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ESTATE PLANNING BUSINESS RESOURCE CENTER
 

ESTATE PLANNING BUSINESS RESOURCE CENTER

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  • [Note to Presenter: This presentation is aimed at the average family or mass affluent, NOT the high net worth.] Good morning ladies and gentlemen. My name is Gerry Frantz and I am a financial representative of The Guardian Life Insurance Company of America. Thank you for attending this presentation. Today, we will be discussing philanthropy and charitable giving. We will be focusing in on the more common methods that people utilize to give to charity. We will begin by addressing what philanthropy and charitable giving means to most Americans. Are the words interchangeable or do they mean something different? Then, we will explore some of the reasons why Americans give of their time and wealth, particularly in these hard economic times. Then, we will go over various charitable giving strategies. The purpose for reviewing these strategies is to create awareness that sometimes the way you give to your favorite organizations, may not be the best or only way to give. That’s particularly true today as everyone is trying to be as efficient and productive with their money and wealth. In addition, oftentimes, individuals are unaware of the different methods in which to make an impact on their community, and that results in their giving in the same manner every time, which as I said before, may not be the most efficient and productive. So, as we go along in this presentation, please do not hesitate to ask questions. An interactive presentation session is always more interesting than sitting there and listening to me all morning.
  • Okay, before we start, I need to give you this disclaimer. (Read disclaimer.)
  • Well, let’s start off by defining what philanthropy is. According to Webster’s Dictionary, philanthropy means “goodwill toward one’s fellowmen especially as expressed through active efforts to promote human welfare.” Well, I don’t know if that is how I would define “philanthropy” but I like what Alan Alda once said. For those of you who don’t know the name, Alan is a famous actor, known for one of the longest running shows on television - “M.A.S.H.”, and now a philanthropist when he’s not acting, “The idea behind meaningful philanthropy is a desire to change the world for the better.” It sounds to me like philanthropy is the process for making a difference. Think about that for a second. When you send a check to your favorite charity, or when you tithe in church, regardless of your motivations for making that gift, whether personally motivated such as for a tax deduction, or because of altruistic motivations, ultimately the money that you give is going to a needy cause. And, because you made that contribution, you are part of a solution. You are addressing a need in this world and making an impact on society.
  • Okay, so what is charitable giving? According to Eli Broad, “money is a means to do good.” Eli may not be as well known as Alan Alda, but Eli was the founder of KB Homes, one of the largest real estate development companies in America. He also founded SunAmerica, a large financial services company. Both, KB Homes and SunAmerica were at one time part of the Fortune 500. Charitable giving is often thought of as the act of volunteerism or contributing money or assets to charity to enable your philanthropy. So, philanthropy is the strategic vision and charitable giving is the implementation of that vision through resources and action. The reality is that the terms philanthropy and charitable giving are very similar and to most Americans, they mean the same. So, the question we really should be asking is: “What does philanthropy and charitable giving mean to me?” Let’s go on and determine why that’s an important question and why you need to answer it.
  • Let’s just quickly review some statistics. According to The Center on Philanthropy, a philanthropic think tank at Indiana University, over 70% of households make charitable gifts. We give away over $260 billion each year. Obviously, we live in a very charitable society. As a result, we should not take charitable giving lightly, nor should charities take gifts of our hard earned money for granted. 2.2% of income, and that’s after Uncle Sam has already taken his fair share in taxes, is given away by Americans. In light of our current economic times, that’s a lot of money.
  • So, why do we give? There are many reasons. Some people have a real sense of wanting and needing to make an impact on society through their charitable giving. They want to make a difference in the world and are willing to share some of their wealth in order to accomplish that. Others are very concerned about their local community. They may have been raised in the community or the community may have been very good to them, such as supporting their business and making it a success. And, therefore, they want to direct their efforts in making the local community even stronger or better. Many families are known for their philanthropic activities. They have created a legacy for their family names and in order to perpetuate that legacy, they need to pass on the family values to the next generations so that the younger generations may continue the family’s good work and maintain the family legacy in society. A sense of guilt is a powerful motivator. Some people feel guilty about their good fortune when others around them are not as fortunate, so they are motivated to give back. Some people feel that with wealth comes a social obligation to give back. Charitable giving is sometimes simply good business. Many business owners make charitable contributions out of their businesses because it enhances the reputation of the business in the community. The reputation of a business is a very valuable commodity and charitable giving enhances that reputation and builds a substantial amount of goodwill. The end result is that consumers may be more apt to frequent that business because of its reputation in the community.
  • Let’s face it. One of the key motivators for charitable giving is the fact that there are some beneficial tax consequences to that giving. We all know that donating money to charity helps with a personal income tax situation and can also help in other tax situations as well, such as estate taxes. Still others engage in philanthropy and charitable giving because of personal ego. It is a way for them to be accepted in certain community circles or to attain higher social status. Charitable giving often increases an individual’s prestige and standing in the community. Yes, there may be a lot of self-centered reasons in this type of motivation for charitable giving, but remember that ultimately, the gift is made and will be applied to a worthy cause. Another reason why people give is because of the need to give back to the community or redemption. Many executives and business owners who started their professional lives very modestly but found great success in business, often have a need or desire to give back to those organizations that helped them to become the success that they are, such as their educational institutions. Others, who have elevated themselves from meager means, deprived childhoods, or depressed social situations, and have attained success, feel a measure of redemption and give to charities and organizations because they can, and because they hope to alleviate the conditions that they were raised in. Current events is often a great motivator for charitable giving. Many people who didn’t give to charity regularly, or were modest in their giving, reacted quite differently during the 9/11 crisis or Hurricane Katrina disaster. Personal events such as a family member dying from cancer or some other disease is also a huge motivator. Religious identity is probably one of the biggest motivators to charitable giving. For example, one large religious group requires all members to give 10% of their income to the church.
