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The Lyre, Spring 2012 / Planned Giving

Save moneyHow to Extend Your Philanthropic Legacy

by Polly J. Dobbs
(Gamma Mu, Ball State University)

When many women hear about planned giving they think, “Oh, that’s not for me.” You may think it’s for someone older or richer, or perhaps you don’t know what planned giving is. Your biggest concern may be making sure you leave enough money for your family after you’re gone. Perhaps you’re overwhelmed at the thought of which charity to choose, and you would prefer to let someone else make the decision after you’re gone. Planned giving can play an important role in every woman’s life. Alpha Chi Omega women are strong, and many of us control the purse strings of our family’s wealth. We need to be comfortable taking charge of our charitable giving decisions for the benefit of future generations. Here, we’ll examine some common objections to planned giving and how to move beyond those misconceptions into a place where you understand how planned giving can be an integral part of your overall estate plan.

“I don’t know what planned giving is.”

In the simplest terms, planned giving is any method of charitable giving other than getting out your checkbook and writing an immediate check with no restrictions attached. Planned giving techniques should balance your financial, personal and charitable objectives. It can be put in place during your lifetime or after your death and can take a variety of different forms.

“I’m too young to plan that far out.”

None of us know when we’ll die. Charitable giving should be a part of every young woman’s life. Start small. You should have a charitable giving plan that fits your lifestyle and goals today, and dust it off every five years or so and make sure it’s still a good fit. Ideally, an Alpha Chi has been writing small checks to the Alpha Chi Omega Foundation and other charities each year since graduating and securing that first job. Planned giving is the next step toward leaving a philanthropic legacy. As a member of the Alpha Chi Omega Foundation’s Planned Giving Subcommittee, my goal is for every young Alpha Chi to name the Foundation as at least a 1-percent beneficiary of that first 401(k) plan she vests in after joining the work force. That small first step will be a reminder of the importance of our sisterhood and philanthropy as the years go by and jobs change, spouses and children come along, beneficiary designations are updated, and those retirement assets are rolled over and moved around.

“I don’t have enough money.”

This might mean a planned gift is a great option for you. If money is tight now, you don’t have to say no to your favorite charity—you can just give in a different way. Leaving a percentage of your assets or a set dollar amount to the Alpha Chi Omega Foundation and/or other chosen charities is easy to do through the beneficiary designation on your retirement plan, life insurance, annuity or in your will or trust. Even a small planned gift will be welcomed. For example, just imagine the impact if every sister left $100 to the Foundation at her passing—the results would be remarkable!

“I want my family to have enough after I’m gone.”

Estate plans can be written so that a charitable bequest is only made after certain other requirements have been met. Using flexible language in a will can address this concern; here’s a great example: “I give the lesser of $50,000 or 5 percent of my net taxable estate to the Alpha Chi Omega Foundation upon my death.” A contingent bequest to charity can also help with this issue. Many of my clients include their favorite charities in their “wipe-out clause”—this clause states what happens to their assets if they and their children are “wiped out” in a common tragedy. Rather than having all their assets distributed to distant relatives, most clients would like to provide for some amount to go to charity. Once the idea of a charitable bequest at death gets into their head, they often move a charity “up in line” to receive some amount at the second spouse’s death, or even at the first spouse’s death. Including a charity in your estate plan can help you leave more than just money to your family; you can leave an example of philanthropy and a commitment to benefit an organization that was important to you during your lifetime. This is a way for you to teach, from beyond the grave, that giving back is an important family value.

“I’ll let someone else make the decision.”

Some may think it’s best to set aside an amount for charity and let family members decide which nonprofit organizations will receive the benefit. I encourage you to own the choice; it is yours to make. Without specific instructions, your charitable gift might not go where you intended. For example, we all know the positive difference Alpha Chi Omega can make in a woman’s life, and financial support of our Foundation ensures that future generations will receive the benefits we have received, but do your family members know? Only you can decide what charity values and benefits are important to you.

Planned giving as a part of an overall plan created with your attorney.

Planned giving must be considered as a part of an overall estate plan. The estate-planning process involves exploration of your desires, goals and your personal and financial circumstances. Your estate plan should be designed to conserve property before and after death, to provide for your care and lifestyle before death, to minimize death taxes, to provide sufficient liquidity at death, and to provide financially for family and/or others (including charity) in an appropriate manner before and/or after your death. Even very straightforward planned-giving techniques should fall into the “big picture” of your comprehensive estate plan.

Considering a planned gift expands your options for charitable giving. A planned gift may allow you to make a larger charitable gift than you thought possible. It also could provide a source of income for you, your spouse, your children or your grandchildren, while helping protect assets and ultimately providing for a charity. A planned gift may achieve specific charitable purposes (possibly for generations to come), and may reduce income taxes and/or estate and gift taxes.

