Various strategies for planned giving include:
Having a valid Will or Trust gives you confidence that your intentions will be met. Besides passing your estate to your loved ones in the way you desire, you can remember the Agriculture and Land-Based Training Association in your Will or Trust. Typically, there are three ways that you can remember us in your Will:
a) A specific gift amount. (I leave “ALBA, a charitable organization with headquarters in Salinas, California” $100,000.)
b) A percentage of your estate. (I leave “ALBA…” 20% of the value of my Estate.)
c) The remainder of your estate after you have taken care of your heirs and loved ones. (I leave all the rest, residue and remainder of my estate to “ALBA…”)
Furthermore, bequests to ALBA may be unrestricted, designated for a program or capital need, or restricted for general endowment purposes in perpetuity. In any event, you should seek the proper professional legal advice when considering the preparation and execution of a Will or Trust.
What is a charitable remainder trust?
A Charitable Remainder Trust is a highly tax-advantaged estate-planning tool that provides income while lowering your taxes, reduces your taxable estate and enables you to ultimately donate assets to a designated charity such as ALBA.
How is this accomplished? Establish a trust!
Transfer stock, property or other assets to a charitable remainder trust, prepared by your attorney, in which you retain an income interest and whose ultimate beneficiary is your designated charity(ies). The trustee you’ve named in the trust will carry out the terms of the trust agreement. You may serve as your own trustee or designate a third party trustee, manage the assets, and name other income beneficiaries in addition to yourself.
Why would you want to do this? There are three primary reasons:
1) Reduce your income and/or estate and gift taxes
Your transfer of assets to the trust results in an estate and income tax deduction, lowering your ultimate tax burden now and/or in the future. As trust assets, your property or stock can be sold with the donor realizing no capital gains tax; the charitable remainder trust is a tax-exempt trust.
2) Produce income
The proceeds can then be reinvested in a diversified portfolio for growth, income or total return in order to generate cash flow to you or other income beneficiaries. The trust pays you and any designated beneficiaries – usually a surviving partner or child – income for life. Or it can pay income until a fixed time in the future. You decide the payout amount at the time you create the trust. This decision will have tax deduction and investment management implications.
3) Give to charity
When the last income beneficiary dies or the trust terminates, the designated charity becomes the recipient of the trust’s assets. By partnering with a charity, you receive significant wealth management planning benefits as well as creating a lasting legacy for the charity(ies) of your choice. Whether or not this is an appropriate plan for you depends upon more in-depth planning and consideration by your financial, legal and/or tax advisors.
Donations of land and buildings, residential and commercial, fall under the same general rules as other property, with a few caveats.
Donations of real property can produce highly beneficial tax results. Many real estate holdings have appreciated greatly in recent years and may be subject to capital gains taxes if sold. Donation of real estate directly to ALBA or through the use of a charitable remainder trust often minimizes these taxes and provides an income tax deduction.
A donation of real property may be made during lifetime or as a bequest in your will, becoming effective at your death. Donating the real estate during your lifetime may generate both income and estate tax deductions. Your donation may be an outright and complete transfer or you may retain a life estate interest in the property, enabling you to live in the property until your death.
The farther into the future the charity will actually receive the property, the lower your current tax deduction. The tax deduction is also impacted by a federally calculated interest rate. The lower that rate, the better the deduction for the donor.
You’ll need an estate planning attorney or CPA to help with this move, but the big tax benefit makes it worth investigating.
When you give a gift of real property to The Center, you may claim an income tax charitable deduction based on the full market value of the gift, avoid capital gains taxes, and possibly eliminate certain costs associated with the transfer of real property. Gifts of real estate can also provide income for you if transferred to the proper instruments.
Because special IRS regulations apply to the contribution of real estate, such as substantiation of value through a “qualified appraisal” and depreciation recapture, it is important to obtain professional advice if you are thinking about donating real estate.
As you consider a gift to ALBA you may want to think about donating appreciated stock that you have held for at least one year. The benefits of this type of donation include:
You save on capital gains tax
You can take a charitable deduction on the full value of the stock at the time of the gift. This tax deduction is limited to 30% of your adjusted gross income. However, gifts over that limit can be carried forward and deducted within the next five years, assuming you itemize your deductions.
Gifting appreciated stock is easy.
This is how it works:
Call your broker and let him/her know how many shares of which stock you want to donate. Typically, you want to select an appreciated stock that you’ve held over one year and that you wish to sell or reduce your holding for diversification purposes. Also, you may wish to donate a stock that is paying little or no dividend as you are not earning any income off of that stock position.
