Planning for the Here and Now | Sharpe Group
Posted October 1st, 2011

Planning for the Here and Now

Robert Sharpe serves as chair of the Philanthropy Committee of the Trusts & Estates magazine Board of Advisors. This article has been adapted with permission from the September issue of Trusts & Estates. See the full article at

In the past few months, we’ve witnessed political and economic events that are unprecedented in recent memory. The debt crisis and ensuing investment market fluctuations, record low interest rates that policy makers have indicated are unlikely to rise in the near term and speculation about major tax law changes have combined to create an environment for estate and financial planning that some might describe as uncharted territory.

In times like these, when there are so many unknowns, it may be best to stop and consider things that remain relatively certain and contemplate how best to assist those who are philanthropically inclined, but who understandably want to maintain economic security for themselves and their loved ones.

Tried and true charitable planning tools such as gift annuities, remainder trusts, lead trusts and others may be uniquely suited to address the challenging circumstances we are currently facing. These tools have been developed and refined over many centuries to deal with the vicissitudes of economic reality faced by earlier generations. In fact, large outright philanthropic transfers with no economic benefits retained for the donor are a relatively recent phenomenon that were a welcome, though perhaps temporary, offspring of the decades of rarely interrupted economic expansion in the years since World War II.

Lessons from the past

What can we learn from the past? First, history reveals that charitable giving continues during even the most severe economic downturns. In fact, for those who remain employed, giving may even increase as a percentage of income. The ways that gifts are made, however, tend to shift. For example, those who would have made outright gifts during prosperous times may instead, during an economic downturn, make gifts that allow them to retain an income for life or another period of time or eventually transfer assets temporarily devoted to charitable use to their children, grandchildren or other heirs.

Solutions to today’s challenges

Today’s environment, as noted earlier, presents somewhat unique challenges. Some 25 percent of the U.S. population, popularly known as “baby boomers,” are now facing or entering their retirement years during a period of historically low investment returns. At the same time, some of them own significant amounts of low-yielding assets that could be subject to state and federal estate taxes of 35 percent, 40 percent or more.

With the possibility of higher income and capital gains tax rates returning after next year along with the resumption of provisions that served to reduce savings on itemized deductions, some may feel a sense of urgency to act to minimize taxes prior to the potential increases. Others are concerned that proposals to limit charitable and other deductions in the future may make it vital to act in the near term.

What are some of the available options that offer possible solutions to these various challenges?

Gift annuities and charitable remainder trusts

Donors who would like to make gifts that allow them to benefit from an additional source of reliable income may find various types of split-interest gift plans attractive. Many charitable entities offer charitable gift annuities, for example, as a way for donors to make substantial gifts while enjoying generous fixed income payments for life.

For those who may be considering charitable dispositions as part of their long-range estate and financial plans, a gift annuity may offer an attractive alternative. If higher estate tax exemptions would preclude any estate tax savings from a bequest, such donors may wish to instead enjoy income tax savings by “accelerating” their bequest into a gift annuity.

This lifetime gift often results in an immediate income tax deduction equal to 30 percent, 40 percent or more of the amount donated. As an added benefit, if appreciated low-yielding assets are used to fund the gift, capital gains tax is completely avoided on the gain attributable to the gift portion and the remainder is reported ratably over the donor’s life expectancy. Since not more than 50 percent of the amount contributed is anticipated to be returned over a donor’s life expectancy, the lion’s share of payments may be received free of tax over the life expectancy of the annuitant(s).

If a donor would like the benefits of a gift annuity but would prefer to make a gift that allows a manager of his choosing to maintain control over the corpus’ management, a charitable remainder annuity trust may be structured to yield much the same results as a gift annuity.

In either case, the donor is making a substantial gift in a way that takes advantage of the full deductibility of the gift portion under today’s law. These gifts also allow the donor to unlock additional income, minimize or eliminate capital gains tax due on the gift and unleash additional spendable income.

Charitable lead trusts

For donors who don’t need additional income now but are concerned about minimizing transfer taxes on amounts left to heirs from their estates, now may be the time to take a fresh look at the charitable lead trust (CLT). A number of recent press reports have noted the attractiveness of this gift vehicle in today’s environment.*

The CLT offers a way to take immediate advantage of the $5 million per person federal gift tax exemption introduced last December that’s guaranteed by Congress to be available only through 2012. What the gift and estate tax exemption as well as rates will be in 2013 and beyond is anyone’s guess. For those who would like to maximize the amount transferrable to heirs free of federal gift and estate tax, the CLT offers an opportunity to transfer amounts much greater than the exemption amount while making significant charitable gifts over a number of years.

For example, a charitable lead annuity trust funded with $16 million that pays 5.7 percent, or $912,000, per year for charitable purposes for 10 years will yield a gift tax deduction of $8 million, leaving $8 million taxable. This amount can be covered by two spouses who each have an additional $4 million unused exemption. Historically low AFMRs (discount rates) serve to further increase the attractiveness of this planning tool in today’s environment.

As an additional benefit, keep in mind that the charitable gifts each year pass outside the donor’s taxable income. This will be tantamount to a full charitable deduction even if the charitable deduction is reduced or eliminated in the future. (Note that not reporting income is the same as reporting it and having it be fully deductible.) The same is true for those who are currently unable to use additional charitable income tax deductions because of adjusted gross income (AGI) limits.

Help donors use carry-forwards

Along the same lines, according to the Internal Revenue Service in reports for the tax year 2009, about 557,000 taxpayers made use of charitable deductions they carried forward from prior years when they made gifts in excess of the amount they were able to deduct. It may be wise in light of current proposals aiming to limit the use of charitable deductions in the future to take steps now to increase AGI for 2011 and possibly 2012 to potentially make full use of unused carried forward deductions due to past gifts. Possibilities include converting a traditional individual retirement account to a Roth IRA or selling appreciated securities or other property and using unused charitable deductions from prior years to offset the resulting income.

Gifts of property

One other often-overlooked gift planning option is the gift of a home or certain other properties to a charitable interest while retaining the right to enjoy the use of the property for life or other period of time. By making a gift in this way, a donor generates a generous income tax deduction today without impacting his or her current lifestyle.

Low discount rates also make this gift more attractive, as the right to occupy the property is assigned relatively low value, resulting in a larger tax deduction. For example, a 75-year-old who donates the remainder interest in a $500,000 vacation home while retaining the use for the remainder of his or her lifetime is entitled to a federal (and perhaps state) income tax deduction of just over $358,000 using the September AFMR of 2.0 percent.

These are just a few of the ways your charitably inclined clients can use planning possibilities that are still a certainty today to help prepare for the uncertainties that lie ahead.

* See Jan M. Rosen, “Tax Cut Deal Could Benefit Charities,” The New York Times, Feb. 9, 2011; Pat Sullivan, “A Trust Surges, Heirs and Taxes in Mind, but Mind the Details,” The New York Times, July 22, 2011.

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The publisher of Sharpe Insights is not engaged in rendering legal or tax advisory service. For advice and assistance in specific cases, the services of your own counsel should be obtained. Articles in Sharpe Insights may generally be reprinted for distribution to board members and staff of nonprofit institutions and other non-donor groups. Proper credit must be given. Call for details.

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