How best to Donate?

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Cruise
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How best to Donate?

Postby Cruise » Sat Jun 17, 2017 5:52 pm

I recently had a meeting with a foundation executive who outlined some options for donating to the foundation. These included:

1. Charitable Remainder Trust
2. Charitable Gift Annuity
3. Charitable Lead Trust
4. IRA Charitable Rollover

As I understand it, the first two provide annual income, avoid some taxation, and benefit the foundation. The third would benefit the foundation, while eventually returning the corpus to my family. The fourth would not provide income, but would obviously benefit the foundation.

I'm new to thinking about these issues, and have not yet approached an attorney or CPA, which I would when I get to the point of taking action. At this time, I thought I would ask this community if they have experience with these decisions, and if so, their thoughts on the benefits and risks of the above options. Thank you.

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dm200
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Re: How best to Donate?

Postby dm200 » Sat Jun 17, 2017 6:07 pm

Cruise wrote:I recently had a meeting with a foundation executive who outlined some options for donating to the foundation. These included:
1. Charitable Remainder Trust
2. Charitable Gift Annuity
3. Charitable Lead Trust
4. IRA Charitable Rollover
As I understand it, the first two provide annual income, avoid some taxation, and benefit the foundation. The third would benefit the foundation, while eventually returning the corpus to my family. The fourth would not provide income, but would obviously benefit the foundation.
I'm new to thinking about these issues, and have not yet approached an attorney or CPA, which I would when I get to the point of taking action. At this time, I thought I would ask this community if they have experience with these decisions, and if so, their thoughts on the benefits and risks of the above options. Thank you.


If you plan to make significant charitable donations now, but want to spread out the receipt by this foundation over a longer period, I would consider a Donor Adviced Fund (DAF). It might make things simpler for you and can be used for other "grants" to charities.

Gill
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Re: How best to Donate?

Postby Gill » Sat Jun 17, 2017 6:08 pm

Your question is,indeed, a comprehensive one, and you have listed four different ways of benefitting charity. You seem to have a good understanding of each, and a detailed discussion is beyond my stamina on this forum. Much has been written on these techniques and each has its advantages and disadvantages depending on the extent you wish to part with assets during your lifetime.

A DAF is also another possibility, but can't accomplish all the objectives of the split interest arrangements you have listed.
Gill

sport
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Re: How best to Donate?

Postby sport » Sat Jun 17, 2017 6:13 pm

If you are older than 70.5, and have a traditional IRA, you can make Qualified Charitable Distributions (QCDs) to charities. These count against your RMD requirement, but are not taxable. Another good method is to donate appreciated stocks that you have held more than one year. You get the tax deduction for the current value and avoid the capital gains taxes on the growth.

stan1
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Re: How best to Donate?

Postby stan1 » Sat Jun 17, 2017 6:37 pm

A Donor Advised Fund may be an option for you, but a single charity or an attorney might not recommend it to you. The reason is because many charities can benefit from a Donor Advised Fund and because you don't need to hire an attorney to start a Donor Advised Fund. There are conflicts of interest hidden even in the most noble endeavours.

If you are over the federal estate tax amount (or close) or have special requirements you should get specialized legal advice for your situation.

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dm200
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Re: How best to Donate?

Postby dm200 » Sat Jun 17, 2017 6:53 pm

stan1 wrote:A Donor Advised Fund may be an option for you, but a single charity or an attorney might not recommend it to you. The reason is because many charities can benefit from a Donor Advised Fund and because you don't need to hire an attorney to start a Donor Advised Fund. There are conflicts of interest hidden even in the most noble endeavours.
If you are over the federal estate tax amount (or close) or have special requirements you should get specialized legal advice for your situation.


Most professionals, including attorneys, tend to recommend and lean towards "solutions" where they will earn or increase their income.

123
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Re: How best to Donate?

Postby 123 » Sat Jun 17, 2017 7:05 pm

The best thing to do could depend on how much you plan to donate (annually or cumulatively over so many years). How much $$S are you thinking about? Since it likely that you want the most money to go to the ultimate charities costs of the mechanism can make a difference. Some charitable mechanisms are less expensive then others just like some can offer more privacy then others. Some can add significant overhead costs for attorneys and staff while others pretty much leave you in total charge.
The closest helping hand is at the end of your own arm.

