Philadelphia PA Charitable Planning Attorney
Do you want to benefit a charitable organization or cause? Your estate plan can provide support for such organizations in a variety of ways, either during your lifetime or at your death. Depending on how your planned giving is set up, it may also allow you to receive a stream of income for life, earn higher investment yield, or reduce your capital gains or estate taxes.
The most obvious reason for donating to charity is the goodwill it creates. A less obvious reason is the tax and estate planning benefits which can be derived from it. If you desire to make a lasting and impactful charitable gift, our attorneys will provide sound advice about the types of gifts which you should give, and the various legal and tax implications of giving them.
For example, you may donate any number of different assets to charity. Cash is a popular gift, and probably the easiest to give. You may make a cash gift in the form of cash, a check or a credit card payment and it is gift or estate tax free, depending on when you make the gift. If you make the gift during your lifetime, you may be able to take an itemized charitable deduction from your income taxes. Furthermore, you will deplete the value of your estate by the amount of cash you gift during your lifetime.
A potentially smarter gift to make is a gift of appreciated assets. Those assets may be your artwork, collectables, retirement accounts, publicly traded or privately held securities, real estate, or various other appreciated assets. Appreciated assets carry inherent tax benefits if you donate them directly to a charity or use them for charitable purposes. Generally, if you donate appreciated assets directly to a charity, you may be able to take advantage of several tax benefits. First, you will avoid any potential capital gains taxes which would have applied had you first sold the appreciated assets, then donated the cash. In addition, you avoid incurring any seller related costs. Instead, if you make the gift during lifetime, you will receive an income tax deduction generally equal to the fair market value of the asset, limited to a certain percentage of your adjusted gross income. Finally, you remove from your estate an amount equal to the fair market value of the assets.
Another option in making a charitable gift is to create a charitable remainder trust (“CRT”). Within the charitable trust, you are able to designate an income beneficiary and a remainder beneficiary. You may designate yourself as the income beneficiary with the remainder of the trust fund to be distributed to a charity of your choice; or you may designate a charity as the income beneficiary with the remainder to pass to your heirs. The CRT can provide that the named beneficiary receives either a fixed amount each year or a percentage of the value of the trust each year for a period of years that can be for the individual’s life or for a period not to exceed 20 years. Further, a CRT remainder interest can be used to fund a private foundation as outlined below. In addition, you are able to achieve a potential immediate (partial) tax benefit, based on the value of the eventual gift to charity. It is for that reason CRTs are typically funded with appreciated property in that the gift may eliminate capital gains tax for gifts of long term appreciated assets. In either scenario, you can provide for the welfare of you and your family while still achieving your charitable goals. Charitable trusts are complex vehicles, but our attorneys are able to provide the proper drafting and execution in order to help you establish one.
Clients who want to control and direct their gift giving to family and friends may establish trusts to do so. In a similar manner, clients who want to direct their charitable gift giving should consider establishing a Private Foundation. Private Foundations have been gaining popularity as a device for charitable gift giving and can be established during a client’s lifetime, or they can be testamentary and incorporated into or as part of a client’s estate planning documents.
A Private Foundation is a nonprofit organization established either as a corporation or a trust, with a principal fund that is managed by a board of directors or trustees, respectively. Private Foundations are recognized as charitable organizations by the IRS. Certain procedures and formalities must be met to qualify as a charitable organization and receive the beneficial income, gift and estate tax treatment that flows from being a qualifying charitable organization.
A Private Foundation offers clients many benefits, including the following:
Through a Private Foundation, a client may achieve the following:
- targeted giving supporting particular charitable works
- timing in which the funds are used
- control of the manner in which the funds are used
- control over how assets are invested
- perpetuating your name or the memory of a parent or child in connection with charitable works.
- control over who sits on the Board of Directors or who is Trustee
- teach your children philanthropy and money management if they are part of the foundation’s board.
By creating a Private Foundation, the client essentially creates his own personal charity.
B) Tax Advantages
Donors may make tax deductible contributions to their own Private Foundations and then, as trustees, direct where the money goes. In the case of endowing a Private Foundation through a testamentary charitable bequest, the Donor will essentially remove the fair market value of the bequest from his taxable estate via the allowable charitable deduction by an unlimited estate tax charitable deduction.
