Getting the Most From Your Charitable Contributions

Is it better to give than to receive?  If you plan your charitable giving right, it can be.StoskopfWilliam-small

Contributions to qualified charities are tax deductible, of course.  But planned gifts to charities can provide other financial benefits, such as avoiding capital gains taxes, reducing estate taxes and even producing a steady source of income.

Planned gifts are charitable donations promised today, but provided at a future specified time.  The gift may be stock, real estate or some other asset.  Planned giving gives the donor the opportunity to make a gift today, while receiving income for present needs.

How planned giving works

How planned giving benefits the donor is best shown by example.  Assume a married couple has paid $200,000 over the past 20 years for stock that today is worth $1,000,000.  Although the capital gains tax rate for assets held five years or longer has dropped to 15 percent, the couple would still owe $120,000. The current low rate is scheduled to expire and return to 18 percent on Jan. 1, 2009.  The reduced rate could be extended, but some members of Congress have talked about increasing the rate sooner.

Instead of selling the stock and paying capital gains taxes, the couple could transfer the stock to a charitable remainder trust (CRT), which can sell the stock and redirect the proceeds without paying capital gains taxes. In return, the trust would pay the couple an agreed amount of annual income. Income is usually set at about 7 percent of assets a year, or $70,000 a year in this case.

During the year in which the contribution is made, the couple would receive an income tax charitable deduction based on the payout rate and the length of the payout period. At the death of the couple, the trust would dissolve, and the charity would own the trust’s remaining assets outright.

As the example demonstrates, the couple can benefit by:

  • Avoiding capital gains taxes; although the current rate is low, some members of Congress have talked about increasing the rate.
  • Generating regular income
  • Creating a charitable tax deduction
  • Helping a charity of the donor’s choice

In addition, though, the couple may be able to potentially replace the entire value of donated assets—or at least of portion of them—by investing the tax savings, income from the contribution or both in a life insurance policy. When the person who sets up the trust dies, the stock is donated to a charity, but the death benefit from a life insurance policy can concurrently go to the person’s heirs.

However, if the life insurance is established as being owned by an irrevocable trust, the death benefit will not be subject to estate taxes—unlike the stock, if it were left to heirs.

Of course, the more the stock has appreciated in value, the greater the advantage of donating it to a charity. Conversely, it is unwise to donate property or securities that have dropped in value, because the tax loss will be forfeited.

It also makes sense not to donate a stock that provides a high level of dividend income, because dividend income will be replaced by income from the charity. The dividend tax rate is currently 15 percent, while income from the charity is subject to income tax at a rate that may be as high as 35 percent. Dividends are taxed at the same rate as capital gains. While the dividend tax is scheduled to increase from 15 percent to 18 percent on Jan. 1, 2009, reduced income tax rates are scheduled to expire on Jan. 1, 2011, which would increase the top rate to 39.6 percent.

Using CRTs in the sale of a business

A CRT can also be used in the sale of a business to a third party. The CRT receives stock before the sale is agreed upon, and the owner obtains an income tax charitable deduction for the gift to charity.

When the CRT sells its shares to the third party, it pays no income tax. The CRT then invests the proceeds and regularly distributes income to the grantor. After the grantor’s death, the CRT distributes the assets to charity without paying estate taxes.

Be certain to seek professional help when establishing a CRT.  You will need the advice of an experienced attorney and tax specialist, in addition to your financial adviser.

Also make certain you choose a charity with care. A CRT should be rewarding not only financially, but also because it helps a charity that merits your support.

William D. Stoskopf, ChFC, CFP is a member

of the planned gifts committee with the

Ingham Regional Healthcare Foundation. He

is a senior financial adviser with John

Hancock Financial Network in Lansing.








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