Charitable Options
Eleeeeeeeeeeeeeeeee! It's What's for Charity
You won't need your money after you're gone. No eating or going on vacation. No tuition bills. No property taxes or rent. No need to buy this, that or the other thing. No nest-egg for support or piece of mind. All of your money, all of your equity, everything you have accumulated that supports your lifestyle and well-being, will be redistributed to others.
If you've lived the good life and achieved some measure of material success, but have been too distracted, selfish or lazy to pay sufficient attention to charitable endeavors, your estate plan can be a final opportunity to atone for those shortcomings. If you are heavily involved in philanthropic activities, financially or otherwise, you can continue your magnanimity from beyond the great divide.
Without a written plan, your charity ends once you have taken your last breath. It doesn't have to.
Coined from the word eleemosynary (relating to charity), "elee" is really just another word for your charitable nature.
Talk about "elee" with an estate planning lawyer from our firm today. In the Chicago area, call: 847.770.6600 or contact us online to schedule a free consultation.
Your estate plan is a last chance to do right and contribute to the greater good. Charity begins at home, but does not have to end there. Large or small, your charitable giving can follow physical demise and skip along for years. Ponder the causes you can support, the people you can help, and the beauty you can enhance and preserve.
On a grand scale, your estate planning can help great numbers of people, or maybe just one family in need. If you have more than enough to leave to the kids, family and friends who are already doing fine, then I beseech you to set aside a portion for others. Soothe your soul and follow through on a unique opportunity to help a wonderful cause. Planned charitable giving can be done creatively or simply, quietly or loudly, with or without tax benefit. No matter how it's done, giving to others is invariably a legacy enhancer. But thinking without acting accomplishes nothing.
The Judaic concept, Tikkun Olam ("repairing the world"), is an essential element of the mystical study of Kabbalah. The more "mitzvot" (good deeds) a person commits the better that person's life is. By being charitable to others, social justice follows.
More on Charitable History
Tithing: The biblical Book of Leviticus and the tenets of Christianity direct that, if possible, a person must donate 10% ("tithe" meaning "tenth" in old English) of earnings and assets to the greater community. At various times in history, tithing to the church was either optional or mandatory, but the practice of giving 10% of your estate to help "the others" has become more universal.
Twelfth century philosopher Maimonides defined eight levels of charity, each greater than the next. From highest to lowest, they are:
- Giving a poor person work (or loaning him/her person money to start a business) so he/she will not have to continue to depend on charity. The giver has then helped the recipient both short term and for the rest of his life.
- Giving charity anonymously to an unknown recipient.
- Giving charity anonymously to a known recipient.
- Giving charity publicly to an unknown recipient.
- Giving charity before being asked.
- Giving adequately after being asked.
- Giving willingly, but inadequately.
- Giving unwillingly.
The first tenet can be compared to the saying that if you "give a man a fish, you have fed him for today. Teach a man to fish and you have fed him for a lifetime." Of course jobs and education are how the bulk of our society functions. But often, the giver receives some benefit in return. Besides, once the master has taught the pupil how to fish, he can sell him fishing equipment. True nobility resides in the second tenet.
If you have the money and inclination to make a difference to the community, then whether you are a quiet giver or you crave posthumous praise, put it in writing.
Charitable Considerations
Fir charitable giving - consider:
The sheer joy you feel by supporting a dear cause, enhancing the beauty of the world or helping those in need.
The selfless lessons that your beneficiaries learn from your elee example.
- The honor or praise made in recognition of your gift. A plaque with your name on it, a bench at the neighborhood garden, a hospital wing named in your family's honor, a scholarship fund named for you.
- Income tax advantages during your life, including tax deductions and elimination of capital gains taxes.
- Estate tax advantages by eliminating a gift from your taxable estate.
- Different types of lifetime gifts made under various "alphabet soup" planned giving techniques, discussed later in this site, involve varying degrees of flexibility and lifetime control; income streams to charities, the donor or other individuals; tax benefits; an active role for your beneficiaries within the charitable structure of your gift; and ultimate disposition of the assets.
