Asset Protection & Charitable Giving Guide

Understanding Charitable Giving

UNDERSTANDING CHARITABLE GIVING

Charitable giving has also been a way of protecting your estate from creditors while, at the same time, providing you with income tax benefits and estate tax benefits and also benefitting some favored charitable entity, such as your church, college, hospital or organization. There are various ways to give your property for charitable purposes. Many of methods INCREASE the benefit you can give to the charity and also potentially INCREASE the size of your estate. Several will be described here:

INSURANCE TRUST

This method of giving, similar to the Irrevocable Life Insurance Trust discussed above, has become quite popular with colleges and churches. It involves purchasing a life insurance policy on your life, naming your charity as the beneficiary and then donating the life insurance policy to your charity. Annually, you will make a gift of the premium payment on the policy which is income tax deductible to you. When you die, your charity receives the insurance policy proceeds for their use and benefit. With so many different insurance products on the market, you can often purchase a $10,000 to $100,000 policy for a relatively small annual investment which will provide a large benefit to your charity. It might be difficult or impossible for you to give your particular charity $50,000 in one lump sum. However, if you were a fifty year old man, you could purchase a $50,000 life insurance policy payable to your charity for usually under $200 a year! Obviously, if you are younger, the annual premium is even lower. There are also insurance policies which are fully paid up after only a few years of payments. Many people already give in excess of $200 a year to some charity. In thirty years, that adds up to $6,000. For that same investment or possibly less, you can give $50,000 or more with life insurance. The proceeds of the insurance, since the policy will be owned by the charity, will not be taxable in your estate at the time of your death.

CHARITABLE REMAINDER INTEREST WITH A RESERVED TERM OR LIFE ESTATE

This is a tremendous way to donate interests in real property to your charity now so that the charity will have it when you don't need it any more. Essentially, it allows you to have the property to use for your life (and your spouse's life, if desired) and then give it to your charity. An example might be your house or some other parcel of real estate. You would donate it to your charity now, but you and your spouse would continue to live there and use it for the rest of your lives. When the last of you dies, your charity would own the house or property and could use it for its purposes, or sell it and use the proceeds for its benefit. You would also receive a present income tax deduction for your gift. This sort of gift only works with interests in real property such as your personal residence, a farm, or certain oil and gas interests and works of art. Although your home is already protected from creditors, the other sorts of property are not. Therefore, you gain asset protection by gifting them to the charity now.

CHARITABLE ANNUITY TRUST/CHARITABLE UNITRUST

These two trusts are virtually identical and achieve the same purpose. That purpose is to give a gift to your charity and then receive income or a fixed amount of the income from the gift for your life. They are collectively called Charitable Remainder Trusts. These trusts involve giving you the income earned on the property contributed to the trust for your life (or the life of you and your spouse, if you desire) while giving the principal and any income earned by the trust beyond what you are to receive to your charity. As an example, let's use a $50,000 certificate of deposit. You could donate the C.D. to form a charitable annuity trust and determine that you would like to receive a 7% annual income from the trust. The trust would then pay you $3,500 a year for your life with any income earned above the $3,500 going to your charity and with the principal of the trust going to the charity after your death. The only difference with the unitrust as opposed to the annuity trust is that with a unitrust, the assets in the trust are regularly revalued to determine what income should be paid to you. As an example, with a charitable unitrust, you could specify a desire to receive a seven percent annual return (which is initially $3,500). If the trust purchases or owns stocks or other investments which might fluctuate in value, the seven percent which you requested to receive might be worth more or less than $3,500 a year. If, in the second year, the trust is valued at $60,000, you would receive $4,200 for that year (7% of $60,000). If, in a later year, the trust is valued at $100,000, you would receive $7,000 for that year (7% of $100,000). With the annuity trust you would only receive $3,500.

Many closely held business owners have found these trusts extremely attractive. A business owner can transfer his or her closely held stock to a charitable remainder trust with the understanding that, at some later time, the corporation will redeem the stock and retire it. The owner is really funding the trust with corporate assets that have been taxed to him already. In addition, he is gaining a dependable lifetime income, immediate income tax savings and the personal satisfaction of providing future support for his or her important charitable organizations. The IRS has made it clear that the redemption of stock by the corporation will not produce adverse tax consequences for the stockholder so long as the charitable remainder trust has no legal obligation to sell the stock to the corporation. The charitable remainder trust is an excellent tool to pass a business from an older generation to a younger generation. Mother and father can make a gift of a small portion of their stock in the family business to their children, then place their remaining stock into a charitable remainder trust. Then, the corporation can redeem the stock held by the charitable trust so that the only remaining stock is the stock owned by the children. As a result, the parents (once the stock is redeemed by the corporation) have successfully passed the value and ownership of their corporation to their children without gift tax consequences, estate taxes or income taxes, and have realized a substantial income tax deduction and income flow.