  • There are still many other reasons why people give to charity and engage in philanthropy. Personal motivations are really not that important for the purposes of this conversation because the fact is that the end result is the same – people share their wealth with others and make a difference whether they know it or not and whether they want to make a difference or not. Okay, now we know what motivates people to give to charity. Perhaps you have identified with one of the motivations that we just discussed. Now, let’s start looking at what people typically give, and the most common methods in how people give and see if any of these methods may apply to your situation.
  • What do Americans give? The first is “time and talent” and the second is “treasures.” The phrase “time, talent and treasures” is often used in philanthropic communities to describe what Americans give in terms of their charitable giving. Time is exactly what it sounds like. You give of your time through volunteer efforts. When you volunteer, you generally are also giving your “talent” to a particular project. To give “treasures” is to give things that you treasure. In other words, you are giving your money or your property.
  • Volunteering your time and talent is one of the most popular methods of giving back to your community. Volunteerism comes in many shapes and sizes: It could be a former executive working in youth centers and prisons preparing people to become productive members of society. It could be medical doctors performing pro bono medical services in third world countries. It could be swinging a hammer side-by-side with former President Jimmy Carter in a Habitat for Humanity project. It could be local residents cleaning up a park or taking graffiti off the side of public buildings. It could be Girl or Boy Scout leadership, coaching youth sports, soup kitchens and the like. No method of volunteerism is more meaningful than another but volunteerism brings great joy and satisfaction because you immediately see the fruits of your labor, unlike contributions of money where it is sometimes difficult to trace the impact of your contribution. Volunteerism comes strictly from the heart because there is no financial incentive. You do not get a tax deduction for your time and labor, merely the satisfaction of knowing that you made a difference and contributed.
  • Now, let’s talk about giving of your “treasures” -- your hard earned money and other assets. The first way to give of your treasures is by giving money, cash or other liquid wealth. Many people make small cash donations when solicited. Solicitations may occur door-to-door, or donation boxes at various establishments such as the local grocery store. Probably the most common method of charitable giving by most Americans is by writing checks to their favorite organizations. This is often referred to as “checkbook philanthropy.” Another method of making cash contributions is through tithing. Members of churches, temples, synagogues or other religious institutions, often give a set percentage of their weekly compensation to the institution to support religious and charitable activities. Contributions of cash is the simplest way to give of your treasures and also yields some personal financial benefit through the receipt of an income tax deduction. From the charity’s perspective, this may also be the best type of gift since the charity can immediately put the donation to use in practically any manner it chooses. Larger donations may, however, come with some strings attached.
  • Now might be a good time to pause and talk a little about the income tax deduction because I think we all know that charitable contributions come with tax deductions. Gifts of cash entitle the donor (the person making the gift), an income tax deduction of up to 50% of the donor’s adjusted gross income in the year the gift was made. For example: the donor gifts $10,000 this year. He has an adjusted gross income of $100,000 for the year. $10,000 is less than 50% of his adjusted gross income. Therefore, he can take an income tax deduction for the full $10,000. By the way, your adjusted gross income is your income after certain deductions are taken on your tax return. It is reported on Line 37 of your Form 1040. Suppose however, that this person is rich in terms of assets, but his adjusted gross income is only $100,000 for the year (perhaps inherited wealth or a retiree). He makes a gift of $70,000. In this scenario, he can only take an income tax deduction for $50,000. The “excess” donation of $20,000 may be carried over into next year. Carryovers may be made for up to 5 additional years until the excess is used up.
  • The other way to give of your treasures is the contribution of property to charity such as art work, securities, cars and real estate. Think of donations of toys for underprivileged children such as the “Toys for Tots” program, or donations of your used furniture, clothing, electronics and other items, to the Salvation Army or Purple Heart Society. This is a simple way to give to the community and also allows existing property to be used for a different or better purpose than what it is currently used for. Organizations can also sell this property to raise money for its operations. Note, that with donations of cars, this used to be a very common method of making a charitable donation. More recently, the IRS has tightened up the rules around donating cars to rein in abuses in valuation and tax deductions. Most donated cars are sold by the charity. So, today, the tax deduction is based upon the value that the car is actually sold for by the charity. If the deduction exceeds $250, you must get written acknowledgement of the donation from the charity. If it exceeds $500, you are required to file Form 1098-C with your tax return.
