Estate Planning

GIFT AND ESTATE PLANNING
GIFT METHODS

 

OUTRIGHT GIFTS

Cash and Non-Appreciating Properties
Appreciated Securities and Real Estate
Ordinary Income and Short-Term Capital Gains Property
Bargain Sale

CHARITABLE REMAINDER GIFTS

Charitable Gift Annuities
Charitable Remainder Trusts
Charitable Remainder Interest in a Residence or Farm

CHARITABLE LEAD TRUST

DEFERRED INCOME ACCUMULATION PLANS

LIFE INSURANCE BENEFICIARY DESIGNATION


OUTRIGHT GIFTS 

Cash and Non-Appreciating Properties

Charitable gifts of cash and non-appreciating property qualify for federal income tax deductions at cost in the year the gift is made.  The gift is deductible up to 50% of adjusted gross income, and any excess deductions can be carried over for up to 5 years if necessary.  The higher the donor’s tax rate, the greater the savings.

Appreciated Securities and Real Estate

Long-term stocks, bonds, and real estate that have increased in value may be very appropriate for charitable gifts.  The donor is eligible for a charitable deduction equal to the fair market value of the property in the year the gift is made, an all capital gains tax is avoided.  This type of gift is deductible up to 30% of the donor’s adjusted gross income, and any excess deductions can be carried over for up to 5 years if necessary.

Ordinary Income and Short-Term Capital Gains Property

Such gifts qualify for federal income tax deductions at cost in the year the gift is made. They are deductible up to 50% of the donor’s adjusted gross income, and any excess contributions can be carried over for up to 5 years if necessary.

Bargain Sale

In a bargain sale, the donor sells appreciated property at a lower price than the fair market value to a charity, with the charity realizing the difference as a gift. Each part of a bargain sale is reported separately.  The donor reports capital gains on the sale portion, and receives a tax deduction for the gift portion. The basis is allocated between the gift and the sale portion.

CHARITABLE REMAINDER GIFTS

Charitable Gift Annuities

A charitable gift annuity is part gift and part purchase of an annuity.  The annuity provides a monthly or quarterly payment for one or two lives, and the payments can begin immediately or be deferred.  It provides a fixed income for the annuitant and spreads the capital gain over the lifetime of the annuitant if the assets given are appreciated, long-term assets.  This type of gift is irrevocable  and provides a Federal and State income tax deduction of 50% or 30% of adjusted gross income, depending on whether cash or appreciated property is used to fund the annuity.

Charitable Remainder Trusts

The basic purpose of a charitable remainder trust is actually fairly simple: to pay the donor, or (after the donor’s death) the donor’s spouse (or another individual) income for life and to then distribute the trust principal to charity when the last income beneficiary has passed away.  With certain types of trusts (unitrusts), the donor can change the list of charities (or “remaindermen”) at any time during the life of the trust. By using low-yield, appreciated securities to set up a charitable remainder trust, the trust can sell those  assets without incurring any capital gains liability, and it can then purchase new, higher- yield stocks.  That way, donors can actually increase their current income, avoid capital gains, and make a major gift to charity with assets that would otherwise have been taxed  heavily if they were sold and given directly to charity.
  
There are two basic types of charitable remainder trusts: a unitrust and an annuity trust, and variations thereof. 

  • Unitrust: The unitrust pays out a specified percentage of the trust’s value, calculated annually.This amount must be at least 5% of the annual net fair market value of the trust assets.  Donors can make additional contributions to a unitrust during their lifetime or through their Will.  Obviously, if the trust’s assets increase in value, the annual payments increase.  The annuity trust pays out a fixed amount each year, and that amount must be at least 5% of the initial value of the property or assets of the trust. This type of trust does not allow donors to make additional contributions.
  • Charitable Remainder Trust: A charitable remainder trust pays no income tax on accumulated income or capital gains because they are added to the trust’s principal and thus reserved for eventual charitable use.  The income beneficiaries of the trust are nonetheless subject to federal income tax on the distributions they receive.  Donors can create an immediate Federal and State income tax deduction (and spread it our over 5 years if needed) by creating a charitable remainder trust.  The amount of the deduction is determined by Treasury Department  tables that consider several factors: the type of trust (unitrust or annuity trust), the percentage or amount to be paid out each year, and the number and age of the income beneficiaries.
  • Net Income Unitrust: A variation of the standard unitrust is the net income unitrust or the income only unitrust.  This type of trust pays the beneficiary either the net yearly income or a fixed percentage, whichever is less.  It can also have a “catch-up” clause which permits the trust (in any subsequent year when the income exceeds the percentage) to make up for any deficiencies which may have occurred in prior years.
  • Q-Tip Charitable Remainder Trusts: The term “Q-Tip” stands for “Qualified Terminable Interest Property”. In a trust of this type, the donor’s spouse must be given the right to all of the income from the property in the trust for his or her lifetime. Then the property can pass to the Community Foundation. One of the advantages of a Q-Tip trust with a charitable remainder is that the trust can give its trustees the power to invade the trust principal in case the spouse has unexpected medical expenses or other needs.

Charitable Remainder Interest in a Residence or Farm

A full or partial interest in a home (any home you own) or farm can be given to the Community Foundation, and the donor can retain the right to live in the home or operate the farm for the rest of his or her life.  The gift will create an income tax charitable deduction for the present value of the Foundation’s estimated remainder interest, and the donor will avoid any potential capital gain tax on the home or farm’s built-in appreciation.  The charitable deduction thus frees up tax dollars, creating spendable income without ny disruption in the donor’s lifestyle.  When the Foundation receives the property, it can be sold to establish a fund in the donor’s name or any other name.

CHARITABLE LEAD TRUST

A Charitable Lead Trust is a trust that pays an annual annuity or unitrust amount to a named charity (such as a Field of Interest or Donor-Advised Fund at the Community Foundation) for a specified number of years.  Then the trust principal can be paid to the donor or to any other non-charitable beneficiary, such as children or grandchildren.  If this kind of trust is created by Will, estate taxes can be reduced because of the charitable deduction for the charity’s interest in the annuity or unitrust payment.  If it is created during the donor’s lifetime, such a trust will generally eliminate income taxes on the assets in the trust, and the donor can reduce the gift tax on the property that children or grandchildren will eventually receive.

DEFERRED INCOME ACCUMULATION PLANS

Retirement plans payable to anyone other than your spouse may be subject to estate taxes at death, followed by income taxes as funds are withdrawn to pay estate taxes.  Naming the Community Foundation as the beneficiary or as the alternate beneficiary can avoid this double taxation.

LIFE INSURANCE BENEFICIARY DESIGNATION

If you no longer need as much life insurance as you did when you were younger, you can donate the policies to the Community Foundation and establish a Fund in your name by simply naming the Foundation as the owner and irrevocable beneficiary of the policies.  If the policies are fully paid up, you can take a tax deduction for either the replacement value or your cost, whichever is less.  If the policies are not paid up and you continue paying the premiums, the payments are deductible as charitable contributions.  In either case, you get an immediate tax deduction and you may save estate taxes later.