Gill
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Re: How best to Donate?

Postby Gill » Sat Jun 17, 2017 7:17 pm

stan1 wrote:A Donor Advised Fund may be an option for you, but a single charity or an attorney might not recommend it to you. The reason is because many charities can benefit from a Donor Advised Fund and because you don't need to hire an attorney to start a Donor Advised Fund. There are conflicts of interest hidden even in the most noble endeavours.

If you are over the federal estate tax amount (or close) or have special requirements you should get specialized legal advice for your situation.

Let's be fair. A DAF won't accomplish the objectives of the four vehicles outlined by OP. If I may take the liberty of being equally as cynical, could it be some of you don't understand these vehicles, how they operate and the tax ramifications of each? I assure you, these devices weren't created for the purpose of increasing attorney fees.
Gill

inbox788
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Re: How best to Donate?

Postby inbox788 » Sat Jun 17, 2017 7:20 pm

Imagine you just retired at age 65 with $2M and suddenly died, how would you divvy up the inheritance? A simple answer might be $1M to heirs and $1M to charities. Now assuming you live another 20 years with a 4% SWR, and you're 85 years old still with $2M, your answer might remain the same. However, depending on the market, you might only have $1M left or possibly $3M. How does that change your answer? And at 95 or 105?

Now if you were making regular sizable donation to the charity, you've probably gotten good tax deductions, but increase your chances of falling short or risk running out of funds. If that's not a major issue, it probably allows you to steer the most optimal course and make adjustments as the market conditions change.

You're balancing many needs, including your own, heirs and charitable causes. Are you trying to secure your income? Have a specific amount you're trying to leave to heirs? Maximize the what the charity receives in total or providing a constant stream of funding for the charity now? Knowing the future helps optimize the plan and minimize taxes, but since none of use knows the exact date, we can only plan for some best guesses.
Last edited by inbox788 on Sat Jun 17, 2017 7:22 pm, edited 1 time in total.

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dm200
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Re: How best to Donate?

Postby dm200 » Sat Jun 17, 2017 7:22 pm

Let's be fair. A DAF won't accomplish the objectives of the four vehicles outlined by OP. If I may take the liberty of being equally as cynical, could it be some of you don't understand these vehicles, how they operate and the tax ramifications of each? I assure you, these devices weren't created for the purpose of increasing attorney fees
.

I do not disagree, but it is not clear (to me at least) everything the OP is trying to accomplish and the relative priorities of such goals.

It is possible, though, that a DAF may assist the OP in accomplishing his/her goals and may be worth evaluating.

littlebird
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Re: How best to Donate?

Postby littlebird » Sat Jun 17, 2017 8:13 pm

There is no one best way; only the way that suits you best. The first three options were designed to let someone benefit a charity while still getting some benefit from the money him/herself or for his/her other heirs. Of course, the more the donor or other heirs benefit from the arrangement, the less the charity does. If you want to be a donor, while still not completely forgoing income and are willing to tie the money up in a complex vehicle, you might want to look further into these options.

If your only intent is to benefit the charity and you are comfortable doing so, writing a check is certainly the simplest and cleanest. In the middle, I would say is a donor-advised fund, one of the greatest benefits of which is to allow for anonymous donations (but this may not be important to you) and to allow you to make your donation in the best year for you tax-wise, but to dole out the money to charities on a stretched-out timetable.

I'm guessing that the person you spoke to was the planned giving officer, or perhaps the development officer?

aristotelian
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Re: How best to Donate?

Postby aristotelian » Sat Jun 17, 2017 8:22 pm

OP, what kind of foundation is this? Are you attempting to help the foundation directly or use it as a vehicle to give to other nonprofits?

fourwheelcycle
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Re: How best to Donate?

