Congratulations! You’ve made the decision to donate to your favorite charity. Now you need to decide: Should you donate assets held in a trust or those that you hold individually? There are several factors to consider, such as determining the tax benefits of making individual asset donations vs. donating trust property and understanding the circumstances under which donations by a trust are deductible.
Individual asset donations
Generally, you’re permitted to deduct charitable donations for income tax purposes only if you itemize. Itemized charitable deductions for cash gifts to public charities generally are limited to 50% of adjusted gross income (AGI), while cash gifts to private foundations are limited to 30% of AGI. 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’re 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.
The discussion that follows focuses on nongrantor trusts. Because grantor trusts are essentially ignored for income tax purposes, charitable donations by such trusts are treated as if they were made directly by the grantor, subject to the rules applicable to individual asset donations. Also, this article doesn’t discuss trusts that are specifically designed for charitable purposes, such as charitable remainder trusts or charitable lead trusts.
Making charitable donations from a nongrantor trust may have several advantages over individual donations, including the abilities to 1) claim a charitable deduction even if you don’t itemize deductions on your individual income tax return, and 2) deduct donations to foreign charities. And a trust can deduct up to 100% of its gross taxable income, free of the AGI-based percentage limitations previously discussed.
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 (37%) tax bracket at only $13,450 of income.
If you’re contemplating a charitable donation from a trust, there are a few caveats to keep in mind:
- The trust instrument must authorize charitable donations.
- The donation must be made from (that is, traceable to) the trust’s gross taxable income. This includes donations of property acquired with such income, but not property that was contributed to the trust.
- Unlike certain individual charitable donations, deductions for noncash donations by a trust generally are limited to the asset’s cost basis.
Special rules apply to trusts that own interests in partnerships or S corporations, as well as to certain older trusts (generally, those created on or before October 9, 1969).
Talk to your advisor
For many individuals, charitable giving is a major aspect of their overall estate plans. Deciding whether to make an individual asset donation or a donation of trust assets can be tricky. If income limits or restrictions on itemized deductions have hampered your ability to deduct charitable donations, consider making donations from a trust. Your estate planning advisor can walk you through the options and help you understand the income and estate tax consequences.