Layaway Largesse: Be at peace over gifts to charities through careful estate planningAuthor(s): MICHAEL McGOWANSource: ABA Journal, Vol. 80, No. 9 (SEPTEMBER 1994), p. 84Published by: American Bar AssociationStable URL: http://www.jstor.org/stable/27835430 .

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i YOUR FINANCES

_Layaway Largesse_ Be at peace over gifts to charities through careful estate planning

BY MICHAEL McGOWAN

If youVe ever had the urge to make a substantial charitable con tribution but found that your funds were not quite up to it, there is an easy way to give now and pay later.

You can make a gift to a chari ty in your will or trust. It can be for specific property, a dollar amount, or a percentage of the residue of the estate. The gift can be restricted (toward a particular program), or unrestricted (for any purpose encompassed by the charity's mission).

A gift to charity is treated as a deduction to your gross estate, and, for estates worth

more than $600,000, can re duce your estate taxes. This method of giving is so common that more than 80 percent of "planned gifts" that charities receive come from wills.

You can give real estate to a nonprofit organization and retain a life estate for your own use. Your gift can be revocable or irrevocable, but you can only receive a charita ble income tax deduction for the present value of an irrevo cable life estate in the year in which the documents are executed.

While the income tax deduc tion rules are not as liberal as the estate tax rules, the 1RS still allows a charitable deduction of up to 50 percent of your adjusted gross income, depending on the type of property you give and the type of organization you give it to.

Trusts and Taxes You can establish a charitable

remainder trust, which passes the property to the nonprofit organiza tion upon your death, but pays you income during your lifetime. The trustors establish the trust and fund it, typically with highly appre ciated stock or real estate (which

must be debt-free). The trust then sells the property, and because it is

Michael McGowan is an attor ney and certified financial planner in Los Angeles. He participates extensively in continuing education activities.

a vehicle approved by the 1RS under the Tax Act of 1969, the trust pays no capital gains tax on the appreciation.

The donors have thus unlocked the value of a highly appreciated asset without payment of capital gains tax. And, since in many instances a professional trustee invests the proceeds, the donors

p.w '- - g. -4 0 e- . ;-'R /

receive a higher, safer, more diver sified yield on their assets while they are alive.

In the remainder trust, there are no gift taxes payable as long as the income beneficiaries are spous es, again because of the ultimately charitable nature of the trust. (You should note that if you include a nonspouse as an income beneficia ry, you may have to pay some gift taxes.) There also is an immediate income tax deduction for the pres ent value of the charitable gift, which is computed using the life expectancy of the donor and a

monthly discount rate allowed by the federal government.

Furthermore, since the gift passes automatically at the death of the last of the income beneficia ries and is not in the estate, the value of the estate is reduced and less is paid in estate taxes.

The Omnibus Budget Reconcil iation Act of 1993 removed the appreciation element as a prefer

enee item under the Federal Alter native Minimum Tax, although this may still be a preference item under state income tax laws.

Technically, there are two types of remainder trusts: the char itable remainder annuity trust and the charitable remainder unitrust. These differ primarily in the method of calculating payments to

donors.

The annuity trust pays a fixed annual percentage of the value the assets had on the date they were transferred into the trust; the unitrust offers choices?a percentage of value of the assets (revalued annually), or net income for the donors.

Trust donors still can pass a substantial estate to their children by using the savings of the income tax deduction and the increased income to establish a "wealth replacement trust" funded with life insurance. The only loser with the charitable trusts is the 1RS.

Lastly, you can establish a charitable lead trust, which is the reverse of the remainder trust. The lead trust delivers

immediate income to the charity for a period of years, and the principal is returned to the donors or to their heirs. The lead trust can be used in tandem with the remainder trust or with other vehicles.

When taking any kind of estate planning action with tax conse quences, you should get advice from your financial advisers, who will consider your specific needs in light of the laws in your state.

With all of these vehicles, the grantor must actually plan, execute and fund the charitable deferred gift. This is important; in a recent study of 150,000 American house holds, the National Committee on Planned Giving found that less than half had wills.

Direct and deferred gifts to

charity benefit the image of lawyers, their surviving spouses, their children, their community and society at large, but no one ben efits if no charitable or estate plan ning takes place.

84 ABA JOURNAL / SEPTEMBER 1994 ILLUSTRATION BY BRAD PURSE

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