Ways to Give

Making charitable contributions is an art - a creative process that adapts to the changing needs and wishes of the donor. Planned giving enables a donor to arrange charitable contributions in a way that maximizes his or her personal objectives while minimizing the after-tax cost.

Depending on the asset given and the gift arrangement selected, a donor can generally expect to obtain some or all of the following benefits:

• Fulfill philanthropic goals
• Reduce income tax through a deduction for the gift
• Avoid capital-gain tax on gifts of long-term appreciated property
• Retain a stream of payments for life of the donor and for other beneficiaries
• Increase spendable income
• Eliminate federal estate tax on property passing to charity upon the donor's death
• Reduce costs and time in estate settlement

The following is a list of the various forms of planned charitable gifts. You should consult with your own tax and legal advisors for a full discussion and explanation of the tax and legal implications of particular gift plans, as they apply to you.

Gifts to Fund the Future

Through the years, many individuals have found planned gifts to be excellent vehicles for benefiting their favorite charitable organizations. In addition to personal satisfaction, such gifts offer major planning opportunities to minimize federal and state taxes, increasing the possibilities for effective distribution of assets. The wide degree of flexibility permitted in arranging a planned gift while still obtaining favorable tax benefits has contributed significantly to making such gifts popular and potent estate-planning tools.

Outright Gifts

Cash — Securities and Real Estate — Tangible Personal Property

Deferred Gifts

Life-Payment Plans — Charitable Remainder Trusts
Charitable Remainder Unitrust — Charitable Remainder Annuity Trust
Gift Annuities — Gifts Under Your Will
Gifts of Real Estate with Retained Life Interest — Life Insurance

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Outright Gifts

Cash - Cash is the simplest, most direct and most popular type of charitable gift. A gift of cash is considered made on the date it is hand delivered or mailed, and because of the charitable deduction, the net cost to a donor can be much less than the actual amount of the gift.

Example: the net cost of a $1,000 cash gift to a donor in the 31% marginal tax bracket is only $690 after his or her $310 tax savings.

A cash gift is deductible up to 50% of a donor's adjusted gross income (AGI). Any amount in excess of the 50% ceiling can be carried over for five years.

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Securities and Real Estate - Popular alternatives to cash are gifts of appreciated property, such as securities and real estate. Such gifts generate a double tax benefit. In addition to receiving an income-tax charitable deduction or the full fair-market value of the property, the donor escapes any potential tax on the capital-gain element in the gifted property. Note: To qualify for this double tax benefit, the property must have been held for more than one year.

Example: Mr. A owns securities valued at $22,000, which he purchased three years ago for $2,000. Because he is in the 31% tax bracket, Mr. A's gift of the securities to the Community Foundation produces a $22,000 deduction that saves him $6,820.00 in income taxes (31% of $22,000).

In addition, Mr. A avoids capital-gain tax on his $20,000 paper profit, which saves a further $4,000 ($20,000 gain x 20%). The net cost of his $22,000 gift is $11,180 ($22,000 less $6,820 less $4,000).

The full fair-market value of gifts of long-term, appreciated property is deductible up to 30% of a donor's AGI. Any amount over the 30% ceiling be carried forward up to five years.

Note: A donor considering a gift of property that has declined in value would be better off selling the property to realize a deductible loss and then contributing the proceeds to charity. This ensures recognition and deductibility of the loss.

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Tangible Personal Property - As with gifts of securities or real estate, a donor is entitled to a charitable deduction for gifts of tangible personal property such as works of art, rare books, or stamp or coin collections. The allowable deduction for such a gift held long-term depends on the standard of "related used."

If the use of the contributed property is related to the exempt purposes of the charitable organization (e.g., a painting to a museum), the donor is entitled to a charitable deduction for the full fair-market value of the property - subject to the 30% ceiling and carryover.

If the use of the contributed property is unrelated to the exempt purposes of the charity (e.g., a stamp collection to a hospital to sell and use the proceeds), the donor is entitled to a deduction only for his or her basis in the property.

As with gifts of securities and real estate, long-term tangible property is property held for more than 12 months. However, unlike securities and real estate, the maximum capital-gain-tax rate for tangible personal property is 28%.

Note: If the donor created the contributed asset (e.g., a painter who gives his or her own art work), the deduction is limited to the actual cost in producing the asset.

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Deferred Gifts

Life-Payment Plans - A life-payment plan can allow you to make a substantial gift to charity while still providing for your personal financial needs. There are several types of such plans, all of which combine life payments for one or more beneficiaries designated by the donor with a gift to charity. These plans are attractive to many donors because they offer substantial tax benefits and may increase cash flow to the donor or other beneficiary, depending on the asset contributed.

