CHARITABLE GIVING STRATEGIES
Aryeh Guttenberg, Esquire
410-484-7711
UMMS Foundation
February 15, 2005
Charitable Giving- Background, Impetus, Challenges
Personal Story – UMMS/Shaare Zedek Lifetime Giving vs. Testamentary Giving Planned Giving- Gift that is (1) tax-advantaged, (2)
established during donor’s lifetime and (3) arranged with the donor’s active involvement
A Family Philosophy – A Family Legacy Challenge of wealth and a meticulous “mitzvah” –
Maimonides Role of Advisor Role of Charitable Partner
Estate and Gift Tax Landscape – A Moving Target
Federal (EGTRAA) – See Appendix A for Confusing Rate Structure
Maryland Decouples-Ouch!! See “The Guttenberg Press” (Fall 2004)
Politics and the Estate Tax – Repeal – See “Estate Tax Timeline” (Appendix B)
Planning Amid “Uncertainty”
Charitable Gifts-Tax Benefits Retained
Last of the Big Time Tax Savers Income, Gift and Estate Tax Benefits Leveraging Gift and Estate Transfers Income and Estate Tax Deductions/Exclusions
Charitable Giving Strategies/Vehicles
Testamentary Bequests Retirement Plan Assets Life Insurance Gift of Appreciated Property Charitable Remainder Trusts Charitable Gift Annuities Charitable Lead Trusts Private Family Foundations Donor Advised Funds
Testamentary Bequests
Provision in Will or Revocable Trust Specific Bequest, Residuary Bequest (% of estate),
Contingent Bequest Private – need not be made public until death Conditions on bequest; Caution: Beware of rigid conditions,
particularly since it may become effective far into future Revocable No effect on donor’s assets or cash flow during lifetime Reduces estate tax Loss of planned giving tax advantages
Retirement Plan Assets (e.g., IRA, 401(k), 403(b))
Designation of charity as beneficiary Full control during lifetime “I.R.D.- Hot Asset” – tax savings to heirs
(income and estate) at death of “participant” Consider wealth replacement strategy for
family – use of life insurance Selection of assets for maximum estate tax
advantage
Life Insurance- Name Charity as Owner and Beneficiary
Income tax deduction Remove policy from estate Used for (not needed) paid-up policies
Gift of Appreciated Property (e.g., Securities)
Fair market value deduction (up to 30% of AGI, excess 5-year carryforward)
Avoid capital gains tax Creative uses with closely-held stock Example:Donor holds publicly traded stock with FMV of
$100,000, which she purchased for $10,000. Benefits of contribution of stock: (1)Income tax deduction of $100,000 and (2) avoid capital gains tax on gain of $90,000 ($100,000FMV minus $10,000 basis).
Basics of Charitable Remainder Trusts (CRT’s)
CRT’s are irrevocable trusts that provide for and maintain two sets of beneficiaries.
Income Beneficiaries – donor and, if married, a spouse – who receive a set percentage of income for lifetime/term of years from the trust
Remainder Beneficiaries – named charities receive principal of the trust after the income beneficiaries pass away (or term expires)
Basic Objective: Retain income in gift to family for life (or period of time), benefit charity at death)- with significant tax benefits
CRT Benefits
Donor(s) maintains control-- change charitable beneficiaries, selection of trustee, individually managed
Donor(s) draw Income/cash flow- during donor’s lifetime- choices of annuity or unitrust –see later
Legacy to charity upon death (or after term);Consider: Make-up distribution to children upon death, i.e., legacy trust/life insurance
Tax benefits –see later Increase cash flow from unproductive assets
Annuity Trust Unitrust
Fixed stream of income based upon % of initial funding
Stable, predictable income
5% minimum payout
Stream of income based upon % of FMV revalued annually
Donor shares in appreciation—hedge against inflation
5% minimum payout
Tax Benefits to Donor
Avoid capital gains tax on sale of highly appreciated assets
Immediate income tax deduction (preset value of remainder in trust), subject to 10% test
Removal of Asset from Estate at Death (Estate Tax Charitable Deduction)
CRT Illustration- 2 Donors
Donor: age 76; spouse age 72 Amount of Funding - $200,000 in securities,
cost basis = $100,000 Return % for Donor and Spouse – 5% Annuity Payment to Donors - $10,000 for life AFR – 4.6% (2/05)
CRT ILLUSTRATION– Tax Benefits
Charitable Income Tax Deduction - $94,546 (annuity trust), $95,168 (unitrust);Savings: $33,250, based upon 35% federal and state rate
Avoidance of capital gains tax of $20,0000 on sale of securities (based upon 20% federal and state capital gains tax)
Estate tax savings-in surviving spouse’s estate (assuming a 50% rate): $100,000
Comparison of benefits
Unitrust Annuity Trust
