True or False: Obama's Charitable Deduction Proposal is Bad for Wealthy Investors

In a May 9 blog post, Obama budget director Peter Orszag reiterated the administration’s commitment to the cap and lawmakers on both sides of both chambers have been objecting since the proposal was first announced. At this stage all we have is a proposal. There’s likely to be serious horse trading before something becomes law, and there’s plenty of time for modifications. Whatever results won’t take effect until 2011–unless the effective date is modified. Until then, donors can still make gifts in 2009 and 2010 that are deductible up to their highest tax rate. Some gift ideas for your clients include:

• Temporary Private Foundation: Known popularly as the Charitable Lead Trust, this gift operates like a temporary family foundation. It makes annual grants to charity and at its close, the remainder transfers to heirs with great transfer-tax efficiency, by taking advantage of a low anticipated rate of return, when actual returns over, say, a 10-year term, will be much higher. The transfer tax due at inception (gift and/or generation skipping) is calculated using the anticipated rate of growth–and there’s no look-back at the end. If set up correctly, the transfer-tax payment can be offset by a combination of lifetime exemption and the gift tax charitable deduction generated by the trust.
• Charitable Remainder Unitrust for the Bullish: This variety of charitable trust will pay a bullish client increasing income as the market rises. Initially, their portfolio will be revalued within the trust at current low prices. As prices and dividends rise and capital gains are realized over, say, a five-year trust life, distributed income will rise. These are typically set up for life, but the Internal Revenue Code also permits a term of years, 20 or less.
• Charitable Remainder Annuity Trust for the Bearish and Uncertain: This trust pays fixed income. Also typically seen for a lifetime, think of it for just a few years, to get guaranteed income to your client for the duration of the recession. Do they think we’ll be out of the woods in three years? Set one up for four years to be safe. With such a short duration, your client can enjoy a higher payout rate than the lifetime variety without running afoul of IRS regulations that guard against excessive payments. After four years, what remains is a gift to one or more charities.

Since I’m suggesting these for a term of years, they can be used for clients of any age. Typically we think about these for the charitably inclined in their 60s, 70s and 80s. Why not a short-term trust for a 30-, 40- or 50-year-old? With life expectancy off the table the payout rate can be more generous and the charity gets a gift in a few years. Do you have a client who has a campaign pledge to pay? They can earn income at a good rate and the obligation is paid before the campaign ends.

For any of these trusts, consider yourself as trustee, so your clients’ charitable dollars don’t depart the portfolio immediately. You need to be experienced with the fiduciary duties of trusteeship so don’t take it on lightly. If you’ve got that experience, or are affiliated with a trust company, you can earn some fees while your clients’ charitable wishes are fulfilled.

The Obama proposal doesn’t worry me much. I’m more concerned about unemployment, credit availability, mortgage relief and consumer confidence. I believe his proposal–which takes aim at the fourth-ranking motivation of those who give one-third of the charitable gifts–won’t kill charitable giving. And there are plenty of options in the meantime. .

Tony Martignetti, Esq. is founder and managing director of Martignetti Planned Giving Advisors, LLC, in New York, New York. The firm is a planned giving consultancy that works with educational, cultural, social service, religious and healthcare institutions to create donor opportunities by building planned gift programs.