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Exploring the benefits of planned gifts

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[Editor’s note: The following article was prepared by Wachovia Trust Nonprofit and Philanthropic Services.]

For many individuals, supporting the work of a favorite charity has become second nature. When a charity asks for help, they think nothing of writing a check and sending it off.

In fact, for many organizations, contributions from individuals are typically their greatest sources of funding. And much of this support is from outright gifts, raised generally through annual fundraising campaigns and capital campaigns.

While you may be particularly passionate about the work of one or more charitable organizations, you may also feel that you are currently limited in the amount of financial support you can offer them. You may worry about outliving your resources and have concerns that a large charitable donation might impact your future financial security. Or you may be unwilling to do anything that could reduce the size of the estate you hope to pass on to your spouse or heirs.

These are legitimate concerns. However, charitable giving is not just about outright gifts. There are other giving options available that can allow you to assist your favorite charity without compromising your financial security.

These options are known as planned gifts, and they can include a wide variety of gift assets from cash and marketable securities to a family home or other real estate to closely held business assets, mineral rights, and intellectual property.

Whether you are concerned about lifetime income, the continued beneficial use of a property, or providing for family members, a planned gift may be the solution you need. Here is a brief overview of several planned gift options that may be of interest to you.

Charitable Remainder Trusts

A charitable remainder trust (CRT) gives you or another noncharitable beneficiary the opportunity to receive an income from the assets you have donated. When you establish the trust, you designate yourself or another person as the income beneficiary for life or for a specific time period of up to 20 years. At the end of that period, your designated charity will receive the remaining trust assets.

Even though the charity will not receive your gift until some time in the future, your donation is tax deductible in the year the trust is funded (subject to general tax law restrictions). The deductible amount is the present value of the charity’s remainder interest in the trust.

Properly structured, a CRT permits you to make a gift, enjoy a lifetime income stream, obtain a current income-tax deduction, and avoid estate taxes on the donated assets. A CRT is also an option for testamentary bequests.

To qualify for the tax benefits, a CRT must be structured as either an annuity trust or a unitrust. If the CRT is structured as an annuity trust, each year the trust must pay out at least 5% (but not more than 50%) of the initial market value of the original principal placed in the trust. This payout must remain constant even though the trust’s principal value may change from year to year.

The annual payout from a unitrust also must be at least 5 percent (but not more than 50 percent) of the value of the trust assets. However, the unitrust payout is based on the market value of the trust assets, revalued annually. Thus, the income beneficiary will receive a larger payout if the trust’s assets increase in value since the percentage is calculated on a higher base. The opposite occurs if the trust’s assets decline in value.

Charitable Lead Trusts

If you would like to benefit a charity and have little immediate need for additional income, a charitable lead trust (CLT) may be appropriate. You name a charity as the income beneficiary of your trust. The charity receives annual distributions during the term of the trust. At the end of the trust term, the remaining trust property returns to you or passes to someone you have designated.

For example, suppose you own investments that you intend to leave to your children. A charitable lead trust is a win-win option that would allow you to help a favorite charitable organization financially while ensuring that your children will ultimately receive the property.

You would transfer the securities to the charitable lead trust, and the charity you support would receive annual payments from the trust for a set time frame. At the end of the trust term, ownership in the property would be transferred to your children as the trust’s “remainder” beneficiaries.

While the present value of the remainder interest that is to pass to your family is taxable, federal law permits the gift-tax value to be discounted to compensate for the beneficiaries’ having to wait to receive the gift. When the trust’s term expires, the fully appreciated value of the assets in the trust passes to your children (as the trust’s beneficiaries) free of additional gift tax.
Donor-advised Funds

A donor-advised fund is a charitable fund administered by a charitable organization. As the creator of the fund, you can recommend what organizations you want your donation to benefit, when money will be distributed from the fund, and how it will be used. The sponsoring organization, such as a community fund, makes a reasonable effort to follow your advice. You should be aware that the sponsoring organization has ultimate control over whether or not your grant will actually be distributed according to your wishes.

A contribution to a donor-advised fund may be a suitable option if you need to minimize your income-tax liability for the year due to capital gains or some other boost to your taxable income. Your contribution will generate an income-tax deduction and will also remove assets from your taxable estate.

A significant advantage to creating a donor-advised fund is that you can name joint and successor advisors, such as children or grandchildren, to keep the fund operating after your death. In addition, you won’t be responsible for preparing or filing any legal documents, annual reporting, or management tasks related to the donor-advised fund since those tasks become the responsibilities of the charity managing the fund.

Charitable Gift Annuities

You can make an irrevocable gift of cash or securities to a charity, which, in turn, promises to make fixed payments to you (or another beneficiary) for life. This approach is known as a charitable gift annuity. The annuity amount that the charity pays you depends on various factors, including the value of your contribution and your age at the time you make the gift. Once the annuity rate has been set, it remains fixed for your life.

You not only receive an income stream for life, but you also receive an income-tax deduction based on the actuarial value of the charitable gift. This option is not a trust, but rather is a contractual agreement between you (the annuitant), and the charitable organization.

Gifts of Life Insurance

You can also support a charity by making a gift of life insurance. You can do this in one of several ways. The least complicated approach may simply be to name a charitable organization as the primary beneficiary of your life insurance policy. When you pass on, your estate will receive an estate-tax deduction for the value of the policy proceeds paid out to the charity. You also can transfer ownership of a policy to a charity. The charity maintains the policy and you make an annual contribution to cover the cost of the premium, a contribution you can deduct.

Life Estates

When you make a gift of a personal residence or a farm to a charity, you stipulate in the transfer agreement that you retain the right to live in or use the property for the rest of your life. The charity, as remainder beneficiary, takes ownership of the property when you die. The trade-off? You may receive a charitable contribution income-tax deduction for the present value of the property interest donated to charity. In addition, the value of the donated property escapes estate taxes.

Bargain Sales

Another planned giving strategy that you might want to consider is a bargain sale. Such a sale occurs when you sell an asset, very often appreciated property such as land or a home, to charity and receive less than the property’s fair market value in return. The difference between the fair market value of the asset and the value returned to you is a charitable gift for which you can claim an income-tax deduction.

Consult with Professionals

All planned giving strategies are complex. The strategies mentioned above are no exception. If you would like to know more about these and other planned giving strategies, such as private family foundations, Wachovia Nonprofit and Philanthropic Services can help. Please contact your Wachovia Philanthropic Consultant.


Trust services are offered through Wachovia Bank, N.A. (Wachovia), a national banking association and subsidiary of Wachovia Corporation, or Delaware Trust Company, N.A., a subsidiary of Wachovia. Trusts that have their situs in and are governed by the law of Delaware use Delaware Trust Company as the trustee. Wachovia does not provide legal or tax advice.

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