TALES FROM THE CHESTNUT TREE

Considering a Charitable Gift?

Neal A. Deutsch, CFP^®

Published in Rivertown Journal, April 2006

Most people desire to see that their communities are made better places to live, voluntarily supporting organizations whose work they wish to further. These organizations can range from houses of worship, hospitals, schools, agencies for the less fortunate and everything else in between ­ as long as they are qualified charitable organizations.

Beyond meeting community needs, many people also feel a personal need to achieve some sort of significance beyond their own lives, or to create a legacy. They want to “give something back” to the community in which they’ve grown and prospered. Giving and sharing with others can strengthen and renew the donor’s mind, body and spirit. In a sense, the donor, through giving, has identified the values important to their own life. Whatever the reasons may be, our tax laws are designed to encourage charitable giving.

Gifts to charity, either during ones life or at death will reduce the size of one’s gross taxable estate. An additional benefit of lifetime gifts is that an income tax deduction is available within certain percentage limits. Some donors prefer to make outright gifts of cash or some other valuable assets to their favorite charities; others, although they would like to make an outright gift, depend on the income from their assets for their daily needs. Often, such donors wait until they die to transfer assets to a charity, through their Will or Trust. There are, however, methods that allow one to make a gift now, while still retaining an income for life. Four of the most popular of these methods are: the Charitable Remainder Unitrust [CRUT], Charitable Remainder Annuity Trust [CRAT], Pooled Income Fund [PIF], and Charitable Gift Annuity [CGA].

A Charitable Remainder Unitrust is a type of trust where the donor usually retains a right to a fixed percentage of the fair market value of the trust assets. These assets are re-valued annually. As the trust value increases or decreases, so does the annual payout, respectively.

A Charitable Remainder Annuity Trust is similar to a CRUT, but instead pays a fixed dollar amount year after year. The changes in the trust value do not affect the annual payments.

In a Pooled Income Fund, assets are transferred to a common investment fund, which is maintained by the charity. Annually, each donor receives a share of the income from the fund, in proportion to the contribution made. Payments will increase or decrease with the investment performance of the fund. Upon death, the corpus of the donor’s gift, together with any capital gains, passes to the charity.

With a Charitable Gift Annuity, the donor transfers the asset directly to the charity in exchange for the charity’s agreement to pay a fixed lifetime annuity.

Another gifting technique, which is the inverse of a Charitable Remainder Trust, is called a Charitable Lead Trust [CLT] or a Charitable Income Trust. Using this technique, the income interest is assigned to the charity, usually for a period of years, and then the remainder of the trust assets passes to the donor’s heirs. The amount of the estate tax deduction and the amount left for the heirs will depend on three things: the number of years of the existence of the trust, the percentage of the annual payments to the charity, and the investment results of the trustee.

Along with the altruistic feelings of giving come some very tangible benefits- it can provide estate and income tax deductions. It can, in many cases, avoid or delay capital gains tax payments and may increase personal after-tax cash flow. It may increase the amount you pass to your heirs. Giving philanthropically may very well be one of the best gifts you can give your family.

Neal A. Deutsch is a Certified Financial Planner^™, Registered Securities Principal and President of Chestnut Investment Group in Suffern, NY, helping people with financial planning since 1984. Please feel free to call Neal at 845.369.0016 or email him with your questions at neald@chestnutinvestment.com Feel free to visit his website at www.chestnutinvestment.com