Charitable Giving

Charitable giving can be the answer to your income needs. Not only can you benefit yourself, but you can also benefit your family and leave behind a legacy.

Procedural and reporting requirements for charitable gifts are closely defined in the Internal Revenue Code and Regulations. These requirements must be compiled with if the donor is to fully realized the tax benefits of gifting. Informational materials describing the benefits to donors and to the recipient charity are available from many charities.

Charitable Giving can help you to maintain control of the assets, Reduce your Capital Gains taxes, Income Taxes and Estate Taxes; Continue to Draw Income, Plan for your Retirement, Plan your Estate, and Provide Income for your heirs; all while benefiting the charitable causes of your choice.

If you are like many people today, you own highly appreciated assets such as real estate or stock that you are reluctant to sell because of the significant capital gains taxes you would owe. At the same time, you may be looking for ways to increase your income or diversify your portfolio. Usually, that would mean selling those assets, paying the high taxes and reinvesting with a substantially reduced amount. Fortunately, there may be a solution to your dilemma, its called the Charitable Remainder Trust.

A Charitable Remainder Trust, also known as a CRT, was created with the tax reform act of 1969. It's an irrevocable trust designed to convert an investor's highly appreciated assets into a lifetime income stream without generating estate and capital gains taxes, while creating a charitable deduction for a portion of the gift. Charitable Remainder Trust's have become very popular in recent years because they not only represent a valuable tax-advantaged investment, but also enable you to provide a gift to one or more charities that have special meaning to you. A Charitable Remainder Trust can potentially:

• Eliminate immediate capital gains taxes on the sale of appreciated assets, such as stocks, bonds, real estate and just about any other asset.
• Reduce estate taxes of up to 55% that your heirs might have to pay upon your death.
• Reduce current income taxes with a sizable income tax deduction for charitable contribution.
• Increase your spendable income throughout the rest of your life.
• Create a significant Charitable Gift.
• Avoid probate and maximize the assets your family will receive after your death.

When you establish a Charitable Remainder Trust, you or another beneficiary, such as your spouse or another family member, receive income from the trust for life or for a term of up to 20 years. When the trust ends, the remaining assets pass to the qualified charity or charities of your choice. For more information on Charitable Remainder Trusts Click Here.

Maintaining Control

While a Charitable Remainder Trust is an irrevocable trust, you and your spouse may change the charitable beneficiaries at any time. Under certain conditions, you may even serve as trustees of the Charitable Remainder Trust. As trustees, you can maintain full investment control of the assets inside the Charitable Remainder Trust.

Capital Gains

Because their assets are destined for a charity, Charitable Remainder Trusts do not pay any capital gains taxes. These taxes can range from 10% to 20% of an asset's growth in value. For this reason, Charitable Remainder Trusts are ideal for assets like stocks or property with a low cost basis but high appreciated value.

For instance, suppose you sell one of your rental properties for $1 million. Let's assume you originally paid $100,000 for the property. Upon completion of the sale, you would owe capital gains taxes on the $900,000 difference. That tax could easily top $150,000, depending on how long you owned the property and your overall tax situation.

Funding a Charitable Remainder Trust with highly-appreciated assets (like real estate) allows you to sell those assets without paying any capital gains taxes. Since Charitable Remainder Trusts have a charitable intent and do not have to pay capital gains, the full value of any assets transfers to the trust (and thus, to your family and favorite charity).

Income and Estate Taxes

Most persons interested in charitable giving also wish to benefit from reduced income tax liabilities during their lifetimes, a benefit that is realized through increased itemized deductions. Itemized deductions for charitable gifts and most deductible expenses currently are deductible to the extent they exceed 2 percent of the taxpayer's federal adjusted gross income. The itemized deduction is reduced as federal adjusted gross income increases above a specified threshold level currently, $150,500(2006) for a married couple filing a joint return.

A Charitable Remainder Trust is considered "outside of your estate" by the IRS. Because of this, you may end up saving as much as 55 cents of every dollar you move to the Charitable Remainder Trust. Plus, you are not limited in how much you can contribute by the annual gifting limit or the Unified Credit. Charitable Remainder Trusts, because they benefit a charity, also qualify you for an income tax deduction. The amount of your deduction is the present value of the remainder interest to the charity. Your current deduction also depends on the type of property you contribute, as well as the type of charity you name as a beneficiary. Average deductions normally fall in the range of 20-50% against your adjusted gross income. Any deductions not used in the year of contribution may be carried forward for the next five years.

• For income tax purposes, the value for charitable gifts given during the lifetime of the giver is directly deductible from taxable income of taxpayers who itemize deductions, subject to the 50-percent and the 30-percent rules and to the general limitations on itemized deductions noted above. (Gifts of appreciated property are subject to additional limitations linked to the nature of the property and type of recipient charity.)
  
