Nonprofit organizations represent one of three sectors of our society, the other two being business and government. Businesses depend on revenue, government depends on taxes and charities depend on donations to provide working capital. The government recognizes the value charities provide our society and gives them a special tax status that allows them to operate without paying tax and it gives donors a tax deduction incentive to make a charitable gift.
My definition of “planned giving” is: “Honoring one’s philanthropic interests by helping a charity or other nonprofit organization support its mission while simultaneously taking advantage of prudent estate planning techniques allowed by current tax laws that provide donors with optimum income, estate, and gift tax reductions and possible income benefits.”
Planned giving can include one or more of the following methods:
You give money or some other asset to a charity. The charity can use the gift immediately and you get an immediate tax deduction based upon the fair market value of the gift. Common gifts include cash, common stock, privately held stock, real estate, paid-up life insurance policies, tangible personal property and U.S. savings bonds.
Charitable gift annuity
You give cash or property to a charity in exchange for a guaranteed fixed income for a number of years or for life and some tax advantages.
Charitable remainder trust
You make an irrevocable gift in a special trust, name yourself as the income beneficiary, and receive income for life or a period of years not to exceed 20. If you place appreciated securities or property in the trust, you avoid an immediate capital gains tax. When the trust terminates, the remaining assets in the trust belong to a charity.
Non-grantor lead trusts
Kind of the opposite of the above. The annual income goes to a charity. When you die, the remaining assets go to your heirs.
This is part gift and part sale. You sell an asset to the charity for less than the appraised value. You get an income tax deduction for the difference between the appraised value and the sale price. The most common asset for a bargain sale is real estate.
Gift of residence with a retained life estate
You give your primary residence or vacation home to a charity but keep the right to live in it. You continue to maintain the home. You will receive a current income tax deduction for a portion of the appraised value and your home is no longer in your estate for estate tax purposes.
You leave part of your estate to a charity in your will or living trust.
Gift of a retirement plan asset
You can leave your IRA to a charity. If your heirs receive your IRA, they have to pay income tax when they withdraw the money, and your estate may have to pay an estate tax, which could be as much as 40 percent of the value of the IRA. If you leave your IRA to a charity, the charity won’t pay any tax on the IRA and neither will your estate.
Kenneth B. Petersen is an investment adviser and principal of Monterey Private Wealth Inc. in Monterey. Send questions concerning investing, taxes, retirement or estate planning to 2340 Garden Road, Suite 202, Monterey 93940 or firstname.lastname@example.org.