Advisor Insight

Donations: The gift that keeps on giving for donors

Shelly Schwartz, special to

Philanthropy is a catalyst for positive change, but it can also be a powerful estate-planning tool. 

By leaving money to charities, donors get to align their personal values and interests with their financial goals—ensuring a portion of their wealth is used to support causes they care about even after they are gone. 

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Done right, however, financial gifts to a nonprofit can also create an income stream during retirement, facilitate the transfer of wealth and provide valuable tax benefits for donors and their heirs. 

The recent CNBC Millionaire Survey found 40 percent of those with assets between $1 million and $4.9 million are planning to give between 1 percent and 10 percent of their personal wealth to charitable causes after they die. 

Thirty-one percent of those with assets of $5 million or more plan to leave that amount, according to market research firm Spectrem Group, who provided the research for the study.  

It's worth noting that the percentage of wealthy Americans who are likely to leave between 1 percent and 10 percent of their wealth to charity gets higher as age increases. Thirty-one percent of the youngest age segment (55 and under) plan to do so, while 40 percent of those ages 56 through 69 and 43 percent of those 70 and older will follow suit, the survey found. 

"There are a number of different vehicles available that can help you take full advantage of current year tax deductions," said Diane Pearson, a certified financial planner with Legend Financial Advisors.

Determining which is right for you depends on the value of your donation and your estate-planning objectives, she said. 

For donors with fewer assets, the simplest gifting strategy is to leave a portion of your assets to a specified charity in your will. 

The donor gets the tax deduction, and the charity gets the contribution once their estate is settled after probate. 

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"There's little cost involved, because there's no complex legal work or ongoing maintenance of the account involved," said Pearson. 

You'll get double the bang for your buck, however, by naming a charity, or charities, as the beneficiary to your individual retirement account. 

Doing so enables you to exclude those assets from your taxable estate, which reduces the amount your family may owe in estate taxes. The charity also receives the full market value of your gift. 

"We like to look at retirement assets first," Pearson said. "You get the write-off, and the charity gets the full value, so it's a win-win." 

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For higher-net-worth donors, however, or those planning a significant contribution, a trust is more common. 

The most popular is the charitable remainder trust, or CRT, said C. Randolph Coleman, an estate-planning attorney with The Coleman Law Firm in Jacksonville, Florida. 

CRTs enable donors to place cash or highly appreciated assets into the trust and claim a charitable income-tax deduction that reduces their income in the year they contribute the assets to the trust. 

If the deduction exceeds their income, they may carry forward any remaining balance to offset future income. 

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In the case of appreciated property, such as low-basis stocks or real estate, the donor can immediately sell that asset after placing it in trust, and therefore avoid any income or capital gains taxes, while reinvesting the proceeds into income-generating securities. 

He or she may then receive an annual income benefit based on Internal Revenue Service code formulas.  

CRTs come in two flavors: the charitable remainder unitrust, which pays the beneficiary a fixed percentage (say, 5 percent a year) of the trust, which is revalued annually, and a remainder annuity trust, which pays a fixed amount for life based on the donated assets. 

Once the term is up, any remaining assets in the trust go to the charity, or charities, the donor chose. 

CRTs are ideal for former business executives who owned a large number of company shares that have grown significantly in value, said Pearson, noting the low-cost basis stock would otherwise trigger a nasty capital gain if sold outright. 

It would also be valuable to a retiring business owner in the highest tax bracket with, say, $10 million worth of company equipment that has been fully depreciated, Coleman said. 

"If he sold the equipment outright, a little over $4 million would go to the IRS right off the top, but if we put that asset into a CRT, he could immediately sell the equipment to the same buyer for the same price, and there would be no income tax that would have to be paid," he said. 

Better yet, based on the IRS formula, the donor would be able to collect up to 8 percent interest on that $10 million per year, generating an income of $800,000 annually for as long as he or she—or a spouse, if named as a beneficiary—live. 

Heirs not left out

Plus, the donor gets a more than $1 million charitable contribution deduction to use against current year income, with an option to carry forward any unused deduction into future years. 

But what about his or her heirs? 

The income generated by the CRT could then be used to purchase a   life insurance policy in an irrevocable trust for the same amount ($10 million).

"Now that $10 million in the charitable remainder trust that would have gone to the children will be replaced by the $10 million life insurance policy in the trust, so the charity got their money and the insurance trust pays out when the second spouse dies, so the kids get the full $10 million as well," Coleman said. 

If, five years from now, you are not happy with the board or the way the charity is functioning, you can change the beneficiary, so [the CRT] does give you some control.
Greg Ghodsi
managing director of wealth management group for Raymond James

The biggest drawback of the CRT is that it is irrevocable. Once assets are placed within, you give up legal control. There's no going back, said Greg Ghodsi, managing director of the wealth management group for Raymond James. 

You can, however, change the beneficiary. 

"If, five years from now, you are not happy with the board or the way the charity is functioning, you can change the beneficiary, so [the CRT] does give you some control," Ghodsi said. 

Though it is less common, high-net-worth donors may also consider the charitable lead trust, which is, effectively, the inverse of a CRT, Ghodsi said. 

More potential punch

When assets are placed within the CLT, they generate an income for the chosen charity for a specified number of years, or for the life of the donor, allowing the underlying asset to appreciate in value during that time.

The remainder interest (what's left) then goes back to the non-charitable beneficiary, typically a family member, free of estate taxes, when the term is up. 

"Someone would do this if they had an investment in a business interest or private stock, for example, that they really thought in 20 years could be significantly higher than it is today," Ghodsi said. "You want to pass it on to your family without estate taxes." 

Such trusts pack an even bigger potential punch in the current low-interest-rate environment, Coleman said. 

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If the return on assets held in the CLT are able to outpace the so-called 7520 Rate, which is the interest rate published monthly by the IRS, the excess earnings and growth at the end of the term pass to the donor's heirs tax-free. The lower the rate, the larger the potential gift to the non-charitable beneficiaries. 

Charitable bequests can help to solve some of the world's most pressing problems, while establishing a lasting family legacy. 

To maximize the value of their contribution, however, and minimize taxes for themselves and their heirs, donors should consider all strategies available, including gifting outright, naming a charity as beneficiary to their retirement account and the use of charitable trusts. 

—By Shelly Schwartz, special to