Postby fourwheelcycle » Sat Jun 17, 2017 8:42 pm

OP, you are asking forum members for comments on four options, but the options are quite different and your choice among them would likely depend more on your own needs and preferences than on the preferences of various forum members. Do you need the annual income you would receive from the first two options? Does your family need the principal that would ultimately come to them under the third option?

If you do not need the principal you are considering for charitable donation, or the income it generates, for your own living expenses, and if your heirs will benefit amply and sufficiently from the portion of your estate you are not considering for charitable donation, you may want to make outright gifts to charity. This would provide the full benefit of charitable deductions and avoid extra expenses to establish and manage specialized charitable trusts.

Since you included option four, I imagine you may also have sufficient principal in one or more IRAs to make a $100K per year QCD to your favored charities. That would remove all federal income tax on your annual RMDs (up to $100K) and it would allow you to make a $1M donation over the next ten years, with the opportunity to cease or redirect your annual donations if your own circumstances or those of your selected charities should change in the future. If your spouse also has significant IRAs you could even make two $100K QCDs each year. Donations to a DAF do not qualify as QCDs.

bsteiner
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Re: How best to Donate?

Postby bsteiner » Sat Jun 17, 2017 9:06 pm

This is like asking whether a fork or a spoon is better. They're both useful tools, but which is better depends on what you're eating. Sometimes either one will work, but more often one will and the other won't.

It would help to know more about your situation and your objectives.

Charitable remainder trust

A charitable remainder trust (CRT) provides payments to one or more individuals for life, or for a term of up to 20 years.

The primary purpose of a CRT is to be able to sell a highly appreciated asset and diversify, and defer the capital gains tax. Your lawyer can customize it to fit your situation. The benefit of the deferral largely offsets the tax, so that in effect you can provide a substantial benefit to the charity at very little economic cost. You or a family member can be the trustee (and would almost always be the trustee), so you can control the investments. The tradeoffs are that it's inflexible, and if you're providing for a child or grandchild (either at once or upon your death), the payments to the child or grandchild are outright rather than in trust.

Charitable gift annuity

A charitable gift annuity is a poor person's charitable remainder trust. The charity's interest is usually much greater than in a charitable remainder trust. These are usually done for small amounts. While it would be simpler to just make an outright gift to the charity, some people like the charitable gift annuity.

Charitable lead trust

A charitable lead trust (CLT) provides payments to charity for a specified number of years (most commonly 15 or 20 years, though sometimes a different term), with remainder to or in trust for yourself or (more often) family members.

The most common form is an annuity trust where the present value of the annuity payments, based on current interest rates (presently 2.4%) is equal to the value of the contribution, so that there's no taxable gift. If (as is likely over a long enough time) the trust earns more than 2.4%, the balance will pass to the family free of estate and gift tax. That's the purpose of the CLT. If it earns exactly 2.4%, nothing will be left at the end of the term. If it earns less than 2.4%, it will run out before the end of the term.

A CLT requires a substantial charitable intent. However, for someone who regularly makes substantial charitable contributions, a CLT provides the opportunity for leverage.

IRA charitable rollover

I'm guessing you meant a qualified charitable distribution (QCD). An IRA owner over age 70 1/2 can direct that up to $100,000 a year be paid from his/her IRA directly to charity. The QCD counts toward the required distribution. Depending on the IRA owner's tax situation, a QCD may be preferable to taking a distribution and then making a charitable contribution. Sometimes giving appreciated securities to charity is preferable to a QCD.

IRA owners with large estates often leave their IRAs to charity. For these people, the QCD permits them to do some of this during lifetime. Many other IRA owners like the concept of the QCD.

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FIREchief
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Re: How best to Donate?

Postby FIREchief » Sun Jun 18, 2017 5:16 am

bsteiner wrote:Charitable lead trust

A charitable lead trust (CLT) provides payments to charity for a specified number of years (most commonly 15 or 20 years, though sometimes a different term), with remainder to or in trust for yourself or (more often) family members.

