Have You Considered Charitable Giving?

Many people, once they’ve reached a point in their lives where their basic financial needs are met, start thinking about giving something back to society. Not only does it feel good to give money to help those that are less fortunate than us, but a gift to charity may also prove to be a smart financial move. When structured properly, some charitable gifting methods offer you excellent tax advantages. Here’s a brief look at some popular options.

Charitable remainder trusts (CRTs). Often, people are hesitant to sell appreciated assets and reinvest the proceeds because of the capital gains taxes that could result from the sale. Well, a CRT might just provide a solution.

CRTs are simply tax-exempt trusts. In transferring highly appreciated assets into a CRT, you get: 1) a tax deduction for the present value of your future charitable gift, 2) income payments from the CRT for up to 20 years, and 3) 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.

How do they work? While you’re alive, once you’ve transferred the assets to the trust, you will receive an annual income from those assets for up to 20 years. After you die, some or all of the assets in the CRT will go to the charity (or charities) of your choice.

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 charitable donation could markedly reduce your gift or estate tax liability.

Charitable gift annuities. Universities commonly suggest these investment vehicles to alumni and donors and 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.

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. Since only interest and dividends are paid out of a pooled income fund, it is possible to shield the whole gain from a highly appreciated stock or piece of property 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.

Donor advised funds (DAF). 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. 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.

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 life insurance policies that they may no longer need but 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.

Life estate gifts. This interesting option allows you to gift real estate to a charity, university, or other non-profit and live there the rest of your life. Upon your death, the charity will receive the property. 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.

Give carefully. If you are thinking about making a charitable gift, remember that the amount and availability of any tax deductions 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.

Money and the Family Dynamic

Money is an incredibly sensitive topic. For most people, their “success” or “failure” in life is gauged by how much they make. Now many people, myself included, feel that there’s more to success than just money, however, we can’t escape the fact that many others don’t feel the same.

Money, in a family dynamic, can cause more strife than any other single topic. As I’ve said many times, money does not cause family dysfunction, it merely amplifies any underlying dysfunction that was always lurking below the surface. Add to this the fact that, in the next 20 years, we’re going to experience the largest transfer of wealth ever and the implications are huge.

The easiest way to avoid future conflicts over money is to do proper planning before it ever becomes an issue. When starting the estate planning process, it’s important that all interested parties be aware of what’s going on so that there are no nasty surprises when the transfer of assets actually happens. By doing proper planning ahead of time any issues can be addressed and hopefully, minimized with much less pain. I can’t tell you the number of times I’ve heard potential heirs complain that their parent/grandparents are frittering away “their inheritance.”

If you are a business owner with family members involved, if you’ve accumulated enough wealth to have a family charitable foundation, or if you simply want to give it all away when you die, it’s critically important that you let your heirs know what you intend to do with your estate when you pass away. There’s nothing worse than having a child that thinks they’re going to inherit a fortune, only to find out that you intend to give it all away to your favorite charities. Many baby boomers are counting on their inheritance to finance their own retirement so imagine their surprise and anger when they find out their own retirement plans have been derailed. At a minimum, not involving your heirs in this discussion could lead to incredible animosity, years of therapy and, most likely, legal wrangling in an attempt to undo your wishes. That’s why, long before it becomes an issue, you need to ask yourself the following questions:

  • While I’m alive and in my twilight years, who’s responsibility is it to take care of me when I can no longer take care of myself?
  • When I do die, what do I want done with my estate?
  • Are my children capable of carrying on the visions and goals of my business?
  • Will my heirs use the money in our charitable foundation the way I intended, or will they change its mission to something completely different?
  • If you plan to give it to your children or grandchildren, and they inherit a large sum of money, will they be able to handle it responsibly or will they “blow it” on, as the saying goes, wine women and song?

One of the trends we’re seeing is inheritance based on reaching certain personal milestones. For example, instead of giving your beneficiary a lump sum inheritance when they turn 21, the trust will dictate that a certain amount will be distributed upon reaching certain milestones i.e. graduation from college, marriage, starting a new business, etc.

The wealth transfer process, by its nature involves many parties including family, charities, attorneys, accountants, wealth managers and a host of others. By having open, honest discussions with your family and advisors regarding the transfer of your own wealth, you can have your estate go where you want it and in the amounts you want and, hopefully, all those involved will be on board so that the process is as painless as possible.