Volunteering. Donor Advised Funds

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1 Test Your Knowledge True or False It is more beneficial to give during your life. Using stock for a charitable gift is always a good idea. Once you transfer your interest in a property to a charity, you can not benefit from it in any way. Private Foundations are only for very wealthy people.

2 Statistics : National Philanthropic Website Charitable Giving 89% of households give. The average annual contribution per contributor is $1,620. Total giving reached an estimated $ billion in 2003 It is estimated that $6 trillion in charitable bequests will be made between

3 More Statistics Volunteering 55% of Americans volunteer million Americans adults volunteer, representing the equivalent of over 9 million full-time employees at a value of $239 billion. Donor Advised Funds There are over 81,000 account holders (second only to charitable remainder trusts). New accounts increasing 8.9% per year. Approximately $14 billion in assets. Average account size is over $91,000.

4 AGENDA Basics of Charitable Giving Charitable Remainder Trusts Charitable Lead Trusts Private Foundations Pooled Income Funds Charitable Gift Annuities

5 Basics of Charitable Giving Tax savings is not primary motive Charitable giving should be tax efficient Inter vivos gifts Double tax benefit Reduces income tax at time of gift Reduces estate tax at death Testamentary bequest Evaluate needs during lifetime Foreign donations Irrevocable transfer Eligible recipients U.S. government, a state, an entity organized for charitable purposes, a war veteran s organization, a domestic fraternal society or a cemetery company See for master list of qualified organizations. Reduction in gift if something is received in return unless they are token items or membership benefits

6 Deducting Contributions Cash Need not be valued No IRS challenge Minimal transfer cost More favorable AGI limitations (50%) Property More complex rules Limitations are determined by: Donee s Identity Nature of Property Use of the Property

7 Determining the Deduction Property (cont d) Generally deductible at FMV No gain recognized on donation Preferable to selling property and contributing proceeds Appraisals or market quote needed If value exceeds $5,000, written appraisal required (unless publicly traded security)

8 Reducing Deduction by Unrecognized Gain Gifts of ordinary income property (i.e., property used in business, works of art created by taxpayer or capital assets held less than a year) Gifts of tangible personal property put to a use unrelated to recipient s tax-exempt purpose (or sold by the charity) Gifts of capital gain property to private foundations (except for gifts of qualified appreciated stock)

9 Other Considerations Donating property that has decreased in value FMV at time of contribution May be more beneficial to sell, take a loss and donate the proceeds Will not matter if loss is not deductible Publicly Traded Securities Limited to 30% of AGI if recipient is public charity or private operating foundation Otherwise limit is 20% Closely Held Corporate Stock Careful valuation requirement including reviewing premiums or discounts If limited market for the stock may have the problem in valuing Donation to private non-operating foundation is lesser of FMV or basis

10 Other Considerations Stock Options Incentive Stock Options (ISO s) can only be owned by employees Nonqualified Stock Options (NQSO s) Would not recognize any income or gain at time of donation Income would be recognized by employee when charity exercises options Deduction is received when stock is exercised Real Estate May use an undivided fractional interest in real estate May have problems if environmental clean up liability

11 Other Consideration Debt Encumbered Property Considered a sale for the relief of the debt Considered a bargain sale and will trigger gain

12 Other Considerations Life Insurance Purchase life insurance and name charity as the beneficiary Transfer the policy to the charity (or can transfer an existing policy) Enable individual to make larger contributions Contribution is equal to premiums paid into the policy reduced by loans. If new policy will equal the initial premiums. Any future premiums paid by donor will also be deductible. Better to give cash to charity to pay premium to get higher AGI limits. Donor can not retain any incidents of ownership or contribution is not allowed

13 Other Considerations Services No deduction for time but allowable for out of pocket costs Miscellaneous Phase out of itemized deductions Anticipatory assignment of income Timing of deduction Check Credit Card Pledges

14 Charitable Foundation Structure Charitable Remainder Trust Donor Transfers Property Into Trust Gets Charitable Deduction Charitable Remainder Trust Sells Property Pays No Tax Primary Beneficiary Receives Annuity Pays Tax on It Charity Receives Remainder

15 Charitable Remainder Trusts (CRT) Advantages Receive an immediate charitable deduction for income or estate tax purposes Appreciated assets transferred to the trust can be sold tax-free by the trust. (Gain may ultimately be taxed to the income tax beneficiary). Can sell assets and invest proceeds without paying tax Donor or someone designated by the donor can receive lifetime income from the trust that may be greater than the actual earnings of the trust. Disadvantages Lose control over the assets Give up remainder interest

16 Charitable Remainder Trusts (CRT) Requirements A fixed amount or a fixed percentage of the trust s value must be paid to a non-charitable beneficiary Periodic payment must be at least 5% of the trust property FMV. All beneficiaries must be living when property is transferred Payment must be over a term of years (not to exceed 20) or for a designated beneficiary s life When income interest ends, the remaining trust assets must be paid to one or more qualified charities The value of the remainder interest passing to charity must be at least 10% of the initial FMV of all property placed in the trust. This requirement will dictate age of donor if lifetime beneficiary This requirement will dictate payout percentage of a fixed term Low interest rates make it more difficult to meet requirement

17 Types of CRT S CRAT makes fixed periodic payments until the principal is depleted CRUT makes periodic payments equal to a fixed percentage of the FMV of trust assets redetermined annually. NI-CRUT, NIM-CRUTS and FLIP-CRUTS provide an income-exception. Therefore, the periodic payment can be limited to income (i.e., net income or net income makeup). A FLIP will switch it to a regular payout when a triggering event happens (i.e., sale of raw land)

18 CRAT vs. CRUT Valuation of Asset-CRAT needs to be valued once Amount of Charitable Deduction-CRUT is better when payout exceeds the IRS (section 7520) interest rate Effect of Inflation-CRAT subject to fixed payout, which may limit buying power. CRUT beneficiary is subject to investment risk Flexibility- Additional gifts can be added to a CRUT not a CRAT. In addition, payout method can be income exception method.

