October 2008

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MONTH YEAR: Lead Article: 1 ¾ pages [2nd page about 45 lines]
Lead Article Title: 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.

Checklist: Second Article 2 lines less than One Page [about 54 lines]:
Checklist Article Title: 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.
Recent Developments Article 1/3 Page [about 18 lines]:

On October 3, 2008 another tax bill was enacted, called “Tax Extenders and Alternative Minimum Tax Relief Act of 2008” (Act). The Act extends a the following charitable gift provisions through 2009: ◙ IRA charitable rollover. If you’re aged 70 1/2 + you can donate up to $100,000 of your regular or Roth IRA to a public charity without having to treat the distribution to the charity as taxable income. For seniors who don’t itemize deductions, and hence would not realize a contribution deduction, this is a tremendous benefit. ◙ Enhanced business charitable deductions. Businesses can claim an enhanced deduction for contributions of food inventory during 2008. C corporations can claim an enhanced deduction for contributions of book inventories to schools, public libraries, and literacy programs. Another provision provides an enhanced deduction for businesses contributing computer equipment and software to certain schools. ◙ Basis adjustment to stock of S corporations donating property. When an S corporation donates property to a charity the amount of a shareholder’s income tax basis reduction in the S corporation stock will be equal to the shareholder’s pro rata share of the adjusted basis of the contributed property. If this special rule was not provided the adjustment to the shareholder’s tax basis would be for the pro rata share of the fair market value of the contribution. The Act added several new charitable giving provisions: ◙ Limitations on charitable contributions. The general limitation on charitable contribution deductions is that they cannot exceed 10% of a corporation’s taxable income, or 50% of an individual’s adjusted gross income in any tax year. These limits are suspended for cash donations to Midwestern disaster relief efforts made during 2008 after the date of the disaster. ◙ Standard auto mileage rates for charitable use. When you use your car in performing charitable work, you can deduct the cost of the mileage by multiplying the number of miles driven by a flat rate of 14 cents. This rate has not be adjusted in more than a decade and substantially understates the cost of operating a car. For work in assisting Midwestern disaster relief efforts, the rate is set at 70% of the current standard business mileage rate, during 2008 after the date of the disaster. Reimbursements for volunteers up to the amount of the standard business mileage rate will be excluded from income in 2008.

Potpourri ½ Page:

◙ Sell your CRT Interest: So you’re charitable and sent up a charitable remainder trust (CRT). You get an annuity payment for life, then your favorite charity gets the remainder. Times are tough. Consider selling your CRT interest. You can get a lump sum now, it might even exceed the present value of the annuity stream you might get for life. Terms of the trust and state law must be considered.
◙ Family Loans: If you’re loaning your brother-in-law money to get through tough times have a formal signed note evidencing the loan, and get collateral. Insisting he sign a note and give you a second mortgage on his home isn’t a sign of your mistrusting him, but gives you better standing ahead of other creditors if he is forced to bankruptcy. You’re preserving family money, not being tough on him.
◙ Review your Divorce Agreement: Divorce agreements might mandate insurance coverage, contributions to 529 college savings plans, and more. How the recent economic turmoil affects your divorce might hinge on the wording used. If you were required to maintain a target level of funds in a 529 plan when a child attained a certain age or started college, the decline in the value of 529 investments might require additional contributions you had not planned on. If you and your ex were each required to contribute specified amounts, will that be enough to fund college if the value of the funds saved just plummeted by ½? Be proactive, review the agreement and consult with your matrimonial attorney and come up with an alternate plan before the fund is depleted on tuition. If your ex has insurance obligations, get proof of insurance to make sure that the ex didn’t cancel the coverage because of economic problems, and that the policy and insurer remain viable (not assured after recent developments).
◙ Ordinary Not Capital Loss. If stock in a C or S corporation is sold at a loss, that loss will be subject to severe restrictions on deducting capital losses ($3,000 above capital gains). However, if your stock qualifies as “Section 1244 stock” the loss might be deductible as an ordinary loss without the restrictions. ►The corporation must be a domestic C or S corporation. ►The total money and property contributed to the corporation for stock must not exceed $1 million. ► The stock must be issued in exchange for cash or other property, not for services. ►The stock must be issued directly to the original owner who is an individual or a partnership. ► Stock can be either common or preferred (if issued after 7/18/84). ► For the 5 years before the loss, the corporation must have derived more than 50% of its gross receipts from other than royalties, rents, dividends, interest, annuities and gains from sales and trades of stocks or securities. ► The amount of ordinary loss that you can claim on Section 1244 stock in any year is $50,000, and for married taxpayers filing joint returns $100,000.

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