Planning for the distribution of your wealth can take many paths.
If you had the opportunity to leave a legacy that included making resources available to help family members lead more comfortable lives, or to help a favorite charity continue its mission—and save estate taxes while doing so—wouldn’t you do it?
In the book Cultivating the Middle-Class Millionaire, authors Russ Alan Prince and David A. Geracioti studied more than 850 individuals with a net worth of between $1 million and $10 million. Their research revealed that nearly 38 percent of those interviewed had not updated their estate plans in the past six to ten years; another 35 percent had not done so in three to five years.
Think for a moment about your own situation. When was the last time your estate plan was updated? What has changed since then? At a minimum, the tax laws in the United States have changed, and will undoubtedly continue to do so. Are you making full use of current IRS rules pertaining to estates and charitable giving to help optimize the impact of your legacy?
In addition to tax changes, you may have experienced significant changes in your professional and/or personal life. If so, does your existing estate plan reflect your current intentions and values? A career move or promotion could mean higher annual income and other forms of enhanced compensation. Your family makeup may have changed: you may have gotten married or divorced, had a child or grandchild, or lost a loved one. In terms of your charitable intentions, perhaps you no longer feel passionate about a charity or cause that you had previously included in your estate. There is much you can do for those you love and the causes you are passionate about, if you take the time to plan.
Create a Unique Giving Legacy
Planning for the distribution of your wealth can take many paths, depending on your intentions and personal giving style. Family groups may work together to channel their charitable goals and build a philanthropic legacy that can be passed down through generations. Entrepreneurs may approach charitable giving with the same drive and commitment they apply to building their businesses. Others may approach philanthropy as an investment, and base their giving decisions on disciplined research and a long-term commitment to a particular organization.
Whatever your charitable aspirations, when selecting a giving strategy, donors with significant wealth must evaluate a number of factors, such as their need for current income, the desired level of involvement for themselves and other family members today and in the future, and important tax considerations.
Vehicles to Drive Your Giving Agenda
There are many strategies and techniques that can be tailored to help achieve most, if not all, of your charitable giving objectives. Donor-advised funds, family foundations, charitable trusts and gift annuities round out the field of essential options available to donors and their families.
- Donor-advised funds—offering convenience and flexibility. A donor-advised fund is a charitable giving vehicle that offers individuals maximum flexibility to take tax deductions and recommend grants to charitable organizations. By definition, donor-advised funds are administered by public charities and contributions to such funds are tax deductible.
Donor-advised funds are particularly family-friendly, as parents and children can consolidate their giving activities through a single account. In addition, children can be named as successors to a fund, ensuring the continuation of a family’s giving legacy.
Another significant advantage of a donor-advised fund is its capacity to accept a variety of assets as charitable contributions. Checks/wire transfers, commercial paper, CDs, mutual fund shares, publicly traded securities, certain privately held securities, bonds and restricted stocks are all potentially acceptable assets. Donors are also able to recommend how their contributions should be allocated among the available investment choices. Plus, the account has the potential to grow over time—increasing the donor’s giving power.
The convenience and administrative simplicity of a donor-advised fund allows donors to spread their charitable giving out over months or even years, in accordance with their own personal giving agenda.
- Family foundations—building a legacy, reaping tax benefits. Family foundations offer an effective way to pursue philanthropic objectives, involve family members in charitable activities, and reap tax and estate planning efficiencies.
A family foundation derives its assets from the members of a single family, in which the donor and/or the donor’s relatives play a significant role in governing and/or managing the foundation throughout its life. Aside from helping families channel their philanthropic ambitions, family foundations can form a legacy of community involvement and responsible citizenship for generations to come. And, as their founders soon realize, family foundations offer potential tax and estate planning benefits.
While gifts made to family foundations are generally tax-deductible, the treatment of these deductions differs depending on the foundation’s structure, the type of property/asset contributed and the donor’s income level. But as a general rule, all gifts to a family foundation are removed from the donor’s estate, thereby avoiding estate and/or gift taxes.
- Trusts—combining charitable intent with the need for income. While the tax deductions and/or transfer tax benefits associated with most charitable giving vehicles help reduce the cost of making charitable gifts, an individual’s own income or wealth transfer needs often have a bearing on his or her ability to give. To address both goals, individuals may want to consider other charitable vehicles such as a charitable remainder trust, a charitable lead trust or a gift annuity.
A charitable remainder trust (CRT) can guarantee a lifetime income stream for you and your spouse, while minimizing current income taxes since you can generally deduct the fair market value of the charity’s remainder interest in the CRT in the calendar year it is funded. A CRT can also be an integral part of a family business succession plan. Lifetime stock transfers can be made to a CRT and subsequently redeemed by the closely-held corporation. The redemption funds the CRT with tax-free monies that subsequently can be invested to provide an income stream to the business owner and spouse.
A charitable lead trust (CLT) provides control over and enjoyment of your assets during your lifetime, an estate tax deduction at death equal to the present value of the charity’s future income interest, and a legacy to family heirs or a family trust with potentially little or no estate tax consequences.
A charitable gift annuity (CGA) is in some respects even more cost- and tax-effective than CRTs or CLTs. CGAs have no administrative or setup fees. Virtually any asset can be used to fund a CGA, and the charitable organization itself guarantees either immediate or deferred lifetime payments to the donor. The typical tax deduction available in the year assets are transferred to a CGA ranges from 30 to 45 percent of the asset’s fair market value.
Including charitable giving strategies in your estate plan can be an effective way for you and your family to enjoy an income stream during your lives, take advantage of tax savings, and maintain a significant degree of control over assets—all while fulfilling your charitable goals.
If you are creating a charitable giving plan, consider seeking the guidance of an attorney, accountant or other trusted professional who is familiar with trust and estates and nonprofit law. Obtaining assistance from the beginning—and retaining such counsel on a continuing basis—is key to making responsible decisions. iBi
Cathy S. Butler, CFP, CRPC is a financial advisor with the Butler/Luthy Group of Morgan Stanley, located at 401 Main Street, Suite 1000, in Peoria. Learn more at morganstanleyfa.com/thebutlerluthygroup or call (309) 671-2873.