An outright gift of cash or appreciated securities (such as stocks, bonds or mutual funds) is the simplest form of making a tax deductible donation to CFPA. The donor is eligible for an income tax deduction in the year the gift is made (please see your advisor). A gift of appreciated securities is particularly advantageous to the donor in that it offers a substantial tax benefit by avoiding the capital gains tax on the appreciation, as well as providing an income tax deduction for the full value of the appreciated security. CFPA is able to sell the securities without incurring a tax.

Cash is the easiest item to donate to CFPA. The value of your gift is the amount of cash that you donated. Your charitable deduction is limited to 50% of your adjusted gross income (AGI) for the year of the donation. Any amount that cannot be deducted in the year of the donation because of this limitation can be carried forward and deducted for up to five succeeding tax years (subject to the same limitation).

When you donate securities that are considered long-term capital gain property (securities held more than one year) to a qualified public charity, you can deduct the full fair market value of the securities to the extent that the deduction does not exceed 30 percent of your adjusted gross income. The carryover rule from above applies in that any amount that is not deductible in the year of the donation can be carried over and deducted for up to five succeeding tax years (subject to the 30% AGI limitation).

A donor can makes an outright gift of real property, including a residence, vacation home, undeveloped land, commercial property or a farm, to a charity. If the donor owned the property for at least one year, he or she may be eligible for an income tax deduction equal to the fair market value of the property on the date of the gift, and the donor will avoid paying capital gains tax on any appreciation on the property. A Donor can also retain lifetime enjoyment of the property by making an irrevocable gift of the property to charity, subject to the donor’s right to use it during his or her lifetime.

The gift of real property can be complex and CFPA reserves the right to do extensive research before
accepting a gift of real property.

If a donor gives an existing insurance policy on his or her life which has been paid in full, irrevocably naming a charity (CFPA for example) as the policy’s owner and beneficiary, the donor may be eligible for an income tax deduction for the policy’s present value, an amount roughly equivalent to its cash surrender value.

A donor also gives a policy on which premium payments are still outstanding, or purchase a new policy. If the donor names CFPA as the policy’s irrevocable owner and beneficiary, he or she may be eligible for an immediate income tax deduction on the policy’s present value, and also for subsequent income tax deductions when he or she pays the policy’s premiums in future years.

Considerations:

1) The simplest way to use life insurance in charitable giving is for a donor to give an existing policy or buy a new policy on the donor’s life to give. In this case the donor will receive a tax deduction.

2) The donor could make the charity the whole or partial beneficiary of a policy. This would give the donor the flexibility to change the beneficiary if so desired. However the donor would not receive an income tax deduction but the proceeds would not be included in his or her estate.

3) If the donor is younger and would like to honor his parents, he could do the same as above with a
policy he buys on his parents. The life expectancy is shorter on the parents.

4) Life insurance can be used to replace a gift given to a charity – usually a large gift. Many people would like to give cash, stocks or real estate to charity either outright or in some other technique but want their family to also be taken care of. Often the premiums for the life insurance can be paid partially or in full with the tax savings from the gift or the income generated from the gift. If the life insurance is owned by the children or an irrevocable trust, the proceeds should be income and estate tax free.

Here are 2 scenarios:

Scenario 1

Mary is age 70 and in good health. She is wealthy enough to have a taxable estate. Mary has $500,000 in an IRA. When Mary dies, the IRA will be subject to both income and estate taxes. As much as 60 to 70% could be lost to taxes.

Mary would like to make a significant gift to her favorite charities. She is advised to consider leaving the IRA to charity since a good portion would be lost to taxes. By leaving the IRA to charity, the whole $500,000 would go to charity and none to taxes.

She takes out a life insurance policy so her children would get the full value of the IRA. She could buy a policy at her age with a death benefit of $500,000 for $10,000 a year. If her IRA generated just 4% per year, she could withdraw enough money to pay the premium and the tax on the withdrawal and still have money left over. The net result:

IRA Left to Children

Taxes @ 60% = $300,000
Charity = $0
Family = $0

IRA Left to Charity with Wealth Replacement

Taxes = $0
Charity = $500,000
Family = $500,000

This works even better when appreciated property, stock or real estate is donated.

Scenario 2:

Mary has $500,000 of cash. She would like a fixed income and also leave a substantial gift to charity. She decides to donate the $500,000 to charity in a gift annuity. At age 70 the annuity would pay her $28,500 for the rest of her life. Of that payment $19,659 is tax free for the next 15.9 years. It is all taxable income after that. She would also receive an immediate income tax deduction of $187,414.

When Mary dies, the remaining assets in the annuity stay with the charity. Since she does not need all of the income and she wants to take care of her children, Mary buys a life insurance policy to replace the gift. The premium would be $10,000.

Mary would get income of about 4%, charity would get a significant gift and the children would get the $500,000 tax free.

