LEGACY GIVING
BY ESTATE ATTORNEY MARK A. ANDERSON
WHAT IS LEGACY GIVING AND HOW DO YOU DO IT?
Legacy giving is a form of charitable contribution that is beneficial both to the donor and the receiving organization, yet many people are unfamiliar with the concept.
I'm Mark Anderson — an esteemed Trust and Estates attorney. Read below as I break down the various kinds of legacy giving and how they work.
CHARITABLE GIVING STRATEGIES
Gifting Appreciated Securities
Compared with donating cash or selling your appreciated securities and contributing the after-tax proceeds, donating appreciated securities is a very tax-efficient means of gifting. You avoid paying capital gains tax on the profit of those securities and you can take a tax deduction for the full fair market value of your donation (subject to limitations). Because year-end is a high-volume processing time for custodians, they impose a deadline for all gifts of appreciated securities. To ensure that there’s adequate time to process your annual charitable gifts, please contact us with all gifting requests as soon as possible.
Charitable IRA Distributions
Qualified Charitable Distributions (QCDs) are distributions made from an Individual Retirement Account (IRA) directly to a qualified charity. Only individuals age 70 ½ and older can make QCDs as they count toward the taxpayer’s Required Minimum Distribution (RMD). The maximum QCD amount is $100,000 per year. When processing a QCD, the corresponding 1099 from your custodian will NOT list the distribution as a charitable contribution, thus it is incumbent upon you to notify your CPA that the distribution was a QCD. Note, QCDs cannot be made to a Donor-Advised Fund.
Donor-Advised Fund
A Donor-Advised Fund (DAF) is a charitable giving account that is set up with your custodian to manage your charitable donations. You receive an immediate tax deduction when making a charitable donation to the DAF and you direct the custodian when to disburse funds (grants) to the qualified charities of your choice. This strategy works well when an individual has appreciated securities (stocks or mutual funds) that he or she has owned for at least a year and would now like to donate. Once donated to the DAF, the assets can remain there until you provide further instructions on when the funds are to be disbursed to your charity of choice. This is particularly useful when an individual has higher than usual income, such as from a sale of a business or a large bonus. The individual can front-load several years’ worth of charitable gifting in one year (DAF gift) to receive a larger tax deduction that particular year. Then, the individual can direct smaller amounts be made from the DAF (grants) to qualified charities over the ensuing years.
Charitable Bequest
Including a charitable gift through your will or trust is a simple way to make a lasting impact through the work of Reaching The Hungry. Every dollar given to Reaching The Hungry in this manner goes directly to Reaching The Hungry which results in significant leveraging of the original gift. Given a historical inflation rate of 3%, most foundation endowment monies grow in real dollar value even after an average of 5% annual distributions to the field.
CHARITABLE GIFTING THROUGH BENEFICIARY DESIGNATION
Many of us forget that most wealth is transferred by one of two methods: the first is by will or trust. Such documents authorize a representative of the trust or the estate to transfer assets owned by the decedent or his/her trust. The other method is by beneficiary designation. A beneficiary designation form is a legal contract which directs a financial institution to transfer assets held by the institution to a named set of beneficiaries. While not all assets can be set up with a beneficiary designation, some of the more common assets that can be directed through a beneficiary form include: - All forms of retirement accounts such as an IRA, 401K, 403B or pension - Life insurance policies - Commercial annuities - Certain types of bank accounts - Savings bonds Some of the advantages of doing your charitable giving by using your beneficiary forms properly include: 1. The gift is made directly to the charity without probate being required. 2. There can be significant tax savings on all tax-deferred (retirement) accounts. Not only can you avoid the estate tax, but the income tax on certain assets, as well. 3. The forms are easy to complete and easy to obtain by simply contacting the account manager. 4. Your beneficiary designations are completely revocable with the completion of another form.
CHARITABLE GIFT ANNUITIES:
A WIN/WIN STRATEGY
What is a CGA?
A CGA is a contract under which a charity, in return for a transfer of cash, securities or other assets, agrees to pay a fixed amount of money to one or two individuals (usually husband and wife) for their lifetime. Because part of the contribution is treated as a gift and therefore partially deductible on the donor’s tax return, the rates used to calculate the income stream payable to the donor are lower than those available from commercial insurance carriers.
What are the benefits of a CGA?
The donor benefits in many ways. First, they enjoy the security of a fixed income stream for life. Next, they enjoy a current tax deduction for the gift portion of the amount transferred. This amount is equal to the excess of the net fair market value of the property transferred over the present value of the annuity. Finally, the donor enjoys seeing the impact of their gift during their lifetime!
The table below illustrates the impact of a gift of $100,000.
The above rates of return are those recommended by the American Council on Gift Annuities (ACGA). The ACGA uses a defined mortality table and a defined interest rate to arrive at the recommended maximum annuity rates. To learn more about the ACGA, visit its website at www.acga-web.org.