Investor and philanthropist Warren Buffet, whose publicly announced estate plan has already begun to donate $44 billion to charity (including $30 billion to the Bill & Melinda Gates Foundation), was quoted in a 1986 Forbes Magazine article describing the perfect inheritance as "... enough money so that they (family members) feel they could do anything, but not so much that they could do nothing."
Sue started her will with a conversation to her kids: "You Can't Always Get What You Want", referring to both the Rolling Stones song and the lessons she wants her adult children to learn. They may be disappointed in her generosity to others, but she sets a high elee bar for them to emulate.
With all of the suffering and beauty in our world, now is a time to open your eyes and look outwardly toward your favorite cause. Locally, your house of worship or the school you attended may be an obvious choice for elee dollars. Beyond those choices are the obvious large institutions that do great work, such as United Way, Salvation Army or Habitat for Humanity. There are thousands of other niche organizations, some much more worthy than others.
U.S. charities generally meet "501 (c)(3)" requirements, referring to the IRS code section exempting charitable organizations from paying income taxes and allowing you to obtain tax deductions for gifts to such organizations. Religious organizations are not required to meet 501 (c)(3) status, but you still get a deduction when making donations to your church, synagogue, mosque and temple.
Charitable Suggestions
If you want to be charitable, but you can't make a decision about where your charitable dollars should go, here are a few suggestions:
- FEED THE HUNGRY
- EDUCATE SOMEONE WHO CANNOT AFFORD BOOKS, LET ALONE TUITION
- CLOTHE THE NEEDY
- HELP A FAMILY STUCK WITH THE CHOICE OF EATING OR STAYING WARM PAY A UTILITY BILL
- RESEARCH OR TREAT A DISEASE OR MEDICAL CONDITION
- HELP SOMEONE PAY TO GET OR STAY HEALTHY
- PROTECT VULNERABLE CHILDREN
- GIVE TO OUR VETERANS WHO PROTECTED OUR WAY OF LIFE
- GIVE TO THOSE IN ACTIVE MILITARY SERVICE WHO ARE PROTECTING OUR WAY OF LIFE
- SUBSIDIZE AN ARTS OR ATHLETIC PROGRAM AT A SCHOOL WHOSE BUDGET FORCES A CHOICE BETWEEN ONE OR THE OTHER
- REPAIR OR ENHANCE THE ENVIRONMENT
- PLANT A NEIGHBORHOOD GARDEN
- HELP AN ANIMAL OR SOMEONE'S PROSPECTIVE PET
- ENDOW THE ARTS
- SUBSIDIZE BUS RIDES FOR ELDERLY PEOPLE TO GO TO THE STORE OR MEDICAL CLINIC
- STAMP OUT SOME EASILY PREVENTABLE DISEASE HERE OR ON THE OTHER SIDE OF THE WORLD
- GO GLOBAL OR STAY LOCAL
Need help making a worthy decision? One of my favorite sites is Charity Navigator [www.charitynavigator.org], a 501(c)(3) organization launched in 2001. Charity Navigator evaluates charities and can help you locate trustworthy ones that do work in areas that interest you. It has examined over 10,000 charities since its inception and currently contains ratings (1 star to 4 stars) on over 5,000 charities. It categorizes charities according to the types of work the charity performs (animals, environment, arts, health, education, religious, etc.) and shines a light on both well-run organizations (where most of the money goes to its mission) and poorly-run ones (where most of the money raised goes into the pockets of the people working there). Their fabulous web site contains a number of "top 10" and "bottom 10" lists that measure the efficiency (or lack thereof) of charities in a number of categories. You can filter by using a 4-star criteria. You can also plug in a favorite charity and get the rating of that organization, along with an efficiency comparison with other charities that do similar work.
Legacy Enhancer: Set aside a percentage of your estate for each of your children to select one or more charities to donate a portion of their inheritance, getting them involved in elee.
Tax Breaks and More
The IRS has long regarded the noble tradition of Americans' elee by rewarding charitable gifts with tax breaks. Though the charitable motivation leads, substantial tax advantages may follow. Tax benefits include deductions that offset income and elimination of the capital gains you would pay by selling an appreciated asset. Also, the asset is disregarded when computing estate taxes.
