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Advice on Estate Planning for the Charitably Inclined

Post date: 
May 28th, 2015
Article Type: 
AGM Blog Post
Article Topic: 
Giving

As an estate planning attorney, I am often approached by clients interested in making charitable gifts.  In most cases, these clients’ goals are similar.  They want to “do good” with their money.  They feel they have been lucky – either because they have succeeded financially or because they have been given or inherited substantial assets.  They want to share their wealth to help others, improve their community, and effect positive change, among other charitable goals.  In some cases, their charitable goals are very specific (i.e., to benefit a certain religious organization or to cure a disease).  In all cases, they have what some call the “Philanthropic Imperative”.  Their companion desires to (i) share wealth and (ii) help others are values that they hope to pass on to their children. 

Charitably inclined clients often seek assistance from attorneys and financial advisors about the best strategy to meet their charitable goals.  They also want practical advice about a secondary goal – to give in the most tax efficient manner.  Charitable gifts have the potential to save substantial income, capital gains, gift and estate taxes.  It is the job of the estate planning attorney and/or advisor to help clients meet their charitable goals using the most tax efficient estate planning techniques available. 

There are number of techniques available, the most common of which I discuss here.

Outright charitable gifts are the simplest form of charitable gift.  Outright gifts can be made during life or at death in a Will or Trust.  The gifts can be cash or other assets.  Gifts of appreciated stock can offer capital gains tax savings.  Gifts made directly from retirement assets also may offer substantial income tax savings. 

Outright gifts make the most sense for clients interested in making moderate gifts in a simple manner.  If clients have specific charitable goals, outright gifts can be made with restrictions or guidance to the charity as to how the gift is to be used.  However, I caution clients about placing restrictions on the charity’s use of the gift because these restrictions may become outdated over time or may create costly administrative burdens. 

Clients who want to make a gift to a select charity but need or want to preserve income should consider a Charitable Gift Annuity.  A Charitable Gift Annuity is a contract between a donor and a charity.  The donor makes a gift to the charity in exchange for an income stream for the donor’s life.  At the time of the gift, the donor receives an income tax deduction.  Upon the donor’s death, the charity keeps whatever is remaining of the gift. 

Clients interested in making more substantial charitable gifts ought to consider setting up Charitable Trusts.  The most common type of charitable trust is a Charitable Remainder Trust (CRT).  Here is an example of how a CRT works.  A donor establishes a trust that provides that a percentage of the trust assets are paid to him for the remainder of his life.  On the donor’s death, the remaining assets in the trust pass to charity.  The donor benefits by retaining income from the assets during his lifetime while also contributing substantially to the charity.  The economic benefits to the donor include income, estate and capital gains tax savings.  Other variations of CRTs also exist.

Another type of charitable trusts is a Charitable Lead Trust.  A CLT is in essence the “reverse” of a CRT.  A donor establishes a trust that provides for annual payments to a charity for a term of years or for the donor’s life.  At the end of the term or at the donor’s death, the remaining assets are distributed to the donor’s spouse and/or descendants.  The donor gives up access to the gifted assets during his lifetime to benefit the charity, but preserves a portion of the assets for his family in the future.  CLTs offer income and estate tax savings. 

Other sophisticated techniques include Donor Advised Funds (DAFs) and Private Foundations.  A DAF is a fund established by a 501(c)(3) “sponsoring organization”, such as a community foundation or the charitable arm of a financial services company, such as Fidelity or Schwab.  A donor makes a charitable contribution to the organization, a DAF is established, and the donor gets an immediate income tax deduction.  The contribution can include appreciated assets, which also offers capital gains tax savings.  The DAF is invested and administered by the organization and, over time, donations are made from it to charitable organizations.  The donor may play an advisory role in the selection of the charities to which donations are made.  The assets that remain in the DAF grow tax free.  Upon the donor’s death, none of the fund assets are includible in his estate. 

Very high net worth clients or those seeking to retain complete control over donated assets may want to establish a Private Foundation, instead of a DAF.  A Private Foundation is a separate legal charitable entity established by and with funds from an individual, family or group of individuals.  The Foundation either uses the funds to run it owns charitable activities or simply disburses the funds over time to other charitable organizations. 

Rachel Ziegler is an estate planning and administration attorney at the Kaiser Law Group in Wellesley, Massachusetts.  She counsels clients about all aspects of estate planning, including estate, gift, generation-skipping, and income taxes, as well as charitable gifts and business succession planning.

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