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The term planned giving refers to charitable gifts which are designated currently but which will take full effect at a later time. The popularity of planned giving is found in the opportunity to create a lasting legacy while, in many cases, taking immediate advantage ot the tax laws. Here are the most common types:
Bequests
An individual’s will states that a specific dollar amount or percentage of the estate will pass to charity. This may either occur immediately at the donor’s death or may be delayed for a specific duration (such as the subsequent death of a spouse). Bequests should be specitif as to (1) the name of the charity to which the gift is given, (2) when it takes effect, and (3) any particular use to which the gift will be put. Gifts for benefit of the SJSU Alumni Association should be designated for “San José State University Alumni Association.”
Living Trusts Gifts
Living trusts have almost the identical effects as bequests. The major difference is that living trusts may become operational while the donor is still living. If living trusts are funded properly duration lifetime, the assets pass free of the expense and delay of probate (though they are still subject to estate taxes).
Retirement Plan Assets
IRAs and other retirement accounts pass by way of beneficiary designation, not by the terms of a will or trust. They are still, however, included in one’s estate for tax purposes. Naming a charity as a beneficiary (whole or part) of a retirement account results in the elimination of all taxes which might otherwise be due on distribution, whether those be estate, inheritance, or deferred income taxes.
Life Insurance
Transfers to charity may take two forms. If ownership is given to the charity, an immediate charitable deduction may be available, generally for the policy’s current cash surrender value. The exact amount of the charitable deduction is a bit more complex, so you should consult your tax advisor for more details. If the policy is not “paid up,” gifts to charity to pay future insurance premiums are likewise deductible. If the beneficiary interest is changed to the charity, there is no immediate charitable deduction. The proceeds upon death, however, pass free of estate tax.
Life Income and Benefit Gifts
It is possible to make a gift to charity now and preserve some financial or practical benefit for yourself.
Reserved Life Estate in Real Estate
You may give certain kinds of life estate now and reserve the use of the property for the remainder of your life. Typical of these are your personal residence and the family farm. You are entitled to live on the real estate for as long as you live and you will continue to treat the property the same way you otherwise would (paying insurance, property taxes, upkeep and improvement costs). However, since the remainder is designated for charity, you are entitled to an immediate charitable deduction based on a formula that takes into account your personal life expectancy and the “useful life” of the property. Gifts with reserved life estates also remove the real estate from your estate.
Charitable Gift Annuity
A simple contract whereby you make a gift to the Alumni Association in exchange for a life-long annuity. The annuity amount is based on your life expectancy. A portion of the annual annuity is generally taxed to you as ordinary income, a portion is received tax free and, where appreciated assets are used to fund the contract, a portion may be taxed as long-term capital gains. Gift annuity rates are calibrated in a manner to give the donor an immediate charitable deduction that is in the general range of 40-60% of the gift’s value.
Charitable Remainder Trust (CRT)
This is a fairly complex document used in large gifts. The concept of CRTs is that income is paid to individuals for life or a term of years with the remainder passing to charity. Charitable remainder trusts are of two major types: annuity rusts, where the amount of the annual payment remains fixes; and unitrusts, where the annual payment is a percentage of the value of the trust as re-determined annually. The charitable deduction is determined by a formula which considers how long the trust is likely to last and the amount which will be paid to the individuals.
Charitable Lead Trust (CLT)
This is a highly complex document used in very large gifts. The concept of CLTs is that income is paid to a charity for a term of years with the remainder either reverting back to the donor or passing to the donor’s family. CLTs are most often used with assets that are likely to appreciate greatly over time. Although most charitable instruments emphasize the charitable deduction available to the donor, the benefits of a CLT are more likely to be in the area of tax-free asset transfers within the family.
The information provided here is not legal or tax advice and is intended for general information only. Tax and estate planning should be done with the guidance of a professional financial planner.
For more information, please contact the San José State University Alumni Association at 408-924-6515 or e-mail .