  • Now, with respect to the income tax deduction, the 50% income tax deduction that we discussed before also generally applies with contributions of property but with certain exceptions. Depending upon the type of property, however, the value of the deduction may be limited. For example: If you contributed property that would otherwise have resulted in ordinary income to you had you sold it, such as a work of art, if you are an artist, or capital assets held for one year or less, the deduction is based upon your original cost basis, not the fair market value of the property donated. However, gifts of property that would have resulted in long-term capital gains if you had sold that property, would result in a deduction that is valued at the current fair market value, although there are some exceptions to this rule as well. But generally, that’s why you often hear that donation of a stock that has appreciated greatly in value is better than a gift of cash. It is the value of the stock at the time of donation that determines your deduction, not the price you bought it for. Let’s suppose that you had one share of stock of XYZ Corp. that is currently trading at $100 per share. You bought that share many years ago at $10 per share. If you sold it today, you would realize a gain of $90 and have to pay capital gains tax on it. However, if you donated that share of stock to charity, not only will you not have to pay capital gains tax, you get a deduction based on its fair market value of $100. Also, other property that is commonly given to charity are things that we call tangible personal property. These are items such as jewelry, artwork and collectibles. Deductions from these contributions are typically based on the lower of fair market value or cost basis unless the property is used in the charity’s mission. An example of a contribution of property that is actually used in the organization’s mission would be a gift of art to an art museum that actually displays the art. This gift is called a “related use” gift and allows for a deduction based on the full fair market value of the item donated. The carryover of an unused deduction that we discussed before also applies. The rules around donations of property can become fairly complicated. You definitely need to consult with your financial and tax advisor when you’re thinking of donating property. Okay, let’s keep going.
  • Planned giving is really nothing more than the phrase used for making charitable contributions at death. The phrase “testamentary gifts” means the same. Planned giving is a very common method of making charitable contributions for the simple reason that many families believe that during their lifetime, they do everything they possibly can to care for and support their family. At death, all bets are off. Hopefully, death does not occur until all of the children are adults and well on their way to making their own successes. Assuming that’s true, upon death, many people want to know that the remainder of their wealth can be used to make a difference in the lives of others. To make a planned gift is pretty easy. There are a variety of ways to leave assets to charity upon your death. It all depends upon the type of property you are leaving (such as art work, collectibles, securities or cash), and the amount. When you are getting your wills and trusts updated, your attorney can insert the appropriate provisions to ensure that assets are left to your favorite charities. Your attorney and financial professional can also help you to structure the beneficiary designations for your qualified retirement plans, IRAs and annuities, to leave those assets to charity. We’ll talk more about this a little later. A “life estate” is a method used to retain the use of real estate during your lifetime, but upon death, the real estate is conveyed over, in this case, to a charity. That is done by a deed prepared with the help of an attorney. By leaving assets to charity at death, your estate will receive a charitable estate tax deduction. It’s not an income tax deduction so there is no 50% limitation as we discussed before.
  • Qualified retirement plans, IRAs and annuities are typically the best types of assets to leave to charity at death. These accounts are often referred to as IRD assets. IRD stands for “income in respect of a decedent.” It is income that is still owed to a person at the time of the person’s death, and not yet taxed. In plain English, and for our purposes only, IRD assets are generally those assets that generate income or gains on a tax deferred basis. As a result, income taxes were never levied on the income or gains of those assets, or perhaps on the assets themselves. For example, your 401(k) contributions go into your plan on a before-tax basis. The growth of your 401(k) plan is not taxed until you take distributions from the plan. Once you take distributions, the IRS starts taking its share for income taxes. Now, if you died before you took distributions from the plan, and you left the plan assets to your beneficiaries, when your beneficiaries take distributions from the plan, they may need to pay income taxes on the distributions. In this way, the IRS will get its share of income taxes. However, if you leave the 401(k) plan assets to charity, the charity will not have to pay income taxes because the charity is a tax-exempt organization. In addition to the income tax ramifications of these assets, IRD assets are also included in the estate for purposes of calculating the estate tax. Therefore, these assets are subject to income and estate taxes at death – a double whammy. However, when you give away assets to charity at death, your estate is entitled to a charitable estate tax deduction. This makes giving IRD assets to charity ideal because income and estate taxes can be reduced or eliminated. In order to utilize these assets in your charitable plan, it’s as simple as changing your beneficiary designation forms to name the charities of your choice as beneficiaries of your IRAs and qualified retirement plans. Married couples may want to name the spouse as the primary beneficiary and the charity as contingent beneficiary to ensure that the surviving spouse won’t need the money.
  • Now, let’s talk about some other methods of charitable giving. I call these specialty planning techniques because it involves a bit more than just giving cash or assets to a charity. As with most things in life, it is rare that philanthropy happens because of a single motivation. Life is complex and several factors may influence you. You may have competing interests in wanting to help out a favorite charity while simultaneously needing to secure the financial future for yourself. You may wish that an asset that you have can serve a dual purpose of helping your family as well as your charitable interests. We’re now going to move on and start reviewing planning techniques that may allow you to meet not only your charitable intent but also your personal financial situation beyond the charitable income tax deduction. As you can imagine, trying to accomplish these dual purposes involves techniques that are more complicated so this will be a very high level review. Also, there may be several techniques that may be appropriate for you. We will not cover them all, but just the more common ones. We just discussed leaving retirement assets to charity upon death. Now we’ll look at giving these assets during your lifetime. We will also discuss donor advised funds, charitable gift annuities, pooled income funds, and life insurance charitable giving, Each of these planning techniques have different income, gift and estate tax consequences. The charitable income tax deduction will vary, and depending upon the technique, the interest that the donor receives from utilizing these techniques, may have tax ramifications. So, this type of planning must be done in coordination with your financial, tax and legal advisors.
