Introduction

In our previous article on charitable giving titled "Estate Planning and Charitable Giving", which appeared in the January-February 2005 issue of Northwest Dentistry, we discussed some philosophical issues surrounding charitable giving. In a separate article in that same issue, we discussed the Minnesota Dental Foundation and its charitable mission. The goal of this article is to give further insight into specific techniques of charitable giving by explaining how these techniques might fit into your financial and estate plans. We will also discuss the income and estate tax benefits that can be obtained by using many of these techniques. If you have charitable intent, we urge you to talk with your professional advisors about using some of the techniques listed below to benefit the Minnesota Dental Foundation or other charitable organizations.

A Greater Good

As we stated in our previous article, there are many reasons why individuals make charitable gifts, among them compassion for those in need, religious and spiritual commitment, perpetuation of one's beliefs, values, and ideals, and a desire to share one's good fortune with others. On a financial level, appropriately planned charitable gifts can also provide a donor with significant income and estate tax benefits.

We have discovered in our discussions with clients that donors with charitable intent sometimes have a difficult time deciding what type of assets to gift and when to make a charitable gift. When these questions arise, we review the types of assets owned by the clients and consider timing and gifting options to help clients craft a solution that will help meet their tax needs and financial and charitable goals.

Cash

When making charitable donations, most people choose to give cash gifts. Many donors establish a pattern of lifetime gifting to charities and then choose to add to those gifts at death with a bequest from a will or trust. Others depend upon the income from their assets, and so may not be in a position to make a substantial outright lifetime gift. These donors may decide to wait until death to make charitable gifts from a will or trust or byuse of a beneficiary designation.

Whether made during lifetime, at death, or both, cash gifts provide many benefits to donors. Cash gifts are easy and convenient. They provide an immediate financial benefit to the charity. If made during lifetime, cash gifts also allow the donor to take an immediate income tax deduction in the amount of the gift. If made at death, charitable cash gifts can help reduce any estate tax that may be due. Cash gifts can also provide the donor with recognition of the gift from the charity and the public both during life and after death.

We find that for many of our clients cash gifts are the primary way that they satisfy their charitable intent. During lifetime, making a cash gift is as easy as writing a check to the charity, filling out a pledge form, or checking off a box on a dues statement. At death, charitable gifts can be made in a will or trust by making a special gift of a specified dollar amount or percentage of the estate to a particular charity or charities.

Stock or Other Highly Appreciated Assets

Another simple way to satisfy charitable intent is to gift stock or other highly appreciated assets directly to a charity rather than selling those assets and donating the proceeds to charity as a cash gift. Gifting highly appreciated assets directly to a charity can provide a donor with significant income tax savings if the gift is made during the donor's lifetime. If a donor chooses to gift stock or other highly appreciated assets that have been held for more than one year, the donor can take a tax deduction of the current value of the stock or asset. In this scenario, the charity gets the benefit of the full value of the stock or asset, and the donor avoids paying the capital gains tax that would have occurred if the donor had sold the stock or asset and donated the proceeds to the charity. (For appreciated stock held for less than one year, only the cost basis can be deducted.)

Life Insurance

Life insurance policies can also be gifted to charities. Using life insurance for gifting purposes can be either straightfoward or somewhat complicated, depending upon whether the donor is trying to get a lifetime income tax deduction. If a donor doesn't care about the lifetime income tax charitable deduction for the gift, he or she can simply name the charity as the beneficiary of the life insurance policy upon the donor's death. This technique, while not providing any lifetime income tax benefit, can still provide a tax benefit to the donor's heirs after death in the form of a charitable deduction against any estate taxes that may be due on the donor's estate. The only paperwork required to make a charity the beneficiary of a life insurance policy is a change-of-beneficiary form. One of the advantages of making a charity the beneficiary of a life insurance policy is that it allows a donor the flexibility to change the beneficiary designation at any time.

In order to get a lifetime charitable deduction on your income taxes, a donor would need to gift the life insurance policy itself, and the charitable deduction will be roughly equal to the cash surrender value or total cost of the premiums, whichever is less. This technique is a bit more complicated, and can involve creating an irrevocable life insurance trust, but it can provide additional tax benefit to the donor by permanently removing the value of the life insurance policy from the donor's estate.

