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Planning strategies for prospective donors

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[Publisher’s note: The Philanthropy Journal does not necessarily endorse the opinions, products or services offered or cited in this paid advertorial.] 

Americans give generously to nonprofit organizations – so generously in fact that contributions rose to the tune of $260 billion in 2005.  This represents a 2.7% increase from 2004 levels when adjusted for inflation.  Of the $260 billion in charitable giving, 75% came in the form of charitable gifts from individuals.  Charitable giving provides an opportunity for tax savings, particularly as individuals seek year-end planning options for their 2006 tax bills.  The amount of tax savings depends on the donor’s tax bracket and other factors.  However, making a charitable gift is more than just careful year-end tax planning.  Rather, this is an opportunity to make a difference in communities through philanthropy.

Charitable gifting options include gifts of cash, gifts of stock, gifts of real estate, gifts of life insurance, life income gifts and bequests.  This year, donors have added incentives for charitable giving due to the Pension Protection Act of 2006.

Charitable Giving Options

Cash:  As the saying goes, cash is king, and it remains one of the easiest ways to give.  Cash gifts can lower the donor’s tax bill if the gift is postmarked by December 31, and subsequently clears the donor’s bank in due course.  Postmark is the most common verification of delivery.  The current law allows deductions of up to 50% of an individual’s adjusted gross income to a public charity, with excess deductions carried forward and deducted over the next five years, if needed, to fully use the deduction.

Stock:  Gifts of stocks and bonds are an extremely tax-efficient gifting option.  The gift of appreciated securities offers a two-fold tax savings by avoiding capital gains and receiving an income tax deduction for the full fair market value of the stock at the time of the gift.  Stock should be owned for generally more than one year to qualify for the tax advantages.  The stock gift and properly endorsed stock power should be postmarked by December 31 to qualify as a gift in the taxable year.  The gift is completed on the date of the receipt of the wire transfer, or on the date of mailing.  If donors choose to mail a gift of stock, it is recommended that both the stock certificate (unendorsed) and the signed stock power be mailed in separate envelopes with return receipts requested.  Gifts of long-term capital gain stock are deductible up to a maximum of 30% of adjusted gross income.  The deduction is restricted to gifts of qualified appreciated stock, and limited to 20% of the donor’s adjusted gross income for gifts to a private foundation.  Gifts of mutual funds are not immediately transferable, and must be facilitated to allow time for processing.

Real Estate:  Contributing real estate will reduce your carrying costs of property taxes, insurance and maintenance while serving to avoid the capital gains tax hit of an outright sale, and generate a charitable deduction for the full fair market value of the property.  The deduction may be reduced where depreciable property is involved.  It is also possible to make a gift of real estate through a retained life estate.  This allows the donor to live in the residence for his or her lifetime, and receive a charitable tax deduction for the current year.  A gift of real estate is completed when the donor delivers a properly executed deed to the nonprofit.  Gifts of real estate take time to facilitate, so donors need to learn about the nonprofit organization’s real estate gifting policy and process.

Life Insurance:  Gifts of life insurance, free of policy loans, allow donors who no longer need the policy, to take advantage of a charitable tax deduction.  For a paid-up policy, the donor benefits from an income tax deduction equal to the replacement value of the policy or the tax basis (premiums paid to date of gift), whichever is less. If premiums remain to be paid, the future premiums can be deducted from the donor’s income tax on an annual basis.  The nonprofit must be named as policy owner and beneficiary.  State law should be consulted when making gifts of life insurance.  To obtain a gift or income tax deduction, all incidents of ownership and rights in the policy must be assigned to the charity.

Life Income Gifts:  A life income gift, or a planned gift, allows donors to make a charitable gift now while receiving an income payment stream for life or a stated term of years (for either the donor or stated beneficiary).  Life income gifts include charitable gift annuities and charitable remainder trusts.  Charitable gift annuities are popular and perhaps the simplest planned giving option for donors.  A charitable gift annuity provides a donor or annuitant with a payment stream for life, while the nonprofit receives the remainder of the gift upon the donor’s or annuitant’s death.  The charitable gift annuity is a contract between the donor and the nonprofit organization, and is irrevocable.  The charitable deduction is based on the contribution portion of the purchase of the gift annuity.  The annuity is secured by the nonprofit’s assets, and the purchase of the gift annuity is considered a bargain sale if the transaction produces an allowable charitable deduction.