If you make a planned gift to the Alpha Chi Omega Foundation or any nonprofit entity, collaboration between you and the charity is crucial. Planned giving is not likely to be productive or rewarding if approached in isolation. For example, you may designate a cash contribution to your favorite charity and specify that such amount is to be added to your favorite charity’s scholarship fund, but if your favorite charity does not have a scholarship fund, that plan will fail. You should explore your desires and goals and also learn about the programs and tools already available within your favorite charity to make sure your planned gift is a success. While the professionals who work for various charities can provide you with valuable information about the methods of planned giving and the benefits of each, it is important for you to involve your own legal advisors in the process so that there is no conflict of interest and all aspects of the transaction can be appropriately considered.

It’s not (just) about the taxes.

A desire to minimize estate taxes may help motivate you to consider a planned gift, but avoiding estate taxes should not be the only reason to make a planned gift. Likewise, if your only goal is to maximize the amount of money going to your family members and minimize the amount of taxes paid to the government, then planned giving may not work for you. You need to have true charitable intentions to gain the most benefit from a planned gift.

Since Dec. 17, 2010, our federal laws have provided a maximum exemption level (i.e., the maximum amount a person may give away without incurring tax) of $5 million, indexed annually for inflation, for estate tax, gift tax and generation-skipping transfer (GST) tax. The gift and estate tax exemption are unified so that $5 million (indexed) may be given away during one’s life gift-tax-free. The maximum tax rate for estate, gift and GST taxes is currently 35 percent. Because of the “indexing,” for 2012, up to $5.12 million of an estate will be exempt from the current 35-percent estate tax. These provisions are only in effect until Dec. 31, 2012. Unless Congress and the President take further action before then, after Jan. 1, 2013, estates worth as little as $1 million will be subject to estate tax, the government will take 41 cents on the first dollar in excess of that $1 million, and tax rates will steadily increase from 41 percent to 60 percent on larger amounts.

This notorious fluctuating federal law has moved the exemption level all over the map from the low point of $600,000 to the current high point of $5 million. In light of this larger federal estate-tax exemption, you may feel that “enough is enough” in terms of the amount of money you wish to leave to family. Many of my clients feel that the amounts in excess of the estate-tax exemption should be left to charity.

Unrestricted vs. designated gifts to charity.

An unrestricted gift to a charity has no strings attached. Charities love these gifts! These are important to a charity’s daily operation and help them keep the lights on, buy paper and pay employee salaries. Some donors embrace this unrestricted type of giving, understanding that these essentials are necessary to provide for the charity’s basic needs.

However, in order to further a particular charitable interest or desire, planned gifts often involve “restricted” or “designated” gifts, which can be used only for a specific purpose. Again, collaboration between the donor’s legal advisors and the charity is crucial to make the donor’s intent clear and ensure that the charity is capable of complying with the restrictions in order to achieve the donor’s goals. When a charity accepts your gift, it accepts any restrictions or designations you placed on that gift and is legally required to fulfill them. I suggest drafting any designated charitable bequest to be made following death in the alternative, to allow the highest possibility for success. For example, a last will and testament could contain a provision such as this: “The lesser of $50,000 or 5 percent of my net taxable estate to [favorite charity] for the purpose of providing scholarships, but if the scholarship program is discontinued in the future, then any remaining funds should be used for [favorite charity’s] then-existing program(s) that benefit children, or if no such programs exist, then any remaining funds may be used for [favorite charity’s] greatest need.”

Another type of designated gift is an endowment. Endowments allow you to give an amount to charity, which is invested, and only the income earned from that investment may be spent for the purposes which you have provided.

Most charities will have a gift-acceptance policy, and a donor should expect to be presented with such a policy to review at the outset of any planned-giving discussions. Also, a planned gift may likely result in a gift agreement that commemorates the assets to be given by the donor and any restrictions the charity agrees to comply with by accepting such a gift.

Different types of assets can be used in planned giving.

The types of assets donated to a charity will influence the planned-giving process, even if the gift is unrestricted. Once you’ve decided that you want to make a planned gift, next you must decide which of your assets you wish to transfer to the charity. Cash is one straightforward option. Marketable securities are easy to transfer to a charity during your lifetime or at death. Stock or other ownership interest in a closely held business may be accepted by a charity, but certain steps must be taken before such a transfer. It’s not as easy as just transferring your Google stock.

Your IRA, 401(k) or other qualified retirement plan assets can easily be left to charity at death. I often suggest these assets as a great way to benefit a charity at death, because they may otherwise be subject to two types of taxes when you die: death taxes on the value of the account at the date of death, and income taxes on each withdrawal made by your named beneficiary after your death. If a charity is the beneficiary of your qualified retirement assets, then such assets are not subject to either death taxes or income taxes because your estate would receive an estate-tax charitable deduction, and the charity would be exempt from income tax when assets are withdrawn. Caution is required when considering lifetime gifts of qualified retirement plans, because income tax and penalties may be triggered when assets are withdrawn from such a plan, even if the ultimate recipient of the withdrawn funds is a charity.

