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Planned Giving Tips

For most of us, making a charitable gift means writing out a check. It's quick, uncomplicated and, best of all, tax deductible. But even if "keep it simple" is a good rule of thumb, a donor who always follows that motto may be missing out.

Consider the person who would like to make a major gift to a favorite charity but can't part with that much and still feel financially secure. Or someone fortunate enough to hold highly appreciated stock. She wants to sell and reinvest in high-yield bonds, but balks at the capital gains tax. Or the professional with a substantial retirement plan account who just learned that most of it will disappear in the form of taxes when he dies.

Writing out a check to a charity won't address the problems these people face, but a "planned gift" might. Planned gifts come in all shapes and sizes but have several common traits. They involve something other than a current, outright gift of cash, stocks or bonds; they offer tax benefits that often go beyond an income tax deduction; and they require "paperwork"-a will, a trust agreement, or a "beneficiary designation," for example.

Perhaps the simplest planned gift is a charitable bequest-a gift at the donor's death. By adding a clause to a will or living trust, a donor can leave their favorite charity a specific item of property (IBM stock, jewelry), a sum of money, or a portion of the "residue" of an estate, i.e., whatever is left after taxes and debts are paid and all other gifts are distributed.

The estate tax deduction for the full value of a charitable bequest will save estate tax if the donor's "taxable estate" is larger than a threshold amount ($625,000 for 1998). The highest federal estate tax rate is 55 percent. Therefore, for someone with an estate in that bracket, a charitable bequest "costs" the donor's children only 45 percent of its value to the charitable donee.

A "charitable remainder trust" (CRT) offers another way to make a major charitable gift more affordable. The donor puts the gift property in the trust today and receives defined annual payments from the trust for the rest of his life. At his death, a designated charity receives the trust property. For someone who wants to make a major gift without loss of income, a CRT may be the answer. Federal tax law even sweetens the deal a bit by allowing a current income tax deduction for the charity's "remainder interest" in the trust (typically 20 to 50 percent of the value of the gift property).

For a donor with a highly appreciated, low-yield asset-a technology stock, for example, a CRT can be even more attractive. If the donor wants to reinvest to generate more income, she first has to sell the stock and pay tax on her capital gain. On the other hand, if she puts the stock in a CRT, the trustee can sell it without tax. One-hundred percent of the sale proceeds remain in the trust to support the annual payments to the donor.

Some assets are attractive as charitable gifts because they would be taxed so heavily if transferred to family members. A perfect example is an account in an IRA or a "qualified" retirement plan (e.g., a pension or profit sharing plan or 401(k) plan). If left to children, such retirement funds are potentially subject to a double federal tax: estate tax and income tax. In a worse case, 70 to 80 percent of the account will be left to the government. Giving these funds to charity at death avoids both taxes, so the gift "costs" the children only a small portion of the benefit to the organization. In effect, most of the charitable gift is paid by the government-out of what would otherwise be federal tax dollars. Most people like that.

Robert Hardings also contributed to this article.

If you would like more information on making a donation or planned gift, contact John Larson at 612-347-5165.

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