Economic Meltdown – Charitable Planning

Summary:

As the economic crisis continues, the feeling amongst most
folks, is to cut back on discretionary expenses including charity. It shouldn’t
be. Those in need require more help during tough economic times, not less.  The charities that carry out the good
deeds that make life special, that make us human, need more help, not less. So
how can you creatively donate during tough times? There are a myriad of ways,
including the use of gift annuities and charitable remainder trusts for donors
uncomfortable parting with any cash now. While out right gifts are best for any
charity, a deferred gift sure beats no gift.

Charity
Isn’t Only About Money

“Generosity is exactly this: to give
that which is dearest to us. It is an act that transforms us. After it, we will
be poorer, but we will feel richer. Perhaps we will feel less equipped and
secure, but we will be freer. We will have made the world we live in a little
kinder.” Piero Ferrucci in his book The Power of Kindness. Feeling blue
about the Dow? Make a donation. In fact, increase your donation over last year
and tell the charity to use your name as an example for other donors.

Gift
Annuity In Lieu of an Outright Gift

◙ Introduction:

You wanted to make a $10,000 donation,
but are feeling the pinch of the stock market meltdown.  Gift annuities are a hybrid to let you
give and receive! A gift annuity is a contract between you and your favorite
charity in which you give the charity a one time payment and receive a periodic
payment, an annuity, for life. The amount of the annuity is determined at
inception, without worries about stock market volatility. On your death (or the
death of a spouse or other loved one, since you can name up to two people to
get the annuity) the charity will receive the funds that remain for its
charitable purposes.

◙
Benefits to Charity:

The assumption used in calculating a
charitable gift annuity is that about 50% of the value of your gift for the
annuity should ultimately go to the issuing charity. So there is a substantial
charitable benefit in purchasing a gift annuity. But this also leaves a
significant benefit for you which might be essential in light of recent
economic developments.

◙
Benefits to You:

When you purchase a gift annuity you’ll
realize an income tax deduction based on the value of what the charity will
receive. You will receive a monthly or quarterly cash flow stream for the rest
of your life. Cash flow payments that are fixed regardless of stock market
performance. Your payments will generally be substantially greater then what
you would earn on a CD (assuming you’re old enough when you make the purchase).
If you gift appreciated property (some of you might be old enough to remember
the concept) to purchase the gift annuity, you won’t recognize capital gains
immediately (as you would if you simply sold the property and purchased a
commercial annuity). Instead, the taxable gain will be recognized over your
actuarial life expectancy. Gift annuities are highly regulated (by the same
folks that watched our backs with sub-prime mortgages?) so that there is assurance
that you’ll receive the payments expected. If the Charity cannot met the
payments required from the reserve it sets up, it will have to use its general
funds to make the payments. If the charity failed, your payments would stop.
Thus, while gift annuities are safe, they are not an absolute guarantee.

◙ Example:

John Doe is 67 and single. John has generally made
six figure gifts to his favorite charity. However, since his savings have be
cut in half by recent market declines he’s feeling uncomfortable. John believes
it important to show some commitment to the charity, but is reluctant to part
with cash. John figures he can earn about 4% on CD. Instead of forgoing any
charitable efforts John opts to purchase a $200,000 gift annuity from the charity.
At his age, the rate of payment he will receive is 5.9%. So his annual annuity
will be about $11,800, substantially more than he could get on a CD. In
addition, then the amount John receives from his gift annuity is not fully
taxable, so he will net even more after tax then with a CD. John knows that on
a present value basis about ½ of the $200,000 will eventually inure to the
benefit of the charity.

◙
Issues Affecting Gift Annuities:

Gift
annuities have a number of shortcomings. The main negative to the charity is
that there are no immediate dollars to spend. For you as a donor, there is no
flexibility. You cannot reach the principal of the gift annuity if you need it
for an emergency. Your annuity is a fixed payment which may not keep pace with
inflation so that over time your purchasing power will erode. Part of the
solution to these issues is to limit the portion of your investment assets you
use to purchase gift annuities. Thus, it might be better in some instances to
give a smaller outright gift and retain complete control over the investment of
the funds you retain.

Give-Back
Charitable Remainder Trust (CRT)

◙
Introduction:

If you feel too financially insecure to
make a large outright contribution, consider a charitable remainder trust (CRT)
with a twist. We’ll call it the “Give-Back CRT”. First let’s explain the CRT
technique, then we’ll show you how you can use it to continue substantial
support of your favorite charity, even while feeling economically insecure.

◙
Classic CRT Example:

You establish a charitable remainder
trust (“CRT”). A CRT is a special trust which requires a payment be made
periodically, perhaps annually, to you for a set number of years or life. This
payment can be made to you and your spouse (or in some instances other beneficiaries).
So the trustee of the CRT could be required by the terms of the trust document
to pay you and your husband a 7% annuity every year for your joint lives. If
you contribute $1 million to this CRT, the trustee must pay $70,000 each year
until the last of you dies. At that time, after the final $70,000 payment, the remaining
balance of the trust will be distributed to the charitable beneficiary you
named. Your trustee is not only authorized, she is required, to make this
charitable distribution. The charity doesn’t receive any current funds, but it
has a substantial future commitment it can rely upon (but see below).

◙
CRT versus No Donation:

So Richie Rich had a set back on some
of his comic book ventures and is feeling a bit pinched on donating to his
favorite charity. But Richie knows he needs to show leadership during these
tough economic times to motivate others to give. Richie had been planning a $1
million contribution, but isn’t comfortable giving anything now. However,
Richie is also aware that if he doesn’t lead the way, the charity will have
even a tougher time soliciting others. So Richie opts to give a $1 million, but
in a way he can feel comfortable doing so. He gifts $1 million in a 7% CRT.
Richie discussed this with the planned giving professionals from the charity
and believes that authorizing the charity to announce this larger gift will
show a major long term commitment that will motivate other donors. For Richie
personally, the fact that he will receive $70,000/year from the CRT makes the
“gift” comfortable. If the economy continues to worsen, he’ll have cash flow
coming from the CRT. That assurance gets Richie over the big gift hurdle. So
Richie will help lead the charitable fund raising effort through tough times
while simultaneously securing his financial future so he’s able to make the
commitment. The only piece missing is that the charity still needs current
dollars for its laudable efforts.

◙
Give-Back CRT:

The real impediment to Richie making
the $1 million outright gift he initially intended were his financial worries.
The CRT got Richie past that, but what about the charity? Richie can make a non-binding
commitment that he’ll donate whatever portion of the $70,000 annual payment he
receives each year back to the charity. This approach gives Richie comfort, but
also the encouragement and moral obligation to donate as much as he can each
year. At some point, Richie can terminate the CRT so that the charity will
receive the then current value of its remainder interest. If a CRT is
terminated early, Richie as the noncharitable beneficiary, will report capital
gain based on the value of the assets distributed to him as a taxable exchange
under IRC Sec. 1001. PLR 200314021 and 200733014.  Richie would be effectively treated as selling his interest
in the CRT to the charity as remainder beneficiary. At that time Richie could
also donate as much or all of the proceeds from this settlement to the charity.

Conclusion

There
are many ways to creatively continue charitable gifts in spite of economic
adversity. While the need for current dollars by every charity is great, it is
still better to make a deferred commitment then no commitment.