Do you know that, by making gifts to charity during your lifetime, you can:

- Increase the value of your estate to pass to your heirs?
- Convert non-income-producing assets into an income stream for you?
- Increase your own income while supporting the causes that matter to you?
- Reduce your income taxes
- Defer and/or avoid capital gains taxes
- Defer current income for later retirement
- Diversify your investment portfolio to reduce risk
- Provide asset protection
- Initiate new and exciting family dynamics?

Charitable inclinations are deeply rooted in our social fabric. Through caring about the needs and lives of others, we build better communities. Through our charity, we address needs that have not been met, rectify wrongs that have been too long ignored, and fill gaps in social services that have gone unfulfilled.

Having affirmed these factors which move us to give, how can we go about giving? Charitable giving is no longer just sending a check, it can be a dynamic resource to improve our communities and benefit our families in ways that are important to us. It is also making the most use of our money, making it continue to work when we send it off into the world, instead of having it disappear into a void or stagnate in a fund.

By creating a charitable philosophy statement, or charitable mission statement, you can focus your values and the impact of your giving. Once you create this statement, there are many ways to implement your wishes. These can include the following:

Giving Cash or Securities

The traditional method of giving to our favorite charities is to write them a check. A benefit of this method is that you can deduct the amount up to 50% of your Adjusted Gross Income from your taxes in the year of the gift. Any amount above 50% of your Adjusted Gross Income can be carried forward 5 years.

Securities can also be given. Generally, appreciated securities are more desirable for charitable gifts, as you do not have to pay tax on the appreciation of these investments, but the fair market value of the gift as of the date of the gift can be deducted from your taxes (up to 30% of your Adjusted Gross Income in the year of the gift).

Donor Advised Funds

These are charitable sub-accounts that donors establish within a larger community foundation or other public charity. A Donor Advised Fund allows a donor to take a charitable income tax deduction in the year of the contribution even though the actual distribution to the charities may be made in future years.

A charity administers the fund for donors, and donors may recommend distributions (grants). The charity makes final decisions on distributions, however, so make sure their intentions align with the donor’s.

Donor Advised Funds are easy to set up, with low cost, and initial contributions can be as small as $5,000. Tax deductions are the same as cash donations (50% of AGI in the year of donation).

Private Foundations

Private foundations are quite complex and expensive to establish, but offer a great amount of control by donors with regard to distributions, investment of the funds, and administrative procedure.

Some drawbacks include lesser tax deductions, greater administrative responsibility, distribution requirements and excise taxes. Legal and IRS restrictions are substantial.

Endowment Funds

An endowment is a permanent fund of donor contributions that helps to ensure the continuous mission of a charity. In essence, endowments are gifts that keep growing and giving. In an endowment fund, assets are permanently set aside and only the income or growth in the fund is made available to further the charity’s mission and goals. An endowment fund allows the charity to do long-range planning and to determine the needs of the community and how the organization will meet those needs. Maintenance of an endowment requires good stewardship by the organization, maximizes its opportunities to support its mission, and increases its permanency and presence in the community.

Getting Income From Your Donation

Giving cash or securities to your favorite charity can feel great, but what if you could get a stream of income from that gift even after you have taken a deduction for the gift? You can give to a charity, stipulating that they may use the balance of your gift after a stated term over which you must receive an agreed-upon income stream.

Charitable Remainder Trusts

A charitable remainder trust is an irrevocable split-interest trust because it pays a percentage of trust principal to named individuals and then distributes what is left, the “remainder,” to charity. The split is between individual beneficiaries and a charity or charities as remainder beneficiaries. More simply put, you may contribute assets to a charitable trust, which will pay yourself or another beneficiary income for a specified period of time, after which a charity receives the balance of the contribution.

Gifts can be made throughout a donor’s lifetime (inter vivos) or at death (testamentary). Inter vivos gifts can be taken as deductions in the year given; testamentary gifts can reduce estate taxes.

This different type of income source can provide valuable diversification to an investor. In some cases, the income stream is greater than what could be generated by more conventional investments.

Donors maintain significant control over the investment of trust assets, but administrative costs can be higher than other alternatives.

These trusts can be good candidates for the donation of highly appreciated assets, as the donor can avoid paying capital gains taxes on the sale of the assets.

Donors receive an immediate charitable income tax deduction (the amount of this deduction varies depending on the income stream desired and the age of the income beneficiaries), which can be carried forward 5 years.

Charitable Remainder Annuity Trust

This option pays the non-charitable beneficiary either a fixed dollar amount or a fixed percentage of the initial value of the assets transferred to the trust. The annual payout must be at least 5% of this original value, otherwise principal must be distributed. The trust can only be funded by a single contribution.

Charitable Remainder Unit Trust

This option pays a fixed percentage of trust assets as valued annually, and therefore can experience fluctuation in its income stream.

Donors may make additional contributions as desired.

There are variations of the charitable remainder unitrust, which can be most effectively illustrated by an estate lawyer (we are happy to make referrals).

Pooled Income Funds

A pooled income fund is similar to the charitable remainder trust in which a non-charitable beneficiary retains the income interest and the remainder interest passes to a charity at the non-charitable beneficiary’s death. The major difference is that the donor does not create or control this trust. Instead, the pooled income fund must be maintained by the public charity to which the irrevocable remainder interest is contributed. The amount of income from the fund is not guaranteed from year to year, and the income is considered ordinary income.

