PLANNED GIVING. A White Paper By DYAUS WEALTH MANAGEMENT

Transcription

1 PLANNED GIVING A White Paper By DYAUS WEALTH MANAGEMENT PREPARED BY: DYAUS WEALTH MANAGEMENT LLC 25 WEST 43 RD STREET, NEW YORK, SUITE 1511, NY Securities and Investment Advisory Services offered through Cantella & Co., Inc. Member FINRA/SIPC.

2 PLANNED GIVING OVERVIEW Planned giving has been increasingly visible in the philanthropic world in the last decade. High-profile universities such as Stanford University, and medical research hospitals such as Memorial Sloan Kettering, have led the change with their own planned giving programs. Other non-profit organizations have followed suit for one simple reason: planned giving is a necessary part of their longer-term strategy for sustainable fund-raising. A planned gift allows for a flow of donations to a charity to take place over a period of time, sometimes even over an entire generation of a family. And it does so while also creating income, estate and/or gift tax savings for the donor and his/her heirs. The over-arching result is often the sophisticated taxadvantaged transfer of wealth to successive generations while providing predictable philanthropic support. In short, a win-win situation for both the donor and the charity. This paper is purely for informational/educational purposes. It serves to provide a basic overview of the typical vehicles of a planned giving program. It does not, however, address the tax and legal requirements and logistics of setting up a planned giving program in your organization. Please consult your attorneys and accountants on doing so. WAYS OF GIVING 1. Gift of time and/or talent. This essentially demands a contribution of man hours but offers no financial rewards (in the form of tax savings). Providing expertise to the charity in operational areas may also save it money in terms of not having to pay for the services of a similar professional. Such pro bono contributions can sometimes be highly impactful. 2. Gift of sponsoring events. Donors be they individuals or businesses can contribute by paying for the costs of a specific event (e.g. space rental, refreshments, materials). Such shouldering of costs can often be tax deductible as donations in kind. 3. Gift of Cash. Cash gifts provide the charity with immediate cash flow to manage daily activities. Cash donations are tax deductible up to 50% of your Adjusted Gross Income (the last number on page 1 of IRS Form 1040). 1 P a g e Copyright 2015 Dyaus Wealth Management LLC

3 4. Gifts of Appreciated Securities. Depending on the specifics, gifting appreciated stock that has been held over some time may be better than giving outright cash to the charity in terms of achieving larger tax deductions. The following illustrates how the donor benefits: Gift of $100,000 Cash Tax deduction to Donor (39.6%* x $100,000) = $39,600 Gift of $100,000 of Stock Held Long Term (more than 1 year) Tax deduction to Donor (39.6% x $100,000) = $39,600 + (20%** x $100,000) = $20,000 Total Tax Deduction to Donor = $39,600 Total Tax Deduction to Donor = $59,600 * Top Tax bracket for Tax Year 2013/14 ** Top Capital Gains tax for securities held for more than 1 year Note also that gifting the stock is a better tax-advantaged way of giving, than selling the stock and paying capital gains tax on the appreciation and then giving the balance of cash to the charity. 5. Charitable Trusts There are a number of charitable trusts that can be drawn up. A donor must consult his/her legal, tax and financial advisors before taking any concrete steps. Trusts have tax implications for a donor s estate, and such taxes impact the giving to heirs and beneficiaries as well. For now, we shall address the most common types of charitable trusts - how they work and the key estate planning implications thereof. The most widely known charitable trusts are: Charitable Remainder Trust (CRT) Charitable Lead Trust (CLT) Charitable Remainder Trust. A Charitable Remainder Trust allows a donor to contribute to the charity while providing income for the donor and/or others. It can be tailored to meet the donor s specific financial needs and investment objectives. The trust is established by irrevocably transferring assets to a trustee, who manages and invests the assets. The donor or the designated beneficiary will receive income payments for life or a term of years (note: the term must not exceed 20 years). The income is either a fixed-dollar amount or a fixed percentage of the trust principal as revalued annually. Upon the death of the beneficiary or the conclusion of the term of 2 P a g e Copyright 2015 Dyaus Wealth Management LLC

