Charitable Giving as Part of Your Estate Plan
November 3, 2009 by Jean Keener, CRPC, CFDP · 1 Comment
As the holidays approach, it’s a good time to consider charitable giving as a potential part of your estate plan. Giving provides a sense of personal satisfaction, and it can be beneficial from a financial planning perspective.
If you’re one of the 2% of Americans currently subject to the estate tax, planned charitable giving can be a powerful estate planning tool. Even if estate taxes aren’t an issue for you, charitable giving can still provide a satisfying opportunity to leave a financial legacy. And a well-planned gift can maximize its benefits to you and the charity.
Usually when people leave a gift to a charity as part of their estate, it’s an organization they’ve had significant contact with during their lifetime. However, it’s still a good idea to check out how the charity uses donated funds prior to planning for a substantial estate donation. You can do this through a charity tracking organization like Charity Navigator or by asking questions directly of the charity about their use of funds, the percentage of donations that go directly to programs, and how your gift would be used.
Once you’ve selected the charity or charities, here are some of your options for gifting techniques.
Put the charitable gift in your will
The easiest and most direct way to make a charitable gift is by an outright bequest of cash in your will. Making an outright bequest requires only a short paragraph in your will that names the charitable beneficiary and states the amount of your gift. The outright bequest is especially appropriate when the amount of your gift is relatively small, or when you want the funds to go to the charity without strings attached.
Name the charity as beneficiary of an IRA or retirement plan
If you have funds in an IRA or employer-sponsored retirement plan, you can name your favorite charity as a beneficiary. Naming a charity as beneficiary can provide double tax savings. First, the charitable gift will be deductible for estate tax purposes. Second, the charity will not have to pay any income tax on the funds it receives. This double benefit can save combined taxes that otherwise could eat up a substantial portion of your retirement account.
Use a charitable trust
Another way for you to make charitable gifts is to create a charitable trust. There are many types of charitable trusts, the most common of which include the charitable lead trust and the charitable remainder trust.
A charitable lead trust pays income to your chosen charity for a certain period of years after your death. Once that period is up, the trust principal passes to your family members or other heirs. The trust is known as a charitable lead trust because the charity gets the first, or lead, interest. You would use the charitable lead trust when you’re optimistic about the future performance of the investments you place in the trust.
A charitable remainder trust is the mirror image of the charitable lead trust. Trust income is payable to your family members or other heirs for a period of years after your death or for the lifetime of one or more beneficiaries. Then, the principal goes to your favorite charity. The trust is known as a charitable remainder trust because the charity gets the remainder interest. Depending on which type of trust you use, the dollar value of the lead (income) interest or the remainder interest produces the estate tax charitable deduction. A charitable remainder trust takes advantage of the fact that lifetime charitable giving generally results in tax savings when compared to testamentary charitable giving.
However you choose to give, planning for it in advance and considering its overall impact both to your estate and the charity can provide maximum impact for your generosity.
Estate Planning Opportunities in a Down Market
July 1, 2009 by Jean Keener, CRPC, CFDP · 1 Comment
Note: This article discusses federal tax rules only. Individual states impose their own property transfer taxes using rules that may be different from the federal rules.
Basic Gifting
Each year, you can make gifts of up to $13,000 to anyone you want, to as many people as you want, tax free under the annual gift tax exclusion. You can give away twice that amount if both you and your spouse make the gifts together (this is called gift splitting). And, you can give away an unlimited amount if you pay tuition or medical bills on behalf of another person (just be sure to make these payments directly to the school or health-care provider
Family loans
You can lend money to your children at the current IRS minimum interest rate (known as the AFR, which changes monthly), and then potentially forgive an amount equal to the gift tax exclusion each year. (The gift tax exclusion amount is adjusted for inflation; $13,000 is the figure for 2009.
Grantor retained annuity trust (GRAT)
A GRAT is an irrevocable trust with a specified term (e.g., 10 years) into which you gift assets that you expect will greatly increase in value in the future. You receive annuity payments during the trust term, and at the end, your beneficiaries receive any remaining propertyThe transfer of assets to the GRAT is a taxable gift to the trust beneficiaries. The value of the gift for tax purposes is determined based on the current IRS rate (known as the 7520 rate, which also changes monthlyTax savings are achieved because the annuity payments are calculated to result in a gift tax value of zero. It’s anticipated, however, that the actual interest earned will be higher than the 7520 rate, leaving a substantial value in the GRAT at the end of the term. This remaining value is passed on to your beneficiaries tax free.
Intentionally Defective Grantor Trust (IDGT)
An IDGT is an irrevocable trust that has a purposeful flaw (i.e., you retain some control over the trust) so that you, and not the trust entity, pays the income taxes on trust income (thus, an IDGT is ideal when you want to transfer income-producing assets). Even though you retain some control over the trust, IDGT assets will generally not be included in your taxable estate at your deathYou sell assets to the IDGT in return for an installment note, with interest calculated based on the current AFR. There is no gift tax because it is a “sale” (except for an initial gift that “seeds” the trust). However, because you and the trust entity are considered the same taxpayer, no gain is recognized on the sale, and interest you receive under the note is not considered taxable income>Tax savings are achieved because, hopefully, the value leaving your estate via the sale will exceed the value returned to your estate via the note. You also reduce your estate by paying the income taxes on IDGT income.
Charitable lead trust (CLT)
A CLT is an irrevocable trust with both charitable and noncharitable beneficiaries. It’s called a lead trust because it is the charity that is entitled to the first or lead interest from the trust property. After the specified term, the remaining trust property passes to you or another named noncharitable beneficiaryAt the time assets are placed into the CLT, you receive a current gift tax deduction equal to the present value of the income stream that will be going to the charity. The interest rate used is based on the current 7520 rate. The lower the interest rate, the higher the deduction. As with a GRAT or IDGT, it is hoped that the CLT assets will appreciate beyond the 7520 rate, allowing the excess to pass tax free.
These gifting strategies, and others, can turn this economic downturn into a mixed blessing.