ALBA has a brokerage account and your broker can arrange an electronic transfer of the stock with the following information:
Name on the Account is: ALBA
When ALBA sells the stock, any trading costs are then deducted. However, in compliance with IRS regulations, your tax deduction is based on the average price of the stock on the day your broker transfers the stock gift.
Example of a Stock Donation
Example: You’ve held 200 shares of stock for more than one year and the shares are worth $20 each on the day you donate them. Your charitable contribution deduction is $4,000 — no matter at what price you originally bought the shares.
Consider that if you bought the shares long ago at $5 per share, your capital gain would be $3000. By donating the stock, there’s no gain on which to be taxed. At 15%, the tax on $3000 would have been $450. You’re getting a deduction for a $4,000 donation, and can ignore any taxes on the appreciation. You are no longer subject to the $450 in taxes that you would have paid if you had you actually sold the stock and donated the cash. Furthermore, if the stock is paying little or no dividend, you’ve made a contribution with a stock that was generating little or no income for you.
So, you eliminate the $450 in taxes on the appreciation and receive a tax deduction for the entire $4,000 contribution. If you’re in the 28% bracket, that $4,000 charitable contribution could save you $1120 of income tax, assuming you itemize your deductions.
[[*Results outlined in this example illustration are subject to deviation based upon the age, date, value and time of transfer. This example serves to illustrate, not guarantee, results. You should engage the proper planning, taking into account your specific and personal circumstances, with your legal, tax and financial advisors.
WHAT IS A CHARITABLE LEAD TRUST?
A Charitable Lead Trust is a tax-advantaged estate-planning tool that uses your assets to provide income for a charity during your lifetime and then transfers your assets to the heirs of your choice.
How to do this? Establish a trust plan!
You donate money or any other asset to a trust designed to distribute a specific payout to ALBA, typically for a specific number of years. At the end of the term, the fully appreciated value of the principal in the trust will be distributed to your designated heirs. Your directions are carried out by the trustee you designated when you created the trust.
Why do it? There are three primary reasons:
1) Give to charity
The trustee uses the trust assets to make distributions to a designated charity during your lifetime or for any other specified period of time. The trustee may pay the designated charity a fixed percentage of the trust, determined annually or a fixed amount every year based on the initial value of the trust when funded.
At the end of the trust term, the principal reverts either to you or to any beneficiaries you designated when you created the trust.
Most charitable lead trusts leave the remaining assets to beneficiaries other than the original donor. This is called a non-grantor lead trust. A trust in which the principal reverts to the donor is called a grantor lead trust.
2) The tax advantages
If you establish a non-grantor lead trust during your lifetime, you receive a gift-tax deduction for the current value of the income interest payable to the charity. If the trust is established at your death pursuant to your will provisions, your estate can take the value of the income interest as an estate-tax deduction. The practical result of this deduction is a discounted valuation of the transferred assets for gift and/or estate tax purposes. Therefore, you transfer more for less taxable valuation. In addition, once the assets are transferred to the trust, the appreciation realized in the trust transfers to the ultimate heir with no additional gift or estate tax implications for you.
The Charitable Lead Trust may be an excellent tool to meet your CURRENT Charitable donation desires with an efficient and tax-advantaged transfer to heirs at a specific date in the future.
3) Compare with a charitable remainder trust
A charitable lead trust makes distributions to a charity during the term of the trust and then distributes the assets to you, your estate or designated beneficiaries. A charitable remainder trust pays you during your lifetime and gives the trust assets to a charity at a future date. Together, these tools may afford you significant financial-planning advantages based upon your goals and objectives.
Life insurance and annuities have long played an important role in charitable giving. Whether you donate an older policy that you no longer need, or start a new policy to fund a major charitable project, life insurance offers a unique way to turn relatively modest annual payments into a sizable charitable gift.
There are some basic ways you can support ALBA by using life insurance:
1. Name ALBA as your successor beneficiary.
For example, you own a policy and have named your partner as the beneficiary. You could name ALBA as successor beneficiary, in the event that your partner dies before you. There are no immediate tax benefits, but if you name no successor beneficiary, the policy’s death benefit could be included in your taxable estate and/or pass to heirs that you do not wish to benefit.
2. Name ALBA as your primary beneficiary.
For example, if you purchased a policy several years ago, but your chosen beneficiary no longer needs protection, you can make ALBA the beneficiary. Your estate would receive a charitable deduction and the death benefit would pass to charity, tax-free to be used to support the mission of ALBA as your legacy.
3. You can donate an existing policy to ALBA.
If you have older insurance policies which you no longer need and would like a current income tax deduction, you can donate these policies to ALBA. As long as all of the rights of ownership are completely transferred to ALBA, you receive a current income tax deduction equal to the lesser of your cost basis or the fair market value of the policy (roughly equal to the cash surrender value).
