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. 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.
Determining which is right for you depends on the value of
your donation and your estate-planning objectives. 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.
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.
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.
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
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
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).
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. 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. Such trusts pack an even bigger potential punch in the current
low-interest-rate environment, Coleman said.
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
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.
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