Charitable Remainder Trusts - Introduced by the Tax Reform Act of 1969, the charitable remainder trust is a popular plan because of the financial and estate-planning flexibility it offers. This trust is similar to other types of trusts, except that a charitable beneficiary receives the remainder interest. A donor transfers property under a trust agreement that specifies how trust income and principal are to be distributed, and the trust may be created to become effective during life or at death.

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An irrevocable trust trust qualifies for special tax consideration if it is in one of two forms:

Charitable Remainder Unitrust - The primary feature of a unitrust is that it provides for payment to the beneficiary(ies) of an amount that may vary. The payment must equal a fixed percentage of the net fair-market value of the trust assets as valued annually. The donor determines the fixed percentage when creating the unitrust in consultation with financial or legal advisors and the trustee. Payment must be at least 5% of the value of the trust assets. Depending on the donor's estate planning objectives, he or she may emphasize the charitable deduction (by choosing a lower rate) or the annual return (by selecting a higher rate).

The unitrust payment must be made at least annually (may be more frequently) to the beneficiary(ies). The unitrust may be set up for life or a term of years not exceeding 20. Example: A 6% unitrust valued at $100,000 will pay out $6,000 its first year. If the trust assets are valued at $110,000 in its second year, the payout will be $6,600. The variable nature of unitrust payments may provide a hedge against inflation - assuming a growth in the value of the assets comparable to the inflation rate.

The donor is allowed a charitable deduction equal to the present value of the charitable organization's remainder interest in the unitrust based on the fair-market value of the asset transferred, the payout rate chosen, and the age and number of beneficiaries (or the term of years). Funding the unitrust with appreciated, long-term, capital-gain securities or real estate can increase the tax benefits.

These trusts have enabled donors to support worthwhile causes while augmenting current income. Example: Mrs. C, 67, endows a fund in memory of her husband. She uses stocks owned for more than 12 months valued at $100,000 with a cost basis of $30,000, which pay dividends equivalent to a 2% annual return. By creating a 6% unitrust with herself as sole payment beneficiary for life, not only does Mrs. C increase her income, she also realizes a charitable deduction of $44,003. In her 36% income-tax bracket, her gift produces a net tax savings of $15,841. She also avoids capital-gain tax of $14,000 ($70,000 gain x 20%) that she would have incurred by selling the stock to buy higher-yielding securities.

The first year she receives payments totaling $6,000 for the trust (6% x $100,000). After that, she receives 6% of the value of the trust assets as revalued annually. Mrs. C may choose to make additional gifts to the unitrust in the future.

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Charitable Remainder Annuity Trust - The annuity trust shares many common features with a unitrust, the principal difference being the manner of calculating the payment to the beneficiary. Instead of a payout that may vary, the annuity trust provides a fixed payout of not less than 5% of the initial fair-market value of the gift in trust.

Among the benefits to the donor contributing to an annuity trust are a deduction for the present value of the charitable remainder interest and avoidance of capital-gain tax on the transfer of appreciated, long term, capital-gain property. The fixed-payout feature of the annuity trust makes it particularly suitable for a beneficiary who needs the security of a specified payment.

Example: If Mrs. C chooses an annuity trust rather than a unitrust for her endowment, her initial deduction will be $46,451 and her resulting tax savings $16,722. The payments she receives from the trust will be fixed at $6,000 and will never vary, whatever the fluctuations of interest rates and stock prices. Because of the rules governing charitable remainder annuity trusts, she cannot add to the annuity trust in the future as she can to the unitrust.

Whichever trust she chooses, however, a final benefit to Mrs. C is that her estate will pay no tax on the principal of the charitable remainder trust that establishes her memorial fund.

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Gift Annuities - The charitable gift annuity is among the oldest, simplest, and most popular of the charitable life-payment plans. In exchange for a transfer of cash, marketable securities or, in some circumstances, real estate, the charity contractually guarantees to make specified annuity payments to the donor and/or another beneficiary. (Note: State law may restrict the types of property that may be exchanged for a charitable gift annuity.) The payout rate depends on the age and number of beneficiaries.  Please contact us for information regarding the availability of this program.

The donor can claim a current charitable deduction for the portion of the transfer that represents the charitable gift element - the amount by which the value of the property transferred to the charity exceeds the value of the annuity received. Another important tax benefit is that, as with other types of annuities, a portion of each annuity payment is income-tax-free over the life expectancy of the annuitant. (This portion is treated as a return of the original investment for tax purposes.)

