Is there such a thing as a "simple" planned gift? In this article, Bloomington, Indiana gift planning consultant Pamela Jones Davidson discusses basic gift plans that every advisor can share with clients.

by Pamela Jones Davidson

Part of our role as practitioners and advisors should be to help our clients make informed choices for themselves, family, friends, and sometimes community and favored charities. Sometimes we fall into the trap of assuming our clients don't have charitable intentions. However, even if we don't know if our clients are charitably minded, as we assist in their financial, estate and tax planning, we should be asking them if charity is part of their planning or if they would like it to be. We should not be waiting for them to tell us, as we customarily do. A client's answer may hinge on a somewhat misguided belief that choosing charity will ultimately decrease the amount received by their family. This may or may not be true because many donors are unfamiliar with the tools and techniques that are available.

Are there simple gift planning options advisors can suggest that will really work for clients in terms of simplicity—ones they can and will actually implement? Are there options that provide clients with flexibility and are some choices revocable? How can we offer a real service to our clients by making their gifts easy for them to accomplish, without the necessity of always doing a will or trust?

While most clients will need these and other estate planning documents, it is true that a substantial majority of Americans still die without even as much as a will. If our only advice for estate planning is a will or trust, these clients, even if terminally ill, may well never accomplish planning objectives for family, friends and favorite charities. In those cases, their states will write their wills for them per their intestate succession statutes. Some estates will have no heirs and "escheat" to the state. No matter the donor's intent, charity can never take under an intestate will.

Appreciated Assets

One of the simplest options to suggest to almost every client is the possibility of using appreciated assets, often low-yield and in a well-timed manner, to make either outright gifts to charity or to fund a charitable life income plan like a (deferred or immediate) charitable gift annuity or charitable remainder trust, for self or others. Informing clients about this potential means they can at least consider these options if and when they have an appreciated asset they decide to sell, exchange or dispose of. We know that if the client uses an appreciated capital asset held at least one year to fund a charitable plan, any charitable deduction will be based on that asset's full fair market value.

The potential sale of appreciated assets can be the "triggering event" that causes individuals to seriously consider a charitable arrangement, especially if and when there's a potential buyer like a tenant farmer or developer, or expressed interest like a redemption or corporate takeover. Yet few of us actually tell our clients in advance of this powerful tool, nor do many seriously consider a charitable plan at such time, subjecting our client to perhaps unnecessary taxes. We should at least consider the significant planning advantages in these plans: both capital gains and income tax savings, higher returns from investing a balance undiminished by taxes, tax-deferred diversification, and our client as a philanthropist at level they did not think otherwise possible.

Why mention this now to your clients who you know own appreciated stock or real estate? Because our clients often act independently and on their own, and then consult us later. A colleague told me a story of how she had talked for years with a high wealth client about charitable options, and was then horrified when he called to announce that he'd sold a lot of stock and could now talk charitable plans. She racked her brain knowing she'd told him about timing, but obviously he'd not heard that important part of her message.

Another advisor told a donor I worked with that he'd sold her stock and subjected her to 28% capital gains taxes so she could then donate the cash proceeds and take advantage of the 50% rather than 30% charitable deduction limitation that year. Who knows if his elderly client was anywhere near the maximum limitation for her charitable gifts that year, or if the advisor had just sold the stock without considering if and how she could avoid capital gains taxes by donating the stock prior to sale.

We should be proactive about sharing such information because almost everyone appreciates a good idea, especially when they control the timing. In my community, it seems as though two individuals own most of the land along our main highway, which may be converted into Interstate 69. These owners bought this land as farmland at a very low basis, and have over the last few years been selling incremental portions to developers for commercial sites. The donation of an undivided fractional interest by deed in one or more of these parcels to a charity in advance (of a binding obligation, but in anticipation) of a sale would result in a great gift with great consequences to these donors. Run, don't walk to clients or prospects in this situation to ask, "Have you ever considered making a (modest) charitable gift first?" Donating appreciated assets offers clients a tax-wise alternative to satisfy a pledge, participate in a capital campaign, or endow a family's legacy. We just need to show them how.

