Charity During Economic Turmoil

Summary:

Economic turmoil impacts existing charitable planning
in a myriad of ways. Following is a checklist of some.

◙
Charitable Lead Trust (CLT)
Burn Out:

A common approach for a CLT is for a parent to establish a trust
for a charity for a term of years, say 20. During the term an annuity payment
is made to a designated charity or charities. At the end of the 20 year term
the remainder goes to the parent’s children. Sometimes the term of a CLT is
designed not only to minimize gift tax consequences but to coordinate with the
child’s estimated retirement age. If the growth of the CLT portfolio is more
than the payout rate to the charity, over the term the trust assets can grow
significantly. However, the recent market meltdown may have derailed the target
investment results so substantially that the parent may need to review the
retirement assistance the child might need as the CLT may provide much less
than anticipated. If the CLT were only recently formed, a substantial decline
in value, especially if it had been invested to maximize the growth for the
child/beneficiary, may be so severe that the CLT’s annual charitable payments
may burn out the trust so that it will end before the intended term with
nothing left for the child.

◙
Testamentary Donations:

Review the size of your estate and the dollar figures of any charitable
bequests to be certain that the significant changes in asset values has not
undermined your goals. For example, if your estate was worth $5 million and you
have four children, you may have been comfortable diving your estate equally
between your four children and a favorite charity. But if the decline in your
IRA and home values reduced your estate to $3 million, you might prefer to
leave it all to your children. Instead of cutting the charity out entirely, you
could draft flexibly and distribute the first $4 million or less equally to
your children, the next $1 million tier to charity and then equally among your
children and the charity above that threshold. This way, if asset values
recover your original goals will be met. If not, your children will still be
protected.

◙
Planned/Deferred Gift:

You
had hoped to donate $100,000 to your favorite cause, but your earnings have
been severely impacted by recent developments. Don’t cut your commitment.
Pledge the same $100,000 but commit to pay it over say 3 years. If
circumstances improve, you can just pay it earlier.

◙
Endowments:

You wanted to
endow a perpetual gift that would support college scholarships for needy students
whose parents who, as a result of chronic illness, are unable to pay for
college. You had determined with the charity a target funding amount. However,
in light of recent market performance, is that amount still sufficient to meet
your goals? Review the status of the fund and the assumptions initially used as
to what percentage could be paid out of that fund without depleting it (so it
would in fact last in perpetuity). Increased funding may be necessary to
achieve your goals.

◙
Insurance Gifts:

Using
insurance to fund a large deferred gift for a charity is a common technique. If
you want to make a large commitment, but fear because of market conditions it
may not be viable, don’t reduce your commitment, fund it with life insurance.  Have an insurance consultant evaluate
the performance of the policy, whether funding adjustments need to be made
(perhaps you were able to stop premium payments several years ago, but the
recent market declines again require annual gifts until the value of the policy
is rebuilt).

◙
Real Estate Donations:

You
donated appreciated real estate to a charity and received a substantial income
tax deduction for the fair value of the property when donated, without every
having to recognize the capital gain on the appreciation. The charity was going
to sell the property. Review the status of this with the charity. If the
charity was caught in a bad local real estate market crash, it may be stuck
holding a property it cannot sell while it is paying carrying costs. You might
need to make additional donations to defray this cost, or perhaps otherwise
help the charity in its efforts to sell the property, to prevent a good deed
from become a financial detriment.

◙ Depreciated Securities:
Don’t do it.
Donating securities that have appreciated to a charity is a great tax deal (you
get a deduction based on the full fair value of the securities donated and
don’t have to recognize the otherwise taxable gain). However, donating
securities that have declined in value is a lousy deal. You only get to deduct
the fair value of the stock donated. You’d generally be better off selling
loosers at a loss, and donating cash from the proceeds.