Site
Contents
 |
General Information about the Area Office
North Indiana Conference Office
South Indiana Conference Office
Prayer Guides
(Courtesy of the NIC Prayer Team)
Area United Methodist
Foundation
For resources to assist your congregation in welcoming guests,
click here
Seashore District Volunteer Center VIM project -- Completed
Hoosier United Methodist News Archives
Doing Well and Doing Good:
Charitable Gift Ideas and Options for You and Your Family
Often when we think about charitable giving, the first thing that comes to mind is an outright gift of cash. Did you know, however, that there are many other ways to make charitable gifts, some with tremendous tax and financial advantages for the donor? These plans make good sense, not just because they offer a financial incentive to donors, but more importantly because they allow a donor to make a much larger charitable gift without any greater financial sacrifice. Here are some of the most commonly used charitable giving plans:
Gifts of Appreciated Property (Securities and Real Estate)
A viable alternative to a cash gift is a gift of property. With careful planning, charitable gifts of certain types of assets will provide even greater tax benefits to the donor than a gift of equivalent value in cash.
The most favorable tax benefits are generated by contributions of appreciated, long-term, capital-gain securities and real estate. Reason: In addition to receiving a charitable deduction for the full, fair-market value of such a gift, the donor escapes any potential tax on the capital-gain element in the gifted property and any sales commission that would be payable upon sale of the asset. Note: The holding period for long-term treatment is more than one year.
The full, fair-market value of gifts of long-term, capital-gain securities or real estate is deductible up to 30% of a donor's AGI. Any amount in excess of the 30% ceiling can be carried forward for five years.
A donor considering a gift of property that has gone down in value would be better off to sell the property to realize a deductible loss and then contribute the proceeds to charity and obtain a charitable deduction. This procedure assures recognition and deductibility of the loss.
Gifts of Life Insurance
If the donor wishes to make an irrevocable gift of an insurance policy to the Foundation:
It is understood that the donor will make all premium payments directly to the Foundation, and that the Foundation as owner of the policy will in turn make the premium payments to the respective insurance company. (This is in compliance with the IRS requirements for irrevocable gifting benefits.)
If the donor chooses to continue payment of the premiums, the Foundation will hold the policy until it matures or until the death of the donor. The donor can claim the amount of premium payments as further charitable deductions.
If the donor chooses not to continue paying the premiums, the Foundation Board will determine whether to retain the policy and make the payments, or forfeit the policy for its cash surrender value.
Charitable Remainder Trusts
Introduced by the Tax Reform Act of 1969, charitable remainder trusts have become increasingly popular because of the financial and estate-planning opportunities they afford.
The charitable remainder trust is similar to other types of trusts except that the amount distributed at its termination (the remainder in legal parlance) is paid to a charitable beneficiary. A donor transfers property irrevocably to a trust and specifies: *the amount of income to be distributed, *to whom it is to be paid, *the duration of payments (a period of years or the beneficiary's lifetime), and *the charity that will receive the remainder.
An important feature common to these arrangements is that they offer an escape from the age-old investment dilemma of the "locked-in" position: an investor may want to dispose of an investment position for various reasons (e.g., to protect a profit, or to reinvest for a higher yield) but is inhibited from acting because of the potential capital-gain tax on the appreciation.
Funding a charitable remainder trust with appreciated, long-term, capital-gain securities or real estate can augment the available tax benefits because the grantor can avoid the potential capital-gain tax that would result from an outright sale of the property. Avoidance of capital-gain tax coupled with a current charitable income-tax deduction can substantially reduce the cost of such a transfer.
Unitrust
The primary feature of the unitrust is that it provides for payment to the income beneficiary in 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 grantor determines the fixed percentage upon creation of the unitrust. It must be at least 5%. Depending on the donor's financial-planning objectives, a choice may be made to emphasize the charitable deduction (by choosing a lower rate) or the annual return (by selecting a higher rate).
The unitrust may be set up for the lives of the beneficiaries or for a term of years not exceeding 20.
The grantor is allowed a charitable deduction equal to the present value of the charitable organization's remainder interest in the unitrust, as determined by reference to Treasury Regulations. The deduction, a percentage of the amount that funds the trust, is based on the fair-market value of the asset transferred, the payout rate chosen, and either the age and number of beneficiaries or the term of years.
The unitrust can be funded with cash or -- ideally -- with long-term highly appreciated, capital-gain securities or real estate. The governing instrument of all unitrusts may include a provision to permit additional contributions. The attraction of this feature is that the grantor need not establish a new trust each time he or she wishes to make an additional gift.
Annuity Trust
The annuity trust shares many common features with the unitrust, the principal difference being the manner of calculating the payment to the income beneficiary. Whereas the unitrust provides for a payout that may vary, the annuity trust provides for a fixed payout. This amount must equal a sum certain of not less than 5% of the initial fair-market value of the gift in trust. Another difference is that an annuity trust cannot permit additional contributions.
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 are among the benefits available to the grantor of the annuity trust. The fixed-payout feature of the annuity trust may make it particularly suitable to meet the financial needs of an older beneficiary.
Charitable Gift Annuity
The charitable gift annuity is among the oldest, simplest, and most popular methods of making a deferred charitable gift. A gift annuity is a combination of a gift and an investment whereby, in exchange for a transfer of cash, marketable securities, or, under some circumstances, real estate, the charitable organization will contractually guarantee to pay a specified annuity to the donor and/or another beneficiary.
The donor can claim a current charitable deduction for the portion of the transfer that represents the charitable gift element, which is the amount by which the value of the property transferred to a charitable organization 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 treated as a return of the original investment and is received income-tax-free over the life expectancy of the annuitant. The tax-free portion is greatest when the annuity is funded with cash.