A gift of an IRA, 401(k) or other retirement plan to CFPA can result in substantial tax savings. If the donor names his or her spouse as the beneficiary of these plans after death, she or he will pay income taxes on the required distributions. If the donor names someone other than his or her spouse as the beneficiary, such as the children, the distributions are subject to both estate and income taxes. In fact, the combination of estate and income taxes can claim up to 70% or more of the original value of the assets when given to heirs. A gift of a retirement plan to charity, on the other hand, is not subject to either estate or income tax taxes and the charity can, therefore, enjoy the full value of the gift.

Example:

Dave, a widower, would like to leave CFPA approximately $400,000, with the balance of his estate going to his children. His total estate is approximately $4,400,000 made up of $400,000 in his IRA and $4,000,000 in cash (general estate asset.) What asset should he use for his charitable gift?

Option 1

Give $400,000 from his general estate assets to charity and the IRA to the children. After an estimated estate tax of 45% on the $4,400,000 and personal income tax of 35% on the remaining IRA, the children will receive approximately $1,943,000.

Option 2

Give the IRA assets to charity and the other assets to the children. After an estimated estate tax of 45% on $4,000,000 and zero income tax on the IRA because it did not go to the kids, the children will receive approximately $2,200,000.

Conclusion: There is a total tax savings of $257,000 by gifting the IRA directly to charity.

In a charitable remainder trust (CRT), a donor transfers property to a trustee. The trust may be created during the donor’s lifetime or in his or her Will. Generally, on at least an annual basis, the trustee makes specified payments to one or more non-charitable beneficiaries selected by the donor (which may include the donor). When the CRT ends, the trustee distributes the trust property to a charity selected by the donor or the beneficiaries – hopefully CFPA. When the donor creates a CRT, he or she is eligible for an income tax charitable deduction based on a portion of the value of the assets transferred. The size of the deduction depends upon the present value of the remainder interest that passes to charity when the CRT ends. When a donor makes a donation of appreciated property to a CRT, she or she gains additional tax savings due to the fact that he or she can defer or possibly eliminate payment of capital gains taxes on the property’s appreciation. The trustee can sell the appreciated assets without incurring tax liability and reinvest the proceeds in higher income producing property.

For example:

Mrs. A has assets valued at $2,000,000 and a serious interest in several charities. Her two children are financially secure, both from their own earnings and an inheritance they received from their paternal grandfather. Within Mrs. A’s stock portfolio is a block of stock she purchased many years ago. This stock has a cost basis of $50,000, a current market value of $500,000 and a current yield of 2%. If Mrs. A sells the stock in order to reinvest for a higher yield, the sales proceeds will be reduced by a capital gains tax of approximately $67,500. This will leave her with net proceeds of $422,500 to reinvest. In the alternative, Mrs. A can create a Charitable Remainder Unitrust for her own benefit, giving herself the right to receive annual payments equal to 6% of the market value of the trust fund revalued annually. She expects the trustee to achieve a total return higher than 6%, and a unitrust will permit her to receive higher payments as the trust value rises. Mrs. A’s gift to the unitrust would have these tax consequences:

Transfer to trust $500,000
Actuarial value of Mrs. A’s right to Receive 6% per year for life,
Revalued annually $285,000+/-
Income tax charitable deduction $215,000+/-

Increase in Mrs. A’s annual income $20,000*
Was 2% x $500,000= $10,000
CRUT = $30,000*

In a charitable lead trust (a “CLT”), a donor contributes property to a trust in which CFPA receives a specified payment from the trust each year for a term of years. Similar to a CRT, the donor may create the trust during lifetime or in a Will. When the CLT ends, the trustee distributes the CLT property to non-charitable beneficiaries selected by the donor (such as the children or other heirs). The payments to charity each year may be either annuity payments or unitrust payments (similar to the payments to non-charitable beneficiaries in a CRT).

Example:

In his will, A leaves stock with a $100,000 value to his son as Trustee to pay $5,000 annually to his favorite charity for 20 years, with the remainder then passing to his then living grandchildren in equal shares. The present value of the charitable annuity is deductible in computing A’s taxable estate.

Leaving a bequest to charity through a will or living trust allows CFPA to continue to provide valuable services for future generations. A donor can give a specific asset, a dollar amount, a percentage of his or her estate or the balance of the estate, after the payment of taxes, expenses and any other bequests that the donor makes. A donor may also want to consider naming charity as a contingent beneficiary of his or her estate or of any trust created by him or her in the event that the named beneficiaries fail to survive (or are not alive when any trust terminates).

Because these gifts are revocable during lifetime, they do not qualify for an income tax deduction. They are, however, fully deductible for estate tax purposes and there is no limit on the amount or percentage of assets which the donor may donate to charity.

Stock Gifts Contact and info:

Tracey E. Flynn
Client Service Associate

One Hundred Northfield Drive
Windsor, CT 06095

Toll Free: (866) 466-9412
Ph: (860) 697-7444
Fax: (860) 683-4227
tflynn@fiallc.com

Stocks are transferred to FIA’s Charles Schwab account
DTC# 0164 (code 40 – not always needed)
CFPA’s Account is # 8597-0468