THE BENEFITS OF GIFTING APPRECIATED ASSETS
All too often donors make gifts of cash to their favorite charities when they would be far better off gifting their non-cash assets. Selling an asset to generate the cash to make the gift is often the most costly form of gifting for a number of reasons. Let’s suppose you own Coca Cola stock worth $10,000.00 with a cost basis of $1,000.00 and are in a long-term capital gains tax bracket of 15%. If you sold the stock in order to make a $10,000.00 donation, you will first have to pay the tax on the $9,000.00 gain-or $1,350.00. Then, you will need an additional $1,350.00 in order to make the full gift of $10, 000.00! What if instead you simply gift the stock? You get the same $10,000.00 tax deduction, you keep your $10,000.00 cash for other purposes and, if you miss the stock, you can use your cash to purchase another $10,000.00 worth of the same stock saving $1,350.00 that would have otherwise have gone to the IRS! By giving the stock and repurchasing new stock you have also lifted your cost basis up to the current market value. Now, if you decide to sell your newly purchased stock, you will only pay tax on the gain above your new $10,000.00 cost basis-instead of the tax you would have paid on your gain above $1,000.00. The above benefits apply not only to stock, but to any asset that has increased in value from the time you obtained it. Capital assets which are subject to capital gains taxation upon sale include real estate, works of art, jewelry, household furnishings, and of course, stocks. If you are thinking of making a gift to Reaching The Hungry but are hesitant to part with your cash, please give a call so we can help you look at the other gifting options that could save you the heartache of paying unnecessary tax!
CHARITABLE REMAINDER TRUSTS:
AN UPSIDE TO GIVING IN A DOWN MARKET
Even in these difficult economic times, when appreciated investment assets have lost significant value, individuals are looking for wise estate planning strategies that mesh with their desire to make significant charitable gifts. For this reason, charitable remainder trusts (CRTs) continue to be a popular choice. Many investors still hold significant investment assets that are worth much more than the initial purchase price. Consequently, the capital gains tax still looms as a huge disincentive to sell and reinvest. Fortunately, the IRS continues to allow investors to sidestep the capital gains tax and reward those who are willing to sell these appreciated assets inside a CRT. A CRT is a type of irrevocable trust that is easy to establish, is able to be self-managed, and benefits both the donors as well as their favorite charities.
The process to establish a CRT is as follows:
Step 1: Create the trust document with an experienced estate planning attorney. Step 2: Transfer title of the appreciated asset to the CRT. Step 3: Donors continue to receive the existing stream of income or liquidate the asset and reinvest the entire proceeds of the sale into a new income stream. Step 4: Upon the deaths of the donors, the residue passes to the named charity or charities which can be changed by the donors during their lifetime.
Benefits Include:
Move old assets into newer markets without capital gains taxation Enjoy a current income tax deduction equal to the value of the gift less the present value of the income stream (IRS calculates % of the value of the asset that can be deducted) Principal passes to charity or charities free of estate taxation
Your future gifts ensure that the ongoing work of Reaching The Hungry missionaries and projects will continue to be adequately funded in the years ahead.
BENEFITS OF MAKING CHARITABLE CONTRIBUTIONS DIRECTLY FROM YOUR IRA
Since January 2, 2013 taxpayers to continue have enjoyed significant benefits from doing their charitable gifting directly from their IRAs. There are a number of potential tax benefits for this type of charitable gifting: 1. Gifts from IRAs reduce your adjusted gross income (AGI) which may avoid penalties that would otherwise be incurred with a higher AGI such as higher Medicare premiums or taxation of Social Security income. 2. While you won’t receive a charitable deduction for the gift, income tax on the distribution is avoided, even if you did not itemize deductions and even if your gifts exceed the “percentage of income” limits for charitable contributions. 3. The gift to charity comes out of the pretax portion of your aggregated IRAs. This is an exception to the usual rule regarding recovery of IRA basis.
Please be aware that such gifts can only be made under the following conditions: 1. Gifts must come from an IRA. 2. You must be 70 ½ or older by the date of the distribution. 3. The receiving charity can be any non-profit other than a donor advised fund, a supporting organization or certain private foundations. 4. The gift must go directly to the charity and must arrive at the charity by midnight, December 31st.
BENEFITS OF GIFTING TANGIBLE PERSONAL PROPERTY
Tangible personal property is generally defined as property that can be physically touched, excluding land and improvements (buildings and structures). Examples of tangible property commonly given to charities include antiques, artwork, jewelry, precious metals, stamp and coin collections and vehicles. By way of contrast, intangible personal property cannot be physically touched and is evidenced by a piece of paper, i.e., stock certificates, deeds, promissory notes or bank statements. The paper merely signifies ownership and in some cases the value of the intangible property. There are many ways donors can give tangible personal property, depending on their objectives. If they want the charity to have immediate use of the property, they can simply give it outright. If they want to convert the property to a stream of payments, they can use it to fund a gift annuity or a charitable remainder trust or sell it to the charity under an installment bargain sale arrangement. The charitable deduction can be significant if the property is given to the charity for a related use. For example, the donation of a vehicle which Reaching The Hungry uses to transport guests to and from the airport would be considered a “related use” gift used to carry out part of Reaching The Hungry's ministry, and would therefore qualifies for full market value deduction by the donor. Even if the gift is not for a related use and the deduction is therefore relatively small, there can still be other significant financial benefits: payments for life or a term of years, avoidance or postponement of tax on the capital gain, and removal of the property from the taxable estate. The benefit regarding capital gain is more significant than with a gift of appreciated securities or real estate because the maximum tax rate on gain in collectibles is higher than on those assets. Even if you have an item of value that you don’t think Reaching The Hungry would have any interest in using, please let us know. We have a strategic working relationship with the National Christian Foundation which will, among other things, take almost any item of value and find a buyer for it. NCF will then sell the item and allow you to direct the proceeds to Reaching The Hungry or any other charity through a donor advised fund.
DISCLAIMER
The information, explanations, and examples on this page are not financial advice but rather are intended for informational purposes only. Reaching The Hungry expressly recommends that you seek advice from a professional.