Real estate may be given to a charity, but expect prior approval of the charity’s governing board to be required before such a transfer is made. Not every potential gift will be accepted by a charity. For example, if the real estate is the prior location of a gas station or a factory that used harmful chemicals and there are environmental issues involved, the charity may decline to accept such real estate. It is also likely that a charity would wish to sell the real estate upon receipt, rather than maintain the property, which can be a potential liability. A thorough negotiation and understanding between the donor and the charity resulting in a gift agreement is a good idea when real estate is involved.

Tangible personal property (works of art or antiques, for example) may be donated to a charity. Be aware that certain restrictions on the amount of your income-tax deduction may be imposed if the personal property is not used for the charity’s charitable purpose.

Life insurance also can be used to benefit a charity. Specifically, there may be a charitable-planning opportunity if you purchased life insurance when the federal exemption was lower ($600,000), for the purpose of helping to pay the estate taxes that would have been due upon your death. Now that the federal exemption is higher ($5,120,000), such life insurance proceeds may no longer be required because your estate will not be subject to estate tax. If that’s the case, you can make an easy adjustment to the beneficiary designation of your life insurance policy to have some or all of the death benefit paid to a charity. It also may be possible to benefit a charity by transferring ownership of no-longer-needed life insurance to the charity during your lifetime.

Methods and vehicles used in planned giving.

The nitty-gritty of planned giving covers a large spectrum from simple to complex. Some examples of simple (if unrestricted) deferred gifts are as follows:

  • primary or contingent beneficiary designation of a life insurance policy: charity can be a partial beneficiary that receives a set dollar amount or a percentage
  • primary or contingent beneficiary designation of an IRA or a qualified plan (remember, these are great assets to leave to charity at death): charity can be a partial beneficiary that receives a set dollar amount or a percentage
  • outright bequest in a will or outright distribution from a revocable living trust after a grantor’s death: can be a set dollar amount or a percentage, or a formula that sets a floor and/or ceiling on the amount going to charity

All of the above are “deferred” gifts that may be revoked and/or changed prior to death. Any of the above become more complex if they are “restricted” for a particular purpose.

Some examples of more complex vehicles include:

  • charitable gift annuity: a contract (not a trust) under which a charity, in return for a transfer of cash, marketable securities or other assets, agrees to pay a fixed amount of money to one or two individuals for their lifetime. This technique can produce an income-tax deduction and enhances income during retirement years.
  • charitable remainder trust: assets transferred to a newly created “split interest” irrevocable trust in which a charity is a remainder beneficiary, but the donor (and perhaps donor’s spouse) retains an annuity (a CRAT) or unitrust (a CRUT) stream of payments for either a term of years or for lifetime. At the end of the specified term or lifetime, the remaining assets are distributed to the charitable beneficiary and the trust terminates.
  • charitable lead trust: assets transferred to a newly created “split interest” irrevocable trust where a charity receives the lead interest (for a term of years) with the remainder to pass to non-charitable beneficiaries (the donor’s family or any individual selected by the donor). The charity can receive an annuity (a CLAT), in which a fixed annual distribution is made to charity, or a unitrust amount (a CLUT), in which the charity receives a fluctuating amount equal to a percentage of the CLUT’s value each year.

All of the above, if established during a donor’s lifetime, are irrevocable and may provide income-tax benefits to the donor. If established after death, the above techniques may provide estate-tax benefits.

However, there are potential pitfalls with any technique. Charitable lead and charitable remainder trusts are irrevocable. If circumstances change, they cannot be amended. If the assets owned by a CLAT or CRUT lose value, the benefit to the donor’s family (or other intended remainder beneficiary) will be less. Charitable lead trusts are somewhat of a hot topic these days, because the special interest rate the Internal Revune Service uses to predict how much assets will grow in a split interest trust such as this (the “hurdle rate”) is hovering at an all-time low, increasing the likelihood that assets transferred to a CLAT or a CRUT will appreciate in value over and beyond the hurdle rate, resulting in a discounted gift to the remainder beneficiaries, and achieving gift- and/or estate-tax savings for the donor.

No matter which route you choose, incorporate planned giving into your estate plan.

Planned giving means different things to different people and can fit into each donor’s estate plan in a unique way to achieve her goals. My suggestion: make a planned gift to the Alpha Chi Omega Foundation in gratitude of the benefits you’ve received from our sisterhood as a way to pay it forward and extend your philanthropic legacy.

Disclosure Required by Circular 230

This Disclosure may be required by Circular 230 issued by the Department of Treasury and the Internal Revenue Service. The federal tax advice contained herein is not intended or written by the practitioner to be used, and it may not be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer. Furthermore, any federal tax advice herein may not be used or referred to in promoting, marketing or recommending a transaction or arrangement to another party. Further information concerning this disclosure, and the reasons for such disclosure, may be obtained upon request from the author.

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