  
• For estate tax purposes, the fair market value of a charitable gift from the estate of a deceased person is directly deductible when determining the value of the taxable estate.
  
  
• The federal estate tax rate applicable to the taxable portion of an estate starts at 37 percent, a tax rate higher than the income tax rate applicable to many taxpayers.
  
  
• For many taxpayers, pre-retirement taxable incomes and tax rates are higher than post-retirement taxable incomes and tax rates. Thus, it often is advantageous to increase income tax deductions during pre-retirement years by taking gift deductions sooner rather than later.
  
  
• Because a dollar in hand has greater present value than a dollar to be received in the future, when the tax load is about the same it usually is better to reduce current income tax payments. Estate tax payments that will be payable at some time in the future usually have less present value than current income tax savings and the dollars saved will have earning power during the period prior to estate settlement.

Draw Income

The amount of income to come out of the Charitable Remainder Trust depends upon the payout percentage that you choose, and the amount of income your assets generate while inside the Charitable Remainder Trust. The IRS states that, at a very minimum, the Charitable Remainder Trust must distribute at least 5% of the net fair market value of its assets. If you don't need the income one year, you may elect to defer income through a "makeup provision." However, the Charitable Remainder Trust's net distributions must eventually equal 5% to be considered valid by the IRS. When setting the payout percentage, be forewarned: the higher it is, the lower your charitable income tax deduction. Considering market conditions and the possibility that taking out too much may reduce the principal inside the trust, you should probably not receive income of more than 10% each year.

Retirement Planning

Many clients use Charitable Remainder Trusts to augment their current retirement plan. By setting one up in your peak earning years, you can make contributions to the Charitable Remainder Trust in the form of zero coupon bonds, non-dividend paying growth stocks, or professionally-managed variable annuities. By letting the Charitable Remainder Trust grow without taking income from it during the early years, the Charitable Remainder Trust can begin making payouts to you when you retire. These payouts can include makeups for any shortfalls in income you did not receive earlier. Unlike IRAs or 401(k) plans, there are no limits on how much you can contribute.

Combining With Other Strategies

Charitable Remainder Trusts are designed to give the principal to charities when you and your spouse pass away. This bypasses any children, which could lead your heirs feeling slighted. These feelings of ill-will can be overcome by combining the Charitable Remainder Trust with another strategy to "make up the difference" that goes to the charity.

For instance, some large estates combine the Charitable Remainder Trust with a Legacy Trust to provide a cash distribution upon the death of the owner. the Legacy Trust then subdivides into individual trusts for each of each named heir. In this scenario, everyone wins. The estate owner receives income streams and tax deductions, the charity gets the principal of the Charitable Remainder Trust, and the children receive a cash distribution.

Charitable Gift Decisions

If you are interested in charitable giving using a charitable remainder trust or a charitable annuity trust, be sure to consider the financial management record and overall condition of potential recipient charities. A strong record of reliability and sound financial management usually is good reason to believe a charity will use your gift wisely and well. A weak or troubled record of financial management or rating agency reports indicating high overhead costs can be reason to consider other possible recipients. Ask questions, gather information, assess and compare charities. Then make your decision.

Your circumstances and your charitable giving interests and intentions interact in determining whether you'll find the estate planning "tools" described in this document to be useful in your estate planning. Discuss your situation and goals with your legal and tax advisers. Ask them for advice and recommendations that you can use when thinking about and discussing these issues:

• For what purposes do you want to make charitable gifts?
• What is the nature and amount of assets to be given for charitable purposes?
• Which charity or charities will receive your charitable gifts?
• How many charitable gifts do you want to make? one, several, or many?
• What is to be the timing and amount of each gift?
• What guidance for the use of your charitable gifts do you want to provide?
• What estate planning "tools" are you willing to use in your charitable giving?

Charitable annuities are offered by many charitable organizations. In using this form of charitable giving, the owner of assets transfers (donates) them to the charity and the charity agrees to pay the donor or other beneficiary (beneficiaries) a lifetime annuity. The present value of the annuity contract is calculated using Internal Revenue Service tables and varies with the age of the donor and the applicable federal interest rate. A portion of each annuity payment received by the donor is taxable income. The remainder is a nontaxable return of assets.

If the fair market value of assets donated to the charity is greater than the present value of the annuity contract, the donor receives an immediate charitable deduction equivalent to the difference. If the value of the annuity contract exceeds the fair market value of the donated assets, there will be a taxable gain to the donor, a taxable gain that can be avoided by using a charitable remainder trust instead of a charitable annuity.

