Informal charitable giving generally involves real-time contributions of cash, securities or other property to charitable organizations with fairly straightforward income and transfer tax implications. When charitable giving rises to the level of more formalized and systematic philanthropic giving, donors should consider the “alphabet soup” of planning options. These various tools and techniques enable one to exert more control over the ultimate disposition of assets while customizing the timing and amount of gifts over one’s lifetime and beyond.
For most people, the timing of their charitable giving is as important as getting money into the hands of their favorite charities. This can present a planning issue for those philanthropic taxpayers with large paychecks or a significant liquidity event who are undecided about which charity to ultimately benefit. Such folks may want to consider the use of one of the following vehicles to both accelerate their current donations and defer distributions to the ultimate charities:
Donor advised funds are public charities that are sponsored by either charitable or commercial organizations and enable the individual to currently fund a charitable investment portfolio while retaining limited control over the assets and ultimate grants. No current grants into nor out of the fund are required. They effectively serve as a charitable pocketbook for the donor and can be established for as little as $5,000.
This is essentially a “private charity” that the donor or his/her designees control. PFs are best suited for those with substantial wealth and are often used to underwrite generations of family philanthropy. Five percent of the foundation’s value must be used for charitable purposes each year, and its income is subject to a nominal excise tax. Far more complex than DAFs, they work best with a minimum investment in seven figures.
For many proto-philanthropists, however, outright gifts during one’s lifetime may not always be the most appropriate approach. Because of this, techniques exist to enable the donor to benefit charity while retaining some financial benefit either individually or for one’s heirs:
This is a partially deductible gift made to a public charity that results in an individualized fixed annuity contract between the donor and the charity. A portion of each annuity payment represents ordinary income and capital gain.
This is also a partially deductible gift made —not to the charity but instead to a common investment trust established by the charity. PIFs pay variable amounts of income to the donor for life.
Contributions to these split interest trusts are partially tax deductible based on the actuarial present value of the remainder interest in the trust. The donor (or other noncharitable beneficiary) retains the income interest from the trust for a period of years or his/her lifetime while the remainder interest is ultimately paid to a charitable remainderman. The annual income payout may be fixed or variable. They are more sophisticated, flexible, controllable and expensive than CGAs or PIFs.
This is another type of split interest trust which is essentially the mirror image of a CRT —the charity receives the income from the trust for a period of years while the remainder is paid to a non-charitable beneficiary. Unlike the CRT, contributions to the CLT may or may not be partially tax deductible, depending on the legal structure of the trust.
By mixing and matching these various vehicles, the individual can devise a lifetime and/or testamentary philanthropic plan that will meet his or her personal planning objectives, satisfy his/her need for cashflow, and impact one or more causes in ways that are meaningful to him/her.
© 2012 WithumSmith+Brown, PC
Ray is a partner in the firm’s New York office and has over 30 years of professional experience providing wealth management advisory services to high-net-worth individuals and families.