Stretching Your Charitable Dollars
You cannot respond to all the worthy causes that seek your financial support, but
you may be able to do more than you realize. It’s all a matter of planning. Here
are some techniques being used by thoughtful supporters of schools and colleges,
health and social welfare groups, the fine arts and a broad range of other charitable
Donate appreciated securities
Many investors have handsome capital gains—and, thus, potential exposure to income
tax on those gains when they sell. Solution: Give appreciated securities instead
Example: Say you are in the 35% bracket for federal income tax purposes.
This means that a cash donation of $10,000 to your favorite charity would cost you
$6,500 ($10,000 less the $3,500 in tax you save by deducting your donation from
your taxable income). Now suppose that, instead, you donate stock worth $10,000
that you purchased years ago for $3,000. You’re still entitled to a $10,000 charitable
deduction. What’s more, you avoid the $1,400 capital gain tax you would owe if you
sold the stock. That additional $1,400 saving reduces the net cost of your $10,000
donation to $5,100!
Enhance your income by creating a charitable remainder trust
This type of trust allows you to set aside a substantial gift to charity and reserve
income payments for life. The payments may be based on a specified percentage of
the trust fund’s market value each year. (This arrangement is called a charitable
remainder unitrust.) Or the payments may be structured as a fixed dollar amount
each year (a charitable remainder annuity trust).
Example: Mrs. A wishes to make a substantial gift to her college, but she
also needs more generous income from $200,000 worth of securities, currently yielding
only about 2%. She decides to set up a charitable remainder unitrust. As life beneficiary,
Mrs. A will receive 6% of the trust’s market value each year. At her death the assets
remaining in trust will pass to the college, just as if she had made a charitable
bequest. Thanks to the trust, Mrs. A will receive a substantially better income
flow each year. She’s also entitled to treat part of her $200,000 deferred gift
as an immediate charitable deduction. (The portion deductible in these cases depends
on the donor’s age, the level of the reserved income payments and other factors.)
And Mrs. A will not realize any capital gain if the trustee sells her low-yielding
securities in order to reinvest in higher-yielding investments.
Charitable remainder annuity trusts provide greater certainty than unitrusts: The
donor knows exactly how much the trust will pay each year. Unitrust payments fluctuate
with market conditions. Still, in the long run most of the fluctuations should be
upward, creating a growing income flow that helps the donor keep abreast of the
rising cost of living.
Note: Charitable remainder unitrusts can be funded by installments if desired.
Annuity trusts must be funded all at once; no later additions may be made.
Conserve family wealth with a charitable lead trust
Want to help your favorite charity and pass along part of your estate to your children
or grandchildren in a way that minimizes or eliminates gift tax? Consider a charitable
lead trust. Charitable lead trusts works much like charitable remainder trusts,
but in reverse. A charity receives unitrust or annuity payments for a specified
number of years, then the trust remainder passes to family beneficiaries.
Example: Mr. B, who heads a campaign to build a new children’s wing for the
hospital, plans to make generous annual contributions to the building fund. He also
welcomes the idea of transferring part of his substantial estate to his grandchildren
in a tax-efficient manner. So he places $300,000 in trust to pay a fixed 8% ($24,000)
annually to the hospital building fund. After ten years the annuity payments will
stop, and the trust remainder will be divided among the grandchildren—or held in
continuing trust for their benefit if they’re under a certain age. Result: Through
the trust, Mr. B is essentially making the same donations of $24,000 that he intended
to make directly. Now, however, he’s also putting aside $300,000 for the grandchildren.
And for gift tax purposes, he is charged with a gift of much less than $300,000
His taxable gift is limited to the “discounted present value” of the trust remainder.
The idea behind “planned giving,” as the fund-raisers for charities call it, is
that you should sit down, consider your charitable intentions, and look at the ways
in which these intentions can be linked with steps that create greater financial
security for yourself or members of your family. It’s an idea often worth pursuing.