Promoting Philanthropic Giving in Current Estate Plans

Journal of Financial Planning; June 2014


Philip Herzberg, CFP®, CTFA, AEP®, is a relationship manager for United Capital Financial Advisers LLC in Boca Raton, Florida. He is president-elect of FPA of Florida, chairman of FPA of Miami, and a member of the Estate Planning Council of Greater Miami Board of Directors.

Philanthropic giving is an often overlooked estate planning strategy. With the value and importance of philanthropic planning flourishing in this current economic environment, charitable giving can also be integral in helping your clients mitigate the new 3.8 percent Medicare surtax, top marginal capital gains taxes, higher federal income tax rates, and significant state income taxes in many jurisdictions. 

What timely techniques can you employ to guide individuals and families in protecting and managing their assets? Evaluate the following viable estate and income tax considerations in accordance with your clients’ charitable and legacy aspirations. 

Finding a Place for Philanthropy

Coordinate the charitable planning process with qualified tax advisers, planned giving specialists, and estate lawyers. Enlist the guidance of accountants and nonprofit officers to maximize the tax benefits and impact of the donation on your clients’ estates, families, and the philanthropic causes they wish to support.

What if your bequeathing clients become upset with the management of a charity and have a disagreement with the organization’s direction? Know that charities can change the terms of their bequest at any time because wills are revocable. 

It’s prudent for your clients to communicate their intentions with family members, so they understand why the money is going to the charity and not to them. Be sure to also tell your clients to talk to the designated charity in advance about any restrictions to a planned gift, such as a life income arrangement or bequest.

Set expectations and assess the ramifications of every gift. Are there any carrying costs to the charitable recipient for accepting hard-to-value property, such as yachts and artwork? Verify that charities can accept specific gifts of illiquid assets, closely held securities, real estate, collectibles, or patents. 

Effective Charitable Giving Vehicles

If your clients are fairly wealthy and charitably inclined, you can consider having them make an irrevocable, lifetime gift via a charitable trust. Seek the collaborative assistance of legal counsel and planned giving staffers to strategize appropriate provisions that are beneficial to both the charity and the client’s family. Note that charitable contributions of long-term appreciated property can now provide a larger tax benefit because of higher income tax rates and the increased level of tax liability attached to these assets.

With interest rates continuing to remain at historic lows, you may also think about incorporating a charitable lead annuity trust (CLAT) into wealth transfer plans for high net worth clients who have immediate philanthropic desires. To avoid inclusion in the donor’s gross estate, you should be cognizant that a CLAT donor cannot have the ability to direct how the charitable payment amount is made, or change the philanthropic organization. Work with a trusted estate attorney and your client’s charity of choice to properly structure a CLAT. 

Understand that donors can choose to take an up-front income tax deduction based on the trust’s expected income payments to the charity. Keep in mind that a “zeroed-out” CLAT is an optimal gift and estate tax savings technique for your clients’ heirs, particularly when the transferred trust assets outperform the IRS’s assumed rate over the duration of the retained interest in the property. Valuation discounts applicable to family limited partnerships and certain other entities can also leverage CLAT benefits by passing assets to your clients’ children at a reduced estate tax cost.

Alternatively, many of your wealthy clients have put their philanthropic planning on hold because they feel more financially secure about having access to cash flow in this evolving economy. If your clients are hesitant to make a direct gift, funding an inter vivos charitable remainder trust (CRT) may be a viable option to generate a current-year income tax deduction and ultimately honor charitable endeavors at the same time. Factor in possible rising interest rates when deciding if a CRT is a suitable vehicle in the near future for the needs of high net worth clients and their families.

Recognize that a prodigious increase on long-term capital gains and qualified dividends makes the CRT especially favorable for high earners who possess low-basis positions or seek an income stream for a period of years. In conjunction with the guidance of credentialed professional advisers, you can use a CRT as a tax-efficient means to diversify your clients’ concentrated holdings or sell an appreciated asset.

Be wary that the CRT can sell trust securities and reinvest the proceeds for greater distributions and overall return. Consequently, the tax gain for your donor client receiving the income is spread over time, and the trustee can delay distribution to the donor to avoid or minimize the 3.8 percent net investment income surtax impact.

Realize that charitable gifts are more valuable at the trust level than on the client’s Form 1040, because these above-the-line deductions can shift net investment income from the trust to the tax-exempt charitable beneficiary. 

The Family Philanthropic Fund

With appropriate legal, tax, and planned giving diligence, you can help wealthy families create private foundations during their lifetimes or upon their death. Most importantly, families can make income or estate tax deductible gifts to strategically benefit charitable institutions while varying how the funds are distributed to philanthropic recipients.

Keep in mind that a private foundation is advantageous in providing donors with the highest degree of personal giving control. In addition, private foundations can be an optimal way to get your clients’ family members, such as children and grandchildren, involved in charitable efforts over several generations. Assist your clients in arranging a management plan to ensure that the private foundation continues after the donor’s death.

Is a private foundation or a donor-advised fund a better charitable giving strategy for heirs to continue their philanthropic legacy after your client passes away? Both vehicles are suitable for clients who are not sure what causes they will later wish to support.

Be aware that a donor-advised fund is an alternative vehicle among charitably minded clients who wish to be actively involved in the distribution of their gifts but not concerned with daily investment management. Understand that a donor-advised fund receives more favorable tax treatment, because the full fair market value of gifts of appreciated stock is tax deductible. Reporting donations for tax purposes and administration is easier with a donor-advised fund than when giving directly to a plethora of charities. 

Clearly, charitable giving is reflective of the principles that are most important to your clients, their families, and the lives of the institutions they care about. Facilitate impactful philanthropic planning to help pass on the values of treating wealth responsibly to the next generation.

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