Hill's Personal Finance

Charitable Giving for the Middle Class

You don’t need to be a multi-millionaire to make a difference.

 

As the year ends, you might be thinking about making a gift to your old school or a charity – especially if you dislike taking Required Minimum Distributions (RMDs) from your IRA. After all, your altruism has the potential to bring you a tax break.

Do you have to make a multimillion-dollar gift to receive immediate or future financial benefits? No. If you’re not yet a millionaire or simply a “millionaire next door”, consider the following options which may bring you immediate or future tax deductions.

Partnership gifts. These gifts are made via long-term arrangements between donors and recipient charities or non-profits, usually with annuity-style income coming to the donor and an eventual transfer of the principal to the charity at the donor’s death.

If you’d like to supplement your retirement income with fixed annual payments that are partly tax-exempt, you might want to look at a charitable gift annuity. If you are retired, converting some fully taxed investments into charitable gift annuities may even help you lower taxes on Social Security benefits.¹

A charitable remainder trust also allows you to pay yourself a dependable income (typically for life) and then distribute the remaining trust principal to charity. A charitable lead trust offers you the potential to reduce gift and estate taxes on assets passing to your heirs by making annual charitable gifts; your beneficiaries get the leftover trust assets at the end of your life or the specified trust term. You could even name a charitable life income arrangement as the beneficiary of your IRA.²

If you don’t have enough funds to start such a trust or annuity, you might opt to invest some of your assets in a pooled income fund offered by a university or charity. Your gifted assets go into a “pool” of assets invested by a fund manager; you get a pro rata share of the income of the fund for life, and when your last income beneficiary passes away, the principal of your gift goes to the school or charity.

If you like the idea of a family foundation but don’t quite have the money and don’t want the bureaucracy, you could consider setting up a donor-advised fund. You make an irrevocable contribution to a third-party fund, realizing an immediate tax deduction; the fund invests the money in an account you create. You advise the fund where the money goes and how it grows, but the fund makes the actual grants to nonprofits.

Lifetime gifts. These are charitable gifts in which the donor retains no powers or other controls over the gift once it is made. A lifetime gift of this sort is not included in what the IRS calls your Gross Estate (but taxable gifts are used in calculation of estate tax).³

An IRA charitable rollover (allowed for 2008 and 2009, and possibly beyond) lets an individual age 70½ or older directly transfer up to $100,000 from an IRA to a charity, school, or other qualified non-profit. An IRA gift can reduce your taxable income by as much as $100,000, as the rollover amount is excluded from your adjusted gross income (AGI) for the year in which you make the gift.⁴ In some cases, IRA charitable rollovers may even reduce income taxes on Social Security benefits.

Lifetime gifts also include outright gifts of cash or appreciated assets such as stocks or real estate. A gift of appreciated stock could bring you a charitable deduction to lower your income tax, and help you avoid capital gains tax linked to the sale of the appreciated shares.⁵

Through a gift of appreciated property, you can transfer a real estate deed to a school or charity and get around capital gains taxes that may result from a property’s sale. You could even arrange a retained life estate, in which you deed your home to a charity or non-profit while retaining the right to live in it as your primary residence for the rest of your life.

Estate gifts. These are deferred gifts you make after your lifetime, without impact on your current lifestyle. You can make a bequest to a charity through your will or a living trust without incurring estate taxes on the gift amount.⁵ A gift of life insurance to a university or charity can give you an immediate income tax deduction for the cash surrender value of a paid-up policy, and possible future deductions. Additionally, the cash value of the policy could be used to fund a gift annuity.⁶ You can also make an IRA gift or retirement plan gift effective upon your death, with the non-profit organization receiving some or all of the assets as you wish.⁵

The caveats. As your income increases, you may face limits on the amount of charitable gifts you can deduct. If you are retired, an increase in income can also cause more of your Social Security benefits to be taxed. The IRS says that your charitable deductions for any tax year can be more than more than 50% or your adjusted gross income (possibly 30% or 20% depending on the specifics of your gifts). But if you exceed such limits, the IRS lets you carry forward excess contributions for up to five years.⁷

Would you like to learn more? Okay, so they may not name a hospital wing or a library after you. But your charitable giving can have real effect even if you don’t have a fortune. Keep in mind that your unique circumstances need to be weighed before making any decision. As with all tax and estate planning, please consult your financial advisor, attorney or tax advisor to affirm that you are in a position to fully benefit from charitable deductions.

