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Charitable Gifting through Estate Planning

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Grace S. Yung
Grace S. Yung, CFP

by Grace S. Yung, CFP

Throughout our lifetimes, there are certain charitable organizations that are likely to touch our hearts. Especially in the LGBT community, entities like the Human Rights Campaign or the Gay and Lesbian Victory Fund may capture our attention—along with our financial support—for the work that they do.

The good news is that there are ways to provide funds to these and other worthwhile causes in the present, while at the same time including them in your overall estate planning. This will allow both them and you to benefit even further—provided that you construct the plan in the proper manner.

Giving Larger Gifts that Matter

While giving regularly to a charitable organization can offer both financial and emotional rewards, there are also ways to set up giving strategies that will provide a great deal more in the future. One way of doing this is to name an organization as the beneficiary of your life insurance policy. In many instances, this can allow you to make a much larger gift down the road.

This strategy can provide other benefits, as well. For example, if the policy is a type of cash-value life insurance, you will still have access to the cash throughout your life. This gives you the ability to borrow or withdraw the funds if you need to. (It is important to note, though, that any borrowed funds that are not repaid will be deducted from the policy’s death benefit.) In addition, the amount of the death benefit proceeds that goes to the charity will not be included in your overall gross estate for estate tax purposes.

Another option for boosting donations to your favorite charity is to name the organization as the beneficiary of your retirement plan. Because charities are nonprofits, they pay no income tax on assets that they receive. Therefore, a larger percentage of the assets in your plan will actually be passed on to the organization, rather than to Uncle Sam.

If you opt to go this route, though, there are a couple of things to keep in mind. First, you need to be sure to include the federal tax ID number of the charitable organization on your beneficiary designation form. Otherwise, inaccurately naming the beneficiary could lead to your funds having to go through the probate process.

Also, in order to help avoid any unnecessary taxation of the account, the funds should pass directly to the charity. For example, if the account were to go through your estate or your heirs first, and then pass on to the charity, it is likely that the funds would be subject to estate and income tax.

Using a Charitable Remainder Trust to Accomplish More than One Goal

Using a charitable remainder trust, or CRT, you can also accomplish the goal of passing on funds to a charity. However, using this type of trust also allows you to provide for yourself and your partner during your lifetimes.

These trusts have two primary features:

First, a CRT can distribute a fixed percentage of its assets to a non-charitable beneficiary. This means that you and/or your partner could still receive income from the assets inside of the trust. These distributions are typically made either on an annual or a semi-annual basis, and they must be at least 5 percent, but not more than 50 percent, of the fair market value of the trust’s assets. The trustee determines the value of the assets at the time they are contributed to the trust, as well as at subsequent valuation dates over time.

Then, at a certain time, the remaining CRT assets are distributed to the charity—usually when the trust beneficiary passes away. The assets that go to the charity must be at least 10 percent of the fair market value of the assets that were originally contributed to the trust.

The other nice benefit of charitable remainder trusts is that the donor is allowed to take a charitable deduction that is based on the present value of the remainder interest of the trust assets.

According to the Internal Revenue Code, the donor is also allowed to deduct CRT contributions from his or her gross estate so they won’t be included in the gross estate value calculation. This can be beneficial for estate tax purposes.

There are a number of ways in which a charitable remainder trust can be set up, depending on the goals and needs of the donor, as well as on what the donor would like to accomplish. Some of these include:

• Charitable Remainder Annuity Trust (CRAT): A charitable remainder annuity trust is a CRT in which the annual payments to a non-charitable beneficiary are in the form of a fixed annuity. The annuity may be either expressed in terms of a fixed dollar amount, or a fixed percentage of the fair market value of the assets on the date that the trust is established.

  • Charitable Remainder Unitrust (CRUT): A charitable remainder unitrust is a CRT in which the annual payments to a non-charity beneficiary are in the form of a fixed unitrust. This unitrust is expressed in terms of a fixed percentage of the fair market value of the assets, revalued on the anniversary date of the trust’s formation. Therefore, the amount that is paid to the charity each year will either increase or decrease as the assets appreciate or depreciate.
  • Charitable Lead Annuity Trust (CLAT): A charitable lead annuity trust is actually a charitable lead trust in which the annual payments to the charity are in the form of a fixed annuity. Here, too, the annuity can be expressed in terms of either a fixed dollar amount or as a fixed percentage of the fair market value of the assets on the trust’s anniversary date. Therefore, regardless of how the trust’s assets appreciate or depreciate, the amount that passes to the charity is fixed.
  • Charitable Lead Unitrust (CLUT): Likewise, with a charitable lead unitrust, the annual payments to a charity are in the form of a fixed unitrust. Like the CRUT, the unitrust is expressed in terms of a fixed percentage of the fair market value of the assets, revalued on the anniversary date of the trust. Therefore, the amount that the charity receives will depend on whether the assets appreciate or depreciate.

The Bottom Line

Donating funds to a favorite charity can be a noble and worthwhile accomplishment. Doing so through beneficiary designations or a charitable remainder trust, however, can provide both you and the charity with additional benefits.

Some of the key advantages of using a charitable remainder trust, for instance, can include not only the ability to transfer funds to the charity at death, but the generation of income from the trust’s assets during your lifetime. And an added benefit is the income tax deduction provided for the trust’s donor.

Prior to setting up any plan for charitable donations or a charitable remainder trust, it is important to discuss your options with professionals who are well-versed in both tax and financial issues, especially as they relate to the LGBT community. That way, you can ensure that you are setting up a plan that will best fit your specific needs and goals.

Personal finance-related questions may be e-mailed to [email protected]

Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston.

 

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Grace S. Yung

Grace S. Yung, CFP, is a certified financial planner practitioner with experience in helping domestic partners plan their finances since 1994. She is a principal at Midtown Financial LLC in Houston and was recognized as a “Five-Star Wealth Manager” in the September 2017 issue of Texas Monthly.
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