the 3 doors to significant giving

The Three Doors to Significant Charitable Gifts and How to

Get Through Them

Presented by:

Tom ConwayThe National Christian Foundation

© 2007 The National Christian Foundation

The Realities of Life

• I will die

• I will take nothing with me

• I will probably die at a time I did not anticipate

• Someone else will get my “stuff”

• I can only decide before I die who gets my “stuff” after I die


Cash is 7% of average

gross estate.**

80 % of gifts are cash *

*This percentage has been deduced from numbers in Giving USA 2005 and IRS statistics. **See Estate Tax Returns Filed in 2003: Gross Estate by Type of Property, Deductions, Taxable Estate, Estate Tax and Tax Credits, by Size of Gross Estate (available at http://www.irs.gov).


Missed Opportunities

• In 2001 alone, taxpayers paid $3.5 billion in avoidable capital gains

taxes that could have gone to charity.(2001 tax return survey – NewTithing Group)

• 80% of real estate gifts offered by donors are refused by charities.



Three Important Questions

• What assets do you have?

• What assets do you need for yourselves and your heirs?

• What will you do with the rest?


Three Doors to Charitable Gift Planning

1. The Transaction Door

2. The Income Tax Door

3. The Estate Tax Door



The Transaction Door• The goal – to lower current income tax by turning

tax dollars into charitable dollars

• The strategy – Have the donor gift a partial interest or entire interest in the real estate or business before he or she enters into a contract or agreement to sell it

• The benefits to the donor - – Donor get a deduction for fair market value – Eliminates capital gain tax on the gifted portion– Tax deduction saves income taxes at your current rate– Ultimately more money goes to the charities of your

choice



Gift After Sale Gift Before Sale

Sales Price of land/busn $ 1M $1MCG Tax Paid on sale $210,000 $ 0Gift to Charity $790,000 $ 1MTaxes saved by gift (40%) $316,000 $400,000Total taxes saved $106,000 $400,000

Additional Gift to Ministry $ 210,000Tax Dollars Converted to Charitable Dollars $ 294,000

Comparison of Gift After or Before Sale


The Smiths have a parcel of real estate worth $3.5 million. They are ready to sell and have some charitable interest, but they also want to keep a large portion for themselves and their family.

The Smiths – Real Estate Sale

The ‘Three Bucket Approach’



1. How much do they want to retain for themselves?

2. How much do they want to give immediately?

3. How much do they want to invest for life income, but then give upon death?

Three questions for the Smiths:



Pre-Sale Gift of Property Interest

The Smiths

Smith Giving Fund

$700,000

20%

Smith CRT

$2,100,000

60%

Smith Family

$700,000

20%

Charities / Ministries / Churches Income: $157,500/year for lifeAt Death to Charity

Tax Deduction: $700,000 Tax Deduction: $538,251



Tax Treatment Upon Sale

The Smiths

Smith Giving Fund

$700,000

20%

Smith CRT

$2,100,000

60%

Smith Family

$700,000

20%

Sell to Buyer

Tax Free Sale

$ 700,000 deduction

Tax Free Sale

$538,251 deduction

Taxable Sale(but $1.2mm+ of deduction)



TRANSACTION CHALLENGES:

Buyer Under Contract Dealing With Debt Continue Private Use Unrelated Business Taxable Income Planning for ongoing costs & liabilities



• Mr. Smith, do you or Mrs. Smith own any (investment) real estate other than your personal residence?

• When did you purchase it?• Was it passed on to you (inherited)?• Has it grown in value?• What do you plan to do with it?• Have you ever considered selling it?

Conversation Starters – R/E


• Do you have any real estate investments?• When do you expect to sell your real estate?

• Will there be a lot of taxes? • What is your plan to lower or eliminate the

taxes?• Do you still have that property for sale? • Are you interested in possibly selling without

paying taxes?

Conversation Starters – R/E


• Mr. Jones – What do you do for a living?• What kind of a business is it? or What does

your business do? He or she explains:• Do you have many employees? (Chances are

the more employees they have, the bigger the business.) Yes, we have 80 employees

• What are your long-term plans for the business?

• Do you plan to sell it at some point? (either to an outsider or maybe to key employees).

Conversation Starters - BI


• Do you plan on passing your business on to any of your children? Yes, I hope to sell it to my son

• Are your children likely to take over the business? • Since your children are not taking over the business,

who will? Will you sell it?• How will you deal with the tax cost of

selling/transferring your business?• If you could lower the tax cost of selling/transferring

your business by raising the benefit to your family and charity, would you be interested?

Conversation Starters - BI


The Income Tax Door• The goal – maximize current income tax deduction

limitations

• The strategy:– Maximize the 50% AGI limitation by combining cash gifts

and asset gifts– Move some income off of your tax return to another entity

• The benefits to the donor– Maximizes current income tax deduction– Tax deduction saves income taxes at donor’s current rate– Can increase donor’s cash flow if done with non-liquid

assets


Key’s to the Income Tax Door

• Don’t pay Capital Gains Tax on gifts you will make to charity

• Maximize your government matching gift program (the tax deduction) – 50%

• Combine cash gifts (50%) and asset gifts (30%)


• Mr. Brown, have you had a good year in your business? Yes.