Basic income tax issues regarding basis and capital gains: You may be sitting on a low basis asset that you refuse to sell because you don't want to pay tax on the difference between what you paid for it and what you can sell it for. If you hold the asset until you die, your beneficiary receives a step-up in basis, which is the equivalent of an elimination of all capital gains taxes that accrued during your lifetime. If you give the low basis item to an individual beneficiary during your lifetime, it's fully taxed when that person sells it. This can be an important reason not to make a lifetime gift of an appreciated asset to an individual.
IRAs, as pre-tax investments, generally have a $0 cost basis. The capital gain is equal to the full value of the asset once it's withdrawn. That means every dollar you withdraw is fully taxed in your bracket. If you are over 70 ½, you must begin withdrawal of IRA and other qualified retirement plans based upon your age (RMD). Your spouse who takes a rollover doesn't have to take money out until she is 70 ½, but anyone else also has to withdraw an RMD and get taxed, perhaps at a boosted rate.
Regular appreciated assets make good lifetime gifts to charity. You may or may not receive a tax deduction, but capital gains taxes disappear. At death, leaving a retirement plan asset to charity is the only way to permanently jettison all capital gains taxes that follow your demise, making it a spectacular testamentary gift to charity.
As with lifetime gifts to charities, elee donations at death are eliminated from estate taxes liabilities. The simplest way to make a charitable donation is to provide in your will or trust for an outright gift to a charity upon your death. The asset is never taxed to your estate and neither you nor your beneficiaries receive anything back from the charity. Even an outright gift can have strings attached. You can specify the use (i.e. a gift to your church "for its building fund" or to your alma mater "to fund scholarships in my name for needy students") and give the trustee discretion to ensure that the use specified is carried out. The gift can provide for an alternate charity to receive if your wishes on its use are not carried out to the satisfaction of your trustee.
Besides outright gifts, with or without additional strings, there are other ways to donate to charity. Enter the Alphabet Soup World of Charitable Giving:
Charitable trusts and other elee planning vehicles allow for different strategies, with a dual purpose of providing benefits for the charities and also individual beneficiaries, probably you and family members. Planned giving can be tailored to suit your goals, which can be juggled around:
- giving to charity, which is first and foremost;
- getting an income tax deduction when the gift is made;
- eliminating taxable income on a yearly basis;
- diversifying your portfolio while eliminating capital gains on gifted appreciated assets;
- reducing your eventual estate tax liability;
- involving family members in the charitable process.
Charitable Remainder Trust (CRT)
A CRT is an irrevocable trust that allows you to gift assets to a charity and get some financial rewards in return. The gift to a CRT is usually made while you are living, but can also be done testamentarily. The simplest typically optimal use: you take an appreciated, low yielding asset-securities portfolio, real estate or private business-and give it to the trust. Upon sale of the assets you donated, there's no capital gains tax and the full value is reinvested in higher earning investments. The income is paid to you or family members, over designated lifetime(s) or a set period. Upon termination of the CRT, the assets pass to charity, though the trust can continue in perpetuity. A CRT enjoys 501(c)(3) status, so other people can donate to your CRT and probably get a tax deduction.
You can be the trustee and control the investments. You can design the yearly income stream to the non-charitable beneficiaries, but no less than 5% and no more than 50% can be paid to the non-charitable beneficiaries yearly. The income received by the non-charitable beneficiaries from the CRT is taxable according to a "tiered" system of varying degrees (ordinary income first, followed by capital gains, then "exempt" income and finally return of principal). For most situations, the income received from a CRT by a non-charitable beneficiary is ordinary income.
The amount of the income tax deduction you get when the gift is made is based upon a number of factors, including:
- The present value of the assets donated (the bigger the value, the bigger the deduction);
- The period of time anticipated to elapse before the charity receives the donated assets outright (if tied to people's ages, the shorter the anticipated time span, the bigger the deduction);
- The income stream selected (the higher the potential income paid to non-charitable beneficiaries, the smaller the deduction);
- An IRS index called the Applicable Federal Rate, published each month and used (among other reasons) to establish present values of future interests.
- No income tax deduction can be taken if the anticipated remainder interest going outright to charity is less than 10% of the present interest.
