1/6 Ways to Give Making charitable contributions is an art a creative process that adapts to the changing needs and wishes of the donor. Planned giving enables a donor to arrange charitable contributions in ways that maximize personal objectives while minimizing the after-tax cost. Depending on the asset you give and the gift arrangement you select, as a donor you can generally expect to obtain some or all of the following benefits: fulfill your philanthropic goals reduce your income tax through a charitable deduction avoid capital-gain tax on a gift of long-term appreciated property retain a stream of income for life for yourself and/or other beneficiaries increase your spendable income eliminate potential federal estate tax on property passing to charity at death reduce costs and time in estate settlement On the following pages, we will discuss the benefits of various forms of planned charitable gifts. We will be delighted to work with you and your advisors in arranging the planned gift that best suits your objectives. Outright Gifts Cash Cash is the simplest, most direct, and most popular type of charitable gift. You may consider your gift of cash made on the date you hand-deliver or mail it; and because of the charitable tax deduction, your net cost is much less than the gift s actual amount. Example: If you are in the 33% marginal tax bracket, the net cost of a $1,000 cash gift is only $670 after your $330 tax savings. Your cash gift is deductible up to 50% of your adjusted gross income (AGI). You can carry over for an additional five years any amount in excess of your 50% deduction ceiling. Securities and Real Estate A gift of appreciated property, such as securities or real estate, is a popular alternative to cash. Such a gift generates a double tax benefit. In addition to receiving a charitable income-tax deduction for its full fair-market value, you escape any potential tax on the capital-gain element in the property.
Ways to Give 2/6 Note: To qualify for this double tax benefit, you must have held the property for more than one year. Example: Mr. A owns securities valued at $22,000 that he purchased three years ago for $2,000. Because he is in the 33% tax bracket, Mr. A s gift of the securities to us provides him with a $22,000 deduction, saving him $7,260 in income tax (33% of $22,000). In addition, Mr. A avoids capital-gain tax on his $20,000 paper profit, which saves $3,000 more ($20,000 gain x 15%). The net cost of his $22,000 gift is $11,740 ($22,000 less $7,260 less $3,000). The full fair-market value of a gift of long-term, appreciated property is deductible up to 30% of your AGI. You may carry forward up to five additional years any amount over the 30% ceiling. Note: If you are considering a gift of property that has declined in value, you would be better off selling the property to realize a deductible loss and then con tributing the proceeds to us. This ensures recognition and deductibility of your loss. Tangible Personal Property As with a gift of securi ties or real estate, you are entitled to a charitable deduction for a gift of tangible personal property such as a work of art, rare books, or a stamp or coin collection. The allowable deduction for such a gift held long-term depends on the following standard of related use. If the use of the contributed property is related to the exempt purposes of the charity (e.g., a painting to a museum), the donor is entitled to a charitable deduction for the full fair-market value of the property subject to the 30% ceiling and carryover. If the use of the contributed property is unrelated to the exempt purposes of the charity (e.g., a stamp collection to a hospital to sell and use the pro ceeds), the donor is entitled to a deduction only for his or her basis in the property. As with gifts of securities and real estate, long-term tangible property is property held for more than 12 months. However, unlike securities and real estate, the maximum capital-gain tax rate for tangible personal property is 28%. If the donor created the contributed asset (e.g., a painter who gives her own art work), the deduction is limited to his or her actual cost in produc ing the asset. Deferred Gifts Life-Income Plans With a life-income plan, you may make a substantial gift to support our work while still providing for your personal financial needs. There are several types of such plans, all of which combine payments for life for one or more beneficiaries with a gift to charity. These plans are attractive because they offer substantial tax benefits and may increase cash flow for you and/or another beneficiary, depending on the asset you contribute. Charitable Remainder Trusts Introduced by the Tax Reform Act of 1969, the charitable remainder trust has grown substantially in popularity over the years because of the significant financial- and estate-planning flexibility it offers. This trust is similar to other types of trusts, except that a charitable beneficiary receives the remainder interest (i.e., what s left in the trust after it terminates). How it works: You transfer property under a trust agreement that specifies how and when trust income and principal are to be distributed. You may create the trust to become effective during life (inter vivos) or at death (testamentary). An irrevocable charitable remainder trust qualifies for special tax benefits if it is in one of the following permitted forms: Charitable Remainder Unitrust The pri mary feature of a unitrust is that it provides a variable stream of income to the beneficiary(ies). The payout must equal a fixed percentage of at least 5% of the fair-market value of the trust assets as revalued annually. Depending on your estate-planning objectives, you may emphasize the charitable deduction (by choosing a lower rate) or the annual return (by selecting a higher payout rate). The unitrust may be set up for life or a term of years not exceeding 20, and the payout must be made at least annually (can be more frequently) to the beneficiary(ies). Example: A 6% unitrust valued at $100,000 will pay out $6,000 its first year. If the trust assets are valued at $110,000 in its second year, the payout will be $6,600.
