Provided by
Michael W. McGreaham
Attorney at Law
101 S. Capitol Blvd.
10th Floor
PO Box 829
Boise, Idaho
83701-0829
Tel (208) 345-2000
Fax (208) 385-5384
Committed to providing the highest quality estate planning legal
services for individuals, families and businesses.
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Are you a gracious giver, perhaps even a philanthropist?
If you are a taxpayer, then the answer is yes. How, you ask?
During your lifetime, your wealth is subject to taxes in a variety of
forms. Income taxes levied on your wages, interest and dividends, and
capital gains taxes extracted on the sale of your appreciated assets may
tend to make April 15th
one of your least favorite days each year.
Voluntary
Taxes?
Our tax system is voluntary
in its form, but the civil and criminal penalties for noncompliance make
the process involuntary in its substance. Thankfully for our
national defense and other essential programs of the federal government,
most taxpayers voluntarily comply with the Internal Revenue Code (IRC)
and pay their fair share.
Beyond the essentials of government, however, are there any programs
funded by the federal government you and your family consider
nonessential, wasteful or even immoral? If there are, then you are an
involuntary philanthropist by your financial support of such causes as
selected by Congress and the White House.
Perhaps there are private sector charities you
deem more worthy of your tax dollars? Chances are you already support
such charities. Beyond your own support, however, would you like to
inspire your children (and beyond) to do likewise even after you are
gone? No doubt you have taught them personal financial responsibility,
but what about personal financial philanthropy to advance the values
that have guided your family?
Over the years, many families have established
Private Foundations and Donor-Advised Funds (DAFs) to control how they
give, when they give and what they give…as they seek to perpetuate a
family legacy of philanthropy.
Private
Foundations
Private Foundations, like Public
Charities, are non-profit organizations deriving their tax-exempt status
under IRC §501(c)(3). Both must be qualified organizations established
for specifically authorized purposes under the IRC. Unlike a Public
Charity, a Private Foundation generally receives its contributions
directly from one source. Commonly the source is an individual or a
family.
A Private Foundation makes its own
contributions (called grants) to one or more Public Charities of
particular interest to the Founder or the Founding Family. Among
the more attractive features of Private Foundations are its potential
perpetual existence and its ongoing control by the Founder. As such it
is an excellent vehicle for donors wanting to create a truly charitable
legacy with the highest degree of perpetual control. However, there are
thorns among these roses.
For example, contributions to Private
Foundations receive lower income tax deductions than contributions made
to a Public Charity. Also, a virtual snarl of red tape can subject
certain broadly defined disqualified persons to significant excise taxes
for various self-dealing issues. Additional excise taxes may be
triggered by the failure to distribute income, excess business holdings,
investments that jeopardize the charitable purpose and taxable
expenditures. Also, watch out for potential unrelated business taxable
income (UBTI), as well as the initial and ongoing administrative filing
requirements with the IRS and state agencies. Establishing and
maintaining a Private Foundation can be expensive, too. Enough said.
Donor
Advised Funds
Because of
the practical problems associated with Private Foundations, many donors
are looking to DAF’s as a means to control how they give, when they
give and what they give. Like Private Foundations, a DAF can
receive charitable gifts from you now and/or upon your death, while you
(and your heirs after your death) continue to advise the DAF regarding
its ongoing grants to your charitable cause(s). However, unlike a
Private Foundation, your DAF is a Public Charity by definition.
Accordingly, contributions to a DAF enjoy the maximum income tax
deductions permitted under the tax code. If you would rather have more
of your charitable wealth actually available to your charitable causes,
then you should know that a DAF is less expensive and much simpler to
establish, as well as to maintain thereafter, than a Private Foundation.
Summary
Because of myriad tax and non-tax
considerations, qualified legal counsel should be consulted regarding
whether a Private Foundation or a Donor-Advised Fund is more appropriate
given your unique personal and family charitable objectives.
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Many Americans would like to be more
gracious in their giving, but they are understandably reluctant to give
away assets today that they may need to maintain their financial
independence tomorrow. Fortunately, the Internal Revenue Code (IRC)
recognizes that it may be attractive for such taxpayers to have
their cake and eat it too!
A Charitable Remainder Trust (CRT), also known
as a split-interest gift under IRC §664, is a popular legal
technique for such giving and receiving. Through a CRT, you may increase
your current income, enjoy current income tax deductions and change the
ultimate charitable beneficiary right up to the time of your death.
CRT
Steps
Here is how it works. First, you
contribute an asset to the CRT. [Note: Appreciated assets are commonly
contributed because they tend to be low-income producers and have a low
income tax basis.]
Second, the CRT sells the asset without capital
gains taxation and then reinvests the proceeds in an income-producing
portfolio that grows income tax free inside the CRT.
Third, you (and your spouse) receive a lifetime income plus valuable
income tax deductions for up to six years.
Fourth, if the ultimate charitable beneficiary
changes for the worse during your lifetime, then you may replace them
with another charity by reference in your Last Will & Testament.
[Sidebar: if your ultimate charitable beneficiary is your own Donor-Advised
Fund (DAF), then you may appoint your heirs or others to further
advise your DAF regarding its future charitable beneficiaries.]
The
WRT Solution
Another impediment to gracious giving is
the old adage that charity begins at home. Simply put, most
Americans do not want to make substantial gifts to charity if it means
disinheriting their own loved ones. Fortunately, there is a proven
solution to this common dilemma employing the unique leveraging power of
Life Insurance: The Wealth Replacement Trust (WRT).
WRT
Steps
First, you create a WRT.
While you may not serve as a Trustee (nor should your spouse), you may
select the current and successor Trustees. The beneficiaries of the WRT
will be your loved ones.
Second, you (and your spouse) make gifts to the
Trustee on behalf of the WRT beneficiaries in an amount roughly equal to
the insurance premiums. The Trustee then provides written notice of the
completed gift to each beneficiary who then has a designated period of
time (not less than 30 days is typical) to request distribution of their
respective share of the gift. After that period has lapsed, the Trustee
applies for the appropriate amount of Life Insurance and pays the
initial premium. [Note: This annual gifting ritual continues until your
death (or the death of your spouse, if an insured and your survivor).]
Third, assuming all of the WRT steps have been
followed, the death benefit will be estate-tax free when paid to the WRT
for your loved ones, replacing the value of the CRT assets distributed
to charity.
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