Charity can meet many personal goals regardless of tax benefits.
New world of charitable planning
The non-tax benefits of charitable giving should be and often are, important to motivating and planning donations. Most donors, other than wealthy taxpayers making significant donations, will receive little if any, tax benefit from donations after the Tax Cuts and Jobs Act of 2017. So, the non-tax motives for giving are the sole motivation for more donors than ever before. But charitable giving can take many forms, not merely writing a check or donating stocks. There are many ways to add charity to a wide range of financial and estate plans. Many of the traditional tax oriented charitable giving approaches can be re-tooled to provide important personal benefits.
Not sure about making a charitable bequest: Name charity as a contingent beneficiary
Charitable giving can include naming charity for gifts or bequests that might be deferred or might not occur. Nonetheless, this can provide a “feel-good” way to include charity, especially if events occur such that your primary goals are no longer possible.
Example: Gordon Smith has three children, two daughters and a son, Phillip, who has been diagnosed with a neurologic condition that impairs his ability to work, and which might affect his life expectancy. Gordon is adamant that his will bequeath assets equally as he does not want to create any animosity or jealousy amongst the children. Gordon is especially concerned about keeping the peace because his daughters have been wonderfully supportive and helpful of his son. However, Gordon realistically understands that Phillip cannot work more than a limited amount and that the fatigue and cognitive problems caused by his brain disease have undermined his ability to maintain what Gordon believes is an adequate lifestyle. So, Gordon provides financial assistance to Phillip by providing a monthly stipend. Gordon’s will bequeaths all assets to his children equally. Gordon establishes an irrevocable life insurance trust that purchases a $2 million permanent policy on his life. This trust is designed to help support and supplement Phillip. If Phillip marries and has children, on Phillip’s death the funds in the trust will be distributed to his children. Gordon feels this is important since Phillip does not have the capacity to earn a livelihood to support his children and cannot obtain life insurance because of his health challenges. If Phillip dies without children, the American Brain Foundation is named as the contingent trust beneficiary for the remaining insurance proceeds. Gordon believes that would be a great way to fund research on brain disease and thereby help others with the same struggle as Phillip.
Protecting your spouse and giving to charity
For charitably inclined couples without children, a simple spin on the typically tax oriented dispositive scheme can provide a great plan with charitable benefits. The couple’s primary goal is taking care of each other. They are concerned about assuring that assets are managed safely as they age, and especially after the first death. On the second death, they want all of their wealth to be distributed to a charity with which they are actively involved. A typical tax-oriented estate plan today might rely on creating a marital trust for the surviving spouse. That trust would assure no estate tax on the first death and on the second death, those assets could qualify for a step-up in income tax basis in any appreciated assets in the trust. This could save capital gains tax for the ultimate heirs. However, in the scenario in this illustration, there are no children or other individual heirs, just charities. But this plan might nonetheless be quite useful.
Example: Cindy Smith’s husband Sam has primary progressive multiple sclerosis. Cindy wants to provide protection for Sam for his life, but on his demise, Cindy wants to benefit the National Multiple Sclerosis Society. Cindy establishes an inter-vivos (while she is alive) marital trust (“QTIP”) for her husband, Sam. Sam has a current interest in the trust. No current income tax deduction is permitted for the future interest the charity will receive after Sam’s death. To protect Sam, the trust may pay any necessary amounts of the trust principal (assets) to Sam, or for his benefit, during Sam’s lifetime. A trust company is named as co-trustee with Sam. This assures Sam’s involvement in his own trust and assures that if he can no longer fully participate in the management of the trust, the trust company will provide for whatever financial and other services he needs. Properly structured, this trust will qualify for a gift tax marital deduction when Cindy establishes it. During Sam’s lifetime, all income must be distributed at least annually. In addition, should Sam face an emergency, the trustees could distribute principal to him. On Sam’s demise, the principal remaining in the trust is to be distributed to the National Multiple Sclerosis Society, the remainder beneficiary. There will not be any current charitable contribution deduction, however, on Sam’s death, although the value of the entire trust will be included in his taxable estate, there will be an equal and offsetting charitable contribution deduction. If there is no estate tax due on Sam’s estate the deduction will be irrelevant, but the plan has provided protection for Sam and benefited the charity they wish to provide for.
Avoid elder financial abuse by giving a remainder interest in your residence
Generally, you can only obtain a charitable contribution deduction if you donate your entire interest in a particular property to charity. There are, however, several exceptions, including an important one relating to your home. You can make a donation of an interest in your personal residence or farm that only takes effect in the future. This special rule permits you to claim a current income tax deduction, without the legal costs and complications of setting up a trust to do so. Thus, you can contribute your house to charity and continue to live in it for the remainder of your life, or for some set number of years that you choose. Your spouse could also reside in the residence as well. The gift of the house to charity, however, must be irrevocable. You can use these rules to donate your house, cooperative apartment or even vacation home to your chosen charity. A donation of a remainder interest in a farm, which includes land and buildings, also qualifies. Charities will require a due diligence and evaluation process to accept such donations. Donations of fixtures, furniture and other personal assets in the house or on the farm will not qualify.
Example: Freda Jones has supported the performing arts in her hometown for years. She is single and has no family. On her death, her will bequeaths all of her assets to a local charity serving the arts. She wants to make certain that her home, which is the bulk of her estate, in fact, goes to her desired charity. She has seen too many elderly friends bamboozled by hucksters committing elder abuse. Since she knows she will retain the right to live in her home for the remainder of her life, she donates a remainder in the property to the charity. In that way, a recorded deed indicates the charity as the successor owner and Freda believes that the fact that the deed is recorded in the County records will make it very difficult for anyone to undermine her intended donation. While not the primary motivator, Freda does appreciate that whatever income tax deduction she gets today will be a bonus since her estate, while large, is not large enough to provide an estate tax deduction if she merely left the bequest in place.
Other considerations affecting charitable giving
While personal motivations for charitable gifts are important to most gifts, there are other circumstances affecting traditional charitable giving (cash or planned gifts to public charities), including more than just changing tax considerations. Consider:
- Crowdfunding is transforming charitable giving. Tremendous dollars are given through online campaigns that individuals can set up instantly at no cost. This trend will continue and has and will shift giving dollars away from traditional charities in many instances to personal causes and stories that resonate through social media. While many traditional charities have created their own crowdfunding sites and participate in many ways with this trend, what will be the impact? If you want to give through a crowdfunding site consider those campaigns that are connected to known charities so that you can be assured that the money you give will be used as described. Future columns will examine crowdfunding in greater detail.
- Socially oriented investing has grown in prominence. While investing is certainly independent of charitable giving, might some potential donors view themselves as accomplishing some of their social purposes in this manner and then devote fewer resources to charitable causes? Socially oriented investing can help encourage objectives you believe important, but don’t reduce your charitable giving because you have tailored your investments in this fashion.
- Longevity is transforming financial and estate planning. The reality is many donors may outlive their resources, eviscerating bequests provided for. Revisit financial forecasts for your future financial security using age 95 or even 100 as a life expectancy. While it is admirable to give to charity confirm that you don’t need to curtail current giving to meet realistic future financial needs. Consider charitable gift annuities and charitable remainder trusts to assure adequate cash flow or make a bequest to charity in lieu of current gifts You can always revisit forecasts in future years and ramp up giving when financially secure to do so. Comprehensive financial planning and forecasts will more commonly be necessary to demonstrate to potential donors that they have the financial capacity to donate more and earlier despite the risks of longevity. This same comprehensive planning approach can integrate well with the new charitable planning techniques (e.g. use of IRA distributions, non-grantor trusts and other techniques to be discussed in future columns).