4 years, the trust's remaining assets will transfer to the charity for its general purposes (donors can, however, specify a particular purpose as set out by the terms of the trust instrument). When a donor establishes a charitable remainder trust, s/he is entitled to an immediate charitable income-tax deduction (the dollar value of which is for a portion of the value of the donated assets). The size of the deduction equals the projected value of the "remainder interest," at the time the trust terminates. The deduction is calculated by an IRS-prescribed formula. The Charitable Remainder Trust is an effective way to achieve two goals for the donor: provide income for herself (and/or loved ones) as beneficiaries, and leave a legacy to the charity after 20 years or upon the demise of the beneficiary, whichever is sooner. Two common types of Charitable Remainder Trusts are the Charitable Remainder Unitrust (CRUT) and the Charitable Remainder Annuity Trust (CRUT). Illustration: From Donor: Securities worth $1,000,000 Income tax deduction = $468,580 (CRUT) or $300,052 (CRAT) Charitable Remainder Trust (upon the death of the Donor, remaining assets go to the Charity) 6% of annual trust value (for unitrust) or initial trust value (for annuity trust) paid to Donor for life. Advantages: Immediate income tax deduction Shelters any gain on appreciated property Can increase donor s cash flow (donor is paid income from the trust assets) Note: Two sub-types of charitable reminder trusts have emerged in recent years: the CRAT Charitable Remainder Annuity Trust and the CRUT Charitable Remainder Unitrust. CRATs are fairly rigid as they pay a fixed amount of income to the charity. In contrast, the CRUT pays a percentage of the trust principal sum, which is largely viewed as providing more flexibility. This illustrates a key consideration -- whether a fixed dollar amount passes to the charity, or a percentage of trust principal is donated. Charitable Lead Trust. This is a scenario where the donor provides for an income-generating asset (e.g. an apartment that can be rented out) to the charity under trust. The asset stays in trust for a number of years, and the income from it passes to the charity without taxation. The donor s asset reverts back to his/her heirs at an appointed time (after 20 years). In short, a Charitable Lead Trust is created by irrevocably transferring cash, stock, income-producing assets, or a combination of these assets to a trustee to be managed and invested for the benefit of the charity for the duration of the trust. 3 P a g e Copyright 2015 Dyaus Wealth Management LLC

5 The income (either a fixed-dollar amount or a fixed percentage of the trust principal as revalued each year) is paid to the charity a fixed number of years. When the trust terminates at the end of this specified period, the remaining trust assets, including any appreciation of the assets, will pass to the designated beneficiary or beneficiaries. There is a deduction on gift taxes in consideration of the income stream to charity during the period of the trust s existence. In other words, the donor receives a charitable gift tax deduction for the present value of the annual income paid to the charity. This kind of trust has the ability to reduce or potentially eliminate gift tax on the future transfer of the assets to the remainder beneficiary (such as the donor s family). Equally significant is that the trust assets will have been irrevocably removed from the donor estate and will therefore not be part of the taxable estate and as such will not be subject to estate taxes. Generally, as the tax consequences to the beneficiaries (or heirs) are assessed when the Charitable Lead Trust is created, this sort of charitable trust is a worthwhile option for donors who have appreciating assets that are likely to increase in value (e.g. stocks, real estate, a business). Illustration: From Donor: Securities worth $1,000,000 Value of the gift to descendants = $366,802 (CLUT) or $197,990 (CLAT) Charitable Lead Trust (remaining assets go to descendants TAX FREE after 20 years) 5% of annual trust value (for unitrust) or initial trust value (for annuity trust) paid to Charity for 20 year term Advantages: Assets pass to descendants at a fraction of the value for gift tax purposes (or tax free if reversion takes place after 20 years) Charity receives income from the trust assets and enjoys a full deduction on the annual income 6. Testamentary Gift (Bequest Under Will) This is generally a straightforward method of giving a donor leaves an asset to a charity in his/her will. Bequests are testamentary creatures and therefore not a charitable gift in the legal and operational sense. Outright bequests from a donor s estate pass to the charity without estate tax; the donor s estate receives an estate tax deduction at death. The transaction is a one-time one, and does not involve the kind of giving that passes over a period of time, unlike planned gifts. But a donor can make the gift while living (inter vivos) and achieve higher tax deductions than when leaving the gift to be distributed as a testamentary gift. The following illustrates how making a gift during one s lifetime may provider higher tax savings than doing so under a will: 4 P a g e Copyright 2015 Dyaus Wealth Management LLC

6 Donor gifts $100,000 under will to charity Income tax deductions = $0 Estate tax deductions= $40,000 (40% of $100K) Donor makes gift of $100,000 to Charity while living (inter vivos) Income tax deductions = $39,600 (39.6% of $100,000) + Gift tax deductions = $40,000 (40% of $100,000) Total Tax Savings = $40,000 Total Tax Deductions = $79, Charitable Gift Annuity This is not a trust. And shouldn t be confused with the Charitable Remainder Annuity Trust (CRAT) described above. Instead, it is a contract between the donor and the charity. When a donor wishes to make a donation of cash or securities, but also retain a fixed-income payment, this is one way to do it. The donor transfers assets to the charity in return for the charity s promise to pay a specific annuity amount to him/her (or to another person) for life. In effect, the donor purchases an annuity for life and makes a gift to the charity. Upon the donor s death, the remaining balance within the annuity passes to the charity. There are two basic kinds of Charitable Gift Annuities: Immediate Gift Annuities Deferred Gift Annuities Immediate Gift Annuities are payments to the annuitants that begin no later than one year after the date of the gift. Cash or securities are transferred to the charity. The charity then pays the donor (or donor and another two annuitants at a maximum) a lifetime annuity (stream of payments). The remainder passes to the charity when the contract ends. The income (not estate) tax deduction is immediately enjoyed by the donor for a portion of the gift. Payments are treated as part ordinary income, part capital gains income and part tax-free income. So both the donor and charity enjoy a tax benefit. The Deferred Gift Annuity differs from the immediate gift annuity in terms of timing. The donor may want to donate now but take the fixed income payments later. It starts payments more than one year after the gift the effect is that compared to the immediate gift annuity, payments when they kick in are higher. This also means that the charitable tax deduction is higher. This type of annuity is recommended for younger donors. Beginning on a specified date in the future, the charity begins to pay the donor fixed annuity payments for life (the donor can also add up to two other annuitants). The principal passes to the charity when the contract ends. 5 P a g e Copyright 2015 Dyaus Wealth Management LLC