  • These days, most people have qualified retirement plans with their employers, such as 401(k) plans, profit sharing plans, IRAs and pension plans. Those that don’t have employer sponsored retirement plans may have Individual Retirement Accounts or IRAs. Retirement plans and IRAs are excellent wealth builders. However, for those that have attained substantial success in life, they find themselves in a position where they don’t need some or all of the qualified retirement assets that they have accumulated for their golden years. As a result, these same qualified retirement plans and IRAs can cause significant adverse tax consequences at death, in particular, income and estate tax consequences, depleting most of the value of these assets to taxes, and leaving very little for family members as an inheritance. Therefore, as we previously discussed, qualified retirement assets and IRAs are excellent assets to donate to charity at death because of the charitable income and estate tax deductions that are available. Using assets in qualified plans and IRAs for lifetime donations to charity, however, are not as easily done due to complicated tax laws and rules that make this planning technique generally undesirable. Recently, however, rules did go into effect that would alleviate some of the issues. Today, an individual age 70½ or older can make direct charitable gifts from an IRA (including required minimum distributions) of up to $100,000 per year to public charities and not have to report the IRA distributions on his or her federal income tax return. This also means that these charitable contributions do not count towards the 50% income limit that we discussed previously but that doesn’t matter since you didn’t have to report the distribution as income. This tax provision will expire on December 31, 2009 unless Congress decides to extend this rule or make it permanent.
  • As you write your check to your favorite charity, have you ever considered whether your donation is really having an impact or not? Do you wish that your donation can have a larger impact? Well, a donor advised fund may be a solution for you. Donor advised funds are funds created by community organizations or certain financial institutions, that allow contributions to be accumulated in the fund instead of being immediately distributed to a charity. The fund may invest these contributions in various securities and other investments, typically in mutual fund type of investments. You may “advise” the DAF on the investment strategy for your contribution. When the time is right, the donor may “advise” the DAF to make distributions from the fund to a specific charity. The distribution does not have to happen in the year the donation is made. This has the effect of accumulating and growing contributions over a period of time so that when the distribution is made, the “gift” to the specific charity may be larger than what it otherwise would have received. For example: Suppose you annually make a donation of $5,000 to your favorite charity. You know that the $5,000 may be a small fraction of the total donations received by the charity. That doesn’t give you the sense of making a huge dent in the charity’s mission, does it? Now suppose you contribute that $5,000 at the beginning of each year into a donor advised fund. The money is invested and earns 8% annually. At the end of five years, the fund is now $31,680 when you “advise” the donor advised fund to make a distribution to your favorite charity. That $31,680 check may be more impactful than your $5,000 check. True, the charity has to wait to receive the money, but the charity will probably feel better with that bigger check, and you might feel like you made a bigger contribution to its cause. What’s nice about this technique is that a donor advised fund is treated like a public charity for tax purposes. So, each time you contribute $5,000 to the donor advised fund, you will get a tax deduction in that year for $5,000, assuming you’re within the adjusted gross income limits that we discussed earlier. Note, that many donor advised funds have minimums to open up an account ranging from $5,000 to $20,000 so you need to determine that. Additional contributions thereafter, however, tend to be much smaller minimums, if at all. Donor advised funds are sometimes referred to as the “poor man’s private foundation” although in reality, a donor advised fund can sometimes accomplish more than a private foundation. We’ll touch on private foundations briefly, later on in this presentation.
  • Okay. Moving on to the charitable gift annuity. The charitable gift annuity is a gift that is made in return for a stream of income. Here’s what I mean. With a charitable gift annuity, or CGA, the donor deals directly with the charity of choice to make a donation to the charity in return for a promised annuity stream. This annuity stream will be for the life of the donor. The annuity can also be for the joint lives of the donor and another person. Typically, a CGA is used when the donor wants to deal only with a particular charitable organization and when the amount in question is in the low hundreds of thousands or less. For larger donations and for more flexibility, there is a technique called a charitable remainder trust or CRT that operates somewhat similarly but is more complex. We’ll briefly touch on CRTs later. With a CGA, however, the donor is stuck with the charity that he made the transaction with.
  • Since the donor is dealing directly with the charity, setting up the CGA is simple, convenient and inexpensive. Charities typically have forms for donors to use to set up the CGA. The biggest downside to setting up a CGA is the fact that the donor is relying on the charity to fulfill its promise to pay the annuity. Unfortunately, it is not uncommon to see charities closing up shop. In addition, the donor does not have control over the amount of the annuity stream that he will receive back from the charity. Most charities utilize rates suggested by the American Council on Gift Annuities to determine the income stream. The charitable income tax deduction in this case will be the difference between the fair market value of the donated property and the present value of the annuity. A portion of each annuity payment represents a return of principal and another portion represents ordinary income. If the property donated is appreciated property, a portion of the annuity payment will also be treated as capital gains. The deduction will also be limited by the percentages we discussed before for cash gifts. By the way, the commencement of the annuity can be deferred and that will also impact the amount of the charitable deduction, but it may satisfy a particular need you have for timing the income stream. For maximum impact on the family and creating a family legacy, some of the income received from the annuity can be used to purchase a life insurance policy inside of another trust, known as a Wealth Replacement Trust. This wealth replacement trust can then act as an asset substitute because, but for your gift to charity, those assets would have gone to your heirs and family members. The wealth replacement trust replaces the assets left to charity for the benefit of your children, grandchildren or other heirs.
