Charitable Planning Ideas
When we reflect on the blessings we have received, often we show our gratitude by our desire to contribute to our community and those less fortunate than ourselves. There are many ways that clients can “give back,” including engaging in lifetime or testamentary charitable giving. Charitable giving can not only benefit society, but it can also provide valuable income tax, gift tax, and estate tax savings. According to the Giving USA Foundation and the Indiana Lilly Family School of Philanthropy, Americans donated more than $316 billion to charitable causes in 2012. This was up modestly from previous years.
Of course, you can give outright to charity during life. Following is a review of some charitable planning strategies that might be part of one’s estate plan:
- Including an outright gift to a public charity as part of the estate plan. All or a portion of the estate can be left outright to charity at death. The gift can be included in a will or in a trust. The gift would benefit the charity as the funds would be available to use toward the purpose of the charity. If desired, the donor can designate how he or she wants the charity to use the funds. For instance, the donor can designate that a gift to the university should be used to fund scholarships to students who are majoring in engineering. The estate would benefit because it would be entitled to a charitable estate tax deduction (this assumes the estate is a taxable estate). For instance, if a decedent worth $10 million left $5 million to his children and $5 million to charity, there would be no estate tax at death due to the charitable deduction the estate would be entitled to. This would save $1,900,000 in federal and state estate taxes if the donor died in 2013. Another way to view the transaction is that the decedent made a gift of $5 million to charity at a cost to the estate of $3.1 million (with the federal government financing the balance).
- Including an outright gift to a private foundation as part of the estate. The mechanics of this transaction, as well as the tax savings and financial benefits to the charity and the donor, would be very similar to the benefits of an outright gift to a public charity, except that the donation would be made to a private foundation created by the decedent and perhaps managed by the decedent’s children or other family members. This is an excellent vehicle to assure that the donated funds are used for purposes important to the decedent. Perhaps more importantly, this can serve to instill an interest in philanthropic activities with younger generations. In some circumstances, members of the decedent’s family can be compensated for work serving on the board of directors of the private foundation.
- Lifetime or testamentary Charitable Remainder Trust (CRT). Sometimes referred to as a capital gain deferral trust or capital gain tax avoidance trust, the CRT has two components. After making a contribution to the trust, typically of highly appreciated property, the trustee of the trust sells the property. As a CRT is a charitable trust, the sale of the property is not taxable to the trust or the donor. The trust then pays distributions for the life or lives of designated beneficiaries or for a fixed number of years, not to exceed twenty years. Upon expiration of the term (or the death of the non-charitable beneficiary), the remaining trust assets are paid to the designated charitable remainder beneficiary(ies). The donor gets an income or estate tax charitable deduction (depending if done during life or at death) for a fraction of the value of the property contributed to the CRT.
As an example, Bob and Mary, ages 70 and 69, own an apartment complex that they paid $100,000 for 20 years ago. Today it is worth $1 million. If they sold the property, they would have to pay a capital gain tax. The sale would also subject them to the new 3.8% federal net investment income surtax (part of the Affordable Care Act). Their estate is large enough that it will be subject to estate tax upon the death of the survivor of the two of them. Bob and Mary transfer the apartment to a CRT. The Trustee of the Charitable Remainder Trust sells the property and invests the $1 million sale proceeds. Because the CRT is a charitable trust, there is no capital gain tax paid on the sale of the property and the 3.8% surtax is avoided. Pursuant to the terms of the CRT, Bob and Mary will receive distributions of $4,166.67 every month until the death of the survivor of them (the joint life expectancy table estimate that will be 27 years). Total distributions to Bob and Mary over the projected life of the CRT would be more than $950,000. These distributions to Bob and Mary will be “flavored” by the income of the CRT over its term. Bob and Mary will also get a charitable income tax deduction of $249,565 and the assets of the CRT will not be subject to taxation in their estate, lowering their overall estate tax bill upon the death of the surviving spouse. If the $1 million original investment in the CRT were to average an 8% return over the projected 27 year life of the CRT, the Trustee would distribute over $2 million to the charity at the death of the surviving spouse.
In summary, Bob and Mary avoid the 3.8% surtax upon the sale of the apartment, delay or avoid the capital gain tax, and they get an additional charitable income tax deduction of almost a quarter of a million dollars to offset other income Bob and Mary have. Bob and Mary are projected to receive over $950,000 in distributions from the CRT over their joint lifetimes. If projections are met, the charity will benefit from over $2 million being distributed to it upon the termination of the trust.
- Using a Charitable Lead Trust to eliminate estate taxes. A Charitable Lead Trust (CLT) is essentially the opposite of a Charitable Remainder Trust. The donor transfers an asset or assets into the CLT. The Trustee uses the income and, if needed, the principal of the trust to make annual distributions to one or more designated charities. The charities can use these distributions to fulfill their charitable purposes. In some cases, if the CLT is done during the lifetime of the donor, the charity uses the distributions to make premium payments on life insurance on the donor’s life. At the death of the donor, the charity would receive the life insurance death benefit income and estate tax free (outside of the assets in the CLT). The donor or his beneficiaries receive the remainder of the CLT upon the expiration of the term of the trust. The donor (or his estate, if this is a Testamentary CLT) also receives a charitable deduction for the actuarial value of the series of distributions to the charity during the life of the CLT. In some cases, the charitable planning strategy can be used to eliminate estate taxes at the death of the donor.
For example, Bill creates a Testamentary CLT. Bill has a $10 million dollar estate. The amount over $5,250,000 (the amount that can be passed estate tax free in 2013) would be subject to estate tax. The estate tax would be $1,900,000 if Bill died in 2013. At death, the amount of Bill’s estate that can passed free of estate tax ($5,250,000 in this example, but it could be a greater or lesser amount at Bill’s death, depending on the law at that time) is distributed to Bill’s designated non-charitable beneficiaries. The remainder ($4,750,000 in the example) is distributed to a Testamentary CLT. The Trustee of the CLT uses the income (and possibly some principal) to pay the designated charity $290,510 annually for the next 20 years, for total distributions of $5,810,200 to the charity. Assuming the assets of the CLT averaged a return of 8% for the next 20 years, there would be $8,845,238 remaining in the CLT at the expiration of the CLT to be distributed to the non-charitable remainder beneficiaries. The present value of the $5,810,200 in distributions to the charity would afford the estate a $4,750,000 estate tax charitable deduction – meaning the estate would not be subject to estate tax at Bill’s death. The charity would receive almost $6 million over 20 years, and Bill’s non-charitable beneficiaries would receive more than $14 million estate tax free over 20 years.
Our office focuses on estate planning, including charitable planning strategies. We can advise your clients on simple charitable planning strategies involving outright contributions to the charity or a private foundation or more complex strategies such as Charitable Remainder Trusts and Charitable Lead Trusts. We work with clients of all wealth levels and ages. As a member of the American Academy of Estate Planning Attorneys, our firm is kept up to date with information regarding estate planning and charitable planning strategies. You can get more information about a complimentary review of your clients’ existing estate plans and our planning and administration services by calling our office.