Case Studies and Articles

Can Capital Campaigns be based on Planned Gifts? – Vaughn W. Henry & Associates

Can Capital Campaigns be based on Planned Gifts? – Vaughn W. Henry & Associates

Can Capital Campaigns be based on Planned Gifts?

While lead trusts generally aren’t promoted like remainder trusts, there are ways to combine the two tools to provide significant gifts to charity today.  Learning about basics is doubly important for advisors to better help donors improve their options and social capital control.  The following case isn’t one suitable for many donors, but the concept has merit for the right circumstances.  For those organizations able to present the idea to a major supporter, it might be the way to get that capital project off the ground without going through a long fundraising campaign or another unpopular bond issue and still help the donor solve financial planning problems at the same time.

Jack Wise, a 66 year old business owner, was approached by a local charity group he’d supported for many years about ways to finance a school district’s youth center.  The community previously rejected an increase in property taxes and school officials wanted a fresh perspective on ways to build the needed facility.  Jack’s financial advisor offered an idea that gave the district new options.  By taking $2 million of Jack’s stock portfolio with modest income earnings of 3% per year, the advisor placed $1 million of the stock into a 6% CRAT to replace Jack’s existing earnings of $60,000 per year.  The remaining $1 million in growth stock was combined with some idle development property worth $2.73 million into a family limited partnership (FLP).  Then 40% of the limited partnership units were contributed to a 6% CLAT designed to produce $60,000 in annual distributions to charity.  The minority interests were discounted by 33% for lack of marketability and control; meaning that the fair market value of assets held by the charitable lead trust were also valued at $1 million.

Once the $1 million in appreciated stock was placed into Jack’s charitable remainder trust, the trustee loaned the school district the $1 million to finance the youth center and commence construction.  The note owned by the CRT requires a payment of 6% interest annually, but where does the school get the funds to pay the note since the youth center isn’t a revenue-producing asset?  It comes from the CLAT payment of $60,000 that passes through their foundation’s hands and back to Jack’s CRAT in order to provide him with the same level of life style he previously enjoyed from the stock and land contributed to his two estate planning trusts.  Besides receiving income from the CRT, an income tax deduction of $522,340 is created and usable for six years.  Additionally, the assets in the CLAT, eventually passing to his heirs, do so for a discounted value of $522,340.  Combined with aggressive annual gifting and other lifetime gifts of FLP units to family members, Jack can pass the $3.43 million plus all the projected growth to heirs for no gift or estate tax while building the Jack Wise Community Center now.

How does this compare to doing nothing?  Jack’s $3.43 million, plus all the associated growth would normally be reduced 50% at death by estate taxes.  By making these three planning tools work within his estate plan, Jack can help a charity fulfill its mission, support a familyphilanthropy, pass more assets to his family and generate an income tax deduction when he can actually make use of it, all without reducing his current income stream.

campaign.gifWhile this case is a little complex for a quick study article, it made good sense to Jack’s advisors and played a major role in his “zero estate tax master plan”.  Learn more about charitable remainder (CRT) and charitable lead (CLT) trusts and find creative ways to introduce them as solutions to client and donor planning problems.

Note to school adminstrators and development officers.

This example of a $1 million youth center was paid for by one donor as a result of creative estate planning.  Tired of sending kids out door to door selling candy, pizzas and magazines?  How about those car washes and bake sales?  Nickel and dime fundraising efforts may build community spirit, but they often irritate donors and there’s plenty of risk in today’s world when peddling stuff on the street to strangers.

It’s become increasingly important to incorporate planned giving into any development program that plans to be around for any length of time.  Long term gifts require an outlook that ecompasses more that putting money on the table today, both new and experienced planners need to make use of the tax planning strategies to help donors be tax efficient in their support of philanthropy.

As an additional note, the July 24, 2000 issue of USA Today had an article, Fundraisers pay for schools’ needs, that contained some interesting statistics concerning the increased use of fundraising activities in schools.

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