In addition, a Private Foundation’s investment income, subject to exception, is exempt from taxation. Further, no capital gains are realized when appreciated property is donated to a foundation and donors may take a charitable deduction based on the full market value of appreciated assets including appreciated stock held in publicly traded companies or appreciated real estate and not the donor’s income tax basis.
For example, an individual may own appreciated stock currently worth $3,500,000 in a publicly traded company where the individual worked before retiring. He decided to establish a Private Foundation and donate $1,000,000 worth of company stock with little cost basis. This contribution of appreciated stock to the Private Foundation will generate a charitable tax deduction of $1,000,000 which is limited to being written off at 20% of the individual’s adjusted gross income (AGI) for the current tax year. Further, he is also permitted to carry forward any of the unused deduction for an additional 5 tax years.
C) Retirement Plan Tax Advantages
IRAs have been good resources for funding charitable endeavors. Often, a client’s most valuable asset is his pension or retirement fund. However, pension or retirement funds are subject to double taxation, estate and income taxes, which substantially diminish an inheritance of up to 85%. In other words, the estate pays death taxes and the beneficiary pays income taxes upon his/her withdrawal of the funds. Consulting with an Estate Planning expert can totally or substantially these taxes by funding a Foundation with pre-tax retirement plan dollars. Retirement plan additions at death qualify for the unlimited estate tax charitable deduction. Further, the Foundation does not recognize any income tax when it receives the proceeds. Note that life time contributions are subject to the private foundation percentage limitations on the income tax charitable deduction as briefly discussed above.
Private foundations can be used to pursue any number of “charitable” purposes, including religious, artistic, scientific, literary, educational, and athletic endeavors. What qualifies as a “charitable” purpose is defined by the IRS and is very broadly defined. Accordingly, a client can fashion many purposes to qualify as charitable and obtain the above desired tax benefits. Furthermore, as times change and attitudes change, a Private Foundation can evolve its charitable endeavors to meet the grantor’s desires.
E) Family Involvement
A client can appoint family members as staff, directors, or trustees to the Private Foundation. This way, the client involves the family as a whole, promoting charity among the family. In the case where the client has set up a testamentary Private Foundation, appointing family members helps to ensure that the client’s wishes and sentimentalities will be followed as closely as possible even after death of the creator/grantor.
By integrating the family, a client can help younger generations gain experience in working in an organization and developing social and community contacts which may bring them social prominence. The family can benefit from public recognition of its charitable endeavors. Usually, a Private Foundation bears the family name, the name of its grantors or is in memory of a family member.
F) Types of Private Foundations
Private Foundations fall into 2 general categories:
- Operating Foundations – An Operating Foundation actively conducts its own charitable, educational, or other exempt programs and activities. Examples of operating foundations include museums, zoos, research facilities, libraries, etc.
- >Nonoperating Foundations – A Nonoperating Foundation provides grants to other entities or to individuals for charitable or other exempt purposes. Nonoperating foundations are often referred to as grant-making foundations because they are simply providing funding to other entities who perform the charitable activities or to individuals directly. Examples include the Bill & Melinda Gates Foundation and the Rockerfeller Foundation.
Once the Private Foundation is endowed, or fully funded, income and principal are used to fund the charitable activities.
G) Continuity & Consistency
Private foundations have the benefit of continuity and consistency. A Private Foundation generally must donate or grant 5% of its assets and income annually. Thus, at a minimum, the Private Foundation will be consistently and annually funding its charitable endeavors. Foundations can be established to remain in perpetuity – as long as there are assets to make minimum distributions, the Private Foundation can exist forever and grow over time. Furthermore, there are no limits on succession of trustees. A family could establish a framework whereby each successive generation takes over the administration and control of the Private Foundation.
Private Foundations offer the tangible benefits of control over how assets are spent and distributed, as well as preferential and substantial tax benefits, and the intangible benefits of promoting family involvement. They are excellent devices for clients to who wish to become involved in charitable giving, whether during their lifetime or at death.
Our attorneys will examine your particular charitable goals and your family’s particular circumstances, and based on that examination, assist you in determining which of your assets you should donate and when. Let our attorneys guide you through the planned giving process in order to maximize your charitable goals and the utility of your assets.
Contact our Philadelphia Estate Planning law firm with your questions, comments or concerns.