Giving Graciously
 Are you
a gracious giver, perhaps even a philanthropist? If you are a taxpayer, then the answer is yes. How, you ask? During your lifetime, your wealth is subject to taxes in a variety of
forms. Income taxes levied on your wages, interest and dividends, and capital gains taxes extracted on the sale of your appreciated assets may tend to make April 15th one of your
least favorite days each year.
Voluntary Taxes?
Our tax system is voluntary in its form, but the civil and criminal penalties for noncompliance make the process involuntary in its
substance. Thankfully for our national defense and other essential programs of the federal government, most taxpayers voluntarily comply with the Internal Revenue Code (IRC) and pay their fair
share.
Beyond the essentials of government, however, are there any programs funded by the federal government you and your family consider nonessential, wasteful or even
immoral? If there are, then you are an involuntary philanthropist by your financial support of such causes as selected by Congress and the White House.
Perhaps there are private sector charities you deem more worthy of your tax dollars? Chances are you already support such charities. Beyond your own support, however,
would you like to inspire your children (and beyond) to do likewise even after you are gone? No doubt you have taught them personal financial responsibility, but what about personal
financial philanthropy to advance the values that have guided your family?
Over the years, many families have established Private Foundations and Donor-Advised Funds (DAFs) to control how they give, when they give and what they
give…as they seek to perpetuate a family legacy of philanthropy.
Private Foundations
Private Foundations, like Public Charities, are non-profit organizations deriving their tax-exempt status
under IRC §501(c)(3). Both must be qualified organizations established for specifically authorized purposes under the IRC. Unlike a Public Charity, a Private Foundation generally receives its
contributions directly from one source. Commonly the source is an individual or a family.
A Private Foundation makes its own contributions (called grants) to one or more Public Charities of particular interest to the Founder or the Founding Family.
Among the more attractive features of Private Foundations are its potential perpetual existence and its ongoing control by the Founder. As such it is an excellent vehicle for donors wanting to
create a truly charitable legacy with the highest degree of perpetual control. However, there are thorns among these roses.
For example, contributions to Private Foundations receive lower income tax deductions than contributions made to a Public Charity. Also, a virtual snarl of red tape can
subject certain broadly defined disqualified persons to significant excise taxes for various self-dealing issues. Additional excise taxes may be triggered by the failure to
distribute income, excess business holdings, investments that jeopardize the charitable purpose and taxable expenditures. Also, watch out for potential unrelated business taxable income (UBTI),
as well as the initial and ongoing administrative filing requirements with the IRS and state agencies. Establishing and maintaining a Private Foundation can be expensive, too. Enough said.
Donor Advised Funds
Because of the practical problems associated with Private Foundations, many donors are looking to DAFs as a means to control how they give,
when they give and what they give. Like Private Foundations, a DAF can receive charitable gifts from you now and/or upon your death, while you (and your heirs after your death) continue to
advise the DAF regarding its ongoing grants to your charitable cause(s). However, unlike a Private Foundation, your DAF is a Public Charity by definition. Accordingly, contributions to a
DAF enjoy the maximum income tax deductions permitted under the tax code. If you would rather have more of your charitable wealth actually available to your charitable causes, then you should
know that a DAF is less expensive and much simpler to establish, as well as to maintain thereafter, than a Private Foundation.
Summary
Because of myriad tax and non-tax considerations, qualified legal counsel should be consulted regarding whether a
Private Foundation or a Donor-Advised Fund is more appropriate given your unique personal and family charitable objectives.
Giving & Receiving
Many Americans would like to be more gracious in their giving, but they are understandably reluctant to give away assets today that they may need to maintain their financial independence
tomorrow. Fortunately, the Internal Revenue Code (IRC) recognizes that it may be attractive for such taxpayers to have their cake and eat it too!
A Charitable Remainder Trust (CRT), also known as a split-interest gift under IRC §664, is a popular legal technique for such giving and receiving. Through a
CRT, you may increase your current income, enjoy current income tax deductions and change the ultimate charitable beneficiary right up to the time of your death.
CRT Steps
Here is how it works. First, you contribute an asset to the CRT. [Note: Appreciated assets are commonly contributed because they tend to be
low-income producers and have a low income tax basis.]
Second, the CRT sells the asset without capital gains taxation and then reinvests the proceeds in an income-producing portfolio that grows income tax free inside the
CRT.
Third, you (and your spouse) receive a lifetime income plus valuable income tax deductions for up to six years.
Fourth, if the ultimate charitable beneficiary changes for the worse during your lifetime, then you may replace them with another charity by reference in your Last Will
& Testament. [Sidebar: if your ultimate charitable beneficiary is your own Donor-Advised Fund (DAF), then you may appoint your heirs or others to further advise your DAF regarding its
future charitable beneficiaries in keeping with your predetermined guidelines.]
WRT Solution
Another impediment to gracious giving is the old adage that charity begins at home. Simply put, most Americans do not want to make
substantial gifts to charity if it means disinheriting their own loved ones. Fortunately, there is a proven solution to this common dilemma employing the unique leveraging power of Life
Insurance: The Wealth Replacement Trust (WRT).
WRT Steps
First, you create a WRT. While you may not serve as a Trustee (nor should your spouse), you may select the current
and successor Trustees. The beneficiaries of the WRT will be your loved ones.
Second, you (and your spouse) make gifts to the Trustee on behalf of the WRT beneficiaries in an amount roughly equal to the insurance premiums. The Trustee then
provides written notice of the completed gift to each WRT beneficiary and that each beneficiary has a designated period of time (not less than 30 days is typical) to request distribution of
their respective share of the gift. After the designated period has lapsed, the Trustee applies for the appropriate amount of Life Insurance and pays the initial premium. [Note: This annual
gifting ritual continues until your death (or the death of your spouse, if an insured and your survivor).]
Third, assuming all of the WRT steps have been followed, the death benefit will be estate tax free when paid to the WRT for your loved ones. This will replace the value
of the CRT assets distributed to charity.
Copyright © 2005 Integrity Marketing Solutions. All rights
reserved. Some artwork provided under license agreement. This
publication does not constitute legal, accounting or other professional
advice. Although it is intended to be accurate, neither the publisher
nor any other party assumes liability for loss or damage due to reliance
on this material.
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