Ways to Give 3/6 The variable nature of unitrust payments may provide a hedge against inflation assuming a growth in the value of the assets comparable to the inflation rate. You are allowed a charitable deduction equal to the present value of our remainder interest in the unitrust based on the fair-market value of the asset you transfer, the payout rate you choose, and the ages and number of beneficiaries (or the term of years). If you fund the unitrust with appreciated, long-term, capital-gain securities or real estate, you can increase your tax benefits. These trusts have enabled many donors to support our work while augmenting their current income. Example: Mrs. C, 73, uses stocks she owned for more than 12 months, valued at $100,000 with a cost basis of $30,000 and which pay dividends equivalent to a 2% annual return, to create a 6% unitrust with herself as sole beneficiary for life. Mrs. C both increases her income and realizes a charitable deduction of $52,519. In her 35% income-tax bracket, her gift produces a net tax savings of $18,382. She also avoids* capital-gain tax of $10,500 ($70,000 gain x 15%) on the initial transfer of the stocks to the unitrust, a tax she would have incurred by selling the stock to buy higher-yielding securities. The first year she receives payments totaling $6,000 from the trust (6% x $100,000). After that, she receives 6% of the value of the trust assets as revalued annually. Mrs. C may choose to make additional gifts to the unitrust in the future. After her lifetime, the trust s remainder will establish an endowment fund in memory of her husband. *Note: The avoided capital gain is transferred to and trapped in the unitrust. Depending on the investments of the unitrust, Mrs. C s future income could be a combination of ordinary income, favorably taxed qualified dividend income, and/or capital gain. Net-Income Unitrust This variation of the straight unitrust facilitates the acceptance of illiquid assets (e.g., real estate or closely held stock) by permitting the trustee to distribute the lesser of the stated percentage and the net income of the trust. In the absence of income, the trust makes no distribution for that year, enabling the trustee to dispose of the illiquid asset in an orderly fashion to realize its full fair-market value. The addition of a make-up provision can provide for the make up of any prior years deficiencies (the difference between the stated percentage rate and the net income of the trust) to the extent the trust income exceeds the stated rate. Flip Unitrust This version is tailor-made for you if you either do not need current income or want to transfer illiquid assets to the trust but still wish to receive a distribution of a stated percentage at some time in the future. The flip unitrust starts as a net-income (with or without make up) unitrust but switches to a straight unitrust with payouts based on the then-value of the trust upon the occurrence of a triggering event. The three permissible triggering events are a specific date, a specific event (marriage, divorce, birth, or death), and the sale of illiquid assets. Charitable Remainder Annuity Trust While this trust shares many common features with a charitable remainder unitrust, the principal difference is the manner of calculating the beneficiary s payout. Instead of a variable payout, the annuity trust provides a fixed payout of not less than 5% of the initial fair-market value of the gift in trust. Among the benefits of contributing to an annuity trust are a deduction for the present value of the charitable remainder interest and avoid ance of capital-gain tax on the transfer of appreciated, long-term, capitalgain property.* The fixed-payout feature of the annuity trust makes it particularly suitable for a beneficiary who needs the security of a specified fixed payment. Example: If Mrs. C chooses an annuity trust rather than a unitrust for her endowment, her initial deduction will be $46,106 and her tax savings $16,137. The payments she receives from the trust will be fixed at $6,000 and will never vary, despite fluctuations of interest rates and stock prices. Whichever trust she chooses in consultation with her advisors, a final benefit to Mrs. C is that her estate will pay no tax on the principal of the charitable remainder trust that establishes her memorial fund. Unlike a unitrust, additional contributions to the annuity trust are prohibited by law.