Example: Mrs. F, 70, transfers $20,000 to the Community Foundation in exchange for an annuity payment of $1,500 a year for life. Of this amount, $779 will be treated as a tax-free return of principal for the next sixteen years (her life expectancy) and only $721 will be treated as ordinary income. Thereafter, the entire $1,500 will be treated as ordinary income. In addition, Mrs. F realizes a charitable deduction of $7,632, that, in her 31% generates a net tax savings of $2,366.

Annual payments may begin immediately or, with a deferred-payment gift annuity, at a set time in the future - at retirement, for example. This type of annuity is particularly attractive to donors in the 40- to 60-year age bracket who have a high current income, who can benefit from a current tax deduction, and who are interested in augmenting potential retirement income on a tax-favored basis.

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Gifts Under Your Will - Each year, thousands of individuals designate a portion of their assets by bequest to benefit charitable organizations. Gifts under wills have become an important part of the American philanthropic tradition because they enable individuals to make significant gifts that they may not have been able to make during life. Bequests can take various forms:

A specific bequest directs that a charitable organization is to receive a specific piece of property. Example: "I give to the Community Foundation all of my shares in XYZ Mutual Fund to be used for the general purposes of said charity."

A general bequest directs that the charity receive a specified dollar amount. Example: "I give to the Community Foundation the sum of $100,000 to be used for the general purposes of said charity."

A residual bequest designates all or a portion of whatever remains after all debts, taxes, expenses, and all other bequests have been paid. Example: "I give to the Community Foundation fifty percent (50%) of the rest, residue, and remainder of my estate, to be used for the general purposes of said charity.

A contingent bequest takes effect only if the primary intention cannot be met. Example: "If (PRIMARY BENEFICIARY) does not survive me, the I give to the Community Foundation all the rest, residue, and remainder of my estate to be used for the general purposes of the Community Foundation." This ensures that property will pass to the Community Foundation rather than unintended beneficiaries - including the government.

While all of the above examples provide for unrestricted support of the Community Foundation, any of them may be designated as a restricted bequest for a specific purpose of the Community Foundation. For example, if you wish to memorialize a family member or an honored colleague, you can establish a named fund that will provide support for a program of special interest to you or the honored person.

A charitable bequest can also provide payments for life to a selected beneficiary by establishing a testamentary charitable remainder trust (established under the donor's will) that provides payments to the beneficiary for life with the principal then being paid to the Community Foundation. If it is an annuity trust or a unitrust, the estate will be allowed an estate-tax charitable deduction for a portion of the initial value of the trust. The deduction will be calculated in a manner similar to that for a living trust.

Notes:

Because of this deduction, a bequest in any of these forms can significantly reduce the tax burden of your estate. If, for example, you are subject to the top estate-tax rate of 55%, a $100,000 charitable bequest saves $55,000 in taxes, and you exercise the privilege of directing your lifetime accumulations as you wish.

If the only life-payment beneficiary of a testamentary trust is the donor's spouse, the entire value of the trust will be exempt from estate tax. In addition to the charitable deduction from the Community Foundation's remainder interest, the spouse's incoming interest will qualify for the marital deduction.

The same result also occurs for charitable remainder unitrusts and annuity trusts created during the donor's lifetime.

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Gifts of Real Estate with Retained Life Interest - A gift of a remainder interest in a personal residence or farm provides the donor with a charitable deduction for the present value of the remainder interest and permits the donor to escape any potential capital-gain tax on the built-in appreciation. What may be more important from the donor's point of the view is that he or she can continue to occupy the residence or operate the farm without disruption.

The term personal residence is broadly defined to include any property used by the taxpayer as a personal residence even though it is not the donor's principal residence. A personal residence may include a single-family dwelling or stock owned by the donor as a tenant-stockholder in a cooperative housing corporation, condominium, or vacation home. The term farm includes any land used by the donor or his or her tenant for producing agricultural products or raising livestock.

Making such a gift does not require that the donor remain in the residence. A donor who moves has several options: renting out the property and retaining the rent; converting the retained life interest to a stream of payments for life; selling and dividing the proceeds with the charity in proportion to their respective interests in the property; or making an additional gift of the retained interest.

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Life Insurance

While most people own some form of life insurance because of its unique ability to meet a variety of needs for financial protection, its role in planned charitable giving is frequently overlooked. Life insurance itself can be the direct funding medium of a gift, permitting the donor to make a substantial gift for a relatively modest annual outlay. Planning pointer: Insurance can also replace the value of an asset given to a charitable organization.

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We have highlighted a variety of planned gift options, and other alternative plans are available to realize the greatest personal and financial satisfaction from making your charitable gift. We will be delighted to work with you and your advisors in arranging the gift that best suits your objectives. Please remember that all illustrations and examples used in our explanations are for demonstration purposes only. Tax laws may change, and you should always consult with professional advisors when considering a deferred gift.

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