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July 28, 2009

Does Your Financial Planning Include Charitable Giving?

America is a nation of givers. In 2005 (the latest data available), more than $260 billion was given to charity and more than 75% of these donations came from individuals.1

Including charitable giving within your financial plan may enable your family to create an income stream, earn tax savings and maintain a significant degree of control over assets during your life and after death. Donor-advised funds, family foundations, gift annuities, charitable remainder trusts and charitable lead trusts are some of the options that may be available to you.


A donor-advised fund, typically administered by a mutual fund firm, is a public charity under Section 501(c)(3) of the Internal Revenue Code. Contributions are tax deductible, and you may donate a variety of assets, including mutual fund shares, stocks, bonds, certificates of deposit and others.

In return for making the contribution, you may allocate this value of your donated assets among investment choices made available by the fund firm. Like any long-term investment, the account has the potential to grow over time, potentially increasing your giving potential. You may be able to spread your grant-making over months or even years in accordance with your personal wishes.

Donor-advised funds offer considerable convenience because the fund firm handles the administration, including making donations available to designated charities. In addition, there often is the option of consolidating giving activities along with other family members through a single account, which means donor-advised funds are family friendly. Children can be named as successors, ensuring the continuation of your family's giving legacy.


Family foundations are another option for pursuing philanthropic objectives, involving family members in charitable activities and reaping tax and estate planning efficiencies. As with a donor-advised fund, members of a single family typically donate their assets. But a foundation usually requires a higher level of personal involvement, with donors playing a significant role in management or governance.

In general, there are two types of family foundations: private foundations and supporting organizations. Private foundations, the more prevalent of the two, offer more flexibility and control. With a private foundation, donors usually oversee the board of directors and grant-making decisions. In addition, the Internal Revenue Service requires 5% of a private foundation's assets to be distributed each year and assesses an excise tax of between 1% and 2% on investment gains. In contrast, the board of directors of a supporting organization consists of members appointed by the charities that are supported. Supporting organizations are not required to make distributions or to pay taxes.

Gifts made to either type of family foundation generally are tax deductible yet deductions

vary depending on the foundation's structure, the type of property or asset contributed and the donor's income. But as a general rule, all gifts are removed from the donor's estate, avoiding estate and gift taxes.


When you and your family consider your approach to charitable giving, estate planning may be an important concern. A charitable remainder trust (CRT), a charitable lead trust (CLT) or a gift annuity may help you bring estate-planning issues into the picture.

A charitable remainder trust allows you (as the grantor) to receive income and a tax deduction at the same time and ultimately bequeath your assets to a charity. The trustee sells donated property or assets, tax free, and establishes an annuity or floating unitrust amount payable to you, your spouse or your heirs for a designated period of time. Upon completion of the time period, the remaining assets go directly to the charity. Assets that have appreciated in value typically are used to fund a CRT and the value of these assets is determined by an appraisal at the time the trust is established.

With a charitable lead trust, the charity receives income from the trust for a designated period of time, after which the principal goes to the beneficiaries, who receive the assets free of estate taxes. A portion of the value of the assets that are transferred to the trust are subject to gift taxes.


In some respects, a charitable gift annuity may be more cost effective and more tax effective than a CRT or CLT. Unlike trusts, annuities have no administrative or setup fees. You may use virtually any asset to fund a charitable gift annuity, and your charity of choice guarantees immediate or deferred payments to you. The typical tax deduction in the year assets are transferred to a charitable gift annuity is between 30% and 45% of the fair market value of the donation.

Including charitable giving within your financial plan can enable your family to create an income stream, earn tax savings and maintain a significant degree of control over assets. If you have specific charitable goals, you may want to present them at your next family gathering.

This article is not intended to provide specific investment or tax advice for any individual. Consult me, your financial advisor, or your tax advisor if you have any questions.

1Source: Giving USA, June 7, 2006.

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