With regard to all of the potential financial benefits flowing back to you as donor, keep in mind the prime directive of spreading your elee. If you are too aggressive in the benefits you or other interested individuals receive, the IRS will bite with a vengeance.
Different types of CRT's
A Charitable Remainder Annuity Trust (CRAT)
The CRAT fixes the amount of dollars paid to the non-charitable income beneficiary for the term of the trust and never varies, even if the assets increase or decrease in value. Because the payments are fixed, a CRAT may fulfill a goal of income certainty. Assets cannot be added to an existing CRAT. A CRAT provides the most income certainty and is the most conservative, least flexible type of CRT.
[EXPAND/CONTRACT THIS AND THE FOLLOWING PARAGRAPH]The income to the non-charitable beneficiary fluctuates yearly with a Charitable Remainder Unitrust (CRUT), based upon the value of the assets that comprise the trust. The initial income tax deduction from a CRUT is less than from a CRAT, as the CRUT flexibility may at some point produce more income to the non-charitable beneficiaries, so the present value is less. CRUTs must be revalued each year. CRUT income can be expected to grow if there is inflation in our economy. You can add assets to an existing CRUT whenever you want. There are different types of CRUTs, designed to give varying degrees of flexibility over the non-charitable income payments tailored to the assets you donate and your goals.
More than half of all CRUTs are Standard Charitable Remainder Unitrusts (SCRUTs). SCRUTs mandate a minimum payment regardless of the trust earnings.
The Net Income Only Charitable Remainder Unitrust (NI-CRUT)
The Ni-CRUT pay the net income earned by the NI-CRUT each year or a set percentage (at least 5%), of the net fair market value of the asset, whichever is less. It does not allow for invasion of principal. This works well if you don't want the income to be paid to you or other non-charitable beneficiaries anytime soon, if ever. A NI-CRUT is usually funded by non-income producing assets expected to grow in value over time, such as vacant land.
Similar to a NI-CRUT, the Net Income With Makeup Charitable Remainder Unit Trust (NIM-CRUT) also pays a fixed percentage, at least 5% annually or the income, whichever is less. The difference is that if the income earned by the NIM-CRUT each year is insufficient to pay the fixed percentage, the deficiency is accumulated in a "make-up account" to eventually pay to you or other non-charitable beneficiary at a later time. Like the NI-CRUT, principal of a NIM-CRUT cannot be invaded by the lifetime non-charitable beneficiary. The NIM-CRUT also works well with an initial funding of assets that, while increasing in value, pay little or no current income. The assets of the NIM-CRUT can be converted to a higher earning investment, such as a tax-deferred annuity when it's time for you to retire, boosting your income, from both the current income and the make-up account, when you need it later in life. If you do not need immediate cash flow, but think you might later, a NIM-CRUT may be your preferred CRT.
The Flip Charitable Remainder Unitrust (FLIP-CRUT)
The FLIP-CRUT starts out like a NIM-CRUT, delaying any income to the non-charitable beneficiary, but upon the occurrence of some pre-determined event, it turns into a SCRUT. Some of the triggering event possibilities:
- A specific calendar date that can be arbitrary or tied to some event whose occurrence can be ascertained, such as when you or your spouse hit your 70th birthday;
- An event whose timing can be guessed at, but is not known with certainty or controlled by you: a child's marriage or graduation, birth of a grandchild;
- An event whose timing cannot be known, but is presumably within some measure of your control: sale of a closely held business interest or other unmarketable asset owned by the trust.
A Pooled Income Fund
A Pooled Income Fund is a type of CRT that requires little in the way of sophisticated set-up. You donate assets to the charity via a pre-existing trust, so you don't have to do much leg work. Again, this works well with appreciated assets, because of the larger deduction you can take, the absence of capital gains when the charity sells the asset and the higher income reflected by the large value of the asset. You receive rights to a percentage of the income generated by the charity's fund until your death. Pooled income funds allow you to diversify your assets during your lifetime while benefiting a charity at your death without the hassle of putting together the trust. The availability of Pooled Income Fund CRTs allow smaller investors, who may only want to donate $5,000 or $10,000, to take advantage of charitable trust techniques that are generally available only to those donating at least $100,000. They are nice and easy and offered by many large charities.
