Teach Your Donors the Benefits of Planned Giving

The information contained in this site is of general nature and should not be acted upon in your specific situation without further details and/or professional assistance

Charitable trusts can be beneficial for both your organization and the donor. During the next 20 years, about $10 trillion will change hands as baby boomers’ parents pass away. Much of this wealth is tied up in America’s small businesses and stock market, and, as it’s liquidated for retirement, the question of capital gains and estate taxes will loom large for donors.

Nonprofits have a great opportunity to tap into much of that wealth. Your organization and its cause can benefit greatly from teach­ing prospective donors how they and their children can save substantial taxes and help their favorite charity at the same time.

Special Planning Solutions:
A Practical Example

Dr. T is 66 and his wife is 62. They are now semiretired and contemplate retiring com­pletely in the next few years. After discus­sions with his advisors, Dr. T creates a chari­table remainder trust (CRT) funded with an initial stock contribution worth $150,000, which Dr. T bought for $40,000 several  years ago.

These stocks, which had been paying divi­dends of about $2,500 per year, will now pay annual distributions equal to 7% of the balance (valued annually) to him and his wife as long as either is alive. After their deaths, the remaining trust assets pass to charity.

The tax savings will be significant. Dr. T can deduct part of the contribution, produc­ing a charitable contribu­tion deduction of $36,600 on his 2002 income tax return. The precise figure depends on Dr. and Mrs. T’s ages, the CRT’s per­centage payout and the IRS actuarial tables in effect for the month the CRT is created.

Dr. T will also avoid capital gains tax of about $30,800 that he would owe if he sold the stocks. Moreover, the CRT will also elimi­nate the estate tax ($75,000 at the top marginal rate for 2002) his estate would owe if he passed these stocks to his heirs.

Besides the tax savings, Dr. and Mrs. T will be able to receive income. Dr. T can control the level of income as he selects his payout percentage when he creates the CRT.           A higher percentage will produce a higher pay­out, but a lower charitable deduction and vice versa. Dr. T’s annual income from these stocks will increase from the $2,500 he origi­nally received to $10,500 initially, and it will go up or down in future years as the trust property’s value fluctuates.

Admittedly, Dr. T’s children are denied the $150,000 contributed to the CRT, because this amount goes to charity when Dr. and Mrs. T both die. But they could purchase a joint-and-survivor life insurance policy to replace this amount. And, if they place this policy in an irrevocable life insurance trust, it would not escape estate tax.

Above all, the CRT will fund a major charitable project in the name of Dr. and Mrs. T when the CRT terminates.

Other Applications

Donors can use a CRT to provide effective tax-saving solutions for several other com­mon planning situations, such as:

      Receiving IRA or retirement plan distributions,

      Assisting in a sale of a business or investment property,

      Creating a marital deduction trust for a husband or wife,

      Funding children’s or grandchildren’s educations, and

      Supporting an aged relative or domestic employee.

Charitable Lead Trust

A charitable lead trust (CLT) is the reverse of the CRT. It is a useful plan­ning tool for donors who wish to save estate and gift taxes on large transfers. Donors can create a CLT to pay current distributions to charity for a period of years, after which the trust corpus passes to the donor’s fam­ily. The estate tax or gift tax otherwise due on the remainder CLT interest is offset by the value of the intervening charitable inter­est. If the charita­ble payout is high enough, or the trust continues long enough, the family share can be transferred tax free.

For example, no tax would be due on the family’s remainder interest in a 10-year trust paid to charity each year an amount equal to 13.2% of the amount originally transferred to the trust. The same would be true of a 15-year trust paying 9.9%, a 20-year trust pay­ing 8.3% or a 25-year trust paying 7.4%. These figures are based on a 5.4% IRS actuarial rate.

Other Gift Alternatives

Many other charitable gift arrange­ments can fit nicely into standard, unex­ceptional per­sonal and family situations. For instance, the charitable gift annuity or the pooled income fund can produce results similar to a CRT’s benefits.

Other examples include donating the remain­der interest in a personal residence, farm or unneeded life insurance policy. Charitable giving tools may be useful for virtually any­one, if his or her planner is aware of the pos­sibilities and knows how to put these vehicles to practical use.

Get To Know Planned Giving

Planned giving vehicles are not obscure or expensive devices used primarily by wealthy philanthropists. But standard estate planning tools designed to achieve a wide range of per­sonal financial-planning goals. Among the financial vehicles used to pass on assets are:

      Outright contributions of appreciated property,

      Transfers by will (bequests),

      Gifts to pooled income funds,

      Charitable gift annuities,

      CRTs, and


Although many vehicles for charitable giving exist, nonprofit organizations must spend time learning how these vehicles function and which are best for them. Every organi­zation should have at least one person who thoroughly knows the charitable giving options and can inform potential donors of their advantages.

Nonprofits have had great success in educat­ing the community around them in how they can donate money to charity without depriving themselves or their heirs of income. Has your nonprofit been doing all it can to attract donors and show them the bene­fits of contributing to your cause? Please call us for help with this important process.


(c)2001-06 Fraser CPA - Last Updated 05/01/2006

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