Contribution: $200,000 $200,000
Income Rate: 5% 5%
First Year's Income:
$10,000 $10,000
Future Income: Variable $10,000
Charitable Deduction:
$95,168 $94,546
See Appendix C for Results of Illustration from Brentmark Software
Comparison-Annuity Trust v. Unitrust
CRT Wrap-Up: Benefits Summary
No Diminution of Income to Donors (possible increase with unproductive assets)
Income and Estate Tax Deductions Capital Gains Avoidance Donor Control
Charitable Gift Annuity-Basics
Contract between Donor and Charity that provides a guaranteed lifetime income for Donor and/or beneficiary. Annuity may be funded with a gift of cash or securities
See UMMS Foundation Materials
Charitable Gift Annuity- Benefits
Immediate income tax deduction (look at “AFR” – choose higher of 3 months)
Capital gains tax savings (if funded by securities, capital gains must be paid for by donor over life of annuity, but lower rate than ordinary income)
Lifetime stream of fixed Income for 1 or 2 persons Rate of return may be higher than most investments
Charitable Gift Annuity- Illustration
Donor – 75 years old Donor contributes $30,000 in cash; CD matures Assume 7.1% Annuity Rate, Donor receives annual
payment of $2,120 before taxes Donor receives current year income tax deduction of $
12,890.10 See Appendix D for UMMS Foundation Illustration for
Eileen Guttenberg
Basics of Charitable Lead Trusts (“CLT’s”)
CLT’s are irrevocable trusts that provide for and maintain 2 sets of beneficiaries(essentially a “Reverse CRT”).
Income Beneficiary – Charity Remainder Beneficiary–
family
Basic Tax Objective:Designed to reduce donor’s taxable income and estate tax by first donating a portion of trust’s income to charity, and then, after a specified period of time, transfer remainder interest to family. Provides immediate benefit to charity and larger intergenerational transfer of wealth to descendants.
CLT’s: Practical Uses and Benefits
Estate Tax Savings Predominant: for investors/entrepreneurs who are more concerned about preserving estate for children than about increased current income/cash flow
Appreciating Assets: Typically, trust holds appreciating assets (e.g., real estate) that provides income to charity and eventually passes to children
Reduction in value of asset’s gift and estate tax value: value of trust assets subject to gift and estate taxes is reduced by present value of income stream to charity
Estate Freeze-- value of asset is fixed at time of transfer to trust
CLT Illustration- Comparison with No Gift
Donors plan to otherwise make full use of lifetime gift tax exemption ($2,000,000 for couple) and annual exclusion gifts ($22,000 per person)
Proposed use of CLT to expand this gift giving further – in a leveraged manner
Amount of Funding: $500,000 (appreciated asset preferable) Term for Charity: 20 years Payout for Charity:6% (choice annuity or unitrust) AFR:4.2% Growth Rate: 8% (6% income, 2% net appreciation on total
return)
CLT Illustration- Benefits to Charity
Immediate funding of important projects for 15 years
Payout $30,000 per year. Donor can designate specific purpose
CLT Illustration- Benefits to Donor
Discounted Charitable Gift Tax Deduction of $400,000 Deduction is based on(1) Term of Trust, (2)Rate of Income Payment and (3) Applicable Federal Rate
Principal distributed to family after 20 years with significant growth-free of tax
No tax on appreciation Note: Unlike CRT, no capital gains avoidance on sale; therefore, hold
asset for ultimate distribution to children Bottom Line: Larger gift to charity without depriving family of
inheritance; possibly give more to family than before (no concern re: wealth replacement vehicle)
See Appendix E for graphic summary
Illustration- Zero-out CLAT
AFR: 4.2% (use December) Payout: 7.5% Funding: $500,000 Term: 20 years See Appendix F for results
Result: No taxable gift upon transfer since gift tax value of Hospital’s lead interest = $500,000; gift tax value of children’s interest is $0.
Best CLT Candidates
Donor holds asset likely to appreciate over time
Donor with no cash flow concerns Donor with estate tax exposure Low interest rate environment
Private Family Foundations
Contribute to charitable causes through foundation – immediate tax deduction (up to 30% of AGI)
Minimize estate tax liability Avoid capital gains on sale of appreciated publicly-held stock Continuing employment, involvement and activity for family
members Identifies and preserves family’s name, charitable intent and goals Required payout of 5% of assets annually Tax on net investment income (1%/2%) Annual filing (990’s) Self-Dealing Rules Contrast with Donor Advised Funds