Some Examples of policies which are often not needed include:
By using life insurance or annuities, you can achieve your charitable legacy intentions to support ALBA simply by designating the ALBA on the beneficiary form of the insurance or annuity contract or by transferring ownership of the policy to the Center.
Did you know that your retirement plan assets are facing double taxation? If you leave retirement assets to your individual heirs, you’ll generate “income in respect of a decedent.” So not only is the amount diminished by estate taxes, but income taxes as well! Depending upon the age difference between you, you’re your heir, the assets may also be subject to generation skipping transfer taxes.
Donating Your Retirement Plan May Offer Tax Advantages
Individual account plans – such an IRA, Keogh, or 401(k) account – resemble tax-sheltered savings accounts. If a participant dies before the entire account has been distributed, the remaining balance can be transferred to an heir or to a charitable organization like ALBA.
The principal advantage of donating retirement plan assets to ALBA is that you avoid all income and estate taxes at your death, whereas giving the assets to individual heirs may trigger a total effective marginal tax rate that is incredibly steep – even exceeding 75% in some cases.
Making ALBA the beneficiary during your lifetime does not hamper your use of the assets during your lifetime.
How to Designate ALBA in your Retirement Plan
Simply name ALBA as the primary beneficiary of your retirement assets by including the Center on your beneficiary designation form. However, if you wish to benefit your partner, and then have the remainder of the assets transfer to ALBA, you may name ALBA as the beneficiary of part, or even all, of the balance remaining after your beneficiary’s lifetime.
Thinking about buying a new dining room set and wondering what to do with the old? Does giving it to ALBA seem like a good idea? How about that stamp collection? Ready to donate it to your favorite charity?
Gifts of tangible personal property require special attention and consideration, as follows:
Income Tax Considerations
Charitable contributions of tangible personal property present special issues for income tax charitable deduction purposes. One of the fundamental questions to be asked in determining the allowable income tax charitable deduction includes – Can the property can be placed to a use that is related to ALBA’s tax-exempt purpose?
What is the “Related Use Rule”.
The amount of the available charitable contribution deduction and the percentage limitation depends upon whether or not the property can be put to a related use by the charitable organization. For example, if a painting contributed to an educational institution is used by that organization for educational purposes by being placed in its library for display and study by art students, the use is related use; but if the painting is sold and the proceeds used by the organization for educational purposes, the use of the property is an unrelated use.
The regulations further require the taxpayer to provide proof that the property is in fact not being placed to an unrelated use by the charity, or that it is reasonable to anticipate that the property will not be put to an unrelated use. For example, if an individual donates a painting to a museum and it is of the type normally retained by the museum, it is reasonable for the donor to anticipate, unless he or she has actual knowledge to the contrary, that the painting will not be put to an unrelated use by the organization.
Typically, tangible personal property donated to ALBA that falls within ALBA’s tax-exempt mission is subject to full fair market value deduction by the donor and subject to a 30% deduction limitation against the donor’s adjusted gross income. Tangible personal property donated to ALBA that does not fall within our tax-exempt mission may generate a deduction based on the lesser of its fair market value and its cost basis, and is deductible to the extent of 50% of donor’s adjusted gross income.
And, there are exemptions to this rule as well. Therefore, proper legal and tax advice should be sought when considering a gift of tangible personal property to ALBA.
The IRS also requires proof of the fair market value a donor assesses tangible personal property. For example, donors who contribute property (other than cash and publicly traded securities) to charity, and who claim a value exceeding $5,000, must obtain a written qualified appraisal from a qualified appraiser to support the claimed valuation. The donor must attach Form 8283–Noncash Charitable Contributions to his or her income tax return, signed by the charity and the qualified independent appraiser. A qualified appraisal must include a full description of the property, the condition, disposition terms, appraiser’s name and identification information, dates of gift and appraisal, the appraised market value, and the method used to determine the value
Whoever said, “Don’t look a gift horse in the mouth” apparently had little experience as a charitable organization being asked to accept donated tangible personal property. In addition to the unique income tax rules that apply to contributions of tangible property, there are several non-tax issues that donors and charities should consider prior to making or accepting such gifts. The following questions provide a good start in determining the suitability of a proposed gift of tangible personal property.
Therefore, while ALBA appreciates the philanthropic motivation of its donors, proper planning and consideration should be made between the donor and the Center in anticipation of a gift of tangible personal property. And, as in all planned gifts, the donor’s legal and tax advisors should be consulted to review the implications of that gift.