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Planned Giving: A Win-Win Situation

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Tools for Giving

One way a person can give is by creating a Donor Advised Fund, or charitable giving account offered by sponsoring charities. A Donor Advised Fund is designed as an accessible, simple, and less expensive alternative to private foundations. Donor Advised Funds allow donors to contribute stocks, cash, bonds, mutual funds or other appreciated assets, receive their charitable deduction, and recommend how the money is distributed. The sponsoring charity then does the record-keeping and due diligence, and, unlike private foundations, can protect a donor’s identity if that is requested.

The costs associated with Donor Advised Funds are so low that 99 percent of the dollars contributed go to charity. Today, more than 100,000 Americans use Donor Advised Funds. Corporations use these funds to streamline their giving, and they’re a beautiful thing to the nonprofits in that these sometimes small start-up organizations don’t have to accept securities as contributions, they simply receive a check instead.

“Donor Advised Funds provide simple, flexible, efficient ways for a person to manage their charitable giving,” explains Bruce Helmer, president and founder of Wealth Enhancement Group. “They provide an immediate tax advantage, allow a person to make grants on a flexible timetable, build a charitable legacy, and increase the value of the account for future grant-making. Since the maximum tax deduction is received by the donor at the time of the gift, the foundation administering the fund gains full control over future contributions, but still grant the donor advisory status.”

Charitable giving trusts are also very effective giving tools, according to Helmer.

“If a person has a highly appreciated asset, such as real estate or securities, and the sale of that asset would trigger a significant capital gains tax liability, the owner of that highly appreciated asset can place it into a charitable trust. Then, the trust can sell the asset rather than the owner. Whatever remains in the trust upon the trust-holder’s death will go to a charity or charities of the trust-holder’s choice.”

In exchange for this future gift to charity, the owner (trust-holder) avoids paying the capital gains tax at the time of the sale and receives a present-day tax deduction for the future gift they will make to charity. In this way, the donor ends up with a greater income stream from the proceeds of the sale of the asset because they did not have to reduce it for tax liability purposes.

A New Way to Give During the Holidays

Some families are changing how they celebrate the holidays and giving to charities instead of exchanging gifts. With nearly 2 million American charities and countless international charities, though, how does a person know where to contribute?

In order to determine if a charity is “good,” a potential donor should ask that particular charity for their IRS Form 990, “Return of Organization Exempt From Income Tax.” The form gives information about the organization’s finances and how money is spent.

Once you feel comfortable donating to that charity (or multiple charities), it’s important to remember you can receive a tax deduction if you itemize your cash donations or other gifts (stocks, goods, etc.) and the charity has the proper Internal Revenue Service status. Other tax deduction tips:

➤ You may deduct up to 50 percent of your adjusted gross income in one year for all charitable donations (certain contributions, though, may have lower limits).

➤ If you give more than 50 percent, you can carry the excess forward for up to five years.

➤ If you donate goods to an organization, they must be in good condition (or better) in order to be deductible. If it’s worth $500, you have to get a professional appraisal to approve its value.

The bottom line? Planned giving is especially important in these tough economic times, and just about anyone can give.

“Giving has less to do with wealth than attitude and the desire to give back to the community,” says Andersen of the Lutheran Community Foundation. “A thoughtful gift through a Donor Advised Fund is affordable to most everyone.”

Types of Planned Gifts

➤  Bequest — When a donor decides to leave assets to charity in her will, she is making a bequest. The donor’s estate will receive a charitable estate tax deduction at her death, when the gift is made to charity.

Gift Annuity — A gift annuity is a contract between a charity and a donor. In return for a donation of cash or other assets, the charity agrees to pay a fixed payment for life to the donor or to a friend or family member of the donor’s choosing. The donor also can claim a charitable tax deduction. If a donor funds a gift annuity with long-term capital gain property, the donor will have to report only some of the gain, and may be able to report it in installments a over many years.

Income from a gift annuity can be deferred for a period of years. Deferred gift annuities are often set up by younger donors to supplement retirement income.

Pooled Income Fund — The name describes this planned gift well-- a charity accepts gifts from many donors into a fund and distributes the income of the fund to each donor or recipient of the donor’s choosing. Each income recipient receives income in proportion to his or her share of the fund. For making a gift to a pooled fund, a donor receives a charitable income tax deduction and will not have to pay capital gains tax if the gift is of appreciated property. When an income beneficiary dies, the charity receives the donor’s portion of the fund.

Charitable Remainder Trust — This trust makes payments, either a fixed amount (annuity trust) or a percentage of trust principal (unitrust), to whomever the donor chooses to receive income. The donor may claim a charitable income tax deduction and may not have to pay any capital gains tax if the gift is of appreciated property. At the end of the trust term, the charity receives whatever amount is left in the trust.

Charitable remainder unitrusts provide some flexibility in the distribution of income, and thus can be helpful in retirement planning.

Charitable Lead Trust — This trust makes payments, either a fixed amount (annuity trust) or a percentage of trust principal (unitrust), to charity during its term. At the end of the trust term, the principal can either go back to the donor (a grantor lead trust) or to heirs named by the donor (a non-grantor lead trust). The donor may claim a charitable income tax deduction for funding a grantor lead trust or a charitable gift tax deduction for funding a non-grantor lead trust. Since lead trusts are typically used to pass assets to heirs, non-grantor lead trusts are far more common than grantor lead trusts.

Retained Life Estate — A donor may make a gift of his personal residence or farm to charity and retain the right to live there for the remainder of his or her life. The donor receives an immediate income tax deduction for the gift. At the donor’s death, the charity can use or sell the property.

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