If the charity has an established charitable annuity program, the donation and establishing of the annuity are easily accomplished. Donors are attracted to charitable annuities when the fair market value of the donation will exceed the value of the annuity contract and the donor is receiving significant levels of taxable income. The certainty of lifetime income in combination with an immediate tax deduction make the charitable annuity particularly attractive.

In circumstances where it's likely a surviving spouse will be unable or unwilling to manage family assets, a charitable annuity or a charitable remainder trust can be a means of ensuring an income stream throughout the remainder of the lifetime of annuity beneficiary or beneficiaries.

An Annuity Trust, also called a Charitable Remainder Annuity Trust or CRAT, pays a fixed percentage of the initial value of trust assets with a 5% minimum income required to be paid to the income beneficiary annually. For example, a Charitable Remainder Annuity Trust with an initial value of $2,000,000 and a 5% payout would pay $100,000 annually to the income beneficiary, regardless of investment performance. Income distribution is mandatory and principal may be invaded to satisfy the requested payout. No additions to the principal may be made after the trust is established.

For example, a $100,000 Charitable Remainder Annuity Trust might pay out 7.5% annually. In this situation, the beneficiary would receive $7,500 each year for the lifetime of the beneficiary or a fixed period of years. The $7,500 may be paid in one sum each year, or in several installments throughout the year.

An annuity trust is usually used for someone who wants a guaranteed income stream each and every year. Regardless of the performance of the trust, the income is paid each year without change.

Charitable gift annuities (CGAs), like Charitable Remainder Trusts, are life income gifts: you transfer assets now, receiving a charitable deduction for a portion of the transfer, and you or a beneficiary receives income for the rest of your life or a fixed period of time. Both the Charity and you can benefit from life income gifts such as these.

With a Charitable gift annuity, you make a gift to the charity, and the charity agrees to pay you a fixed amount of income every year for the rest of your life. Another beneficiary can also receive income from your Charitable gift annuity. In addition, you have the option to defer receiving income for a period of time. The income received by you or your beneficiary each year is equal to a fixed percentage of the original gift. This percentage is dependent upon the age of the beneficiary (or beneficiaries) at the time the Charitable gift annuity begins to pay out income. For example, if you are age 68 and transfer $10,000 to the charity for a Charitable gift annuity, you would receive guaranteed payments of $700 each year, based upon the 7% annuity rate for your age. The $700 may be paid in one sum each year, or in several installments throughout the year. (These annuity rates are for illustration purposes only. Current annuity rates may differ.)

Regardless of your age or the timing of the income, you can take the charitable deduction for a portion of the gift in the year you make the gift. A portion of the payments you receive each year may also be exempt from certain income taxes. You may even be able to reduce your capital gains tax by using long-term appreciated securities to make your gift. For more Information on Charitable Gift Annuities Click Here

A Unitrust, also called a Charitable Remainder Unitrust or CRUT, requires that a fixed percentage (minimum 5%) of the annual value of trust assets be paid to the income beneficiary. For example, a Charitable Remainder Unitrust with a value of $2,000,000 and a 5% payout would pay $100,000 to the income beneficiary in that year. If the investment performance for that year was 10% and the value of the trust on the valuation date was $2,200,000 the income beneficiary would receive $110,000 in that year. Another benefit of the Charitable Remainder Unitrust is that it will allow for additional contributions. The Unitrust will generally produce higher amounts of income but a smaller tax deduction.

For example, a Charitable Remainder Unitrust might pay out 5.5% annually. If the assets are valued at $100,000, the beneficiary would receive $5,500 that year (5.5% of $100,000). If the assets are valued at $125,000 the next year, the beneficiary would receive $6,875 (5.5% of $125,000). As with a charitable remainder annuity trust, the payments may be made in one lump sum each year, or in several installments throughout the year.

A Charitable Remainder Unitrust is good for someone looking for a specific percentage return. This can be used to keep up with inflation if the trust value continues to grow over the years.

A Net Income with Makeup Charitable Remainder Trust or NIMCRUT is a type of trust that requires that a fixed percentage (minimum of 5%) of the annual value of trust assets be credited to the income beneficiary, or if less, the net income of the trust for that year, with any deficiencies to be made up in later years when trust income exceeds the required set percentage amounts for such years. If a deferred annuity contract is used to fund a Net Income with Makeup Charitable Remainder Trust, the trustee has discretion as to the timing of distribution of income, and therefore, unlike other Charitable Remainder Trusts, a Net Income with Makeup Charitable Remainder Trust can allow for the buildup of income. Using an Annuity as a funding vehicle for a Net Income with Makeup Charitable Remainder Trust allows for greater control of income and flexibility. Since the trust is exempt from tax, the buildup is also without tax.