7 Deferred gift annuities permit a higher annuity rate and generates a larger charitable deduction. Donors concerned about their retirement can also target annuity payments to begin when you need them upon retiring 1. Naturally, the longer he or she defers payments, the higher the effective rate enjoyed. 8. IRA Charitable Rollover. Another way by which donors can benefit charities with their retirement plans is through an IRA charitable rollover. People who have an IRA (Individual Retirement Account) are required to take distributed income from it at age 70½ years. They have to pay income tax on these mandatory distributions. The IRA Charitable Rollover provision allows individuals who have reached age 70½ to donate up to $100,000 to charitable organizations directly from their IRA, without treating the distribution as taxable income (in other words, any individual who takes withdrawals from her IRA has to pay taxes on it as it is treated by the IRS as income, but the charitable giving of such income creates no such taxation). In order to qualify, contributions must go directly to a public charity and be made from traditional IRAs or Roth IRAs. Donors may receive no goods or services in return for their contributions, and must obtain written documentation of their contribution from each recipient charity. 9. Life Insurance. Donors with paid-up life insurance policies but who no longer need it to protect their loved ones may wish to make the charity their (or a) beneficiary under the policy. Upon their passing, the death benefits of the policy go to the charity. Where the life insurance policy is put under an Irrevocable Life Insurance Trust (not a charitable trust), but the beneficiary is the charity, the donor s estate (taxable base of assets upon death) is also taxed less simply because the life insurance benefit amount no longer forms part of his/her taxable estate. Donors should check with their tax advisor on the exact tax deductions they receive. LAST BUT NOT LEAST It s important that donors and charities talk about what they really want to achieve together. The world of planned giving has a complexity of legal implications and time-sensitive tax advantages, with often permanent impact on a donor s estate. So too does it involve the issue of control over assets, and the question of long-term impact on the lives (and even behaviors) of family. Consequently, it s the intent that counts most. Attorneys and tax experts and financial advisors can guide a donor quite well, but they are circumscribed by the clarity of a donor s thinking and clear communication of intent. A donor s real intent and wishes are therefore the key starting point for the work to be done. 1 Note that a donor can designate the charity as a beneficiary of part or all the remainder of the donor s IRA or retirement plan. Distributions from retirement plans at the death of the survivor (e.g. spouse) of the account-holder holder can be subject to both income and estate taxes. But by naming the charity as the beneficiary of the remainder of your retirement plan, the distribution avoids both income and estate taxes. But note also that it is important to ensure that surviving loved ones are provided for so the designation to the charity should be something the donor must discuss with those who will depend on the annuity income upon his/her passing. 6 P a g e Copyright 2015 Dyaus Wealth Management LLC

8 And while the above discussion gives the broad outlines of how a donor can leave a legacy to a charity of choice, to ensure that intent is carried out, attention must be paid to the detailed tax and legal rules. Donors should take time to consult their advisors, a process that will set them on the path to clarity, and a comfort level with their ultimate decision. This is especially so when they have dependents, loved ones or other charities they are also interested in supporting. But once clarity is achieved, then it s really a matter of getting the experts together to attend to the details of a specific strategy or set of strategies SOURCES (Planned Giving Design Center) (American Institute for Cancer Research) IMPORTANT DISCLOURES & NOTICES Securities and Investment Advisory Services offered through Cantella & Co., Inc. Member FINRA/SIPC. This material is not intended to provide legal, tax or investment advice, or to avoid penalties that may be imposed under U.S. Federal tax laws, nor is it intended as a complete discussion of the tax and legal issues surrounding planned giving. Neither Dyaus Wealth Management LLC nor Cantella & Co., Inc. provides legal or tax advice. For legal or tax advice, please seek the services of a qualified professional. This document was prepared for informational purposes only. It is not an official confirmation of terms. It is based on information generally available to the public from sources believed to be reliable but there is no guarantee that the facts cited in the foregoing material are accurate or complete. The views and opinions expressed in an article or column are the author's own and not necessarily those of Cantella & Co., Inc. Investing involves risk and you may incur a profit or a loss. Please carefully consider investment objectives, risks, charges, and expenses before investing. 7 P a g e Copyright 2015 Dyaus Wealth Management LLC