Charitable Lead Trust (CLT)
A Charitable Lead Trust (CLT) uses an approach that can be characterized as the opposite of a CRT. Let's say you don't need the income from certain assets and your estate will likely be subject to estate taxes. Per the CLT, you irrevocably lend income-producing assets to a charity. The charity receives the income for a term of years or your lifespan. When the term expires or you die, the CLT assets, including any growth, are transferred to your heirs (or in trust for the benefit of your heirs) at a discount, saving or eliminating estate taxes.
There are two types of CLTs, the grantor CLT and the non-grantor CLT that determine the manner in which the income tax is handled each year. If making a gift to a grantor CLT, you get a partial income tax deduction on the gift when it's made, but you are taxed yearly on the income. In the case of a non-grantor CLT, you get no income tax deduction on transfer of the assets, but though the non-grantor CLT itself is taxed on yearly earnings, if the income is transferred to the charity it gets a tax deduction, so no income tax is paid.
Assets selected for a CLT produce income for charity and are optimally ones that also have great growth potential, as the intent is to remove the growth from your estate. CLTs are among the most sophisticated charitable trusts and are mostly used by people with at least tens of millions of dollars in assets who can establish the CLT with assets valued at $500,000 or more.
Foundation (PFF)
A Private Family Foundation (PFF) is another way to help charitable causes. It's the most hands-on approach to planning giving, involving you and/or your beneficiaries' continuing involvement. Though its substantial commitment of time and money makes it appropriate mostly for very wealthy families ready to commit over $1 million, IRS estimates that there are over 14,000 PFFs that have less than $100,000 in assets.
A PFF is created as a trust or corporation, during your lifetime or following your death. If established as a trust, the PFF is controlled by trustees; if it's established as a corporation, then a board of directors controls. Use of a trust is somewhat less flexible than a corporation. On the one hand, less flexibility better ensures that your stated charitable vision will continue well into the future; but on the other hand, inflexibility may cause the trust to lose step with a changing tomorrow. Corporations are generally better suited to adapt to future unknown variables. Either way, your PFF can exist in perpetuity, investing and distributing money according to a mission statement that you write with the help of your attorney. The mission statement serves as a roadmap for the PFF and must be submitted to IRS to obtain tax-exempt status.
A typical PFF established during your lifetime involves appointing a board of directors (or trustees if established as a trust), often including yourself and other family members, who decide how money is invested and disbursed. PFFs require a fairly large time commitment, typically spent reviewing and following up on grant applications. At least 5% must be paid out each year to recognized charities or other grant-seekers (such as those applying for college scholarships) to qualify as a tax-exempt PFF. Your children may even be employed by the PFF, drawing a salary. Be careful about excessive family compensation or other potential self-dealing, because IRS can pull the plug, sending your PFF down the drain. Filings must be made every year to IRS, which will make a determination of continuing charitable eligibility based upon certain criteria.
PFFs can provide a forum in which family members discuss and work toward a common charitable goal. It can be a tool to unite your heirs in a shared elee vision, perpetuating your family commitment to philanthropic efforts. It can also sow discord after you are gone if the family members put in control are unable to agree on the disbursements that must be made to retain tax-exempt status. Careful drafting can eliminate these types of problems, either by putting each child in control of his/her own foundation or if you want to keep them corralled together, by referring dispute resolution to a third party.
Like CRTs, donations to PFFs enjoy many charitable income-tax advantages. If funded with appreciated assets, capital gains can be eliminated when the donated assets are sold or transferred from the PFF to the charities in the form of grants. As with a charitable organization, income is not subject to tax, though an "excise" tax of 1-2% is assessed yearly on the income. You can get an income-tax deduction on donated assets, but the deduction is less than that given by IRS for other types of charitable donations.
A PFF is another way to provide for the long-term needs of charitable organizations or purposes you want to help, while eliminating or mitigating estate taxes. If structured properly and invested wisely, principal can increase over time, making an impact for generations to come. As the flipside to the benefit of existing in perpetuity, complicated rules must be followed to terminate a foundation. Otherwise, ending a foundation results in a "termination" tax.