  • The pooled income fund is fairly similar to the charitable gift annuity in that a gift is made in return for a stream of income. Unlike a CGA, however, where the income stream is based upon a fixed rate, with a pooled income fund, the income stream is based upon investment results. With a pooled income fund, or PIF, the donor deals directly with the charity of choice. The PIF is a trust created and managed by the charity. The donation to the charity is held in the trust with all other donations made by other donors who entered into a pooled income fund transaction with the charity. Upon making the donation, the donor receives a certain number of “units of participation” from the trust. Think of a mutual fund and how that operates. The donation is made in return for a promised income stream. The income stream is a proportionate amount of the income that is generated by the “pooled” contributions of the various donors. A financial institution may manage the investments for the fund. This income stream will be for the life of the donor. The income stream can also be for the joint lives of the donor and another person. When the income stream ends (upon the donor’s death or the last surviving income recipient’s death), the donated assets are removed from the pool and given to the charity. That’s the charity’s “remainder interest.” As with a charitable gift annuity, a wealth replacement trust may be used, funded by the income stream received, to replace the assets that are being gifted to charity. This ensures that the family’s financial legacy is maintained by maximizing their inheritance.
  • For those of you who like pictures, here is a schematic of how pooled income funds work. Typically, a PIF is used when the donor wants to deal only with a particular charitable organization. Since the donor is dealing directly with the charity, setting up the PIF is simple, convenient and inexpensive. The biggest downside to setting up a PIF is the fact that the donor is relying on the charity’s investment management of the pooled contributions to fulfill its promise to pay the income stream and to get a reasonable amount of income. Also, like a CGA, when families are dealing with large sums of money or assets, the charitable remainder trust may be a better alternative due to the flexibility and control that can be built into the planning technique. As with many charitable giving techniques, highly appreciated securities are good assets to give to a pooled income fund because taxes on capital gains may be avoided since the pooled income fund is a tax exempt organization. The charitable income tax deduction in this case will be the present value of the charity’s remainder interest, like a CRT. Unlike the CRT and the charitable gift annuity, however, the income stream received from the pooled income fund will be treated and taxed as ordinary income. The charitable deduction will be up to 50% of adjusted gross income for gifts of cash or ordinary income property. If the gift is long term capital gains type property, then the deduction is up to 30% of adjusted gross income.
  • Let’s now shift our focus a little to life insurance. Few people think of life insurance and charitable giving together but it is one of the most overlooked methods to make an impact on your community and society. While it is true that the charity will not have any immediate benefit from this gift because the donor must die before the charity has the funds to spend on its programs, the charity stands to gain a real windfall in the future. There are generally four common methods in using life insurance as a charitable giving vehicle. Naming a charity as the beneficiary of your group term life insurance Naming a charity as the beneficiary of your individually owned life insurance Gifting an existing policy that you may no longer need for your own purposes, to a charity Gifting money to a charity so that a charity may purchase insurance on your life and continue to make the premium payments over time.
  • The first method of using your group term insurance is probably the most overlooked. Most individuals who work for companies that provide employee benefits, have some amount of group term life insurance from the company. Typically, the amount of group term insurance is a multiple of salary. Since the group term only exists as long as you work for that company, most individuals do not think twice about it. Oftentimes, the group term insurance does not play a significant role in a person’s insurance planning and many individuals don’t even remember having it. Did you know, however, that if your company provides you with group term insurance in excess of $50,000, you are taxed on the excess? Perhaps you knew the answer to that question, but most people do not know that if you name a charity as a beneficiary of a portion of the group term insurance for a full year, you will not be taxed on any of the group term insurance in excess of $50,000. In future years, you are not bound by that decision. You can change your mind about the charity, or whether or not to even name a charity as a beneficiary of your group term. Your future actions will not affect the tax break that you received previously. This is an excellent way to provide a potential community legacy using an asset that is often overlooked. While there is no charitable income tax deduction, you don’t really need it because you were able to exclude taxable income. If you died with this plan in place, your estate will also receive an estate tax benefit from this.
  • The other way to use life insurance as a charitable asset is to simply name a charity as the beneficiary of some or all of the death benefit in a policy that you own. If you’re concerned that you need to provide for a child or other family member first, then name a charity as the contingent beneficiary. That means that if the primary beneficiaries – your children or other family members, survive you, the insurance benefit will be there for their benefit. If the primary beneficiaries predecease you, the charity, as contingent beneficiary, will received the insurance proceeds upon your death. This is a simple and easy way to provide for social causes. It is also flexible, allowing you to change your mind about the charity as well as whether or not to even leave the insurance proceeds to charity. You can also split the death benefit between family members and charity. While there is no income tax benefits to this strategy, there will be an estate tax benefit if the insurance proceeds are left to charity.
