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What's Up Magazine

Financial Planning for Charitable Giving

May 17, 2011 04:16PM ● By Anonymous

Americans are characteristically inclined toward being generous—giving up precious time, sharing practical knowledge, and donating money to assist those less fortunate in our society. While our generosity is personally rewarding, the charitable contributions we make entitle us to benefits provided for in the tax code—one being the tax-saving advantages associated with our financial support of the causes we care deeply about.

With the recent changes in federal tax laws and glimmers of hope in economic forecasts, it’s a good time to take stock of your personal finances and make some decisions that have been on hold. Consulting with a financial advisor or estate-planning specialist is a wise first step. You should also discuss how their fees are structured for the expertise you will require.

Estate-planning requires a strategy for maximizing and preserving assets, minimizing tax obligations, maintaining overall financial health, and reaching long-term goals. Part of the process involves a well-developed plan for charitable giving whereby your gifts allow you certain tax benefits—if you itemize deductions on your federal tax return and the donations are made to IRS-approved, “qualified charitable organizations” that exist and operate exclusively to support public purposes, such as taxexempt, 501(c)(3) nonprofits. These generally include cultural, educational, health, human services, religious, scientific, fraternal, veterans’ groups, and, with restrictions, state and local governments. IRS Publication No. 78 contains an up-to-date list of qualifying organizations, while No. 526 explains “qualified charitable organizations” in detail (a revised version was released earlier this year).

Before giving to any charity, check its financial statements to ensure donations are responsibly managed and spent primarily on its programs and stated mission—not on salaries and fundraising. Charity ratings, statistics on charitable giving, and a host of other useful information is available on various Internet websites.

There are many options for supporting “qualified” charities and benefiting from tax savings; advantages and tax implications depend upon the type of gift, how it’s gifted, and other considerations. Each type of donation has annual limits on the amount you can deduct. In planning your gifting strategy, you’ll need to consider

  1. Where you want your assets to go
  2. Who your beneficiaries will be
  3. How your assets will be titled, particularly when it comes to ownership of trusts
  4. Asset management
  5. Whether gifts will be outright, term-limited, or deferred
  6. Whether gifts provide income for you, as well as benefit your heirs and charity
  7. Tax implications, and make decisions about many other important factors


In our region, the Community Foundation of Anne Arundel County and Mid-Shore Community Foundation in Easton are public charities that manage charitable gifts to 501(c)(3) nonprofit organizations. Donors are guided through the maze of gifting options, and vehicles are tailored to their personal philanthropic goals. Both make gift-giving easy and offer you the alternative to either: 1) support charities through existing community foundation funds, or 2) establish a private family foundation by starting your own fund for philanthropic giving that operates as a tax-exempt, 501(c)(3) nonprofit without subjecting you to the associated tax burdens and administrative headaches.

Whatever your long-term charitable or financial goals may be, a financial professional can guide you through the maze of options
and suggest the charitable-giving “vehicles” most suited to your particular needs and desired outcomes. Below are some options to
consider when structuring a plan to preserve your wealth, create a lasting legacy, and provide for your heirs—so that they, too, can
show generosity through meaningful contributions of their own.

OUTRIGHT GIFT—The most common gifting option, providing immediate support to charity and maximum possible tax deduction for you. Donations are usually made in cash and written checks (but can be securities or other assets).

CHARITABLE BEQUEST—A (revocable) planned gift whereby charity is made a beneficiary in your will or a designated beneficiary of your life insurance policy, qualified retirement plan, or other asset. It supports charity after your death and may reduce estate taxes.

IRAS AND QUALIFIED RETIREMENT PLAN ASSETS (401(K), 403(B), ETC.)—Gifting these can reduce potentially high taxes if the donor doesn’t expect to use all the assets while still living or has other ample assets (securities, etc.) by 1) naming charity the beneficiary of some/all can save taxes and preserve more non-retirement plan assets, or 2) designating that the plan’s remaining termination-date assets fund a gift plan that pays family/loved ones for life, and charity gets the gift plan’s remaining termination-date assets. Benefits include federal and state tax savings, and preservation of non-retirement plan assets.

The Charitable IRA Rollover incentive, reinstated through 2011, allows donors age 70 and a half and over to gift up to $100,000 of IRA assets to public charities, but must pass from the IRA custodian directly to the charity. Distributions qualify as the donor’s minimum annual withdrawal requirement but are not tax deductible.

LIFE INSURANCE POLICIES—If payments are up to date, the cash value is significant, and there are no outstanding debts against it, a policy can be gifted to charity, which may 1) cash it in for immediate use or wait for the termination-date cash value, while the donor benefits from tax savings and no change in cash flow; or 2) become the policy’s beneficiary and upon its termination get some/all of the death-benefit proceeds, while the donor benefits from tax savings, no change in cash flow, and the option to take
back the gift, if necessary.

PUBLICLY TRADED SECURITIES (SHARES OF STOCK, MUTUAL FUNDS, ETC.)—May be an option if the securities were purchased at least one year ago, have increased in value significantly, or generate little or no income. Shares are transferred to a charity and are typically either gifted outright or made a gift whereby you receive lifetime payments. The benefit is reduced income and capital-gains taxes.

POOLED-INCOME FUND—Provides donor income for life and saves on taxes. An irrevocable gift of cash or securities goes into the fund, the donor gets annual payments of their share of the net income for life, and the share then goes to charity.