The most common form is an annuity trust where the present value of the annuity payments, based on current interest rates (presently 2.4%) is equal to the value of the contribution, so that there's no taxable gift. If (as is likely over a long enough time) the trust earns more than 2.4%, the balance will pass to the family free of estate and gift tax. That's the purpose of the CLT. If it earns exactly 2.4%, nothing will be left at the end of the term. If it earns less than 2.4%, it will run out before the end of the term.

A CLT requires a substantial charitable intent. However, for someone who regularly makes substantial charitable contributions, a CLT provides the opportunity for leverage.


This is interesting. A few questions:

Hypothetical situation. I set up a charitable lead trust (annuity, non-grantor) and fund it immediately with $100,000 of appreciated shares of a stock index fund. If I did the math right, at the 2.4% rate, the charity will receive $6354 per year for 20 years. I act as trustee (can I?), leave the money invested 100% in stocks and earn 7% over the 20 year term. As long as the $6354 charitable payout each year (deductible to the trust) exceeds the capital gains and dividends generated by the trust's investments, the trust pays no taxes. This means that at the end of the 20 years the trust has $181191 in assets that can be paid out to the trust beneficiaries free of estate or gift tax.

a) Is transfer of the remainder ($181191) to a trust for my child in any way a taxable event? Or is it just a subsequent transfer of appreciated shares of stock.
b) can a DAF qualify as the charity receiving payments from the CLT?
c) can another existing irrevocable trust be the beneficiary of the CLT's final assets?

Thanks!

bsteiner
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Re: How best to Donate?

Postby bsteiner » Sun Jun 18, 2017 11:12 am

FIREchief wrote:... Hypothetical situation. I set up a charitable lead trust (annuity, non-grantor) and fund it immediately with $100,000 of appreciated shares of a stock index fund. If I did the math right, at the 2.4% rate, the charity will receive $6354 per year for 20 years. I act as trustee (can I?), leave the money invested 100% in stocks and earn 7% over the 20 year term. As long as the $6354 charitable payout each year (deductible to the trust) exceeds the capital gains and dividends generated by the trust's investments, the trust pays no taxes. This means that at the end of the 20 years the trust has $181191 in assets that can be paid out to the trust beneficiaries free of estate or gift tax.

a) Is transfer of the remainder ($181191) to a trust for my child in any way a taxable event? Or is it just a subsequent transfer of appreciated shares of stock.
b) can a DAF qualify as the charity receiving payments from the CLT?
c) can another existing irrevocable trust be the beneficiary of the CLT's final assets?


You probably wouldn't create a CLT for $100,000.

Most CLTs that we create are grantor trusts for income tax purposes. By paying the income tax on the trust's income and gains, you're effectively shifting additional wealth free of estate and gift tax.

Cruise
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Re: How best to Donate?

Postby Cruise » Sun Jun 18, 2017 1:48 pm

OP here: I appreciate everyone's input. Very valuable. I am early into this process, so my thoughts are still forming. It appears that there will have to be compromises given various objectives.

My primary goals is to make sure that my wife and I have sufficient assets so that we can live comfortably and be cared for throughout our lives. I'm quite certain that this can be accomplished if we defer giving by making a bequest. If Firecalc and other simulators have low error rate, a deferred bequest could be substantial.

Another objective is to benefit worthy causes, and the idea of taking money that the government would get and directing it to causes we deem worthy is appealing. So, dealing with those pesky RMDs in some fashion gets traction.

One benefit of early giving is feeling that one having an impact. There is some joy in seeing the results when one is alive, and also from getting social recognition. (I do have some vanity. Not a great deal, but some...)

I was talking to a foundations's Director of Estate Planning. The foundation has a single general purpose, but many directed options.

One of my concerns is that donating early to a foundation involves them taking what I believe to be high yearly administrative fees (between their yearly administrative fees and the ER for their advisors, the AUM fees appear to exceed 5+%). If I want the most bang for my buck, why not leave my assets in low ER funds until we pass on, and then the recipients will have much more money? At least that is my thought.

Since we have five or so years before RMDs will be a factor, perhaps a DAF might be a good intermediary step for us to create a vehicle for near-term donations.

I thank you for your past and any additional comments. This forum is a valuable asset.

Swansea
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Re: How best to Donate?

