Many investors have tried imitating the incredible success of Warren Buffett. Will he also now lead the way in how the wealthy conduct their philanthropy for maximum charitable impact? I’m pretty sure that you’ve heard that Warren Buffett is giving away the bulk of his $37-billion dollar fortune to his pal Bill Gates’ charitable foundation. Buffett’s previous plan was to give it all away at his death, but his act shows that giving while living can be better choice in many ways. First, you get to see the results and reap the joy of giving. And, in most cases, your involvement will help ensure that your legacy is fulfilled. Giving while living can provide many attractive tax benefits. Not only can you reduce your income tax bill, you can save estate taxes by removing donated funds from your estate. Let’s look very briefly at some of the options available to you:
• Charitable Remainder Trust - Donate assets to a charity, which provides you with a regular income stream in return. When the trust term is over, the assets go to the charity. You receive an income tax deduction for the amount that is estimated to be donated to the charity.
• Charitable Lead Trust - This is the mirror image of the Charitable Remainder Trust. Here you donate assets to a charity, which receives the regular income stream. At the end of the trust term, the assets left over in the trust pass to your heirs. Again, you receive an income tax deduction for the amount that is estimated to be donated to the charity.
• Charitable Gift Annuity - Donate assets to a charity, which promises to pay you a fixed amount regularly for life. Part of the annuity payments you receive are taxable, but you receive an income tax deduction for the amount that is estimated to be donated to the charity.
• Donor-Advised Fund - This choice has become more popular in recent years. You provide a lump sum to a third-party charitable fund, and you receive an income tax deduction. The fund legally controls the money, but you can recommend how it is distributed and which charities benefit.
• Pooled Income Fund - Donate money to a charity which invests it in a special fund and pays you your share of the fund’s earnings. When you die, you receive a tax deduction for the value of what is left of your original investment that goes to the charity.
• Private Foundation - Your legal team establishes your own charitable entity with funds from your family. This entity makes grants to support your stated charitable mission; therefore, you have much more control over the decisions of the foundation. However, private foundations can be expensive to run (compared to a donor-advised fund) and have less favorable tax rules than public charities.
• Qualified Charitable Distributions from IRAs- The Pension Protection Act of 2006 provides an exclusion from gross income for an otherwise taxable distribution from IRAs (up to $100,000 per year) that is paid directly from the IRA to a qualified charity, if the IRA owner is 70 ½ or older and certain other conditions are satisfied. This is effective for the years 2006 and 2007 only.
If you are fortunate enough and charitably inclined, be sure to discuss the most appropriate choices with your estate attorney, financial planner, and tax advisors. They can help you properly coordinate your charitable intent with the maximum tax benefits.
Giving While Living
December 11, 2008
George Papadopoulos, CPA/PFS, CFP
www.thefeeonlyplanner.com
Many investors have tried imitating the incredible success of Warren Buffett. Will he also now lead the way in how the wealthy conduct their philanthropy for maximum charitable impact? I’m pretty sure that you’ve heard that Warren Buffett is giving away the bulk of his $37-billion dollar fortune to his pal Bill Gates’ charitable foundation. Buffett’s previous plan was to give it all away at his death, but his act shows that giving while living can be better choice in many ways. First, you get to see the results and reap the joy of giving. And, in most cases, your involvement will help ensure that your legacy is fulfilled. Giving while living can provide many attractive tax benefits. Not only can you reduce your income tax bill, you can save estate taxes by removing donated funds from your estate. Let’s look very briefly at some of the options available to you:
• Charitable Remainder Trust - Donate assets to a charity, which provides you with a regular income stream in return. When the trust term is over, the assets go to the charity. You receive an income tax deduction for the amount that is estimated to be donated to the charity.
• Charitable Lead Trust - This is the mirror image of the Charitable Remainder Trust. Here you donate assets to a charity, which receives the regular income stream. At the end of the trust term, the assets left over in the trust pass to your heirs. Again, you receive an income tax deduction for the amount that is estimated to be donated to the charity.
• Charitable Gift Annuity - Donate assets to a charity, which promises to pay you a fixed amount regularly for life. Part of the annuity payments you receive are taxable, but you receive an income tax deduction for the amount that is estimated to be donated to the charity.
• Donor-Advised Fund - This choice has become more popular in recent years. You provide a lump sum to a third-party charitable fund, and you receive an income tax deduction. The fund legally controls the money, but you can recommend how it is distributed and which charities benefit.
• Pooled Income Fund - Donate money to a charity which invests it in a special fund and pays you your share of the fund’s earnings. When you die, you receive a tax deduction for the value of what is left of your original investment that goes to the charity.
• Private Foundation - Your legal team establishes your own charitable entity with funds from your family. This entity makes grants to support your stated charitable mission; therefore, you have much more control over the decisions of the foundation. However, private foundations can be expensive to run (compared to a donor-advised fund) and have less favorable tax rules than public charities.
• Qualified Charitable Distributions from IRAs- The Pension Protection Act of 2006 provides an exclusion from gross income for an otherwise taxable distribution from IRAs (up to $100,000 per year) that is paid directly from the IRA to a qualified charity, if the IRA owner is 70 ½ or older and certain other conditions are satisfied. This is effective for the years 2006 and 2007 only.
If you are fortunate enough and charitably inclined, be sure to discuss the most appropriate choices with your estate attorney, financial planner, and tax advisors. They can help you properly coordinate your charitable intent with the maximum tax benefits.