Charitable Planning

Questions and Answers - Q&As

• Should appreciated securities be used for large contributions?
• How should contributions of securities be made to a charity?
• Should a portion of an IRA be used for a testamentary charitable gift?
• Should Series E Bonds be used for a testamentary charitable gift?
• Should a large IRA be used for a large testamentary charitable gift?
• What is a charitable remainder trust ("CRT")?
• How is the charitable deduction from creating the CRT computed?
• What expenses are associated with the CRT?
• What is a charitable lead trust?

There is a substantial income tax advantage in making a gift of stock which has appreciated in value and has been held for more than one year. The gift of such securities will enable you to deduct the present fair market value of the securities without being required to recognize the capital gain on the securities.
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If the securities are in certificate form, the contribution can be made by giving the charity the stock certificate and a stock power transferring the securities. If the securities are in a brokerage account, a letter of direction should be sent by you to your broker with a copy to the charity. It is essential that the gift of the securities be made to the charity and that the charity, and not you, make the sale of the securities. A sample letter that can be used directing your broker to make your gift to a charity is found in Forms [F-1]. A sample letter that can be used by a charity to acknowledge receipt of the securities is found in Forms [F-2].
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There is a substantial tax advantage of satisfying any testamentary charitable contributions from a part of your IRA or retirement plan benefit because the income tax on the amount given to the charity will be avoided. For example, if your family is in the 30% income tax bracket, a $10,000 gift from your IRA will only reduce the inheritance for your family by a net of $7,000.
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As with an IRA, a gift of a Series E bond is a more tax efficient method to make your testamentary charitable contributions.
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It depends on various factors including: (i) possible alternative beneficiaries for the IRA, (ii) age of the alternative beneficiaries, (iii) time period for which the payment of the benefits can be extended and (iv) other available liquid assets for the payment of estate taxes.
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The basic concept of the CRT is that a cash flow will be paid to an individual or individuals for a lifetime or a term of years and thereafter the remainder interest is paid to a charity or charities. The reserved interest can be for either the individual creating the CRT, the individual and spouse, or the individual and anyone else. The amount that is to be paid on an annual basis can be either (i) a fixed dollar amount [annuity trust] or (ii) a percentage of the value of the CRT [uni-trust]. In certain circumstances, consideration is given to purchasing life insurance for the benefit of the family to replace the remainder interest passing to a charity and funding the insurance from the annual payment received from the CRT. The CRT can be particularly useful when funded with appreciated assets so that the capital gain will be eliminated or deferred.
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The income tax deduction will be equal to the present value of the remainder interest that will pass to the charity. The present value of the charitable remainder interest is influenced by both the (i) reserved amount or percentage and (ii) the current IRS interest rates. The higher the reserved amount or percentage, the lower the present value of the charitable remainder. The higher the general IRS interest rate, the higher the present value for the charitable remainder.
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There are legal fees to establish the CRT and the annual cost to prepare the income tax returns. There are certain common pooled funds which allow you to create a CRT without the expenses of creating the trust and the annual filing requirements. Some of these arrangements require a certain portion of the CRT to be distributed ultimately to the sponsoring charitable organization. In addition, certain mutual funds which offer CRTs require the funds to be invested in the securities offered by the funds.
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A charitable lead trust is a trust in which the charitable interest is the first or "lead" interest in the structure. After a certain event, the balance in the trust will be distributable to non-charitable persons, such as children or grandchildren. This may be a suitable technique when there is a substantial estate exposure and the present generation, such as parents and even children, do not have a need for the income or return from the assets during their lifetime.
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