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Gracious
Giving
The year 2001 was a difficult one for Americans. Nevertheless, even as
they were reeling from the tragic events of September 11th and in the
midst of a recession, Americans gave an estimated $212 billion to
charity. Over 75% of this total generosity came from the wallets and the
estate bequests of individuals, not from corporations or charitable
foundations. Indeed, Americans have a rich tradition of gracious giving
and, with the exception of 1987, have given more each year since 1955.*
Are you a gracious giver, perhaps even a
philanthropist? If you are a taxpayer, then the answer is yes. How, you
ask? During your lifetime, your wealth is subject to taxes in a variety
of forms. Income taxes levied on your wages, interest and dividends, and
capital gains taxes extracted on the sale of your appreciated assets may
tend to make April 15th one of your least favorite days each year.
Voluntary Taxes
Our tax system is voluntary in its form, but
the civil and criminal penalties for noncompliance make the process
involuntary in its substance. Thankfully for our national defense and
other essential programs of the federal government, most taxpayers
voluntarily comply with the Internal Revenue Code (IRC) and pay their
fair share.
Beyond the essentials of government, however,
are there any programs funded by the federal government you personally
consider nonessential and perhaps even wasteful? If there are, then you
are an involuntary philanthropist by your financial support of such
causes as selected by Congress and the White House.
Perhaps there are private sector charities you
deem more worthy of your tax dollars? Chances are you already support
these charities. If so, then you really should know about IRC § 664 and
how you may turn your involuntary philanthropy into tax-savvy voluntary
philanthropy.
IRC § 664
Charitable tax deductions have been part of the
IRC since its inception. Why? The government’s own research determined
that private sector charities deliver social services more
cost-effectively than the government itself. The government, in turn,
sought to encourage increased charitable giving to private sector
charities by enacting IRC § 664 in 1969. In essence, IRC § 664 permits
split-interest gifts, making it attractive for taxpayers to have their
cake and eat it too!
A Charitable Remainder Trust (CRT) is a popular
split-interest gifting technique. Through a CRT, you may increase your
current income, enjoy current income tax deductions and leave a
substantial financial legacy for your favorite charity (or charities)
upon your death (or upon the death of your spouse, if later).
Here is how it works. First, you create a CRT
and contribute an asset to it. [Note: Appreciated assets (i.e. assets
that would be subject to capital gains taxation were you to sell them
yourself) are commonly contributed because they tend to be low income
producers and have a low income tax basis.]
Second, the CRT sells the asset without capital
gains taxation and then reinvests the proceeds in an income-producing
portfolio that grows income tax free inside the CRT.
Third, you (and your spouse) receive an
enhanced lifetime income plus valuable income tax deductions for up to
six years.
Fourth, upon your death (or upon the death of
your spouse, if later), the CRT distributes any remaining CRT assets
probate-free to your selected charities and your estate receives a
charitable estate tax deduction for the value of the assets distributed.
Family Matters
As the saying goes, charity begins
at home. Accordingly, many Americans want to maximize the wealth they
ultimately transfer to their children and grandchildren. While the CRT
provides a lifetime income and tax benefits to the taxpayer (and
spouse), it correspondingly reduces the estate eventually available to
loved ones. This is obviously one of the major drawbacks to CRT
planning. However, there is a tax-savvy strategy available to replace
the value of the CRT assets for the benefit of loved ones.
Summary
Americans have a rich tradition of being
gracious givers, in good times and in bad times. Fortunately, they may
choose to be voluntary philanthropists instead of involuntary
philanthropists. Be sure to contact qualified legal counsel before you
pursue any sophisticated financial or legal strategy.
* Giving USA, AAFRC Trust for
Philanthropy, http://www.aafrc.org/.
Copyright © 2005 Integrity Marketing
Solutions. All rights reserved. Some artwork provided under license
agreement. This publication does not constitute legal, accounting or
other professional advice. Although it is intended to be accurate,
neither the publisher nor any other party assumes liability for loss or
damage due to reliance on this material.
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