  • The third method of using life insurance as a charitable gift, and probably the most common method, is to give an existing life insurance policy to charity. Permanent life insurance policies like whole life, universal life or variable life, are the best types of insurance to give for two reasons: the first is that since the insurance is permanent, so long as the premiums are paid, the insurance death benefit will always exist and will eventually be paid to the charity. The second reason is that permanent insurance typically has cash values. If the charity is not interested in keeping the insurance in force until the donor’s death, the charity can cash in the policy for the policy’s cash surrender value. Why would you want to give an existing life insurance policy to charity? Simple, because you may no longer have a need for the insurance. For instance, your children are all long gone from the home and you and your spouse have more than enough to live out the rest of your days. The insurance no longer serves the income protection needs that it was purchased for and you may not have an estate planning need for that insurance. Or, you used to be a business owner and had a business continuation plan funded with life insurance. You sold the business rendering the business continuation plan moot, and now, no longer have a need for the insurance. Or, you simply have more insurance coverage than you currently need. There are a variety of reasons why you may not need the insurance anymore but since you’ve paid into the policy for so long, creating a social legacy with the death benefit by giving the policy to charity, is a positive result. If the policy still needs to be carried with additional premiums, you can also gift the premiums to charity as an additional charitable donation. This third method will provide you with an income tax benefit from the charitable donation, but also an estate tax benefit by having the life insurance proceeds removed from your gross estate for estate tax calculation purposes.
  • The fourth method of using life insurance as a charitable gift, is the gift of money to the charity so that the charity can purchase an insurance policy on your life. This allows a charity to leverage a modest gift of cash into a much larger deferred benefit in the form of the life insurance death benefit. This method has some hurdles to overcome depending upon individual state laws. The main hurdle is in complying with state “insurable interest” laws. Insurable interest basically means that the person or organization applying for the insurance, must have an interest in the life (or death) of the person being insured. These laws exist to prevent people or organizations from speculating on the lives of strangers or acquaintances. It is unseemly and against public policy. For charities, however, most states recognize that charities have an insurable interest on the lives of its donors. For example, a charity may wish to insure against the loss of a donor who makes large contributions to the charity each year. In these cases, the rules need to be followed strictly to the letter. The gift of the initial and ongoing premiums to the charity so that it may maintain the policy will result in an income tax charitable deduction each time a contribution is made. As you can see, there are a variety of ways to use life insurance as a charitable vehicle. Each method will allow you to make a huge impact on your community through the death benefit.
  • Several times during this presentation, I briefly mentioned a wealth replacement trust. Before we wrap up this session, I wanted to go over this point again because it addresses a concern that I frequently hear from clients. As we have seen, many individuals are very charitably inclined, but for the vast majority of Americans, most families want to benefit the community without adversely impacting the financial legacy that they leave to their children and family members. That’s where the Wealth Replacement Trust comes into play. A Wealth Replacement Trust is an irrevocable life insurance trust that has significant estate tax and legacy benefits. It allows for the purchase of life insurance inside of the trust, thereby keeping the insurance proceeds out of your taxable estate. The beneficiaries of this trust, however, are your children and other family members so the insurance proceeds can “replace” the assets that you donate to charity. The premiums for the insurance are paid using a portion of the income stream that you receive from either the charitable remainder trust, charitable gift annuity, or the pooled income fund, leaving you with no out-of-pocket expense. The wealth replacement trust can also be funded with other sources of cash flow or assets that you may have. That would be useful to replace charitable donations made using one of the other charitable giving techniques that we discussed, such as outright gifts, donor advised fund or private foundation. The end result of this is that you can gift to charity without reducing the financial legacy that you leave to your children and heirs.
  • I also wanted to briefly mention that there are other charitable planning techniques out there that we will not be discussing. These techniques are more common with high net worth families who probably have an estate tax problem. These are more complex planning techniques that require the involvement of an estate planning attorney to draft legal documents, and your CPA. If you are interested in more information on these other techniques, I would be more than happy to speak with you after the meeting or by scheduling an appointment with you. But I wanted to briefly mention them. Charitable remainder trusts, or CRTs, are somewhat similar to charitable gift annuities and pooled income funds in that they serve dual purposes. It provides an income stream back to the donor for a certain period of time, and at the end of the term, the remainder goes to one or more charities designated. CRTs are generally used when we’re talking about donations of several hundreds of thousands of dollars, if not millions. They provide more flexibility and options than CGAs and PIFs and there are several variations on the theme. They are very popular tools with high net worth families who have highly appreciated assets that they wish to use for their charitable activities. Charitable lead trusts, or CLTs, operate in reverse of CLTs. The income stream goes to the charity, with the remainder going back to the donor or the donor’s family. CLTs are very popular with high net worth families, particularly when used at death, because it can generate a large estate tax charitable deduction if used correctly. Qualified conservation contributions are becoming more and more common as people become more concerned with overdevelopment of their communities, preserving open space and preserving historic landmarks. While there are many rules and regulations to follow when setting up a conservation contribution, the contribution to society is unquestioned. Land and buildings are preserved for the enjoyment of future generations. Finally, private foundations have a reputation as being the charitable vehicle of choice for the very wealthy. While that’s not entirely true, foundations are generally limited to those families who are very charitably inclined, have the resources to make large donations on a regular basis, and have a desire to perpetuate family values and the family name. There are many rules and regulations that need to be followed with a private foundation, but an awful lot of good is done through these organizations. There are even more types of charitable vehicles out there that are used by high net worth families but these are the most common.