 

Citations.

¹ minnesota.publicradio.org/support/planned_giving/gift_annuities.shtml              [12/5/08]

² alumni.cornell.edu/gift_planning/additional_charstrategies.cfm               [12/4/08]

³ irs.gov/businesses/small/article/0,,id=108143,00.html [12/4/08]

⁴ case.org/Content/Miscellaneous/Display.cfm?contentItemID=6175=     [10/6/08]

⁵ minnesota.publicradio.org/support/planned_giving/gift_comparison.shtml          [12/5/08]

⁶ redcrosslegacy.org/GIFTinsurance.php                        [12/4/08]

⁷ irs.gov/pub/irs-pdf/p526.pdf           [TY 2007]

 

Should a Millionaire's Son accept a Full Scholarship?

Knight Kiplinger preposes an interesting ethical dilema: should a wealthy child accept a full scholarship?

This is interesting article with many thoughtful ideas about scholarships.

Have you Considered Charitable Giving

Could it make the world a better place? Could it make sense financially?

A gift to charity may prove to be a great financial favor to you. Some charitable gifting methods offer you notable tax advantages. Here’s a brief look at some popular options.

Charitable remainder trusts (CRTs). These trusts can be useful estate planning tools. People with highly appreciated assets – such as stocks or real estate – are often hesitant to sell those assets and reinvest the proceeds because of the capital gains taxes that could result from the sale. Could the CRT offer a solution to this problem?

CRTs are tax-exempt trusts. In transferring highly appreciated assets into a CRT, you get: a) a tax deduction for the present value of your future charitable gift, b) income payments from the CRT for up to 20 years, and c) tax-free compounding of the assets within the CRT. You avoid paying capital gains taxes on the amount of your gift, and you can exclude an otherwise taxable asset from your estate.¹

After you die, some or all of the assets in the CRT will go to the charity (or charities) of your choice. (What about your heirs? You can structure a CRT in conjunction with an irrevocable life insurance trust so that they are not disinherited as a result.)¹

A charitable remainder annuity trust (CRAT) pays out a fixed income based on a percentage of the initial fair market value of the asset(s) placed in the trust. In a charitable remainder unitrust (CRUT), income from the trust can increase as the trust assets grow with time.²

Charitable lead trusts (CLTs). This is the inverse of a CRT. You transfer assets to the CLT, and it periodically pays a percentage of the value of the trust assets to the charity. At the end of the trust term, your heirs receive the assets within the trust. You don’t get an income tax deduction by creating a CLT, but your gift or estate tax could be markedly reduced.³

Charitable gift annuities. Universities commonly suggest these investment vehicles to alumni and donors. (The concept has been around since the mid-1800s.) Basically, you donate money to a university or charity in exchange for a flow of income. You (and optionally, your spouse) receive lifelong annuity payments. After you pass away, the balance of the money you have donated goes to the charity. You can also claim a charitable deduction on your income tax return in the year you make the gift.⁴

Pooled income funds. In this variation on the charitable gift annuity, the assets you donate are unitized and “pooled” with the assets of other donors. So essentially, you are buying “units” in an investment pool, like an investor in a mutual fund. The rate of return on your investment varies from year to year.

Pooled income funds often appeal to wealthier donors who don’t have a pressing need for fixed annuity payments. As just interest and dividends are paid out of a pooled income fund, it is possible to shield the whole gain from, say, a highly appreciated stock through such a fund. You get an immediate income tax deduction for a portion of the gift, which can be spread over a few consecutive tax years. Also, the balance of the assets left to the charity at your death may be greater than if a charitable gift annuity is used. Another nice option: you can put more assets in the fund over time, whereas a charitable gift annuity is based on one lump sum gift.⁵

Donor advised funds. A DAF is a variation on the “family foundation” concept. Unlike a private foundation, it is not subject to excise taxes, and it does not require employees and lawyers to implement and administer. You establish a DAF with a lump sum gift to a public charity. The gift becomes property of the charity, which manages the assets. (You can continue to contribute to the fund.) Each year, the charity determines the percentage of the value of the fund which will become available for grants or other programs. You advise the charity how to spend the money. DAF contributions are tax-deductible in the year that they are made. You may avoid capital gains taxes and estate taxes on the gift, and the assets may grow tax-free.⁶

Scholarships. These can be created at a school in your own name or in memory of a loved one, and you can set the criteria. Commonly, you and your advisor can work directly with a school to create one.

