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Finance 553

Finance 553. Charitable Giving. Charitable Giving. Some facts about Charitable Giving (2013) 95.4% of American households give to charity Average contribution per household is $2,974 Total giving was $335.17 billion Household giving was $241.32 billion (72%)

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Finance 553

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  1. Finance 553 Charitable Giving

  2. Charitable Giving • Some facts about Charitable Giving (2013) • 95.4% of American households give to charity • Average contribution per household is $2,974 • Total giving was $335.17 billion • Household giving was $241.32 billion (72%) • Bequests were $26.81 billion (8%) • Corporate giving was $16.76 billion (5%) • Foundation giving was $50.28 billion (15%)

  3. Charitable Giving • More facts about Charitable Giving (2013) • Gifts were made to • Religion (31%) • Education (16%) • Human Services (12%) • Grantmaking foundations (11%) • There are approximately 1,536,084 charitable organizations in the U.S.A. • Nonprofits accounted for 9.2% of all wages and salaries paid in the U.S.A.

  4. Charitable Giving • Charitable Giving and Nonprofit Organizations are big business in the U.S.A. • Qualified charitable giving of any size is fully deductible from income and estate assets. • In general the full gift to a charity during one’s life (inter vivos) results in a deduction in taxable income up to the AGI of the individual or couple • In genera the full gift to a charity at death (causa mortis) is deductible from the estate assets if the asset is included in the estate • Assets can be split with a portion going to charity

  5. Charitable Giving • What does it take to qualify an organization as a charity? • Charities are qualified by the Internal Revenue Code (Section 170(c)) – most common types • State or U.S. possession or any political subdivision • Corporation, trust, community chest, or foundation organized for • Religious, community service, scientific, literary or education • Fostering national or international amateur sports competition • Preventing cruelty to children or animals • A post or organization of war veterans • A domestic fraternal society, order, or association operating a lodge • A cemetery company

  6. Charitable Giving • Examples of Charitable Organizations • Churches, Synagogues, Mosques, etc. • Public Parks (National, State, City, etc.) • Colleges and Universities • United Way • Boy Scouts and Girl Scouts of America • Salvation Army • American Heart Association • American Society for the Prevention of Cruelty to Animals • Listing of Charitable Organizations at IRS Publication 78 with updates both quarterly and weekly via bulletins

  7. Charitable Giving • Why give to charities (rather, why does your client want to give to charities)? • List three reasons – • Not on the list, tax reduction • How can your client give to charities • Outright cash • Property donation (real, tangible, or intangible) • Service • What is the benefit of the donation? • Altruism – principle or practice of concern for the welfare of others • Side benefit – some tax relief (altruism behavior encouraged by tax codes)

  8. Charitable Giving • How are the tax benefits calculated? • Gifts of Cash – amount donated less any tangible benefit received by the donor for the donation • Buying season tickets to college sports team with “donation” for the seat selection process (80% of donation allowable) • Benefit of relatively small value then all donation tax deductible – get a coffee mug for $100 donation to OPB, entire $100 deductible • Gifts of Service • Usually only direct out of pocket expenses (not reimbursed) • Cost of gas for delivery of meals on wheels • Cost of uniforms required for volunteer work

  9. Charitable Giving • How are the tax benefits calculated (continued)? • Property Gifts-- Generally the fair market value of the gift at the time of donation • Property Gifts that are at adjusted basis • Ordinary Income Property • Any property that when sold would result in recognition of ordinary income • Donation is reduced by the income produced (adjusted basis) • Capital Gain Property • Fair market value unless donated to nonoperating foundation • Property donated for unrelated use • Limitations based on 50%, 30% and 20% AGI rules • Skipping this section

  10. Charitable Giving • Special Giving Vehicle – Charitable Remainder Trust (CRT) • Current benefits of property “retained” by donor • Remainder interest in property donated to charity • Irrevocable trust • Charity is trustee of the trust • Value of donation is fair market value of property minus the beneficiary interest in the trust retained by the donor • Beneficiary interest is usually income and value is present value of income based on estimated life of the donor

