Giving Guidelines

by Christy K. Thompson, Esq.

Americans are remarkably generous. Each year, individuals, families and corporations donate millions of dollars to charities and foundations. In 1999, Giving USA reported that the level of charitable giving has grown faster than personal income levels, and that more than two-thirds of American households make charitable gifts that total nearly $122 billion each year.

Contributing to a charitable organization can be a rewarding experience – both for the donor and the recipient. In addition to the satisfaction that comes from making the gift, there are very real benefits that come in the form of tax deductions and estate planning tools for the donor. Best of all, anyone can initiate a charitable giving program – provided they consult an investment planner, tax advisor or other expert who can help them identify the giving plan that matches their needs and goals as well as those of the organizations they plan to benefit.

The Who and the When
The first step for every donor is to determine goals and preferences. Which organizations appeal to you or your philanthropic ideals? And just as importantly, do you want to make gifts during your lifetime, or do you want them to be dispersed after you’ve passed away? Next, donors must consider their total assts, current and future income levels and their financial needs for retirement and those of their dependents.

There are significant benefits that come from making charitable gifts during your lifetime. First and foremost, if you donate during your lifetime, you will see the firsthand the results of your gifts and you will have the satisfaction of promoting a cause or organization close your heart. And in addition, the assets you choose to donate can provide a wide variety of tax and other economic benefits that you can use now—both for yourself and for your family.

“My advice to clients is to make their large charitable gifts during their lifetime rather than through their will after death,” explains Stuart Zimmerman, founding principal of Buckingham Asset Management. “In addition to having the pleasure of seeing your gift helping others, the tax benefits you can gain during your lifetime are not offset by estate taxes and other fees that may be assessed against your estate.”

The What
The number of outright charitable gift giving opportunities are vast and can include contributions of cash, securities, real estate holdings, personal property or even life insurance. No matter what type of gift you choose, the biggest economic benefit to you will be an income tax deduction. Gifts of cash or non-appreciated property to most public charities entitles the donor to a deduction of 50 percent of his or her adjusted gross income, less any net operating loss carrybacks – otherwise known as the donor’s “contribution base.” In the case of appreciated long-term capital gain property to a public charity, deductions are limited to 30 percent of the contribution base. Regardless of the amount involved, gift and estate taxes are never applied to outright gifts to charitable organizations.

Doug Weber, a principal with the Monetta Group, points out that as a general rule of thumb, it is always better for a donor to make gifts of appreciated securities rather than selling an asset and making a cash donation. “Many people are unaware that by donating your longterm capital gain property, you can receive a tax deduction and avoid the capital gains taxes that you would owe if you sold your property first and gave the money from the sale to the charity,” Weber explains. The charitable deduction available for a gift of long-term capital gain property is based on the property’s fair market value at the date of the gift. “Ultimately, by avoiding the capital gains taxes, you will have more income available to donate,” he adds.

The How
For donors who wish to create an ongoing giving strategy, a wide variety of options exist. One of the simplest means of charitable giving is through the charitable gift annuity. When a donor gifts his asset to a charity’s gift annuity fund, he or she receives an immediate tax deduction and begins to receive a stream of income in the form of an annuity. Bruce Ward, a principle with The Greater St. Louis Group, often recommends annuities to his clients since many charities make them available to donors and they are a relatively simple way to benefit a charity and to receive instant recognition for the gift.

Donors who wish to gift a large asset that is not currently producing income (such as a large block of stock that pays no dividends) may consider a type of gift known as a charitable remainder trust (CRT). The CRT provides for a charitable contribution in the future and ensures an income stream to the donor or other beneficiary. Upon the death of the last designated beneficiary, the remainder of the asset is given to the charity.Weber advises that creating a CRT is more complex and therefore more expensive than some other gifting options. However, in the case of large, low basis assets, it’s a great way to realize a tax deduction while removing a large asset from the donor’s estate.

“The CRT can be considered a win/win/win gift, because of the multiple benefits it provides,” comments Harry Young, senior financial advisor with RT Jones Capital Equities. “It provides the donor with a charitable tax deduction and a lifetime or ‘term of years’ stream of income. And it gives him or her the satisfaction of assisting their favorite charity, church or even an alma mater.” Young points out that the CRT is not appropriate for everyone, but it is a useful way to ensure income for life and avoid capital gains taxes for appreciated assets while also providing a possible hedge against inflation.

Yet another strategy involves the creation of a charitable lead trust (CLT). As is the case with the CRT, the CLT involves annual accounting and reporting responsibilities and must be created with the assistance of a tax advisor and/or an attorney. It is ideally suited for large gifts. The CLT is created and pays income to the charity for a period of years. At the end of the trust term, the trust terminates and the remainder is distributed to the donor’s family or beneficiaries.Ward explains that one of the chief advantages of the CLT is the fact that the taxable value of the gift is computed at a discounted rate and that it is an effective way to pass assets on to the next generation without incurring further gift or estate taxes.

If the gift you are considering is on a smaller scale, a charitable gift fund may be the perfect answer. Institutions such as Charles Schwaab and Fidelity have created gift funds that are qualified as 501©(3) charitable organizations. Donors can make an irrevocable gift to the gift account, select a name for the account and receive an immediate tax deduction and then select from a list of charitable institutions to benefit from the gift.

“Gift funds are perfect instruments for smaller gifts and for individuals who wish to advise to which charity money should be given while the fund continues to grow,” says Zimmerman. “With a gift fund, once donors make a transfer to the fund, that money is no longer theirs and they are only ‘advisors’ to the fund.”

Community and private foundations also are viable options for charitable donations, but in each case the donor sacrifices some or all control over the use of the funds. “Donors must realize that with a private foundation, their gift can live forever, but in the future the foundation may be controlled by public interest groups, heirs of the original beneficiary or even outsiders who will become directors or trustees,” cautions Ward.

The charitable giving strategy that provides the maximum control for donors is known as a donor-advised charitable fund. Zimmerman explains that when his clients create such a fund, they make an irrevocable, tax-deductible transfer of $10,000 or more in appreciated securities. The donor then can distribute those funds over time to any charitable group and in any amount greater than $250 that they choose.

How Much?
When considering the amount of your gift, it’s important to remember that even a small gift can make a big difference. “Some people feel that unless they can give a large gift, they cannot have an impact,” offers Joe Terril, president of Terril & Co. independent investment advisors. “But small gifts are well worth considering, and many charities exist solely through the accumulation of small individual donations.”

Terrill stresses the importance of consulting an attorney or tax expert before embarking on any major charitable giving campaign. “No matter how you do it, when you donate to charity, you’re giving away your money,” he says. “You want to give that money in the way that best benefits you and those who will receive your gift.”

Finally, charitable giving should involve much more than simply giving money and receiving tax and estate benefits in return. “Donors must have charitable intent,” Ward asserts. Giving to a charity can create a stream of income, it can remove an asset from an estate and it can gain instant recognition for the donor. But the donor must truly believe in the institution or cause he or she is funding and have the intent to create a real benefit. “To really make the process work, a charitable gift must be accompanied by a charitable spirit,” Ward concludes. “Charitable giving truly is an issue of the heart.”

BACK TO NETWORK HOME