Charitable Giving Strategies To Meet Your Clients Objectives

By John S. Budihas

There are ultimately only three possible “beneficiaries” of your clients estate assets: their heirs, their charity of choice or the Internal Revenue Service. Those who fail to plan risk forfeiting not only their right to choose their beneficiary, but may unintentionally pass their assets to the federal government.

Charitable gifting strategies may be a key ingredient in structuring a living estate plan for the owner of a multimillion-dollar estate who wants to achieve a multitude of objectives.

In terms of priority, most people are concerned with their own comfort and continued ability to control their assets. That means ensuring financial independence or the ability to maintain the accustomed standard of living for both spouses for as long as they may live.

The second priority may be wealth preservation or the desire to control and conserve those assets accumulated both during life and at death.

Third is the ability to distribute the right asset, at the right time, in the right amount, to the right beneficiary, and perhaps satisfy philanthropic desires either during life or at death.

And, last but not least is the desire to have adequate liquid dollars available to pay any and all taxes, indebtedness and estate settlement expenses at death–perhaps using an asset such as life insurance that may result in a larger lump sum for distribution.

The art of estate planning is to assist the client to attain most if not all of his or her prioritized objectives, even though some of those objectives may appear to be incompatible with one another. Charitable estate-planning techniques can help achieve most if not all of the above listed estate-planning objectives. Some of these strategies are as follows:

Charitable Remainder Trust (CRT). In addition to satisfying a taxpayers charitable intentions, a CRT can guarantee a supplemental annual income stream to enhance the comfort level and financial security of both spouses over their lifetime. This helps accomplish priority No. 1–financial security for your client.

A qualified CRT can also minimize current income taxes since the taxpayer who itemizes charitable deductions may generally deduct the fair market value of the charitys remainder interest in the CRT in the calendar year the CRT is funded.

The donors control instinct can also be satisfied if he or she is the trustee of the CRT. Family control can continue after the donors death if a family private foundation is named the charitable beneficiary of the CRT. Family members appointed as directors/managers of the foundation can sprinkle its assets among various charitable institutions of their choice over their lifetimes. Additional flexibility can be attained with contingency CRT provisions that terminate a beneficiarys income interest upon certain conditions.

Assets transferred to a living CRT generally remove all of the donated assets subsequent appreciation from the taxable estate. And, the sale of low-cost-basis assets at a high fair-market value by the tax-exempt CRT avoids capital gains taxation.

The tax savings and CRT lifetime income distributions realized by the donor and spouse can be leveraged into a wealth-building life insurance trust that can satisfy the liquidity need objective for any future estate settlement costs or asset protection needs. This wealth creation or family dynasty wealth replacement trust can also fulfill another estate-planning objective: the right asset goes to the right beneficiary at the right time and in the right amount.

If a CRT is named the beneficiary of an IRA or other qualified plan asset, the double taxation inflicted upon such income in respect of a decedent (IRD) asset at death can be substantially neutralized. Estate taxes are reduced by the charitable remainder gift, and the CRT does not pay an IRD income tax.

CRTs can also be an integral part of a family business continuation plan. Lifetime and/or testamentary stock transfers can be made to a CRT and subsequently redeemed by the closely held corporation as long as the corporation does not have a pre-existing obligation to purchase the family stock interest. This facilitates a gift or estate tax-free transfer of the business to the active family members and could avoid accumulated earnings excise taxation by directing excess earnings to the CRT. The redemption funds the CRT with tax-free monies that subsequently can be invested to provide a supplemental lifetime income stream to the business owner and spouse. Just remember that a CRT is not a qualified/eligible shareholder for S-Corporation stock.

Testamentary Charitable Lead Trust (CLT). This estate-planning tool provides: the taxpayer control over and enjoyment of his or her property during life; an estate tax deduction at death equal to the present value of the selected charitys future income interest; and a legacy of the CLT corpus to family heirs or a family trust with possibly little or no estate tax consequences.

The charitys income interest creates a valuation discount for estate tax purposes. Even greater flexibility and valuation discounting can be achieved by funding the CLT with family limited partnership interests and by directing the stipulated CLT income to a family private foundation. Triple valuation discounting is achieved: a limited marketability discount; a minority interest discount; and a present value discount equal to the family foundations income interest. This years historically low applicable federal rates also further enhance the valuation discount for the CLT donor. The IRC 7520 rates are lower now than they have ever been.

Charitable Gift Annuity (CGA). These tax-deductible annuities in some respects are even more cost- and tax-effective than CRTs. CGAs have no administrative or set-up fees, implementation costs are minimal and yet they can accomplish multiple estate-planning goals. Virtually any asset can be used to fund these annuities, and the charitable institution itself guarantees either immediate or deferred lifetime payments to the annuitant.

Unique to CGAs is the application of the annuity exclusion ratio that results in partially tax-free income to the recipient. And, if the assets contributed to the charity are long-term capital gains assets, then preferable capital gains taxation–not ordinary income taxation–is afforded to the income distributions. Also, remember that estate assets used to fund a CGA may not be included for Medicaid qualification purposes–this can facilitate financial planning for potential nursing home care.

The typical tax deduction available in the year assets are transferred to a CGA ranges from 30% to 45% of the fair market value of the asset.

Incorporating charitable planning strategies in a clients estate plan can achieve his or her estate-planning objectives in a more tax- and cost-effective way. Charitable planning strategies can enhance income, reduce taxation and provide the disposable funds needed for life insurance to facilitate the building of both charitable and family legacy wealth creation, family equalization planning and asset replacement. Such strategies also provide the needed flexibility that is required during these times of uncertainty caused by constant tax law changes.

John S. Budihas, CLU, ChFC, CFP, is a business, estate and trust planning consultant for Hartford Life Insurance Company in Sarasota, Fla. He can be reached via e-mail at john.budihas@hartfordlife.com.


Reproduced from National Underwriter Edition, February 10, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.