Front Seat Driver

So which charitable giving products work best, and for whom? While there are exceptions to any rule, there is usually no “mixing and matching” of available giving strategies with a single giver, since the advantages of one often offset the other. The vehicle of choice for persons wishing to donate $1 million or more, especially in the case of appreciated property, is the family foundation. Citing the Foundation Center and Giving USA, Fidelity notes that more than 50,000 independent private foundations are responsible for almost 10% of the more than $200 billion Americans donate to U.S.-based charities each year. In 2000, charitable giving assets in independent private foundations grew more than 7% to $409 billion. A family foundation allows its family-member board of directors to take the foundation’s investment income and make donations to various charities, either locally or nationally.

The tax advantages, while dollar for dollar, are not as compelling. “If you contribute a million dollars in cash, you’re probably going to lose most of that tax deduction,” explains Ferrara, “as your income increases–at about $128,000 or $130,000.” The most compelling reason for setting up family foundations is that the donors get recognition within their communities. Family foundations don’t come cheap, however, nor simple. The legal entity must be set up and tax returns filed each year. The board of directors must meet to decide how best to invest and where to donate the money. Ferrara estimates initial legal and filing fees for a $1 million family foundation to be $5,000 or $6,000. Ongoing accounting work will probably run about $2,500 a year. Then there are money management costs and miscellaneous expenses. All told, the price tag on a $1 million family foundation could run anywhere from $5,000 to $15,000 per year.

For the less wealthy, the community foundation is worth a close look. Bill Welch, president of AM&M Financial Services in Rochester, New York, for example, says some of his clients couldn’t be happier with the Rochester Area Community Foundation. Spokeswoman Jennifer Leonard says the foundation is one of 650 nationwide that collectively administer $31 billion in charitable assets (to find a community foundation in your area, visit www. communityfoundationlocator.org). If Welch spots an outsized investment profit during a review of the portfolio of a charitably inclined client, “we say, let’s bank it now.” What he’ll do is sell off part of the profit to bring the portfolio back into balance, and fulfill the client’s charitable intent by placing the proceeds into the client’s local community foundation charitable checking account–taking the tax deduction that year. Funds can be held in the account until the client is ready to gift the money to a charity during any year.

A variant of the community foundation is the designated fund, which involves the donor’s children. Designated funds allow the donor to give away 5% of the account value each year. At the death of the donor (and sometimes the donor’s children; this is negotiable) the money becomes part of the foundation’s general community fund. In some cases, advisors continue to manage assets earmarked for a community foundation.

Hot Ticket

The hot charitable ticket these days is the donor-advised fund, offered through a host of companies including Thornburg, Fidelity, Vanguard, and T. Rowe Price. These funds accomplish much of what a foundation does without the administrative hassles and expenses. A donor can place $200,000 into a fund account, mull over with the account manager how to invest the assets, and instruct the advisor as to where the donations should be made each year. That’s it. Trustee fees for Thornburg Investment Management’s National Gift Trust, for example, run 1.25% on the first $100,000, 0.75% on the next $900,000, 0.5% on the next $1.5 million, and 0.25% for everything over $2.5 million.

One of the most popular ways people are donating money today, if they’re not giving cash, is through a charitable remainder trust (CRT), which enables donors to give money on a deferred basis. There are several varieties. A charitable remainder annuity trust (CRAT) pays the donor a fixed amount of money each year, at least 5% of the initial investment. A client putting $200,000 into a CRAT would receive at a minimum $10,000 per year, and that payment would be fixed for life, regardless of how the underlying investments fared. Ferrara notes that the annuity payout can be raised to the 7% range without jeopardizing the vehicle’s tax deductibility.

Unlike other giving strategies, with a CRT there is no dollar-for-dollar tax deduction. Rather, the deductible amount will equal the calculated remainder that will go to charity at the donor’s death. The amount is based on such factors as the donor’s age, how much money he takes out, and the expected investment return. A 65-year-old with $200,000 in a CRT might only qualify for a charitable deduction of $80,000, because that figure represents the “remainder” interest that would go to the charity. Ferrara suggests a “bare bones” CRT entry point of $100,000. Associated expenses include tax returns and investment management.

Gauging the Percentage

Cousin to the CRAT is the charitable remainder unitrust. Unlike the former, in which the annual payout is fixed, the latter allows the investor to draw down a certain percentage of the value of the trust each year. “If you invest $200,000 and you’re going to draw down, say, 6%, and the $200,000 grows to $250,000, you’re going to get 6% of that, or $15,000,” explains Ferrara. “Conversely, if it goes down to $150,000, then you draw $9,000. Your payments vary, based on the underlying investments.”

Another related variant of CRT is the NIMCRUT, or Net Income With Make-up Charitable Remainder Unitrust. With this vehicle, the donor is entitled to the net income each year generated by the trust.

If for any reason the trust doesn’t pay it in a given year, then the trust must make up this shortfall in the future. The NIMCRUT works well for persons who are still working and have maxed out their contributions to their 401(k)s and pension plans, and want another way to create income in retirement. Depending on their tax bracket, they can enjoy a tax deduction for part of it.

In estate planning discussions with charitably inclined clients, Welch recommends the charitable IRA. The client can instruct that all or a portion of the balance in his IRA or 401(k) be given to charity at the death of the second spouse. “Because if you leave the IRA to your kids through your will, they’re probably getting 70 cents on the dollar if they’re not doing well, because the tax has to be paid on that IRA or 401(k),” Ferrara says. By leaving the IRA or 401(k) to charity, the donor’s children don’t have to pay taxes on it. As part of an overall estate plan, a charitable IRA “is a way to give more money to charity than you would otherwise.”

Other vehicles on the horizon include a measure before the Senate that would allow tax-free rollovers of IRA assets into charitable vehicles as part of the Charity, Aid, Recovery, and Empowerment Act of 2002 (CARE, S 1924); a similar bill (HR 7) has already passed the House. But even without new charitable techniques, the urge to give remains strong despite today’s muted economy and markets.