Ways to Give 4/6 The Charitable Lead Trust While annuity trusts and unitrusts are often used by donors when planning deferred charitable gifts, the charitable lead trust may appeal to individuals who wish to make a gift but retain the property in their family. There are two types of charitable lead trusts: the grantor lead trust and the more popular nongrantor lead trust, made famous by Mrs. Jacqueline Kennedy Onassis. A grantor lead trust provides you with a charitable tax deduction for the present value of the payments we are to receive from the trust for a specified period of time. You, however, continue to be taxed on the income earned by the trust each year including the amount distributed to us. (To avoid this negative tax result, donors often fund grantor lead trusts with tax-exempt securities.) At the end of the trust term, the assets are returned to you. If you create a nongrantor lead trust during life, it does not provide you with a charitable income-tax deduction, but neither are you taxed on any of the income the trust earns. At the end of the specified trust term, the assets remaining in a trust are distributed, usually to children or grandchildren. Note: The principal advantage of the nongrantor lead trust is that because of the charitable gift- and estatetax deduction for the present value of the payments we are to receive from the trust it can significantly reduce or even eliminate gift and estate taxes on the value of the assets you used to fund the trust. (The longer the trust term and the greater the amount of the payments to us, the larger your charitable tax deduction.) In addition, any appreciation in the trust s value will avoid transfer (gift and estate) taxes when your beneficiary(ies) eventually receives the assets. The Gift Annuity The charitable gift annuity is among the oldest, simplest, and most popular of the charitable lifeincome plans. In exchange for a transfer of cash, marketable securities or, in some circumstances, real estate, we contractually guarantee to make specified annuity payments to you and/or another beneficiary for life, the payout rate depending on the age and number of beneficiaries. One Life Gift Annuity Payout Rates Two Lives Age Rate Age Rate Ages Rate Ages Rate 65 5.7% 80 7.6% 65,65 5.4% 80,80 6.6% 70 6.1% 85 8.9% 70,70 5.6% 85,85 7.4% 75 6.7% 90 10.5% 75,75 6.0% 90,90 8.7% Please call us for our current rates. This table shows sample rates of return that apply to both men and women, as recom mended by the American Council on Gift Annuities (an association of philanthropic organizations that reviews and sets these rates). You can claim a current charitable deduction for the portion of the transfer that represents the charitable gift element the amount by which the present value of the property transferred to us exceeds the present value of the annuity received. Note: Income from a gift annuity receives favorable tax treatment (similar to a commercial annuity) in that a portion of each income payment is considered a tax-free return of principal over the donor s life expectancy. Example: Mrs. F, 75, transfers $25,000 to us in exchange for an annuity payment of $1,675 a year for life. Of this amount, $1,126 will be treated as a tax-free return of principal for the next twelve years (her life expectancy) and only $549 will be treated as ordinary income. Thereafter, the entire $1,675 will be treated as ordinary income. In addition, Mrs. F realizes a charitable deduction of $11,036 that, in her 28% bracket, generates a net tax savings of $3,090. Payments may begin imme diately or, with a deferredpayment gift annuity, at a set time in the future at retirement, for example. A deferred gift annuity is particularly attractive if you are in the 40- to 60-year age bracket, have a high current income, can benefit from a current tax deduction, and are interested in aug menting potential retirement income on a tax-favored basis. A Gift Under Your Will or Living Trust Each year, thousands of individuals designate a portion of their assets via bequests in their wills or directions in their living trusts to benefit philanthropy. Such gifts have become an important part of the American philanthropic tradition because they enable many individuals to make significant gifts that they could not