Charitable remainder trusts are popular planned giving vehicles from a tax efficiency perspective.  Charitable remainder trusts allow donors to reduce estate taxes, defer capital gains tax, and claim an income tax deduction.  Charitable remainder trusts provide distributions of a specified payment to one or more persons, at least one of who is not a charitable organization.  The payment may be structured as an annuity or unitrust payment.  Nonprofits receive the remainder from the trust upon the termination of the trust, either upon the death of the last beneficiary or after a stated period of time.  A charitable remainder trust is an irrevocable trust created under state law.  Charities generally do not pay the legal fees to draft and execute a charitable trust instrument, because a donor has the right and obligation to independent legal advice.

Bequests:  During the year-end charitable planning process, donors may wish to revisit their estate plans.  Charitable bequests allow donors to achieve a philanthropic legacy while providing estate tax relief.  A properly executed bequest is necessary to secure the deduction, which is important given the impact of the estate tax on large estates.

Pension Protection Act of 2006

President Bush signed the Pension Protection Act of 2006 on August 17, 2006.  Included in the package were a series of charitable giving incentives.  The first item of interest is the new IRA charitable distribution or transfer provision.  In 2006 and 2007, an owner of a traditional or Roth IRA who is age 70 ˝ or older may instruct the custodian to distribute to a public charity up to $100,000,
without the distribution being included in taxable income.  The distribution will count towards the IRA owner’s mandatory withdrawal amount, and is an outright gift to the nonprofit organization.  Donors do not get a tax deduction for the gift, but they do get to exclude the money from taxable income.  The distributions cannot be used for charitable gift annuities, charitable remainder trusts or pooled income funds.  The distributions cannot be made to donor-advised funds or supporting organizations.  The tax consequences for many of the donors will be the same as a personal withdrawal from an IRA followed by a cash contribution of an equivalent amount.  Donors who wish to make such distributions should follow their IRA custodian’s process of a direct distribution.  Donors cannot request that the funds be made payable to themselves; the distributions must be made directly from the IRA custodian to the nonprofit to qualify under this provision.

Another charitable giving incentive in the Act was the conservation property contribution where the deduction limit has been increased to 50% of adjusted gross income, with the carryover period for excess deduction increased to 15 years.  The Act also has provisions for the basis reduction to stock of S Corporation contributing property.  The Act makes the basis reduction equal to the shareholder’s pro rata share of the basis of the contributed property.  This provision makes gifts of S Corp property more beneficial, and like the IRA transfer, the provision lasts through 2007.

The Act eliminates the deduction for used clothing and household items unless such clothing or items are in good used condition or better and a qualified appraisal is obtained and attached to the tax return substantiating the value of the gift if over $500.  The Act revises the rules regarding gifts of fractional interests in tangible personal property that have an impact on gifts of art.

Final Thoughts

Donors should consult with their tax and financial advisors, as well as the nonprofit organization, well in advance to discuss charitable giving options.  Many nonprofit organizations have gift acceptance policies that guide the organization regarding giving assets and processes, and donors need to ensure their donation will be properly accepted and accounted for the deduction to be valid.

Charitable giving is essential in long-term financial planning and strategy.  While charitable giving provides tax-efficient solutions, the primary motivation in making a gift is donative or philanthropic intent.  The advantages of philanthropic financial planning are significant and include tax efficiency, asset diversification, and retention of tax dollars.  Advantages are also significant by providing for the building of philanthropic capital and improving the common good, all while bringing meaning to the money.

This communication is not a covered opinion as defined by Circular 230 and is not intended or written to be used, and cannot be used, or relied on, by the taxpayer, for the purpose of avoiding federal tax.  This communication was written to support the promotion or marketing of the transaction(s) or matter(s) addressed in the written communication; and the taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.


Robin R. Ganzert, Ph.D. is the Senior Vice President, National Director Wachovia Nonprofit and Philanthropic Services.

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