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Spring 2013

December Current Thinking Column

Sunday, December 21, 2014

Charitable Giving Year End Thoughts

 by William E. Roberts, CLU, ChFC

While thoughts of charitable giving are often motivated by the best of intentions, there is nothing like increasing tax rates to catch the attention of high income earners. This year, after April 15th, when the new income tax rates became apparent, clients received a very unfriendly call from their tax accountants that, to their surprise, they owed a very large tax bill to the IRS. Our office has fielded questions about strategies that could mitigate the tax pain, including the use of tax deductible gifts to qualified charities.

With top income tax rates exceeding 50% (California's top rate is 56.7%) and capital gains rates at 25-35% depending upon what state you live in, we often are considering income tax planning as a part of estate and business transition plans. Some of these strategies are prospective, that is to say plans put in place before the sale of a highly appreciated asset. Strategies such as Charitable Remainder Trusts can be effective in reducing income taxes while implementing long-term income objectives and charitable gifting wishes.

However, discussion of charitable giving is often accompanied with highly emotional positioning. When we ask clients about their charitable intentions, we often hear the phrase, "our charity begins at home.” While supporting church, schools, medical-related concerns and the like with annual gifts, the thought of making substantial gifts as part of a long-term estate plan is foreign to their thinking.

Other families want to make contributions to charity to avoid passing largesse to their children with the fear they may become "trust fund babies." Their concern over entitlement issues with their children may or may not be founded in fact or performance by their children, yet is a very real fear in the senior generation's thinking.

We find that most often, the decision for a family to make philanthropic contributions centers on the core values they have or have inherited from previous generations. Whether it is motivated by the desire to better their community around them by making gifts to charities, or causes they are deeply dedicated to, or simply because they have a passion to solve a societal ill, families will give up some of what they could have kept for their children and often make significant gifts to charitable causes because of their heartfelt values.

Therefore, it could be of significant benefit to explore different strategies involving charitable giving to understand both tax and other advantages that might just fit into family core values, goals and objectives.

Because of the concern to both benefit a charity as well as the heirs, several of our clients have implemented a strategy that has been used by very wealthy and well-known families. One such family passed significant valuable real estate with very little estate tax consequence, reaped a large income tax deduction, benefitted charities of their choice for 20+ years with healthy donations and ultimately returned the asset back to the family intact with no income or estate tax consequence. The real estate will provide the family an income stream for generations to come.

While you may not have the wealth of one of America's first families, this strategy might be an effective approach to saving both income and estate taxes while benefiting charities of your choice and possibly passing a substantial inheritance to your family. The strategy that was used in the above illustration is a Charitable Lead Annuity Trust (CLAT). It is a philanthropic estate planning tool in which a donor can transfer assets to a trust for a set number of years. Each year, payments are made from the trust to the donor's designated charity or charities. Once the trust's term expires, what is left in the trust is returned estate tax free to the donor's heirs. Thus, the assets appreciation can be sheltered from estate taxes. More importantly to our clients today, though, is that since the CLAT is a charitable trust, the IRS will allow a generous income tax deduction in the year the assets are transferred to the trust.

Those facts, along with some interesting applications, make this an intriguing structure for those who already have philanthropic intent. There are many variations on the simple illustration above, but let’s look at the components of the Charitable Lead Annuity Trust (CLAT) and some thoughts as to why it is such a good strategy in the current interest rate environment.

CLATs are irrevocable trusts that pay an annuity amount to a charity for the lifetime of the grantor for a fixed number of years. At the end of the annuity period, non-charitable beneficiaries, who are usually the grantor's family, receive the remainder, free of estate or gift tax. CLATs may be set up during a lifetime or at death as part of testamentary trusts.

As previously mentioned, the CLAT qualifies for a gift tax charitable deduction at its inception, or an estate tax charitable deduction at death. The income tax deduction occurs when the transfer to the CLAT occurs, and the amount of the deduction is the present value of the future annuity payments to the charity. The interest rate used is a specifically prescribed rate known as the Section 7520 rate. Currently, the rate is extremely low, +/- 2.00%. This opens some interesting possibilities for planning if the asset is earning in excess of the 7520 rate, such as an 8.00% return, the amount returned to the family could be significant.

One interesting application is to contribute a paid-up life insurance policy along with cash. The strategy provides the grantor an income tax deduction, while removing a portion of the life insurance out of the estate of the grantor at the end of the CLAT.

There are many charitable gifting alternatives and you should consult with your advisors as to which strategy best fits your situation given your objectives, values and tax situation. But if you are like many of our clients, reviewing your potential income tax with your tax advisor is a prudent move, and a charitable giving strategy may have a place in your planning. 

 

Reflections on Legacy

by Leslie Dashew

 
Recently, I have been called upon to reflect on the concept of “legacy” in several contexts: how do family business owners think about the legacy they want to leave to heirs and family members? What is the legacy we wish to leave, both professionally and personally? And what is the legacy that has had an impact on our own lives?

Legacy includes the tangible and intangible assets that we inherit, develop and pass on to those who follow us. These legacies can be either enriched or weakened through the experiences, opportunities, and systems that we create for the future stewards of the legacy. (Joe Paul)

For some, a legacy may be property: e.g. a vacation home that has been in the family for generations and has memories, traditions and emotions attached to it. For others, it is a business that was created and maintained with the hope that it would provide opportunities for generations to come. Still, others feel that they have a “spiritual legacy” to transmit in documents such as an ethical will, and hope that the values and lessons of their life will benefit those who follow.

As my father turned 95 and faced the end of his life, I wrote the following poem as a birthday gift:


Daddy-o’s Legacy

Your legacy began early in your life and certainly in ours
Showing us the way
By venturing
Into new territories
By taking us on the sea before we could walk
Through setting up shop in a new state
Creating new machines and new industries
And new ways of financing our lives

Your legacy is an attitude, a philosophy
That says
“You Can Do It!”
And you demonstrate that by never giving up
By seeing possibilities and opportunities
And by insisting that we be independent
And self-sustaining
As soon as we could

Your legacy is to be creative
In your inventions
Your photography
In problem-solving
And in the design of your life

Your legacy is to build
To build boats
and machines
and systems
and organizations
and family
and wealth
and community.

Your legacy is to be generous
With your family
Your friends
And the people around you who need help
With guidance, love and money.

Your legacy is love
of beauty
And the sea
Of your family
And your friends

Your legacy includes your
Children
Grandchildren
Great grandchildren
And all the other lives you have touched.

I feel blessed to have the benefit of your legacy

Your legacy will continue well beyond the days of your life.

(September 16, 2011)

As I reflect on the legacy I received, my dad’s values, model and impact were the greatest gifts I received. As we think about the legacy we wish to leave through our own lives, it seems most important to me to share wisdom, opportunities and to leave the world a little bit better.

The end of the year is often a time of reflection. If we use the reflection to gain clarity about our vision for our lives and the legacy that we wish to leave, we will move more purposefully into the New Year. I wish you clarity, love, wisdom and peace during this holiday season and in the coming year.

 

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