Charitable Planning Can Be An Important Part of Your Estate Plan

Charities help those who are not as fortunate, but believe it or not, charities serve another purpose; they help wealthy Americans reduce their tax bill and can be a key part of your estate plan. At Chayet & Danzo, LLC, we offer charitable planning options that include Charitable Trusts and Private Foundations, as well as other charitable planning techniques.

The Charitable Trust

A Charitable Remainder Trust, also known as a CRT, was created with the tax reform act of 1969. It’s an irrevocable trust designed to convert an investor’s highly appreciated assets into a lifetime income stream without generating estate and capital gains taxes. CRT’s have become very popular in recent years because they not only represent a valuable tax-advantaged investment, but also enable you to provide a gift to one or more charities that have special meaning to you. A CRT can potentially:

• Eliminate immediate capital gains taxes on the sale of appreciated assets, such as stocks, bonds, real estate and just about any other asset.
• Reduce estate taxes of up to 45% that your heirs might have to pay upon your death.
• Reduce current income taxes with a sizable income tax deduction.
• Increase your spendable income throughout the rest of your life.
• Create a significant Charitable Gift.
• Avoid probate and maximize the assets your family will receive after your death.

When you establish a CRT, you or another beneficiary, such as your spouse or another family member, receive income from the trust for life or for a term of up to 20 years. When the trust ends, the remaining assets pass to the qualified charity or charities of your choice.

In What Situations Can A Charitable Trust Help?

• Avoid Estate and Capital Gains Taxes, Reduce Income Taxes
• Use a charitable remainder trust (CRT) as a Discretionary Pension Plan
• Increase Retirement Income with a NIMCRUT or Spigot Trust
• Real Estate, Stock Portfolios, Business Assets Repositioned Tax-Free (Lifetime Control of More Capital) through a CRUT
• Coordinate the Control of Your Social Capital with a CRT and Family Foundation or Donor Advised Funds by Giving Away the IRS’ Money
• Families with Donative Intent Can Meet Their Financial Goals Within an Integrated Financial and Estate Plan
• A retiring farmer with last year’s crop to sell and no expenses to offset income
• An executive with much of his or her net worth concentrated in employer’s company stock and a need to diversify
• Owners of family businesses with widely scattered heirs likely to sell after inheriting this asset
• The owner of a closely held business who wants to sell with more favorable tax treatment
• Corporate stockholders using partial redemptions seeking preferred tax positions
• Owners of underperforming and low-basis non-leveraged real estate or personal property
• The owner of a highly appreciated stock portfolio who would like to move from growth to income assets
• The owner of a low income or non-income asset who needs more current income
• Highly compensated individuals looking to set aside additional retirement savings without IRC section 415 limitations
• Parents who want to establish a secure source of lifetime funding for a disabled or financially irresponsible child.
• Employees with Incentive Stock Options (Qualified) seeking tax relief and diversification
• Business owners owning stock after an Initial Public Offerings (IPO) seeking to minimize capital gains tax losses
• Individuals with a history of current giving who would like to create an ongoing family philanthropic program
• Professionals with extra large qualified retirement plans and a desire to improve control of distributions to heirs
• Charitable trusts aren’t for all clients and donors. There must be some charitable intent, as there is often a significant gift to charity involved; all too often the concept is pitched as a tax dodge or as a way to sell financial products. Instead, it should be part of an integrated financial and estate plan designed to solve problems.

Why Start Your Own Private Foundation?

What happens when you give appreciated qualified assets to a private foundation? 1) You can generally deduct a percentage of the fair market value of your gift as a charitable deduction on your income tax return-carrying forward any unused portion for up to five years and 2) Neither you nor the private foundation pay capital gains tax.

Other Foundation Benefits

Some restrictions may apply and a private foundation has the added burden of having to maintain records and meet IRS and state filing requirements. But installing a private foundation may well be worth the bother because it offers several benefits.

Foundations allow you to:

Carry out your own charitable objectives. Perhaps you haven’t found a public charity that can address your specific charitable objectives. By innovating your own foundation, you can set guidelines for it to carry out.

