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How to Give Away Your Taxes

How to Give Away Your Taxes

Capturing Social Capital is more than enlightened self-interest; it is a means of asserting control over assets you have spent a lifetime accumulating. When exploring estate planning techniques, normally you must include powers of attorney, wills, trusts, business agreements and the use of gifts. Planned gifting programs are best utilized within a complete estate plan, and offer the donor a great opportunity to give away tax liabilities. After all, the joy of giving allows you the choice of transferring assets to children, charity or Congress. Of the planning tools used, charitable giving may be more powerful than you have imagined, but it has been avoided by too many professional advisors.

What will sponsoring a charity do for you?

It will make your life more interesting, more exciting, more flexible, more fun and more meaningful.

Changes in lifestyle, economy and government programs have greatly influenced trends in modern charitable giving. Typically, the institutional priority today is a more donor driven philanthropy instead of the traditional needs driven approach. In order to compete for limited donor support, charities have to move from a gift getting mentality to a problem solving manner of thinking. Organizations can best accomplish this shift in mind-set by developing partnerships with their donors. Charities with a proactive outlook in their development efforts will be able to better respond to the changes in the gifting environment. This flexible approach allows institutions the continued opportunity to provide improved services and support to their clients.

In order to understand their future partners, today’s charities must better understand family dynamics and motivations. Prosperous families recognize that they are in jeopardy and must address those risks to protect both their wealth and the individuals in their family. These risks include a lack of feeling competent, no cohesiveness, too little commitment to something more important than self and guilt about having wealth. Unfortunately, there is a lack of information about property and money management, and nobody is trained to inherit wealth. The solution is to work with charitable groups and family foundations. This mentoring activity allows younger family members to learn how to manage assets, plan and budget before they inherit the bulk of their noncharitable bequests. Besides preserving wealth, the elder generation wants to create a significance that survives them, so gifting programs can create a sense of immortality. Whether or not clients have purely charitable interests, most families have community or social issues that influence their outlook. By establishing a trust or foundation to support these activities, death will not interfere with the transfer of an important value system.

Often gifts are made by charitable bequests, but this may be the worst tool to shift assets, as it creates an obligation in the estate that may come before other necessary distributions. As an alternative, the government recognized two components to a charitable gift in 1969 by dividing the income and remainder interest. Four of these split interest planning tools now have the potential to both give something away and still keep the use of it. Of these, Charitable Remainder Trusts, have recently been popularized as powerful tax reduction techniques. In reality, they allow donors the opportunity to give away assets, retain an income stream, take tax deductions and still retain control over the ultimate disposition of the remainder gift. Besides a need for tax deductions, donors must also have charitable intent and a desire to maintain control. Remainder trusts may guarantee a fixed amount for life or a term of years based on either a fixed annuity calculation or a percentage of the trust’s annual value. Of the four types of trusts best known by their acronyms (CRAT, SCRUT, NICRUT, NIMCRUT), the Net Income with Make-Up Charitable Remainder Uni-Trust or “spigot trust” is the most flexible. Each trust has very different applications, depending on needs for future gifts, flexibility, donor tax deductions, income and control. Charitable Lead or Income Trusts are designed to pass the principal of a gift to heirs after a charity has received an income stream for a period of time. If the asset produces more than the required income payout, all of the future appreciation and the asset itself will pass back to the heirs without further estate tax obligations. These techniques are best understood as enlightened self-interest because both good works and family priorities are promoted.

For donors with purely charitable inclinations, the next three tools address some of the security issues which most concern the older client. While these techniques do not preserve any assets for the family, they are more practical as a means of supporting charitable works and giving final control to the philanthropic institution. Charitable Gift Annuities are programs in which the institution must guarantee a lifetime of income for the donor, but any unused funds revert to the charity at the donor’s death. This technique is most useful for the very elderly or those with no family wealth to pass along to heirs. Pooled Income Funds, owned and run by the charity, are similar to mutual funds. The institution is then required to pay the donor each year’s investment proceeds on a proportional basis. Ultimately, the principal amount will pass to the charity and be used at their discretion. Life insurance may also be purchased and gifted to a charity in a direct program that offers a guaranteed benefit for donors with a fixed budget. Charitable gifting is not limited to the ultra-wealthy, as any sized estate plan may benefit from its use. To evaluate the best use of gifts within the estate planning blueprint, experienced legal, tax and financial advisors should be consulted.

Vaughn W. Henry deals primarily with planned giving programs and estate conservation work and is a member of the Central Illinois Chapter of the International Association for Financial Planning.

Failing to stabilize and protect estate values is one of the classic errors in most estate plans. Avoid this situation by consulting your tax, financial and legal advisors.

Contact us about seminar programs for non-profit organizations seeking deferred or planned gifting programs.

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‘To give away money is an easy matter, and in anyone’s power. But deciding to who to give, how much, when, for what purpose, and how much is neither in everyone’s power nor an easy matter. Thus, it is that such giving is rare and noble and praiseworthy.’

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