Postby Swansea » Sun Jun 18, 2017 2:21 pm

With a DAF, you will need to be aware on IRS limits on contributions. I think for cash it can not exceed 50% of AGI annually.

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dodecahedron
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Re: How best to Donate?

Postby dodecahedron » Sun Jun 18, 2017 2:34 pm

Swansea wrote:With a DAF, you will need to be aware on IRS limits on contributions. I think for cash it can not exceed 50% of AGI annually.


No limit on contributions to a DAF but there is an annual limit on the amount of the contribution that can be deducted each year, which is 50% of AGI for cash contributions and 30% for noncash contributions (e.g., in-kind donations, including appreciated securities with embedded LTCG). Amounts in excess of annual limits can be carried forward and deducted for up to five years in the future.

Note that these limits for DAFs are the same as they would be for most typical charities, e.g., the Red Cross, United Way, churches, etc.

Applicable annual deduction limits for private foundations, by contrast, are generally tougher than limits for DAFs and typical charities: 30% of AGI for cash gifts and 20% for appreciated securities.

More details here: https://www.irs.gov/publications/p526/a ... 1000229802

bsteiner
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Re: How best to Donate?

Postby bsteiner » Sun Jun 18, 2017 2:41 pm

stan1 wrote:A Donor Advised Fund may be an option for you, but a single charity or an attorney might not recommend it to you. The reason is because many charities can benefit from a Donor Advised Fund and because you don't need to hire an attorney to start a Donor Advised Fund. There are conflicts of interest hidden even in the most noble endeavours.

If you are over the federal estate tax amount (or close) or have special requirements you should get specialized legal advice for your situation.


Attorneys recommend donor advised funds where they're appropriate. They're useful for amounts too small to warrant creating a foundation, for contributions in excess of the limits on deductions for contributions to foundations (some people give 30% of their income to a foundation and another 20% to a DAF), for many foreign grants, and for anonymous grants. There are other situations where a DAF may be advisable as well.

However, while there's a cost to forming and operating a foundation, there's also a cost to administering a DAF. For example, Fidelity (one of the most popular ones) charges 0.6% on the first $500,000, 0.3% on the next $500,000, 0.2% on the next $1.5 million, 0.15% on the next $2.5 million, and negotiable fees over $5 million, with a minimum of $100. For a $100,000 fund, their fee of $600 is much less than the cost of administering a foundation. However, for a $1 million fund, their fee of $4,500 is probably more than the cost of administering a foundation.

letsgobobby
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Re: How best to Donate?

Postby letsgobobby » Sun Jun 18, 2017 3:18 pm

Cruise wrote:OP here: I appreciate everyone's input. Very valuable. I am early into this process, so my thoughts are still forming. It appears that there will have to be compromises given various objectives.

My primary goals is to make sure that my wife and I have sufficient assets so that we can live comfortably and be cared for throughout our lives. I'm quite certain that this can be accomplished if we defer giving by making a bequest. If Firecalc and other simulators have low error rate, a deferred bequest could be substantial.

Another objective is to benefit worthy causes, and the idea of taking money that the government would get and directing it to causes we deem worthy is appealing. So, dealing with those pesky RMDs in some fashion gets traction.

One benefit of early giving is feeling that one having an impact. There is some joy in seeing the results when one is alive, and also from getting social recognition. (I do have some vanity. Not a great deal, but some...)

I was talking to a foundations's Director of Estate Planning. The foundation has a single general purpose, but many directed options.

One of my concerns is that donating early to a foundation involves them taking what I believe to be high yearly administrative fees (between their yearly administrative fees and the ER for their advisors, the AUM fees appear to exceed 5+%). If I want the most bang for my buck, why not leave my assets in low ER funds until we pass on, and then the recipients will have much more money? At least that is my thought.

Since we have five or so years before RMDs will be a factor, perhaps a DAF might be a good intermediary step for us to create a vehicle for near-term donations.

I thank you for your past and any additional comments. This forum is a valuable asset.

Yes there is a time value of money, but that is as true for the charity as it is for you. They'd like to have the money now, thank you very much.


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