An important note is that, unlike the other types of Charitable Remainder Trusts, Net Income with Makeup Charitable Remainder Trusts do not allow invasion of principal for the payout of income. If there is insufficient income to meet the payout, the income beneficiary must wait until sufficient income exists. Until such time however, the income beneficiary's "make-up account" will continue to build. Once income is sufficient, the income beneficiary will be entitled to the entire buildup in the "make-up account." This is advantageous for people who want to defer income and have more control over their income stream.

A Net Income with Makeup Charitable Remainder Trust is best used for someone who doesn't need immediate income. Generally, if income is expected to start in 5 years or longer, a Net Income with Makeup Charitable Remainder Trust can be considered. This will make it more likely that income will be available to meet any payout requirements.

If you wish to reverse who receives the income and who receives the asset, you can create a Charitable Lead Trust.

A charitable Lead Trust differs from a Charitable Remainder Trust in who benefits, and when. In a Charitable Lead Trust, the charity you've named receives the income during your lifetime. You still receive a current income tax deduction and the asset remains in the Charitable Lead Trust until the donor passes away. At death the assets revert to your beneficiaries.

Like a Charitable Remainder Trust, Charitable Lead Trusts offer current income tax deductions and a reduction of capital gains taxes. The only difference is the Charitable Lead Trust flip-flops the parties involved. Charities become the income beneficiaries, receiving a steady stream of income during the owner's lifetime. At the owner's death, named beneficiaries then receive the bulk of the Charitable Lead Trust's assets. And just like the Charitable Remainder Trust, Charitable Lead Trusts also receive the same preferential tax treatment. For More information on Charitable Lead Trusts click here.

People give to charity for a variety of reasons. These range from soul soothing, peer pressure, furthering the work of a particular organization, a desire to be remembered after they are gone, to improving the quality of life for others, a desire not to leave property to relatives and finally, tax savings.

When most people think of charitable giving, they usually consider giving of their time or making a cash donation. Rather than cash, some donors may want to consider giving away a growing asset, for example, common stocks. These donors should keep two things in mind. First, the capital gains tax is a voluntary tax - you only pay it if you sell an appreciated asset. The estate tax is involuntary - it's due nine months after death essentially no matter what. One philanthropic way to avoid both these taxes is to give highly appreciated securities to a charity.For more information on Charitable Gifts of Stock click here.

Very few individuals decide one day to write out a check for $100,000 or more to their favorite charity. But with life insurance, it can effectively cost very little to be so generous. Life insurance enables a charitable individual to make a substantial future gift by making small premium payments over time.

The advantages of funding a charitable giving plan with life insurance include: prompt payment of death benefits to the charity; a policy's growing cash value also may be borrowed by the charitable institution for special needs; giving without disrupting other assets reserved for your family; and qualifying for income, gift and estate tax deductions.For more information on Charitable Giving with Life Insurance click here

A Wealth Replacement Trust can be set up to replace the amount of the asset or more to the Heirs. The donor can use a life insurance policy held inside of a trust to be paid out to the Heirs at death. If structured properly, the Life Policy will pay out 100% Income and Estate Tax Free. This can mean a much larger after-tax inheritance for the heirs than if they received the asset itself. The premium for the life policy can be paid from a portion of the tax savings and/or income generated by the Charitable Trust. The key is to have the life policy owned outside the estate. This is usually accomplished with an Irrevocable Life Insurance Trust.

An Irrevocable Life Insurance Trust is used to hold a life Policy outside of an estate in order to avoid Income and Estate Taxes. Because the trust is a separate entity from the insured's estate, the Life Insurance is not a part of the net worth and therefore not subject to estate tax. Life insurance death benefits are not subject to Income Tax. Therefore, the proper use of an Irrevocable Life Insurance Trust will enable the heirs to receive the Death Benefit free and clear of Estate and Income tax.

Second to Die Life Insurance is used to reduce the overall cost of a Life Policy and/or provide for funds to cover Estate tax when they are due, typically at the death of the second spouse. In most cases, the charitable donor wants to replace the gifted asset value for the heirs to receive. More often than not, a second to die life insurance policy is the vehicle used to do just that. As the name implies, the policy pays a death benefit when the second person the policy is insuring passes away. Because the Insurance Company can spread the risk out over two lives instead of one, the cost to purchase the policy can be lower than if two lives were insured separately.

A second to die can also be a good option when one of the insured's has health problems; again, the policy pays the death benefit after the second person dies. This makes it easier to obtain a policy if one person is in poor or failing health.