The Bill & Melinda Gates Foundation is one of the best known and richest PFF and can be expected to last as long as Microsoft, the company that Mr. Gates founded.
The Kresge Story: In 1899, Sebastian S. Kresge opened a modest store in downtown Detroit. Eventually, Kresge's evolved into the giant retailer Kmart, land of the blue light special, more than 1,800 stores, and over 220,000 employees. In January 2002, Kmart filed for Chapter 11 bankruptcy protection, but since then has joined with Sears to try to remain a viable retail entity.
Meanwhile, in 1924, Mr. Kresge, with a personal gift of $1.3 million, began the Kresge Foundation, to "promote the well-being of mankind." Today, the Kresge Foundation grants support a broad range of organizations reflecting almost the entire array of the nonprofit sector, a $3 billion foundation that distributed over $170 million in 2006.
The Kresge example illustrates the fact that a charitable legacy can outlast all the rest of the good and great things we do throughout our lives.
Donor Advised Funds (DAF)
On a smaller scale than a regular PFF, but sharing some characteristics, is a Donor Advised Funds (DAF), the PFF equivalent to a Pooled Income Fund CRT. A DAF allows you to get involved with a favorite charity at a relatively low cost, without the need to hire an attorney to do the paper work. You get a tax deduction and may recommend to the DAF recipient how the funds are disbursed. Usually, the charity follows your recommendations, but it is not obligated to do so.
Not-So-Charitable Giving, But a Spectacular Result - John D. MacArthur
At the time he died in 1978 at the age 80, John D. MacArthur, who owned Bankers Life and Casualty, was the America's second wealthiest person. By many accounts he was a stingy man, the type of person who saved on the cost of rubber bands by instructing employees to bring them from home (after taking them off their delivered newspapers).
For most of his life, MacArthur reportedly refused to seriously consider estate planning. He would not even discuss the subject of his own mortality with his lawyer. His simple will left half of everything to wife Catherine and a quarter to each of his two children. When he was in his 70s, after his lawyer had hammered on him for years to set up a trust or foundation, something clicked and he finally took action. He may have been a miser, but he eventually realized that his insurance and real estate empire would be eviscerated by taxes unless he did the right planning.
The John D. and Catherine T. MacArthur Foundation was established for essentially generic charitable purposes, probably more for tax motives than philanthropic ones. He wanted nothing to do with the operation of the Foundation and directed his advisors to "figure out after I am dead what to do with it." It is now one of the largest philanthropic organizations in the country, distributing over $250 million in grants every year for work being done in over 60 countries. Listeners of NPR hear the name of the Foundation mentioned numerous times every day.
The Foundation is probably best known for the MacArthur Fellows Program, a/k/a the "Genius Award", which awards 20 to 30 unrestricted Fellowships every year to individual Americans across all ages and fields who show exceptional merit and promise of continued creative work.
$500,000 is paid to each "Fellow", distributed in equal quarterly installments over five years. Fellows may be "writers, scientists, artists, social scientists, humanists, teachers, entrepreneurs, or those in other fields" who have demonstrated "originality, insight, and potential." The gifts are made to enable the Fellows to "advance their expertise, engage in bold new work, or, if they wish, to change fields or alter the direction of their careers" and enabling them "to exercise their own creative instincts for the benefit of human society." As a "no strings attached" award in support of people rather than projects, the grant does not require or expect specific products or reports from recipients, nor is any evaluation made of the recipients' creativity during the term of the Fellowship. Since the nominating process is anonymous and selections are made secretively, most recipients are clueless that they have even been considered until notified that they have won the award.
John D. MacArthur spectacularly enhanced his legacy via a creative estate plan, albeit well funded, administered by people with vision and imagination.
Types of Trusts We Establish:
- Revocable/Irrevocable Trust
- Irrevocable Life Insurance Trust
- Supplemental Special Needs Trust
- Generation Skipping Trust
- Charitable Trusts
- Credit Shelter/Applicable Exclusion Amount Shelter Trust
- Pet Trust
- Estate Freeze Trust
- Qualified Personal Residence Trust (QPRT)
- Qualified Domestic Trust
- Life Partner and LGBT