Life insurance and life estate gifts. Some people have unwanted or inadequate life insurance policies that may end up increasing the size of their taxable estates. In such cases, a policyholder may elect to donate their policy to charity. By doing this, the donor reduces the size of his or her taxable estate and enjoys a current tax deduction for the amount of the cash value in the policy. The charity can receive a large gift at the donor’s death, or they can tap into the cash value of the policy to meet current needs.⁷

Life estate gifts are an interesting option allowing you to gift real estate to a charity, university, or other non-profit – even while you live there. You can take a tax deduction based on the value of property, avoid capital gains tax, and live on the property for the rest of your life.⁸ (If somehow you can’t remain at that residence, the charity may opt to lease or sell it. You can gift all of a property or just some of a property as appropriate.)⁹

Give carefully. If you are thinking about making a charitable gift, remember that the amount of your tax deduction will ultimately depend on the kind of assets you contribute, and the variables of your individual tax situation. Remember also that some charitable gifts are irrevocable. Be sure to consult qualified financial, legal and tax advisors for more information before you decide if, when and how to give.

Citations. ¹ library.findlaw.com/1997/Dec/1/128372.html

² giving.mit.edu/ways/planning/trusts/index.html

³ 360financialliteracy.org/Life+Stages/Retirement/Articles/Charitable+giving/Charitable+giving.htm

⁴ plan.gs/CategoryDetailList.do?orgId=327&categoryId=228

⁵ cmu.edu/giving/planned/pooled.shtml

⁶ worldlawdirect.com/article/570/What_are_donor_advised_funds.html

⁷ younglife.org/Giving/LifeIns.htm

⁸ purdue.edu/udo/planned_giving/life_estate_gift.shtml

⁹ ucsf.edu/support/trustsandbequests/realEstate.html

Small Tax Exempt Organizations Will Have to File in 2008

As a part of The Pension Protection Act of 2006 Tax exempt organizations with under $25,000 in gross receipts will have to file a postcard return with the IRS beginning in 2008. The organizations will be giving general information and stating that they received less than $25,000 in gross receipts for that year. For more information read the article at accounting web.com

'Tis the season...

‘Tis the season for giving. This is the number one time of the year for charitable giving not just because of the holidays, but it is the last few days to get that needed tax deduction in. With careful forethought, your gifts can help you in the tax and estate planning portion of your financial life.

Keep your cash. The first strategy is to give away those highly appreciated assets that you want to take profits on. Give the asset, a stock or real property, to the charity of your choice and let them convert it to cash, so you avoid a taxable event. Use your cash to start a new investment with a new cost basis.

If you want to give a bigger gift to your favorite charity than you can afford now - buy a life insurance policy on yourself for the organization. This strategy allows you to leverage your money for the benefit of the organization. You can fund the policy every year with a cash gift or a single premium immediate annuity or a single premium life policy. One can leverage their gift by 2 to 3 times in this scenario.

Suppose you need that highly appreciated asset for your retirement income. One could gift the asset to a charitable remainder trust. Let the trust sell the asset and pay an income for life to you and your spouse. At the donor’s death their charity receives the “remainder”.

Setting up one’s own “foundation” used to be only for the ultra wealthy. Now a person can set up their own philanthropic entity through a donor-advised or community foundation. These are umbrella organizations that fall under a non-profit 501(c) 3 charitable status of a parent charity. The parent charity makes certain all the non-profit rules are adhered to. The donor funds their “donor family community foundation” through any of the means above and gifts the money out as they see fit to 501(c) 3 organizations according to IRS guidelines.

Please remember no two individual’s situation is the same and with any area of law and tax one should seek input from their legal and tax adviser.

Rare Books

The Thomas Cooper Library at the University of South Carolina houses many valuable manuscripts and special collections of rare books. How did they amass such a collection in tough economic times for academia... read and find out by Gina Vaselli via The Daily Gamecock