Volunteering. Donor Advised Funds

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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.

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Statistics : National Philanthropic Website

• Charitable Giving

– 89% of households give.

– The average annual contribution per

contributor is $1,620.

– Total giving reached an estimated $240.72

billion in 2003

– It is estimated that $6 trillion in charitable

bequests will be made between 1998-2052.

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More Statistics

• Volunteering

– 55% of Americans volunteer.

– 83.9 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.

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AGENDA

• Basics of Charitable Giving

• Charitable Remainder Trusts

• Charitable Lead Trusts

• Private Foundations

• Pooled Income Funds

• Charitable Gift Annuities

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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 www.irs.gov for master list of qualified organizations.

• Reduction in gift if something is received in return unless they are token items or membership benefits

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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

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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)

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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)

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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

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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

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Other Consideration

• Debt Encumbered Property

– Considered a sale for the relief of the debt – Considered a bargain sale and will trigger gain

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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

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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

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Charitable Foundation Structure

Charitable Remainder Trust

Donor

Transfers Property Into Trust Gets Charitable Deduction

Primary Beneficiary Receives Annuity

Pays Tax on It

Charity

Receives Remainder Charitable Remainder Trust

Sells Property Pays No Tax

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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

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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

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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)

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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.

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CRT 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.

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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

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Types of

Types of CLT’ CLT ’s 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.

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Types of

Types of CLTs 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

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Using

Using CLT CLT’ ’s s to accomplish goals 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 (Grantor-

type CLT) in a year when donor is in a

substantially high income tax bracket

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Estate Planning with Non

Estate Planning with Non- -Grantor CLT 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

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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

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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

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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

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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

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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

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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

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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 www.acga-web.org

• Deduction for charity is available in the year of the property is donated to charity