CharitableGiving

Some facts about Charitable Giving (2013)o 95.4% of American households give to charityo Average contribution per household is $2,974o Total giving was $335.17 billiono Household giving was $241.32 billion (72%)o Bequests were $26.81 billion (8%)o Corporate giving was $16.76 billion (5%)o Foundation giving was $50.28 billion (15%)

More facts about Charitable Giving (2013)o Gifts were made to • Religion (31%)• Education (16%)• Human Services (12%)• Grantmaking foundations (11%)

o There are approximately 1,536,084 charitable organizations in the U.S.A.

o Nonprofits accounted for 9.2% of all wages and salaries paid in the U.S.A.

Charitable Giving and Nonprofit Organizations are big business in the U.S.A.o Qualified charitable giving of any size is fully

deductible from income and estate assets.• In general the full gift to a charity during one’s life

(inter vivos) results in a deduction in taxable income up to the AGI of the individual or couple

• In genera the full gift to a charity at death (causa mortis) is deductible from the estate assets if the asset is included in the estate

Assets can be split with a portion going to charity

What does it take to qualify an organization as a charity?o Charities are qualified by the Internal Revenue Code

(Section 170(c) – most common types• State or U.S. possession or any political subdivision • Corporation, trust, community chest, or foundation

organized for• Religious, community service, scientific, literary or education• Fostering national or international amateur sports competition• Preventing cruelty to children or animals

• A post or organization of war veterans• A domestic fraternal society, order, or association operating

a lodge• A cemetery company

Examples of Charitable Organizationso Churches, Synagogues, Mosques, etc.o Public Parks (National, State, City, etc.)o Colleges and Universitieso United Wayo Boy Scouts and Girl Scouts of Americao Salvation Armyo American Heart Associationo American Society for the Prevention of Cruelty to Animals

Listing of Charitable Organizations at IRS Publication 78 with updates both quarterly and weekly via bulletins

Why give to charities (rather, why does your client want to give to charities)?o List three reasons – o Not on the list, tax reduction

How can your client give to charitieso Outright casho Property donation (real, tangible, or intangible)o Service

What is the benefit of the donation?o Altruism – principle or practice of concern for the welfare of

otherso Side benefit – some tax relief (altruism behavior

encouraged by tax codes)

How are the tax benefits calculated?o Gifts of Cash – amount donated less any tangible benefit

received by the donor for the donation• Buying season tickets to college sports team with

“donation” for the seat selection process (80% of donation allowable)

• Benefit of relatively small value then all donation tax deductible – get a coffee mug for $100 donation to OPB, entire $100 deductible

o Gifts of Service• Usually only direct out of pocket expenses (not reimbursed)• Cost of gas for delivery of meals on wheels• Cost of uniforms required for volunteer work

How are the tax benefits calculated (continued)?o Property Gifts -- Generally the fair market value of

the gift at the time of donationo Property Gifts that are at adjusted basis

• Ordinary Income Property• Any property that when sold would result in recognition of ordinary

income• Donation is reduced by the income produced (adjusted basis)

• Capital Gain Property• Fair market value unless donated to nonoperating foundation• Property donated for unrelated use

o Limitations based on 50%, 30% and 20% AGI rules• Skipping this section

Special Giving Vehicle – Charitable Remainder Trust (CRT)o Current benefits of property “retained” by donoro Remainder interest in property donated to charityo Irrevocable trusto Charity is trustee of the trusto Value of donation is fair market value of property

minus the beneficiary interest in the trust retained by the donor

o Beneficiary interest is usually income and value is present value of income based on estimated life of the donor

Example of basic Charitable Remainder Trusto Claire and Phil want to donate a stock portfolio currently

worth $2,000,000 to their university foundation with basis of $500,000

o The trust is set up such that the foundation is the trustee and the remainder beneficiary

o Claire and Phil take a beneficiary interest in the portfolio such that it pays an annual annuity of $50,000 to Claire and Phil for the remainder of the longer living spouse

o The foundation “manages” the portfolio and as trustee can alter the stocks in the portfolio

o At the death of the second to die, the portfolio will transfer to the foundation

o What, if any, tax benefit do Claire and Phil get from the CRT?

Example of basic Charitable Remainder Trust continuedo The fair market value of the portfolio is established at the

time the trust is set up – rules for valuing stocko Value of the annuity is determined by

• Section 7520 rates (2% for this example)• Expected life tables for couple with second in death - note this

would be longer than the expected life of either Claire or Phil• For example, Claire is 63 and Phil is 61 and actuarial tables have

second in death of 33 years• Calculation: N = 33 years, I/Y = 2.0%, Payment = $50,000 and

Present Value = $1,199,428• Donation benefit is $2,000,000 - $1,199,428 = $800,572• Typically estimated remainder must be greater than 10% of fair

market value of donation (here it is 40.0%)

Example of basic Charitable Remainder Trust continuedo How are the annual $50,000 payments calculated for Claire

and Phil as ordinary income and capital gains? Donation has two elements – sale element and charitable gift element• SALE ELEMENT -- PV of annuity minus Pro Rata adjusted

basis equals the charitable gift• PV annuity = $1,199,428• Pro Rata = $500,000 x ($1,199,428 / $2,000,000) = $299,857

• Capital Gain = $1,199,428 - $299,857 = $899,571

• CHARITABLE GIFT ELEMENT -- $800,572• Life of Annuity produces, $50,000 x 33 = $1,650,000• Principal $299,857, Capital Gain $899,571, Interest $450,572

Example of basic Charitable Remainder Trust continued• Annual $50,000 is what type of income?

• First calculate annual change in PV for principal reduction – annuity for 33 years vs 32 and difference is principal reduction (amortization schedule)

• $1,199,428 - $1,173,417 = $26,011• Next ratio of basis and capital gain

• Basis ratio $299,857 / $1,199,428 = 25%• Capital gain ratio $899,571 / $1,199,428 = 75%

• Interest Earned = $50,000 - $26,011 = $23,989• Capital Gain = 75% x $26,011 = $19,508

Example of basic Charitable Remainder Trust continuedo What is the anticipated remainder in trust for foundation?

• Estimate annual earnings on the portfolio – use an 8% return on stock portfolio

• Each year $50,000 payout takes place and additional gain (or annual loss) is added to the portfolio

• With expected payouts for 33 years and market return of 6%, calculate anticipated remainder benefit• N = 33• I/Y = 6.0%• PV = $2,000,000• PMT = -$50,000• FV = $8,814,022

o A portion of the appreciating assets avoid capital gains tax

Other Trustso Charitable Remainder Income Trustso Charitable Remainder Unit Trustso Charitable Remainder Trusts with Split Interest

Other Issueso Community Property in Wills with charity bequest of

propertyo Life Insurance in Will with charity bequest of proceedso IRAs in bequest

What are the implications for Financial Planning?o What is the most efficient way to transfer property for the

client to their beloved charities?o What potential events to the plan may render the transfer

choice ineffective or inefficient?• Pre-mature death• Asset value changes• Cash flow needs of the donor/grantor

o Changing tax lawso IRS potential challenges to the transfero Gift tax changes (size of one time exclusion or annual

exemption)o Availability of trust maker to change mind about transfer, both

assets and beneficiaries and thus tax implications of trust