charitable planning chapter 30 tools & techniques of financial planning copyright 2009, the...

Charitable Planning Chapter 30Tools & Techniques of

Financial Planning

Copyright 2009, The National Underwriter Company 1

What is Charitable Planning?

Charitable planning is the process of providing for the client’s charitable desires in a way that is financially beneficial for the client. Most charitable planning uses special aspects of the tax code.

– Many financial planning clients who have some charitable inclination will not even broach the subject with their planner.

– Planners should probe the possibility of a charitable inclination in their clients and be prepared to explain the advantages and disadvantages to a charitable giving strategy within their financial plan.


Financial Planning


What is Charitable Planning? (cont)

• Clients will tend to be open to charitable planning as a part of their financial plan for one or more of the following reasons:– Ability to “give back” to the community.– Social benefits, including potential recognition by their peers.– Income (and gift) tax deductions for gifts to charity made

during lifetime.– Estate tax deductions for bequests to charity made at death.


Financial Planning


What is Charitable Planning? (cont)

• When a charitable intent is identified in the planning process, it is the planner’s responsibility to assist in the determination of:– The timing of the contribution.– Whether the client can afford the size of the contemplated

contribution.– The form of the contribution (e.g., direct or through a trust or

foundation).– The appropriate assets that should be given (e.g., cash,

stock, other property).


Financial Planning


Outright Gifts

• Most charitable donations are made in the form of outright gifts. – In an outright gift, the donor relinquishes total control of

either cash or other property. – The donor can still attach restrictions on how the gift is to be

used by the charity. – For the donor, in addition to the altruistic reason for giving, a

donor can obtain tax benefits.


Financial Planning


Outright Gifts (cont)

• Although outright gifts of cash (often in the form of a check) are common, an outright gift of cash is not necessarily the most advantageous or convenient type of gift for a donor to make.

• Consider gifts involving stock or other charitable giving strategies to help the client from a financial planning perspective, as well as helping the client feel good about the gift.


Financial Planning


Benefits of Outright Gifts

• A donor benefits from an outright gift to charity by:

– Taking an income (and gift) tax charitable deduction in the year the donation is made (The amount of the deduction is usually equal to the fair market value of the relinquished property.).

– Removing the asset(s) from the donor’s gross estate by taking an estate tax charitable deduction, and thereby reducing the amount of potential estate tax that would be due upon the donor’s death.


Financial Planning


Restrictions on Income Tax Deductions

• The income tax deduction for charitable contributions is subject to certain limitations.

– To benefit from the deduction in the year of the donation, the donor must have taxable income and itemize deductions.

– The donor’s deduction for charitable contributions cannot exceed certain percentages of the donor’s adjusted gross income.


Financial Planning


Charitable Contributions

• Charitable contribution deductions are not allowed for– Donations to nonqualified organization – generally one that is

not an IRC Section 501(c)(3) tax-exempt organization (A list of qualified charities may be found in IRS Publication 78.).

– A contribution to a specific individual.– The portion of a contribution from which the donor receives, or

expects to receive, a benefit (such as tickets to charity dinners).– The value of the donor’s time or services.– The donor’s personal expenses.– Appraisal fees.– Certain contributions of partial interests in property.


Financial Planning


Percentage Limitations

• The amount of an individual’s income tax charitable deduction may be limited to 50%, 30%, or 20% of the donor’s adjusted gross income in a given year. The appropriate limit to be applied is dependent on:– The type of charity.– Whether the gift is made “to” or “for the use of” the charity.– The type of property donated.


Financial Planning


Percentage Limitations in Order

• The percentage limitations are not “stacked”; in other words, each level is reduced by contributions deducted (or carried over) at the next higher level.

• So, first all 50% deductions are taken, up to the 50% of AGI limit; then the 30% deduction up to the 30% limit or the excess of the 50% limit not taken by 50% gifts; then the 20% gift deductions up to anything left by the 30 or 50% limits; etc.


Financial Planning


Percentage Limitations

• Caution: Contributions of long-term capital gain property to 50% organizations, which ordinarily would be subject to the 30% limitation, must nevertheless be included in the latter amount.

• Gifts exceeding these limitations may be carried over for up to five years and deducted then, subject to the limitations on deductions in the carryover years.

• Table 4 from IRS Publication 526, Charitable Contributions can be helpful in determining the amount and order of charitable contributions that are deductible as well as the carryover amount, if any.


Financial Planning


Charitable Bequests

• A charitable bequest is a donation that is made by will, revocable during the life of the donor, and completed only upon the donor’s death. A bequest can be made for:– a specific amount;– a specific asset;– a percentage of the estate.


Financial Planning


Charitable Bequests (cont)

• For estate tax purposes, the donor’s estate generally receives a deduction from the gross estate equal to the amount of the bequest.

• Since there is no tax limitation on the deductible amount of a charitable bequest for estate tax purposes, the estate may deduct the entire value of the bequest.


Financial Planning


Charitable Bequests (cont)

• Charitable bequests come “off the top” for estate tax purposes.

• In addition to reducing the amount subject to estate tax, this may also have the effect of reducing the estate tax even more because the charitable bequest saves taxes at the highest marginal estate tax rates.


Financial Planning


Other Charitable Giving Strategies

• Charitable Gift Annuity.