Charity makes fixed, lifetime payments to donors in exchange for irrevocable gifts of cash or securities.A way of maintaining or increasing current income, earning tax-free income, receiving payments for life, or saving on income and capital gains taxes. Principal remaining when the gift annuity ends goes to charity.

CHARITABLE FLIP UNITRUST—A vehicle for making a large gift now (at least $100,000) that will supplement your future retirement income and reducing income or capitalgains taxes if you’re thinking of gifting $100,000 or more. Cash or securities are transferred to your flip unitrust, which makes payment to you or your designee during its term. You’ll first be paid the lesser of a percentage of its value or net income at first, and down the road you’ll receive a percentage of its value annually, no matter how much net income is earned. Assets that remain at the flip trust’s termination go to charity. Flip trusts typically provide lifetime payments and tax savings.

CHARITABLE LEAD ANNUITY TRUST (IRREVOCABLE)—designed to shift wealth to heirs or named beneficiaries in a tax-efficient manner, especially in a low-interest-rate environment.

CHARITABLE LEAD UNITRUST (IRREVOCABLE)—allows the transfer of assets to heirs or named beneficiaries at reduced tax costs, and charity receives payments for a fixed term.

CHARITABLE REMAINDER ANNUITY TRUST (IRREVOCABLE)—a custom-designed trust that gives you a fixed income for a fixed term or life and an income-tax deduction, and provides a future gift to charity.

CHARITABLE REMAINDER UNITRUST (IRREVOCABLE)—a custom-designed trust that gives you a variable income for a fixed term or life and an income-tax deduction, and provides a future gift to charity.

There are many other vehicles for leaving a lasting legacy through charitable giving—each with distinct advantages and structured for reaching specific goals, depending on one’s needs and desired outcomes—such as donor-advised funds, endowments, and private foundations, to name a few.

Learning the Lingo of Estate Planning and Charitable Giving

Administration: The handling of a decedent’s estate (distributing/collecting assets, payment of debts, etc.).
Administration Expenses: Costs incurred in adminstration of a decedent’s estate (commissions, attorney’s fees, funeral expenses, etc.).
Adjusted Taxable Gifts: Total sum of a decedent’s post-1976 lifetime gifts that exceeds the allowable charitable deductions.
Annual Exclusion:
A donor’s right to gift, tax free, up to the maximum sum allowable annually to each of any number of recipients.
Annuity: A specified payment made at regular intervals; if a trust is involved and income is insufficient, principal may be the source of payment.
Beneficiary: One named in a will to receive a devise, legacy or use of estate assets.
Bequest: A direction in a will to pay/distribute personal property (aka, legacy).
Corpus: The principal fund/capital on which income is earned (aka, principal).
Decedent: A deceased person.
Estate: A decedent’s assets and liabilities.
Executor: Person/trust company appointed to execute the terms of a will (aka, personal representative).
Federal Estate Tax: A tax on the net value of property subject to tax (taxable estate plus the sum of adjusted table gifts) at decedent’s death.
Federal Gift Tax: A tax paid by the donor of inter vivos gifts (gifts made while living).
Fiduciary: A legally obligated person/entity entrusted with holding another’s assets.
Insurance Trust: A trust consisting of life insurance policies or proceeds.
Inter Vivos (Living Trust): A trust set up and in effect while its creator is living.
Intestate: Death without a valid will.
Irrevocable Trust: A trust that may not be terminated by the person who creates it.
Legacy: A disposition in a will of personal property.
Letters of Administration: Documents issued as proof of authority of person/trust company to act as administrator.
Letters Testamentary: Documents issued as proof of authority of person/trust company to act as executor/personal representative.
Life Income Agreement: A gift of a principal sum or securities with a stipulated life income paid to the donor through a gift annuity program or pooled income fund of the issuing institution.
Life Income Trust: A plan whereby gift property is placed in trust for the lifetime benefit of an income beneficiary with remainder to another beneficiary.
Personal Representative: An estate’s executor or administrator.
Power of Appointment: The right of a trust income beneficiary to designate the person to receive the trust principal upon that trust income beneficiary’s death.
Remainder: That which remains in a trust after life interests have ended.
Remainderman: The one entitled to receive the principal upon termination of a trust. (A remainder is vested when payable to a designated beneficiary/class of beneficiaries, whether living or not when the trust terminates, and is contingent when dependent on some future occurrence/event taking place.)
Revocable Trust: A trust that may be terminated by the person who creates it.
Spendthrift Trust: A trust protecting a beneficiary from creditors or lack of foresight.
Taxable Estate: The gross estate less allowable deductions.
Tentative Tax (Estate): The federal estate tax tentatively due on the sum of a decedent’s “taxable estate” and “adjusted taxable gifts” (calculated under the estate tax rate table) before gift tax credit, credit for estate tax on prior transfers, and credit for foreign death taxes.
Tentative Tax (Gift): The federal gift tax tentatively due on “lifetime” gifts made by a donor in any calendar year, as calculated under the gift tax rate table, and before allowance of available unified credit.
Testamentary Trust: A trust created by will.
Testate: Dying with a valid will.
Testator: The person who makes a will.
Trust: An arrangement whereby one’s property is held by a person/trust company.
Trustee: The person/company holding one’s trust property.
Will: A vehicle for disposing of a decedent’s property.