  • Before we close, I just wanted to provide you with a list of helpful resources that may help you in choosing the right charity to give to. Most of these on-line resources tend to focus on the bigger charities but they may be a good place to start. You should also check with the IRS to ensure that the organization that you are thinking about giving to, is a bona fide charitable organization. Unfortunately, in today’s world, there are many organizations that appear to be legitimate charities but exist only to defraud individuals. The IRS regularly publishes Publication No. 78, the “Cumulative List of Organizations Described in Section 170(c) of the Internal Revenue Code.” This list is of all of the organizations that have complied with various IRS rules at the time of the publication.
  • We just spent the last XXX minutes/hours reviewing what philanthropy and charitable giving are, some of the most common methods in giving to charity, and briefly touched upon some of the more common specialty ways in giving to charity. As you can see, there is really no “one size fits all” type of solution. Each charitable planning technique exists because people like you have multiple needs and in some cases, complicated needs. The only way to determine what’s best for you is to sit down with your financial professional, as well as your tax and legal advisors, to explore what you are trying to accomplish with your charitable giving, in relation to all of your other financial goals. Together, we can devise an action plan to ensure that as many of your needs are met while ensuring that your own financial security is certain. Once your action plan is in place, we can help you to implement that plan and ensure that your philanthropy and charitable giving make an impact on your community creating a social legacy. We can also explore how best to involve family members. As we said before, philanthropy and charitable giving are excellent tools to help deepen family relationships, as well as to pass wisdom and values down the generations. That’s what a family legacy really means. I hope that you have learned a little about the different ways people give, and why they give. From that, perhaps you can see how what you have learned may apply to your own situation. I would be more than happy to discuss this topic with you further and to assist you in your philanthropy and charitable giving.
  • Here are EWI Corporate and my contact information if you would like to discuss your philanthropy and charitable giving further. Thank you for your time and attention today.

ESTATE PLANNING BUSINESS RESOURCE CENTER ESTATE PLANNING BUSINESS RESOURCE CENTER Presentation Transcript

  • Philanthropy and Charitable Giving Why We Give and How We Give The Guardian Life Insurance Company of America, New York, NY
  • Disclaimer
    • The foregoing information regarding estate, charitable and/or business planning techniques is not intended to be tax, legal or investment advice and is provided for general educational purposes only. Neither The Guardian Life Insurance Company of America (Guardian), nor its subsidiaries, agents or employees provide tax or legal advice. You should consult with your tax and legal advisor regarding your individual situation.
    • Links to other sites are for your convenience in locating related information and services. Guardian does not maintain these other sites and has no control over the organizations that maintain the sites or the information, products or services these organizations provide. Although Guardian believes that the information from these organizations is reliable, we cannot guarantee its completeness or suitability for any purpose. Accordingly, Guardian expressly disclaims any responsibility for the content, the accuracy of the information or the quality of the products or services provided by the organizations that maintain these sites. Guardian does not recommend or endorse these organizations or their products or services in any way.
    GEAR # 2008-9685 Approval: 01/05/2009 Expiration: 07/04/2010
  • What is Philanthropy?
    • “ The idea behind meaningful philanthropy
    • is a desire to change the world
    • for the better.”
    • – Alan Alda
  • What is Charitable Giving?
    • “ To me, money is a means to do good.”
    • – Eli Broad
  • Charitable Giving in America
    • Over 70% of households make charitable gifts*
    • An estimated $260.28 billion was given to charities in 2005 by Americans**
    • Americans give, on average 2.2% of their after-tax income**
    • * The Center on Philanthropy at Indiana University, Panel Study, 2005 wave, revised January 2008
    • ** Giving USA 2006
  • Why Do Americans Give?
    • Have an impact in society and make a difference
    • Pride in the community
    • Creating a legacy and perpetuating family values
    • Sense of obligation and guilt
    • Good business
  • Why Do Americans Give?
    • Tax management and leverage
    • Recognition, standing and prestige
    • Giving back and redemption
    • Compelled by recent events
    • Religious identity
  • Why Do Americans Give?
    • Philanthropy is different for each person.
    • The outcome of philanthropy can be as much for oneself as it is for others.
  • What Do Americans Give?
    • Time and Talent
    • Treasures
      • Money
      • Property
  • Time and Talent: Volunteerism
    • Most altruistic
    • Often brings greatest personal satisfaction
    • No financial incentive or reward
  • Treasures – Cash Contributions
    • Cash contributions
    • “ Checkbook philanthropy”
    • Tithing
  • Income Tax Deduction
    • Cash Contributions
      • Up to 50% of adjusted gross income in the year the gift was made
      • Carryover of unused deduction
  • Treasures – Contributions of Property
    • Art work
    • Securities
    • Cars
    • Real estate
    • Personal property (e.g., furniture, clothing, used electronics, etc.)