  11. Charitable Giving • Example of basic Charitable Remainder Trust • Claire and Phil want to donate a stock portfolio currently worth $2,000,000 to their university foundation with basis of $500,000 • The trust is set up such that the foundation is the trustee and the remainder beneficiary • Claire and Phil take a beneficiary interest in the portfolio such that it pays an annual annuity of $50,000 to Claire and Phil for the remainder of the longer living spouse • The foundation “manages” the portfolio and as trustee can alter the stocks in the portfolio • At the death of the second to die, the portfolio will transfer to the foundation • What, if any, tax benefit do Claire and Phil get from the CRT?

  12. Charitable Giving • Example of basic Charitable Remainder Trust continued • The fair market value of the portfolio is established at the time the trust is set up – rules for valuing stock • Value of the annuity is determined by • Section 7520 rates (2% for this example) • Expected life tables for couple with second in death - note this would be longer than the expected life of either Claire or Phil • For example, Claire is 63 and Phil is 61 and actuarial tables have second in death of 33 years • Calculation: N = 33 years, I/Y = 2.0%, Payment = $50,000 and Present Value = $1,199,428 • Donation benefit is $2,000,000 - $1,199,428 = $800,572 • Typically estimated remainder must be greater than 10% of fair market value of donation (here it is 40.0%)

  13. Charitable Giving • Example of basic Charitable Remainder Trust continued • How are the annual $50,000 payments calculated for Claire and Phil as ordinary income and capital gains? Donation has two elements – sale element and charitable gift element • SALE ELEMENT -- PV of annuity minus Pro Rata adjusted basis equals the charitable gift • PV annuity = $1,199,428 • Pro Rata = $500,000 x ($1,199,428 / $2,000,000) = $299,857 • Capital Gain = $1,199,428 - $299,857 = $899,571 • CHARITABLE GIFT ELEMENT -- $800,572 • Life of Annuity produces, $50,000 x 33 = $1,650,000 • Principal $299,857, Capital Gain $899,571, Interest $450,572

  14. Charitable Giving • Example of basic Charitable Remainder Trust continued • Annual $50,000 is what type of income? • First calculate annual change in PV for principal reduction – annuity for 33 years vs 32 and difference is principal reduction (amortization schedule) • $1,199,428 - $1,173,417 = $26,011 • Next ratio of basis and capital gain • Basis ratio $299,857 / $1,199,428 = 25% • Capital gain ratio $899,571 / $1,199,428 = 75% • Interest Earned = $50,000 - $26,011 = $23,989 • Capital Gain = 75% x $26,011 = $19,508

  15. Charitable Giving • Example of basic Charitable Remainder Trust continued • What is the anticipated remainder in trust for foundation? • Estimate annual earnings on the portfolio – use an 6% return on stock portfolio • Each year $50,000 payout takes place and additional gain (or annual loss) is added to the portfolio • With expected payouts for 33 years and market return of 6%, calculate anticipated remainder benefit • N = 33 • I/Y = 6.0% • PV = $2,000,000 • PMT = -$50,000 • FV = $8,814,022 • A portion of the appreciating assets avoid capital gains tax

  16. Charitable Giving • Other Trusts • Charitable Remainder Income Trusts • Charitable Remainder Unit Trusts • Charitable Remainder Trusts with Split Interest • Other Issues • Community Property in Wills with charity bequest of property • Life Insurance in Will with charity bequest of proceeds • IRAs in bequest

  17. Charitable Giving • What are the implications for Financial Planning? • What is the most efficient way to transfer property for the client to their beloved charities? • What potential events to the plan may render the transfer choice ineffective or inefficient? • Pre-mature death • Asset value changes • Cash flow needs of the donor/grantor • Changing tax laws • IRS potential challenges to the transfer • Gift tax changes (size of one time exclusion or annual exemption) • Availability of trust maker to change mind about transfer, both assets and beneficiaries and thus tax implications of trust

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