Funding a gift annuity with long-term, appreciated securities can reduce and spread out the capital-gain tax because the transaction is treated as bargain sale. Thus, part of the appreciation escapes capital-gain tax entirely. In addition, any reportable capital gain is spread out over the donor-annuitant's actuarial life expectancy at the time of the gift. No capital-gain tax is due at the time the gift annuity is established.
Deferred-Payment Gift Annuity
The deferred-payment gift-annuity plan is a recent innovation of the traditional gift annuity designed to appeal to the younger donor in the 40-to 60-age bracket who has a high current income, needs to benefit now from a current tax deduction, and is interested in augmenting potential retirement income on a tax-favored basis.
The deferred-payment gift annuity involves the current transfer of cash, marketable securities, or, under some circumstances, tangible personal property or real estate, in exchange for which the charitable organization agrees to pay the donor an annuity starting at a future date-usually at the donor's retirement. The gift can consist of a single transfer, a series of transfers, or periodic transfers to the plan in high-income years.
The donor realizes an immediate charitable deduction for the gift portion of each transfer to the deferred gift-annuity plan. A portion of each annuity payment, when the payments begin, will be a tax-free return of principal over the life expectancy of the annuitant. When appreciated, long-term, capital-gain securities are transferred, any reportable capital gain is spread out over the donor-annuitant's life expectancy.
Gift of a Remainder Interest in a Residence or Farm
The owner of a personal residence or farm may give the property to a charitable organization while retaining the right to occupy the residence or operate the farm. Such a gift of a remainder interest provides an income-tax charitable deduction for the present value of the remainder interest that frees up tax dollars into spendable income without causing any disruption in the donor's lifestyle. In addition, this plan permits the donor to escape any potential capital-gain tax on the built-in appreciation.
The term personal residence is broadly defined in the Regulations to include any property used by the taxpayer as a personal residence even though it is not used as the donor's principal residence. A single-family dwelling, condominium, vacation home, or stock owned by the donor as a tenant-stockholder in a cooperative housing corporation qualifies as a personal residence if used each year by the donor. The term farm includes any land used by the donor or the donor's tenant for the production of agricultural products or for the sustenance of livestock.
Planned Gifts through Wills
A will is a very powerful instrument. It affords
an individual the
opportunity to:
-
specify which property is to be distributed to whom;
-
direct when such distributions are to be made;
-
choose the individual or institution to carry out the wishes off the decedent;
-
select a guardian for minor children; and
-
preserve as much of the estate as possible through the judicious use of tax-saving devices and opportunities.
A Charitable Bequest
Each year thousands of individuals exercising their privilege to determine the final distribution of their estates designate that a portion of their assets be used for the benefit and support of charitable organizations. Such gifts enable a person to make significant contributions that may not have been possible during life.
Bequests can take various forms.
-
General bequest: A general bequest is one of the most popular ways to make a charitable gift by will. With this bequest you simply leave a specified dollar amount to the designated charity.
-
Specific bequest: A specific bequest is another popular type of charitable bequest. With such a bequest, you designate that a charitable organization is to receive a specific piece of property.
-
Residuary bequest: A residuary bequest is used to give the charitable organization all (or a portion thereof) of an estate owner's property after all debts, taxes, expenses, and all other bequests have been paid.
-
Percentage bequest: The bequest can be expressed as a percentage of the estate or the residuary estate.
-
Contingent bequest: When writing your will, it is important to plan for the situation when the beneficiary of a bequest dies before you or disclaims the property. In anticipation of such an occurrence, a charitable organization may be named as the alternate or contingent beneficiary. This will ensure that the property will pass to the designated charity rather than to unintended beneficiaries.
-
Restricted bequest: You may prefer to restrict your bequest for a specific purpose. A restricted bequest usually should be made in the broadest terms possible consistent with your interests. This guards against the possibility of the purpose of your gift be coming obsolete (such as by discovery of a cure for a disease).
Income for a Beneficiary
A charitable bequest can also be arranged to provide income for a selected beneficiary by directing that the bequest be used to establish a charitable remainder annuity trust, a unitrust, or a charitable gift annuity. If such a gift is made by will, the principal will pass to the charitable organization only after both the donor and the income beneficiary have died.
Planned Gifts of Qualified Retirement-Plan Benefits
Qualified retirement-plan benefits represent a major portion of the average person's estate. Due to special tax considerations that apply to qualified retirement-plan benefits, they make excellent choices for funding a testamentary charitable gift.
Not only are retirement-plan benefits that pass in a decedent's estate subject to federal estate taxes, they also can give rise to a substantial income-tax liability to the estate or the ultimate recipient. Reason: Such benefits are, in federal tax parlance, income in respect of a decedent (IRD). IRD is income to which a decedent was entitled but which was not properly includible on his or her final income-tax return.
IRD is taxable to the estate or beneficiary who receives it. The taxpayer who must recognize the income is entitled to a deduction equal to the amount of the federal estate tax attributable to the inclusion of the IRD in the taxable estate. Consequently, a charitable gift of any IRD item, including qualified retirement-plan benefits, can produce double savings. First, the value of the interest passing to charity is fully deductible for estate-tax purposes. Second, because the charity is a tax-exempt entity, it will pay no tax on the IRD. Directing IRD too charity -- and those assets without income-tax consequences to non-charitable beneficiaries -- increases the benefits for all.
Charitable giving can be a very important component of a donor's estate plan. Potential donors should discuss their charitable giving plans with their professional advisors (financial and legal) before making any charitable planned gift. We also recommend you confer with our Executive Director at the Indiana Area Foundation who may provide invaluable guidance as well as illustrations of alternative gift plans designed to achieve your personal objectives. He can be reached by phone at 317-924-1321 or e-mail: jgentry@inareaumc.org