• Charitable Remainder Trust.

• Charitable Lead Trust.

• Pooled Income Fund.

• Private Foundations.

• Donor Advised Funds.


Financial Planning


Charitable Gift Annuity

• A charitable gift annuity is a contract entered into between a charity and a donor in which the charity agrees to pay an annuity to the individual donor in return for an amount transferred by the individual to the charity. – The charity receives a current gift while the donor is provided

with a predictable payment stream for the rest of the donor’s life.

– The donor receives a charitable deduction for the excess of the value of the property transferred over the present value of the annuity received in return for the property.


Financial Planning


Charitable Remainder Trust

• A charitable remainder trust (CRT) is a trust that provides for specified payments to one or more individuals (generally, for life or a term of years not to exceed 20), with an irrevocable remainder in the trust property to be paid to or held for a charity. – The donor receives a deduction for transferring property to

the trust that is calculated based upon a number of factors, such as how long the charity will have to wait to receive what remains in the trust after payments are made to the noncharitable beneficiary(ies) and the interest rate required to value the interest at the time the trust is created.


Financial Planning


Charitable Remainder Trust (cont)

• A CRT may be in the form of – a charitable remainder annuity trust (CRAT)– a charitable remainder unitrust (CRUT)

• Both kinds of trusts give the donor, or someone he or she specifies, payments for life or a period of years.

• The deduction is calculated by taking the amount transferred to the trust, then subtracting the present value of the future payment stream going to the donor or his designee, based on the Section 7520 interest rate (that fluctuates monthly) and government life expectancy tables (if payments are for life). What remains is the deductible amount.


Financial Planning


Charitable Remainder Annuity Trust

• A CRAT is one that pays a specified amount to the individual(s) at annual or more frequent intervals.

• The annual payment must be at least equal to 5%, but not more than 50%, of the initial value of the property transferred to the trust.

• The value of the charity’s remainder interest must also be at least 10% of the initial value of the property transferred to the trust, determined at the time the gift is made.


Financial Planning


Charitable Remainder Unitrust

• A CRUT is one that pays a specified percentage of the value of trust assets (valued annually) to the individual(s) at annual or more frequent intervals. – In a CRUT, the payment fluctuates each year with the value

of the trust based on the payout percentage established upon the creation of the trust.

– The annual payout percentage must be at least equal to 5%, but not more than 50%. The value of the charity’s remainder interest must also be at least 10% of the initial value of the property transferred to the trust, determined at the time the gift is made.


Financial Planning


Charitable Lead Trust

• A charitable lead trust (CLT) is the inverse of a CRT. • With a CLT, the donor gives the current economic

benefit of the trust to the charity (either an annuity or a unitrust interest) for either:– a term of years; or – for one or more lives.

• When the charity’s interest ends, either the donor or another person receives the assets remaining in the trust.

• The donor receives a charitable deduction for the actuarial value of the lead interest given to charity.


Financial Planning


Pooled Income Fund

• A pooled income fund (PIF) is created by a charity.

• The donor transfers property to the fund and the donor or a named beneficiary receives an income interest in the fund for life in the form of shares. At the death of the individual, the charity receives the assets remaining from the shares. The donor receives a charitable deduction for the actuarial value of the remainder interest given to charity.


Financial Planning


Private Foundations

• A private foundation is a charitable organization established by an individual donor or family who wishes to control, as much as possible, the use of their contributions for charitable purposes.

• Typically, a private foundation is established with a large donation up front. The foundation then passes out smaller pieces of the funds to public charities. They are commonly referred to as family foundations, since the intention of the donor is to have the family share in the responsibility of choosing which charities will receive donations from the foundation.


Financial Planning


Donor Advised Funds• For those individuals who want to make a charitable

contribution now but do not want to identify the charity just yet or make the investment in a private foundation, a donor advised fund could be a good solution.

• With a donor advised fund, the donor enters into a written agreement with a sponsoring charity or brokerage to establish an account to benefit the donor’s charitable causes. – Over time, the donor requests the sponsoring charity or

brokerage make grants to the donor’s chosen charities. The charity or brokerage will usually receive a fee for managing the account and providing services.


Financial Planning


Towards a Zero Taxable Estate

• A common estate tax planning technique that has been popular among the wealthy is the charitable bequest of all or part of their estate upon the last to die of the two spouses.

• The bequest may be made to one or more charities or to the decedents’ private foundation. The charitable bequest is deductible for federal estate tax purposes.


Financial Planning


Wealth Replacement Trusts

• If the clients wish to leave other property to their children to replace the amount going to charity, they might create a wealth replacement trust.

• The wealth replacement trust could be an irrevocable life insurance trust (ILIT) funded by second-to-die life insurance. – When the second of the spouses dies, the insurance is paid

to the trust and is paid out to the beneficiaries in accordance with the terms of the trust.

– Structured properly, the life insurance within the ILIT escapes the federal estate tax.


Financial Planning


Conclusion

• Using zero estate tax strategies, the clients get the amount of property they wanted to get to the children without paying any federal estate tax AND make a difference to society by donating what otherwise might have gone to the government to charities that they prefer.

• Their foundation is funded with a large amount of property that the family can manage after their passing.

charitable planning chapter 30 tools & techniques of financial planning copyright 2009, the...

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