The length and value of the of the non-charitable interest is not flexible with a PIF. However, the cost is relatively low and does not include start-up fees, attorney fees, or administrative costs.

The tax deduction is the present value of the remainder interest. It is based upon the number of income beneficiaries, the age of each income beneficiary, the highest annual rate of return of the fund for the three years immediately preceding the year of contribution, and the appropriate monthly interest rate set by the IRS for the month in which the contribution was made.

Donors have no control over investments.

Giving Real Estate or Other Assets

Real Estate can also be given, either entirely or partially. The deductibility limitation is the same as with securities, 30% of your Adjusted Gross Income in the year of the gift. Some donors choose to sell property to charities at a below market price, and these are called bargain sales. Donors who choose this option must be aware of the tax consequences, however. If the property donated has gained value, both the basis and the gain are split evenly between the donor and the charity. For private residences, this can be less of an issue due to the possibility of excluding $250,000 of gain from the sale (please speak to a tax professional when considering this or any other option discussed in this paper).

Another option which is less known is a conservation easement. A donor may make an irrevocable choice to allow an eligible charity the right to use of a portion (or all) of a piece of property. This must be done with the intent to preserve or protect land for use by the general public, dedication to open space, or protection of animals.

Giving Life Insurance You Already Own

Life Settlements

Owners of life insurance policies, who are over 70 years of age, can benefit charities in yet a different way, by going through an intermediary and making a life settlement. If you have a policy which you no longer need, it can be sold to a third party (instead of cashing in the policy), and the proceeds can be given to a charity. The benefit of this technique is that a sold policy generates more money than simply surrendering a policy.

Reasons owners of these policies may no longer need them include: their estate has grown to a point that additional assets risk estate tax; a key-person business policy is no longer needed; the premiums have become so expensive that it is no longer feasible to keep the policy; the insured has outlived their beneficiaries.

Charities can also sell policies that have been gifted to them, and it is often best for them to discuss this possibility with the donor at the time of the gift to assure it reflects the intentions of the donor.

Buying A New Life Insurance Policy

You can use life insurance for charitable giving in a number of ways. You can give it outright to charity. You can buy life insurance to protect a pledge made to a specific charity. You can use it to replace a bequest to charity. And you can use life insurance to replace for your family the value of an asset that you donated to charity.

You can make an outright gift of life insurance. Giving life insurance to charity allows you to make substantial gifts at a relatively small cost. And as long as you name the charity as the owner of the policy, the premiums are fully deductible for income tax purposes and the proceeds of the policy are not included in your estate for purposes of calculating estate tax. Here’s how you can do it:

1. Buy a policy, naming the qualified charity as owner and beneficiary.

2. Pay the premiums directly to the carrier or write the check to the charity, which then pays the premiums.

3. Increase the amount of coverage as your ability to pay larger premiums increases, as long as your policy allows this option.

If you are uninsurable, you can insure the life or lives of family members to accomplish the same results.

Income Giving Trusts

Charitable Lead Trusts

Charitable lead trusts are irrevocable split-interest trusts – a lead interest and a remainder interest. Charitable Lead Trusts are the opposite of charitable remainder trusts in that the order of the beneficial interests is reversed: with a Charitable Lead Trust, the charity receives the income interest and noncharitable beneficiaries receive the remainder interest.

These can also be funded inter vivos or testamentarily.

Charitable Lead Annuity Trust

This option pays the charitable beneficiary either a fixed dollar amount or a fixed percentage of the initial value of the assets transferred to the trust.

- After a stated term, the funds return to the donor, or to their named beneficiary. Use this when you no longer need the income an investment produces. The establishment of this trust can create a large tax deduction in a donor’s high income year.

- A trustee is responsible for the investments and distributions to the charity.

Charitable Lead Unit Trust

This option pays a fixed percentage of trust assets to a charity as valued annually, and therefore can experience fluctuation in its income stream. After a stated term, the funds return to the donor, or to their named beneficiary. Use this when you no longer need the income an investment produces. The establishment of this trust can create a large tax deduction in a donor’s high income year.

- A trustee is responsible for the investments and distributions to the charity.

- Be aware that additional contributions can be made in a Charitable Lead Unit Trust, but not in a Charitable Lead Annuity Trust.

Charitable Mission Statements

A charitable philosophy statement, or charitable mission statement, is important for individuals or families who want to focus their donations; it is a must for anyone who is creating a charitable giving plan. A focused philosophy provides greater satisfaction than piecemeal giving because it requires that each family member participate in the charitable giving process and take responsibility for the distribution decisions.

If you’re like many of Steve Margulin’s clients, you’ll want to create a philosophy that is uniquely yours. Your statement will be a living, breathing document, almost like a constitution that guides you and your family through the giving process. Periodically, your family may amend the philosophy to reflect changes in your collective charitable aspirations and your level of sophistication.

The process of creating the philosophy takes time, but, like so many things in life, it’s the journey, or the process, that seems to count most. It can be a wonderfully positive experience that will involve you and your family for the rest of your lives.