19 CRT Wealth Replacement Trust Use tax savings from CRT donation deduction Set up a Irrevocable Life Insurance Trust Transfers the tax savings to the ILIT to purchase insurance to replace property gifted away Retirement Plan Assets Retirement plan distributions are income in respect of the decedent (IRD) Income tax can be deferred or avoided by naming a CRT as the beneficiary When the individual dies, the CRT receives the plan distributions No tax is paid until distributed to noncharitable beneficiary.

20 Charitable Lead Trusts (CLT) An irrevocable trust that Provides income interest to a charitable beneficiary for a period of time Property reverts to the donor after the period is over Useful when the Donor is sufficiently wealth to give up the income stream from the property Trust is not tax-exempt Mirror image of a CRT No minimum payout or trust terms

21 Types of CLT s Qualified CLT Lead interest paid to charity must be an annuity or a unitrust interest (CLAT s or CLUT s) For non-grantor CLT, besides the donor not being the remainder beneficiary, he also cannot retain sufficient powers to cause him to be treated as owner of the income interest. The income from the assets is taxed to the trust which in turn deducts the contributions. For a grantor CLT, the income is taxed to the donor and receives a charitable contribution for the present value of the future payments to the charity. Subject to 30% AGI limitation and provides income tax deferral.

22 Types of CLTs Non-qualifying non-grantor CLT Lead trust with an income interest that is not structured as an annuity or unitrust amount but all income is paid to charity Grantor is not entitled to charitable donation Trust will pay tax on the income and get the 50% donation deduction Avoids forcing to sell any portion of the property to satisfy payout requirement The tax on the income is being reduced by the donation deduction and grantor indirectly get the benefit of the deduction

23 Using CLT s to accomplish goals Allows donation without losing the assets Transfer property to family members at reduced estate and gift tax cost Avoids deduction limits Allows deferral of income tax (Grantortype CLT) in a year when donor is in a substantially high income tax bracket

24 Estate Planning with Non-Grantor CLT Use of a testamentary trust will allow step up to FMV Estate gets a deduction for the reduced value of future payment to charity

25 Private Foundations A charitable organization supported by a single source (i.e., a family or company) Most are non-operating foundations Contributions to private foundations are deductible with limits Foundation can hold a bulk of the contribution. It is required to distribute only 5% of its asset each year Tax rate on foundation income is low Deduction of appreciated stock is available up to FMV

26 How a Private Foundation Works Donor deducts contributions to the foundation when made Foundation distribute 5% of its net asset value, determine annually Donor can be a foundation officer who controls the investment and charitable distributions of those assets Pay income tax at 2% on net investment income

27 Who should use a Private Foundation? Donor should have high wealth Good if there is a high income year Has a commitment to make charitable donations for an extended period of time If foundation is used to receive a bequest from the donor, he can name the foundation officer and have him make sure donor s goals are meet. Avoid money being used by a charity whose focus changes Foundation can be used to grant scholarships or provide research grants for an activity not well supported by public charities

28 Private Foundations Advantages Control Legacy Family Ties Narrowly Defined Causes Long-term Charitable Giving Goals Current Tax Deduction Disadvantages Expense Drafting Organizational Documents Filing all Federal and State Forms Application for Exemption Maintaining Accounting Records Contributions versus Operating Costs Income Tax Limits Penalty Tax Subject to Public Inspection

29 Alternatives to the Private Foundation Donor-Advised Funds (also known as charitable gift funds) Public charities Contributions are tax deductible Only can make recommendations for use of funds Allows time for donor to decide on recipient Costs are generally little Supporting Organizations Public charity Allows 50% deduction Operated exclusively for another public charity Avoids 5% payout

30 Pooled Income Funds Similar to a CRT Trust established and operated by a public charity Donor contributes property to the trust in exchange for a lifetime interest and a current income deduction Property contributed by each donor must be commingled The fund cannot receive or invest in tax-exempt securities No donor can be a trustee Donor or other named beneficiary must retain a life income interest Each income beneficiary must be entitled to receive a pro rata share of the annual income based on the rate of return earned by the fund

31 Charitable Gift Annuities A contract between an individual and a tax-exempt organization, often an educational institution, whereby a gift to charity is made in exchange for a guaranteed income stream for the life of the individual or for the joint lives of the income and a named beneficiary Annuity rates are not variable, as in the case of a pooled income trust. The rates are typically quite conservative to ensure that the charity receives a significant benefit. The rates are available at Deduction for charity is available in the year of the property is donated to charity Similar to a CRAT, except obligation to make annuity is the charity s.

32 Test Your Knowledge True or False There is more benefit to charitable giving during your lifetime. Using stock for a charitable gift is always a good idea. Once you transfer your interest in a property to a charity, you can not benefit from it in any way. Private Foundations are only for very wealthy people.

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