Residence

If a donor is interested in making a gift of his or her primary residence while still living in it, a donor can establish a life estate in the residence. In order to create a life estate, a donor deeds a remainder interest in the house to the charity now, and retains the right to live in the house for life. At the donor's death, the charity would come into full ownership of the home and could sell the house and use the proceeds however the charity sees fit. For making this gift during life, the IRS allows the donor an income tax deduction, and the value of the house is removed from the donor's taxable estate.

Retirement Assets

Gifting of an IRA or other qualified retirement plan to a charity at death will allow the charity to get the full benefit of the tax deferred assets without them being subject to income tax as would be the case if the assets were left to a child or other individual. There are special rules for spouses, but typically, if a child or other individual is named as the beneficiary of a tax deferred asset, that child or individual will have to pay income tax on the assets when he or she withdraws the assets from the account. Depending on the size of the estate, these assets might also be subject to estate taxes, potentially leaving heirs with 40% or less of the total amount. When tax deferred assets are left to charity, the charity does not have to pay income or estate tax on those assets and can receive the full benefit of the assets immediately upon the death of the donor.

To make a charity the beneficiary of retirement assets, all that is needed is to fill out a change of beneficiary form. Again, a benefit of this type of gift is that it allows the donor to change the beneficiary designation as charitable intentions change over a life time.

In order to make a gift of retirement plan assets during life, a donor must withdraw the money from the plan, pay any required income tax, and then make a donation to a charity. This is a far less elegant solution and more costly from a tax perspective, but still an option for those who want to precisely control the amount and timing of the gift going to charity.

Other Options

Although beyond the scope of this article, a brief mention should be made of other more advanced techniques that allow a donor to make a gift now while still retaining an income for life. These life-income gift arrangements have a number of variables, but in summary they involve a transfer of cash or stock or property to a charity or trust with a retained right to income from the gift. The charity or trust invests the gift in order to be able to make the agreed upon payments to the donor or whomever the donor selected.

The donor receives an income tax charitable deduction in the year the donor makes the transfer. When the person receiving the income dies, whatever remains of the gift can be used by the charity.

The most popular of these methods include charitable remainder annuity trusts, charitable remainder unitrusts, pooled income funds, and charitable gift annuities. A gifting technique called a charitable lead trust gives income to the charity for a period of years, after which the remainder passes to the donor's heirs.

Another increasingly popular lifetime gifting tool that is again beyond the scope of this article is a Donor Advised Fund. Creation of a Donor Advised Fund allows a donor to make gifts into the fund and then spread those monies out to charities over the time period chosen by the donor. Once the assets are in the fund, the donor can recommend which charitable organizations will receive grants, when grants will be made, and in what amounts. The gift into the fund is a completed charitable gift, and the donor receives an immediate tax deduction for the current market value of the assets contributed to the DAF.

Just as with any other charitable gift, there is no capital gains tax on contributions of appreciated assets, and any growth of the assets within the fund is not subject to tax. The fund accepts many types of contributions as the funding source, including cash, marketable securities, life insurance policies, closely held stock of a C or S corporation, limited partnerships, and real estate.

In sum, there are many different ways to make charitable contributions. Each individual must assess his or her financial situation, asset mix, and charitable goals in order to determine which technique or techniques will work best for them. The goal of this article has been to expand knowledge about creative ways in which gifts can be made that further personal financial plans and benefit charities. Consulting further with a financial advisor and/or estate planning attorney can help accomplish both goals.

If you would like to learn more about the ideas in this article, we suggest the following book, which was used in its preparation: You Can Be A Philanthropist, by David Clough. Planned Giving Specialists 1995.

The ideas and techniques contained in this article are presented for informational purposes only and should not be construed as legal advice.

*Angela M. Lutz Amann is MDA Legal Counsel and a shareholder in the law firm of LeVander, Gillen & Miller, P.A., South Saint Paul, Minnesota.

In addition to advising the MDA and individual dentists on legal issues related to dentistry, she also focuses her practice on estate planning for families and individuals. E-mail is aamann@levander.com.

**Joel Greenwald, M.D., is a Certified Financial Planner, Affiance Financial, LLC, Minnetonka, Minnesota. Registered Representative offering securities through Financial Network Investment Corporation: Full Service Broker Dealer, Member SIPC. Financial Network and Affiance Financial are not affiliated. E-mail is joelg@affiancefinancial.com or www.affiancefinancial.com.