusion

Charitable giving is an important aspect of many ultra-high-net-worth family legacy goals. These families normally have complex asset types and entity structures. Careful consideration of assets and legacy objectives should be reviewed for planning purposes to best fulfill grantor intent while achieving tax efficiencies.