We recently hosted a seminar on wealth management where the topics included traditional estate planning techniques and how some charitable giving strategies can be used to expand these estate planning tools. The giving strategies generated a lot of interest so we thought we would spend a little more time discussing the opportunities. Our goal is to increase your awareness of the strategies. To save space, the assumptions used to illustrate the concepts have been abbreviated and the calculations have been eliminated. Please consider the scenarios as examples and consult your tax adviser for a more thorough discussion.
Outright Donation of Appreciated Stock
- What if you own a stock worth $10,000 with a cost basis of only $1,000
- What if you want to make a gift of $10,000 to your favorite charity
The outright donation of appreciated stock is one of the most common charitable giving techniques. You donate the stock to the charity instead of making a cash contribution. The charity sells the stock and receives $10,000. You take a $10,000 charitable deduction just as if you had written a check but avoid the $1,800 in capital gains taxes you would have paid had you sold the stock to make the contribution.
Charitable Lead Trust
- What if you own a stock worth $200,000 with a cost basis of only $20,000
- What if you do not need the funds but would like to leave them to your children
You set up a Charitable Lead Trust and name your children as the beneficiaries. You donate the stock to the trust. The trust sells the stock, re-invests the proceeds and earns 10%. Your charity receives an annual payment from the trust, say 6% or $12,000 during your lifetime. At your passing in say 20 years, the balance in the trust of around $400,000 will pass to your children. It is called a Lead Trust because charity takes the lead in receiving the annual payments and your heirs receive the remainder. You endow an annual gift of $12,000 for your lifetime and leave $400,000 for your heirs. You save taxes in two ways: 1) you avoid $36,000 in capital gains taxes and 2) you pay $23,800 in gift taxes now instead of $220,000 in estate taxes at your passing.
Charitable Remainder Trust
- What if you want to retire and sell your $3 million family business
- What if you need to use some of the proceeds as retirement income
- What if you want to limit the size of the estate you leave for your children
- What if you want to give other children the benefit of a good education
You set up a Charitable Remainder Trust and name a scholarship fund at your alma mater as the beneficiary. You locate a buyer and negotiate the sales price. You gift the stock in the business to a Charitable Remainder Trust. The trust sells the business to your buyer for $3 million and invests the proceeds. You receive the annual payment from the trust, again assuming a 6% payout, of $180,000 for you and your spouse’s lifetime. Again assuming 20 years, the balance in the trust of around $6 million passes into the scholarship fund. It is called a Remainder Trust because your family takes the lead in receiving the funds and charity receives the remainder. The tax savings are significant. In effect the government’s loss is charity’s gain: capital gains taxes of $600,000, income taxes of $540,000 for the gift, and estate taxes of $3.3 million.
