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Sharing Your Wealth

Financial Planning

October 2006

Sharing Your Wealth

The United States Congress recently presented those of us with a philanthropic bent a gift of sorts. It gave donors the ability to donate up to $100,000 in funds from an individual retirement account without first declaring the funds as taxable income. While this is a great provision for those who can afford to part with $100,000 of retirement savings, and who are age 70½ years or older, the vast majority of Americans would be hard pressed to take advantage of the new law.

How can the average American afford to support their favorite charity and still eat? One way is to take advantage of a concept called planned giving. Planned giving is essentially a way for charities to help you make sizable donations without harming your retirement income. If you have ever been asked to include your alma mater in your will, or establish a gift annuity or trust, those are examples of requests to participate in a planned giving program.

This article will concentrate on several vehicles that are designed to help you help your pet charities. Typically, your choices will fall into one of the following categories:
  • Gifts that produce income for you while leaving assets to a charity upon your death.

  • Gifts that produce income for a charity while leaving assets to your heirs upon your death.

  • Gifts made by bequest through your will.

  • Life insurance.
Let's take a look at life insurance and bequests first. Naming a charity as a beneficiary of a life insurance policy is relatively easy - you simply tell the insurance company whom you want to name as beneficiary. Using life insurance to benefit a charity has the smallest impact on your estate and heirs. Since the proceeds are not assets of your estate until you die, your heirs lose nothing. Although the life insurance proceeds are included in your federal estate for tax purposes, there is also an offsetting deduction, which wipes out any estate tax. If you leave a bequest in your will, it is also deductible and, hence, reduces any estate tax, but the bequest will take assets that you might otherwise have available to your heirs.

Probably the best part of using either life insurance or a direct bequest is that the charity only gets what's left over. That means you will have use of all your assets during your lifetime and you won’t harm your retirement by making the donation. Be careful in your planning, though, to insure that you leave enough to take care of those heirs you do want to benefit.

Gifts that produce income during your lifetime give you the best of both worlds. You continue to receive income from assets that have been earmarked for the charity of your choice, which helps you maintain your standard of living. You will also get a huge tax advantage. Even though the charity does not receive the gift until you die, you get a tax deduction for the present value of your gift.

For example, you put $100,000 into what's called a charitable remainder trust and your remaining life expectancy is 21 years. If you assume that the current applicable federal rate is 5%, you would get a charitable deduction of approximately $36,000. This is the present value of a $100,000 payment 21 years in the future at 5%. Put another way, it would take an approximately $36,000 deposit to a savings account earning 5% annually for the account to be worth $100,000 in 21 years.

There are a number of vehicles you can use to meet your needs, but the most common ones are charitable remainder trusts or pooled income funds. The charitable remainder trust can be cumbersome to administer, therefore it is best to use this vehicle when you are talking about amounts equal to or greater than $100,000. The pooled income fund was developed to allow philanthropy with smaller pocketbooks. You can invest a few thousand dollars in a pooled income fund and reap the some of the benefits available to larger donors.

The drawback to vehicles that revert to a charity upon your death is that your heirs don't get the assets. To address this issue, you can, if it is affordable, purchase life insurance with benefits equal to the amount to be provided to charity.

If you don't need an income stream and want to give to charity while leaving principal to your heirs, there is a vehicle for you. Probably the most common form of gifts that provide income to a charity but principal to your heirs is the charitable lead trust. This is the exact opposite of the charitable remainder trust. In the previous example, assume you wanted the charity to receive all the income during your life-time and wanted your son to receive $100,000 on your death. You would deposit $100,000 into a trust, the income of which will go to Alma Mater and the $100,000 would go to your son upon your death. You will also receive a tax deduction, but, in this case, the amount will be $64,000.

Charitable lead trusts, like charitable remainder trusts, are cumbersome to administer and should not be considered for small donations.

This article is intended only as a general discussion of possible ways to benefit a charity without giving up needed income or assets. There are some very attractive ways to achieve your charitable goals, but each requires attention to detail in executing the appropriate documents. Should any of these techniques interest you, please contact your tax and financial advisors before implementing a planned giving program. Of course, should you need assistance and have no current advisors, give us a call. That's what we are here for.

Have a terrific first month of October.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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