• Do you find yourself paying a lot of federal and state income taxes? Yes.

• Do you end up spending much more on income taxes than what it costs you to live. Yes, considerably more.

Conversation Starters


• In light of your financial success, you could enjoy a much higher lifestyle…why don’t you?

• Are you paying high taxes in spite of your modest lifestyle?

• Would you like to know how to lower your income taxes to an amount that more fairly reflects your lifestyle?



The Estate Tax Door

• Two Strategies

– Gifts made during life – Current Income Tax Benefit

– Gifts made at the end of life – Estate Tax Benefit


Gifts Made During Life • The Goal – lower income tax during life

for gifts they will make after death.• The Strategy – Give while living to a

Charitable Remainder Trust; Create current income tax deduction; remove the assets from taxable estate.

• The Benefits – Current income tax deduction saves income taxes at donor’s current rate. Could increase donor’s cash flow by reduced taxes.


The Taylors –

SCENARIOSCENARIO:

Mr. & Mrs. Taylor have three children. At their deaths, they would like to leave 25% of their estate to each child and the remaining 25% of their estate to their favorite charities.

Is there any way they can enjoy less income taxes during life for gifts they plan on making at the end of life?



Current Plan – The Taylors

“I’m Giving to Charity at Death”

Death

$2,250,000 $750,000

Estate$3,000,000 Probate Estate

$3,000,000

Family Charity



“I’m Giving to Charity at Death”

Gift$750,000

Charitable Trust

Proposed Plan:1. During life, transfer

asset to Trust that will go to charity at death.

2. Transfer creates BIG Income Tax deduction (750k – 500k present value of inc.interest = 250k deduction).

3. Trust makes payments to Owners for Life.

4. Only ‘non-charitable’ estate goes through probate.

5. Family receives intended gifts from Probate Estate.

6. Charity receives gift from Trust.

Death

Estate$3,000,000

FamilyCharity

$250k Income Tax Deduction Probate Estate $2,250,000

Life Income – The Taylors



Comparison of Gift Before and After

Before After

Amount to family $2.25M $2.25MCurrent inc.tax deduction $ 0 $ 250,000Taxes saved on gift (30%) $ 0 $ 75,000

To Charity at death $750,000 $750,000

Potential to Charity now $ 0 $ 75,000


• Do you and Mrs. Taylor have wills?• Are your wills up to date, or when were they

drawn up and signed? Probably five years ago.

• Are you planning on doing any charitable giving upon your deaths? or do you have charitable giving in your estate plan?

• Roughly how much do you plan to give to the Lord’s work at death? (Generally it is at the death of the last one to die.)



• How do you view giving to charity through your estate?

• Are you planning on doing that? • Have you discussed this with your children?

How do your children feel about it? • Would you be open to a conversation with

some people who could help you think through your options to maximize your charitable giving at death and also minimize your taxes during life?



• Since you have decided to give to ministry at death, do you know you could have lower income taxes during life? Would you like to know how?

• Would you like to lower your taxes ‘today’ in light of gifts you will be making ‘tomorrow’?



Gifts Made At the End of Life The goal – lower (or eliminate) estate taxes

The strategy – Give life insurance to heirs and assets to charity– Look at Charitable Lead Trust– Make charity the beneficiary of IRA assets

The benefits to the donor– Lower estate taxes– Potentially double charitable giving at death– Pass on more assets to heirs during life


Gifts Made At the End of Life

• Three Questions for Donors:

1. If the two of you were called home today, how much would go to the government in estate taxes?

2. If the two of you were called home today, how much would go to your children?

3. How do you feel about that?



The Myths of Estate Planning

1. Estate Planning is a one-time event

2. ‘I’ve got the highest priced attorneys in town, certainly they have done the best job money can buy’

3. It’s my heirs money


The Truth Regarding Estate Planning1. Estate taxes are optional2. You will leave it all behind, but you get to

choose the next steward3. This is the last stewardship decision you

will make4. You can accelerate some of these gifts

during life5. You will give an account of your decision


Disclaimer Funded Giving Fund

$5,000,000Estate

Taxable Portion

of Estate

Children

By Child’s Disclaimer

Non-taxable portion of estate

Parents want to sharewith their children. Butdesire children to decidehow much to pay Govt.in taxes and how much to sharewith ministries and charity. Giving

Fund

Children

Net After Tax Amount



• Mr. and Mrs. Johnson, do you have a will?

• When was it last updated?• Do you know if you will be liable to

pay estate taxes upon your death or deaths if a couple) or, do you know if you have a taxable estate?



• Have you decided to share most of your estate with your family? What caused you to reach that decision?

• Are you aware of the amount of taxes your family would pay upon the transfer of your estate to them? What steps have you taken to lower these?

• If you could substitute charity for the Government in your estate plan, would you be interested?



“Make all you can, Save all you can, Give all you can.” John Wesley

the 3 doors to significant giving

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