Here is an actual example of how a charitable remainder unitrust can benefit you and your estate:

Mr. & Mrs. Smith, ages 40 and 39, respectively, own their own corporation with stock valued at $2 million. They were considering selling the stock. However, based on their tax basis, capital gains on the sale would cost them $420,000 in taxes. As a result, they would not receive $2 million, but only $1,580,000 which they could reinvest for their retirement. During their lifetime, they would receive $9,450,815 in income, based on a return of 8%. At their deaths, their estates would pay $4,291,346 in estate taxes. Had they not sold the stock prior to their deaths, their estate would have paid a larger estate tax on the stock (since the capital gains taxes had not been deducted) and, if their children wanted to generate cash, they would have needed to sell the stock on their own. Since the estate taxes are due within nine months after death, they may have had needed to sell the stock for a lesser sum just to generate cash necessary to pay the taxes owing.

Instead of selling the stock, the Smiths transferred the stock to a charitable remainder unitrust. Based on the $2 million value of the stock, they received a charitable deduction of $768,051. The charitable deduction can be applied against up to one-half of their adjusted gross income or carried forward for a total of five years. Since they did not lose the $420,000 in taxes, they had the entire $2 million to reinvest. Through the trust, they contracted for a 5% return. However, the assets were invested at 10% thus causing them to grow annually since half of the income was reinvested. As a result, during their lives they received $14,878,064 instead of the $9,450,915 generated through the sale described above. (Realize that the trust can sell the stock at any time and NOT pay the capital gains taxes which the Smiths as individuals would have had to pay). Since, by the terms of the trust, the entire principal balance of the trust passes to charity at the death of the Smiths, there would be no estate taxes on the trust as well. In order to protect their family's interest, the Smiths purchased a life insurance policy on them equal to $6 million. At the death of the Smiths, the entire $6 million in cash would be paid to their children without estate or income taxes.

As you can see, the only party hurt by this sort of planning is the tax man! The Smiths' estate saved nearly $5 million in estate taxes while leaving cash assets to their children instead of the headache of trying to sell or run the family business. More importantly for charitable purposes, the $2 million initially put into the charitable unitrust grew, by the time of their deaths, to $20,339,248! That meant that in the last year of the trust, the Smiths received 5% of that total or more than $1 million in income! DO NOT IGNORE THE POTENTIAL OF CHARITABLE GIVING!

CHARITABLE LEAD TRUST

This type of trust is just the opposite of the remainder and annuity trusts and the unitrusts. It is a concept by which you are giving your charity all or a portion of the income from an investment for your life (or for someone else's life) and saving the principal for your family after your death or after a certain period of time. In other words, with the same $50,000 C.D. discussed above, your charity would receive the $3,500 a year income and, upon your death, the $50,000 principal balance would go to your heirs. The tax deduction you receive is not as great as with the other forms of trust, but it is a way to help your charity while not depleting the inheritance you wish to leave to your family AND saving income and/or estate taxes along the way. The charitable lead trust made headlines with the death of Jacqueline Kennedy Onassis. Jackie knew that her children did not really need her sizeable estate at the time of her death. They had their own sizeable estates! She also knew that her estate would have been reduced substantially by estate taxes. Therefore, she created several charitable lead trusts to benefit her many charitable interests. Through income payments over a period of years, she was able to reduce her estate taxes tremendously because the present value of the income flow to the charities is deductible from her estate for estate tax purposes. Once the income period for the trusts expires, the remaining principal will then pass to her surviving daughter and grandchildren.

CHARITABLE GIFT ANNUITIES

This is a wonderful way of gifting that is quite simple and benefits both you and your selected charity. It involves making a gift and then receiving a fixed income based on the value of the gift. The IRS has established a table based on age and that table establishes the interest income rate the charitable organization must pay you on your gift. The gift can be in the form of cash, C.D.s, stocks, real estate or personal property. Realize that it is more beneficial to gift appreciated assets to the charitable organization and allow it to sell them because the charity can do so without incurring a capital gains tax. On the other hand, if you sell the asset and then use the proceeds to fund a charitable gift annuity, you will first have to pay capital gains taxes on the gain realized. Consider what you gain from a typical certificate of deposit (CD). The best rates existing now are around 7% and are going down. For anyone age 65 or older who creates a charitable gift annuity, you can obtain a 7% return annually FOR LIFE! You do not have to deposit a large sum. The gift annuity will not "mature" like a CD and you do not have to risk giving up your good interest rate. Rather, you receive the same rate until you (or the person who is the measuring life for the gift annuity) die. Clearly, if you are age 80 or older, you can realize a tremendous increase in income with a guaranteed interest rate of 9.2%. As with any other charitable form of giving, the only drawback is that you cannot leave the annuity principal to your family. However, if you generate a greater income flow for the remainder of your life (say, gifting a 5.5% CD and receiving 9% on a gift annuity), you will increase your income and be able to keep from spending your principal for your maintenance. In addition, you provide a tremendous benefit to a charity of your choice.

SINGLE LIFE GIFT ANNUITY RATES
Effective January 1, 2003

A charitable gift annuity is NOT a trust and it is NOT guaranteed by the FDIC. It is simply a contract with your intended charitable organization. The charitable organization promises to pay you the annuity amount on an annual basis. Therefore, choose your charitable organization carefully. Make sure they have the ability to pay you the income flow for the rest of your life!

Back to Index