  • Income Tax Deduction
    • Contributions of Property
      • Up to 50% of adjusted gross income in the year the gift was made, with exceptions
      • Amount of deduction depends upon the type of property donated
        • Ordinary income type property
        • Capital gains type property
      • “ Related use” gift of property
      • Carryover of unused deduction
  • Treasures - Planned Giving
    • Gifts to charity made at death (testamentary gifts)
      • Through wills and revocable living trusts
      • Through beneficiary designations
      • Through a “life estate” with remainder to charity
  • Treasures - Planned Giving
    • Particularly advantageous with “IRD” (“income in respect of a decedent”) assets
      • Qualified retirement plans
      • Individual Retirement Accounts (IRAs)
      • Annuities
  • Common Specialty Planning Techniques
    • Retirement Assets Donated to Charity
    • Donor Advised Fund
    • Charitable Gift Annuity
    • Pooled Income Fund
    • Life Insurance Charitable Giving
  • Retirement Assets to Charity
    • Retirement Plans
      • 401(k) Plans
      • Profit Sharing Plans
      • Pension Plans
      • Individual Retirement Accounts (IRAs)
      • Others
    • Commonly used in testamentary planning
      • Many tax benefits
    • Not as common for lifetime gift planning
      • New rules have helped
  • Donor Advised Fund
    • What is it? How does it work?
    • Contributions can be accumulated
    • Contributions are invested and grown
    • You, as donor, can “advise” the donor advised fund on the investment strategy
    • You, as donor, can “advise” the donor advised fund to make a distribution
    • Same tax deduction as a gift of cash
    • Donor advised fund does not have to distribute your contribution each year
  • Charitable Gift Annuity Donor Charity 1. Donation to charity 2. Promise to pay annuity stream
  • Charitable Gift Annuity
    • What is it? How does it work?
    • Dual purpose
      • Stream of income to donor for life
      • Remainder to charity
    • Inexpensive to set up
    • Deal directly with charity of choice
    • Reliance on charity
    • Maintaining the family’s financial legacy
      • Obtained through a Wealth Replacement Trust
      • Purchase life insurance in Wealth Replacement Trust using income stream
  • Pooled Income Fund
    • What is it? How does it work?
    • Somewhat similar to charitable gift annuity
      • Stream of income for life based upon investment performance
      • Asset to charity upon death
    • Deal directly with charity of choice
    • Reliance on charity’s investment management skills
    • Maintaining the family’s financial legacy
      • Obtained through a Wealth Replacement Trust
      • Purchase life insurance in Wealth Replacement Trust using income stream
  • Pooled Income Fund Donor Pooled Income Fund Trust 1. Contribute to trust 2. Pay income stream based upon investment results Charity 3. Remainder to charity
  • Gift of Life Insurance
    • Four Methods:
    • Charity as beneficiary of group term life insurance
    • Charity as beneficiary of personally owned life insurance policy
    • Gift of an existing life insurance policy to charity
    • Gift of premiums to charity for charity owned life insurance policy on donor
  • Charitable Beneficiary of Group Term
    • Group Term Life Insurance
    • Group term life insurance
      • Provided by employer
      • Income tax on benefit in excess of $50,000
    • Charity named as beneficiary for full year
      • Avoid income tax
      • Create social legacy
  • Charitable Beneficiary of Personally Owned Life Insurance
    • Personally Owned Life Insurance Policy
    • Name as primary beneficiary
    • Name as contingent beneficiary
    • Beneficiary of some or all of death benefit
  • Transfer Life Insurance Policy
    • Transfer of Policy
    • Gift of existing life insurance policy to charity
    • On-going gift of premiums to charity
  • New Life Insurance
    • New Life Insurance
    • Gift of money to charity for charity owned life insurance policy on donor
    • Annual gift of money to charity for premiums
    • Insurable interest rules
  • Wealth Replacement Trust
    • What Is It? How Does it Work?
    • Irrevocable life insurance trust
    • “ Replaces” wealth gifted to charity
      • Premiums paid from income stream
      • Premiums paid from other assets or cash flow sources (depending upon charitable giving technique)
    • Allows for social legacy without reducing family family
  • Other Specialty Planning Techniques
    • Charitable Remainder Trust
    • Charitable Lead Trust
    • Qualified Conservation Contribution
    • Private Foundations
  • Choosing a Charity
    • Charity Navigator (charitynavigator.org)
    • GuideStar (guidestar.com)
    • Community Giving Resource (smartlink.org)
    • American Institute of Philanthropy (charitywatch.org)
    • Better Business Bureau Wise Giving Alliance (give.org)
    • Schwab Charitable (schwabcharitable.org)
    • Publication No. 78 (irs.gov)
  • Conclusion
    • Philanthropy and charitable giving are what you want it to be and what you make it to be
    • Many ways to accomplish your goals
    • Create a community and social legacy
    • Create a family legacy
  • For Additional Information
    • Lynn Shaffer, EWI Executive Director
    • Corporate Office
    • 515 South 700 East, Suite 2A
    • Salt Lake City, UT 84102-2801
    • Phone: 1.877.4EWI.NOW(1.877.439.4669)
    • Fax 801.355.2852
    • Email: [email_address]
  • For Additional Information
    • EWI of Denver
    • Wealth Strategies Group
    • Gerry C. Frantz, CLU
    • Financial Representative
    • 6455 South Yosemite Street, Suite 300
    • Greenwood Village, CO 80111
    • Phone 303.714.5855
    • Email: [email_address]