Voluntary
Philanthropy
Who
will forget the year 2001? Do you remember where you were that morning
of 9/11? The terrorism of that day sent shockwaves throughout America
that continue to reverberate. Despite the evil of others, Americans
remained generous in the midst of their suffering, giving an estimated
$212 billion that year to charity.
Even
with challenges of rebuilding the economy and fighting the War on
Terror, Americans contributed an astonishing $241 billion to charity in
2003. That was a 2.8 percent increase over the previous year and is the
highest rate of growth since 2000.* It is noteworthy that more than 75%
of this total generosity came from the wallets and the estate bequests
of individuals, not from corporations or charitable foundations.
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 personally consider nonessential
and perhaps even wasteful? 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 these charities. If so,
then you really should know about IRC § 664 and how you may turn your
involuntary philanthropy into tax-savvy voluntary philanthropy.
IRC
§ 664
Charitable tax deductions have been part of the IRC since its inception.
Why? The government's own research determined that private sector
charities deliver social services more cost-effectively than the
government itself. The government, in turn, sought to encourage
increased charitable giving to private sector charities by enacting IRC
§ 664 in 1969. In essence, IRC § 664 permits split-interest gifts,
making it attractive for taxpayers to have their cake and eat it too!
A Charitable Remainder Trust (CRT) is a popular
split-interest gifting technique. Through a CRT, you may increase your
current income, enjoy current income tax deductions and leave a
substantial financial legacy for your favorite charity(ies) upon your
death (or upon the death of your spouse, if later).
Here is how it works. First, you create a CRT and contribute an asset to
it. [Note: Appreciated assets (i.e. assets that would be subject to
capital gains taxation were you to sell them yourself) 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 an enhanced lifetime income plus valuable income
tax deductions for up to six years. Fourth, upon your death (or upon the
death of your spouse, if later), the CRT distributes any remaining CRT
assets probate-free to your selected charities and your estate receives
a charitable estate tax deduction for the value of the assets
distributed.
Family Matters
As the saying goes, charity begins at home. Accordingly, many
Americans want to maximize the wealth they ultimately transfer to their
children and grandchildren. While the CRT provides a lifetime income and
tax benefits to the taxpayer (and spouse), it correspondingly reduces
the estate eventually available to loved ones. This is obviously one of
the major drawbacks to CRT planning. However, there is a tax-savvy
strategy available to replace the value of the CRT assets for the
benefit of loved ones.
Summary
Americans have a rich tradition of being gracious givers, in good times
and in bad times. Fortunately, they may choose to be voluntary
philanthropists instead of involuntary philanthropists. Be
sure to contact qualified legal counsel before you pursue any
sophisticated financial or legal strategy.
*
Giving USA, AAFRC Trust for Philanthropy, www.aafrc.org.
The
Charitable Planning Trifecta
In
the world of high-stakes wagering on horse races,  winning
the Trifecta is a most noteworthy achievement. To win, you must
pick not only the winner of the race, but also the second and third
place finishers. When it comes to gracious giving, most taxpayers would
prefer to benefit their charities first, themselves second, their loved
ones third…and the IRS dead last. This Charitable Planning Trifecta
can be achieved through a carefully coordinated financial and legal
strategy that includes both a Charitable Remainder Trust (CRT)
and a Wealth Replacement Trust (WRT).
The
Trifecta Challenge
The creation of a CRT helps your charity finish first, with you (and
your spouse) a close second. Before the charity inherits the
assets held in the CRT upon your death (or upon the death of your
spouse, if later), you (and your spouse) enjoy a lifetime income from
the CRT and valuable charitable tax deductions. However, when the
charity inherits the assets held in the CRT, they are forever
unavailable to your loved ones. That is where the WRT comes in.
The
WRT Solution
With your CRT generating income sweetened by income tax deductions, you
may have a total annual income in excess of the amount necessary to
maintain your lifestyle. If so, then you may want to consider acquiring
Life Insurance in a WRT to replace the value of the CRT assets
ultimately passing to charity instead of to loved ones. To keep the
value of the Life Insurance death benefit out of your estate (and
that of your spouse) you must be very careful to follow the WRT dance
steps to ensure proper ownership of the Life Insurance from the
outset.
WRT
Dance 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 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 dance 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 paid to the charity.
Conclusion
With careful planning and crisp execution, your Charitable Planning
Trifecta will enrich your charity, yourself (and your spouse) and your
loved ones...disinheriting only the IRS.
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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