Taking a big tax deduction. Suppose you anticipate having an unusually large amount of income this year that you would like to offset with a large charitable deduction. But you don’t want your favorite charity to receive the entire donation in a single year. The solution is to make the large gift to your favorite foundation and obtain a current income tax deduction. The foundation can invest the funds and spread the contribution to charity over the next three or four years. Your foundation will get 100 cents on the dollar. Your estate will include some assets that can be subjected to both income and estate taxes. These include:

Profit sharing and 401K plans

Pension Plans

Individual Retirement Accounts

Tax-deferred annuities

Deferred Compensation

Deferred Earnings

In some situations, your heirs may net only 18% to 20% of the value of these types of assets after all taxes are paid. But you can take an estate tax charitable deduction if you designate your private foundation as the beneficiary or the recipient of these assets — and the foundation will escape income tax on the assets. As a result your private foundation will have 100 cents on the dollar to use for charitable purposes.

Teaching your children sound financial values. You can provide that your children run your private foundation after your death or after you relinquish control. Because the funds in your foundation cannot be diverted to non-charitable uses, your children will learn the importance of giving and the different purposes charities in the community serve. A private foundation can last in perpetuity as long as it has funds. If you want people to remember your family for its generosity and philanthropy, a private foundation named after you may accomplish that goal.

Social capital for you and your heirs. As you and your family go about overseeing the assets in your private foundation very positive social interactions occur. If you choose to you can request your family volunteer to sit on a “board” for your foundation and meet annually to discuss investments and distributions to selected charities. These periodic get-togethers can serve as enjoyable focal points keeping family members and siblings in closer touch until and long after your passing. Additionally consider the positive social implications for your family as past or potential annual donors to dozens of area charitable organizations seeking their contributions.

Using A Charitable Remainder Trust With A Private Foundation

The Charitable Remainder Trust (CRT) is also a very popular vehicle that is used to help a donor avoid capital gains on the sale of a highly appreciated asset. It will also generate a current value charitable deduction and unlike the private foundation, it will generate income for as long as the donors full life. The proceeds from the CRT are then left to charity. That is where the private foundation comes in. It can be named as the remainder beneficiary of the assets inside the CRT.

A Private Foundation can also work well in a situation where a donor of a Charitable Remainder Trust has established their nonprofit 501© charitable organization or has a desire to set one up in the future. In many cases the donor is or will be active on the board of that charity as well. In this situation the Private Foundation can provide a little more flexibility and options to accomplish more specific goals with the charity it is designed to support.

Let’s look at an example:

George and Martha Johnson own a strip mall that they originally built 20 years ago in the suburbs of a major city. Their cost to build at the time was $3.5 million. They have since depreciated their cost basis down to $1.5 million. The city has now grown dramatically, and the suburbs now look more like a part of the city. The Johnsons are older and looking to do some estate planning and diversify what is now the bulk of their estate as the strip mall is now valued at $20 million.

The Johnsons are also very active with a small local nonprofit in town that helps homeless women with children. It is a shelter that feeds and houses the families and works with the women to get back on their feet by helping them find employment and eventually their own housing. The shelter has had a hard time recently finding the space to house these families. The Johnsons decide to sell their strip mall using a combination of a Charitable Remainder Trust and an outright sale by splitting the interest in the property.

For their income needs they put $10 million into the CRT and sell the property, with the other $10 million retained as their own. The CRT tax deduction is used to help offset some of the taxes on the retained property portion of the sale. After the sale they donate $1 million to the local shelter from the portion of the sale proceeds from the retained portion of the property. They will use the monies to purchase two adjacent properties to the shelter and use the homes on those properties to greatly expand the shelter’s ability to house more families.

The Johnsons also established a $2 million Private Foundation, again with proceeds from the retained portion of the sale. They will use the foundation to donate monies each year to support the ongoing management expenses of the shelter. They also named their Private Foundation as the recipient of the remainder interest of their Charitable Remainder Trust. The Johnsons have stipulated that their children and grandchildren take over the Private Foundation when they pass away and use the monies to continue to support the local shelter.