Ways to Give 5/6 have made during life. Charitable bequests or living trust directions to support our work can take various forms: A specific bequest or direction instructs that we receive a specific piece of your property. Sample: I give to (OUR LEGAL NAME) all of my shares in XYZ Mutual Fund to be used for the general purposes of said charity. A general bequest directs that we receive a specified dollar amount. Sample: I give to (OUR LEGAL NAME) the sum of $100,000 to be used for the general purposes of said charity. A residual bequest designates all or a portion of whatever remains after all debts, taxes, expenses, and all other bequests have been paid. Sample: I give to (OUR LEGAL NAME) fifty percent (50%) of the rest, residue, and remainder of my estate, to be used for the general purposes of said charity. A contingent bequest takes effect only if your primary intention cannot be met. Sample: If (PRIMARY BENEFICIARY) does not survive me, then I give to (OUR LEGAL NAME) all the rest, residue, and remainder of my estate to be used for the general purposes of said charity. This ensures that property will pass to us rather than to unintended beneficiaries including the government. While all of the above examples provide this institution with unrestric ted support, any of them may be designated as a restricted bequest for a specific purpose. For example, if you wish to memorialize a family member or an honored colleague, you may establish a named fund that will provide support for a program of special interest to you or the honored person. A charitable bequest or living trust direction can also provide payments for life for a selected beneficiary by establishing a testamentary charitable remainder trust (established under your will) that provides payments to the beneficiary for life with the principal then being paid to this institution. If it is an annuity trust or a unitrust, it will allow your estate a charitable estate-tax deduction for a portion of the trust s initial value. The tax deduction will be calculated in a manner similar to that for a trust created during life. Planning Pointers Because of the estate-tax deduction, a bequest in any of these forms can significantly reduce the tax burden of your estate. If, for example, you are subject to an estate-tax rate of 45%, a $100,000 charitable bequest saves you $45,000 in taxes, and you exercise the privilege of directing your lifetime accumulations as you wish. If the only life-income beneficiary of a testamentary trust is your spouse, the entire value of the trust will be exempt from estate tax. In addition to the charitable deduction for our remainder interest, your spouse s income interest will qualify for the marital deduction. The same result also occurs if you create a charitable remainder unitrust or annuity trust during your lifetime. Testamentary Charitable Gifts from Your Qualified Retirement Plan or IRA Naming us as a beneficiary of your qualified retirement plan or IRA is doubtless the most cost-effective way to make a charitable gift. Here s why: Such assets are subject to double taxation at the owner s death. For example, if he or she dies before 2010, there could be a federal estate tax of 45%. And regardless of the size of the estate, the noncharitable beneficiary will have to pay federal income tax on any distributions. Gifts of such assets to this institution avoid both taxes because of our tax-exempt status. Gift of Your Home with Retained Life Estate Your gift of a remainder interest in your personal residence or farm provides you with a charitable deduction for the present value of the remainder interest and permits you to escape the potential capital-gain tax on the built-in appreciation. What may be more important from your point of view is that you may continue to occupy the residence or operate the farm without disrupting your lifestyle. If you decide to move for any reason in the future, several options are available to you: renting out the property and retaining the rent; converting the retained life estate to a stream of income for life (e.g., in exchange for a gift annuity with us); jointly selling and dividing the pro ceeds with us in proportion to your and our respective interests in the property; or making an additional outright gift of the retained interest.
Ways to Give 6/6 Life Insurance and Charitable Giving While most people own some form of life insurance because of its unique ability to meet a variety of needs for financial protection, its role in charitable giving is frequently overlooked. You may use life insurance as the direct funding medium of a gift, permitting you to make a substantial gift for a relatively modest annual outlay. Planning pointer: You may use insurance to replace the value of an asset you give to support our work. Gifts to Fund the Future In addition to personal satisfaction, planned gifts offer major planning opportunities to minimize federal and state taxes, increasing the possibilities for effective distribution of assets. The wide degree of flexi bility permitted in arranging a planned gift while still obtaining favorable tax benefits has contributed significantly to making such gifts popular and potent estate-planning tools. Craig Rinas, CFP Planned Giving Director 1200 Sycamore Ph: 972-825-4662 Waxahachie, TX 75165 crinas@sagu.edu You should consult your attorney about the applicability to your own situation of the legal principles contained herein. Pentera, Inc. 038/0908