| ESTATE PLANNING |
Strategies for Charitable Giving
Several avenues exist for impacting positive change
Community-oriented executives and philanthropic business owners don’t often have time to think about the tax implications of their commitment to causes. Your altruistic endeavors can factor into your current financial strategies while benefiting your employees, family, and friends far into the future.
Thoughtful planning can assist in reducing gift or capital gains taxes, help make a meaningful impact on a favorite charity or important foundation, or even establish a trust large enough to support a significant endowment. A wide range of methods are available, including these insurance products and charitable trusts strategies:
Give an Existing Insurance Policy to a Charity
If you have a policy you no longer need, you may want to consider gifting it to charity. Your estate is effectively reduced by the face amount of the proceeds. Generally, you will receive an income tax deduction equal to the lesser of the cost basis or the fair market value of the contract. However, caution needs to be exercised when there is a policy loan on the contract and it is important to consult with your tax advisor and the charity prior to transferring ownership.
Purchase a New Policy for the Charity
Buying a new policy can provide a very large gift in proportion to the amount of the premiums gifted to the charity. The premiums should provide current tax deductions as long as there are “no strings attached” to the gifts and the charity possesses all ownership rights in the contract.
Buy Life Insurance to Replace the Value of an Asset Donated to Charity or to Back a Pledge
Potential donors may be in the position to donate highly appreciated assets to a charity, but considerations regarding heirs may be a concern. You can replace the value of assets with life insurance so your heirs can receive inheritance income tax free. If the policy is purchased inside a wealth replacement trust, the death benefit can also be tax free. You can also purchase life insurance and name a charity as the beneficiary, which provides a low-cost way to provide a large benefit. As the pledge is paid off, you can decide whether to leave the charity as the beneficiary of the entire life policy, or redirect a portion of proceeds to heirs.
Other life insurance strategies include gifting insurance policy dividends to a charity and changing the current beneficiary on a policy for either a portion or the entire policy proceeds.
Set Up a Charitable Lead Trust Charitable Lead
Trusts allow an annual payment to be given to a charity with the remainder available for your designated beneficiaries (considered a gift). With the low §7520 interest rates, which are used to value certain charitable interests in trusts, the trust can have a fairly low payout rate to the charity and minimize the amount of the gift to the remainder beneficiaries. If the investments perform better than the payout rate, the remainder beneficiaries end up with a bigger benefit with little or no estate and gift tax implications to the trust creator.
Donate Appreciated Long-term Capital Gain Property
Although capital gains rates are currently at historic lows, they may not stay at that level for much longer. Donating appreciated stock to charity can provide a current fair market value deduction on taxes and eliminate the recognition of gain. As rates increase, the charitable deduction can be of more value.
Create a Private Foundation
For those with significant wealth, setting up a private foundation is an excellent option. A current tax deduction can be made for what is deposited into the foundation, and, over time, the money can be distributed to charitable organizations. (Foundations require a donation of 5 percent of their net assets each year.)
Contribute to a Donor Advised Fund
In a donor advised fund such as those offered by brokerage houses, including California Community Foundation and the Jewish Community Foundation), money is put into a fund, and with a seat on the Board of Directors, you have a role in determining how funds are distributed. The fund manager handles the administrative aspects (board meeting minutes, tax filings, etc.). You have less control than a private foundation, but also less administrative burden. You may consider combining some of the above techniques. For instance, the charitable beneficiary on the Charitable Lead Trust can be your private foundation or donor advised fund. This allows you to build up the principal over time instead of in one lump sum. As a first step, we recommend speaking with a life insurance specialist, such as the professionals at Cohn Wealth Management, and a reputable tax advisor, such as the professionals at JH Cohn, to determine the tax implications associated with these strategies.