Beneficiary Designations from Retirement Plans and Life Insurance

Clients should also consider giving assets to charity that would otherwise cost their heirs more to inherit. The best assets to give are those that produce income in respect of a decedent ("IRD"). These assets are not only includible in the estate of the decedent for income tax purposes; they are also partially or entirely taxable for income tax purposes when received by heirs.

Do we inform, let alone counsel, our clients about the ultimate tax load on qualified retirement plans after the owner and spouse use them: income taxes on the entire plan balance both state and federal, possible state estate and/or inheritance taxes, possible federal estate taxes? The combination of taxes from these assets can exceed 80%! Heirs (other than a spouse) often inherit only cents on the dollar from these plans.

Many people have heard me talk of my father, a doctorate in economics, former banker and business school professor, who does not believe that his TIAA-CREF plan will be taxed virtually into oblivion after he and beloved stepmother use it, saying to me, "That can't possibly be true."

Why not ask your clients this question: "Would you prefer that a significant portion of this plan balance, from 50% to 80% perhaps, be paid in taxes or would you prefer the entire plan balance go to one or more of your favored charities, even stay local, undiminished by taxes? What do you choose?" I imagine the answer is influenced once the client understands that these plan balances cannot go to their children or other individuals without that heavy tax load first (a hard lesson rarely learned by our clients but painfully experienced by their heirs). Do you think, as a practitioner said to a client, that even if the kids ultimately get only 10 cents on the dollar, it's still something? Do you think that client would think it's a better plan to instead give 100% of the plan balance, after owner and spouse have used it, to one or more of their favorite charities, and transfer other less-taxed assets to heirs?

Stretch-Out IRAs Good in Theory. Stretch-out IRAs that name non-spouses as successor beneficiaries can delay these taxes for another generation, but I heard a very pragmatic speaker on that topic asking how many lottery winners take the annuity option? Virtually none is the answer; all seem to take the lump-sum payout, and kids will too, he said. They will not want to receive an annual stipend over lifetime like their folks got. He said only one child in all his years of advising had elected the annuity option. Pragmatically, the plan balance can be reduced significantly by taxes after the client and spouse use them, so why not leave one or more plans to favored charities and leave other less heavily taxed assets (Dad's lake home) to the family?

Clients can also take care of multiple charitable interests via retirement plan beneficiary designations and can easily add or substitute charities by simply completing a change of beneficiary designation form and returning that form to the company holding the plan. This option may not be available for retirement plan balances for which the owner has already chosen an annuity option.

Charitable Remainder Trust for Surviving Spouse. While clients can name a surviving spouse as the successor beneficiary of an IRA, they also designate a testamentary charitable remainder trust (or one already in existence) as a primary beneficiary of an IRA or qualified retirement plan account with the surviving spouse as its only income recipient. This is a tax-wise arrangement since no income or estate taxes are due at the time of funding (due to the combined marital and charitable estate tax deductions).

Charitable Remainder Trust for Kids or Others. A testamentary charitable remainder trust (usually a unitrust) naming children or others as income recipients can be designated as primary beneficiary of the retirement plan balance. Because of the combination of number of ages of income recipients, these trusts are usually designed to operate for a term of years (up to 20) rather than the lives of the income recipient(s) in order to satisfy the minimum 10% present value of remainder interest qualification requirement. Income from the trust can be of great help while these individuals are buying homes, changing careers, and saving for their children's college educations and their own retirement. It could well be that these income recipients would derive more economic benefit from 20 years of income from a hopefully growing 5% unitrust, than if they'd inherited the net outright of the plan's balances after paying income and estate taxes up front. In addition, the trust can then fund charitable legacies of the donor's own design and choosing. What a way to teach philanthropy to that next generation!

There are, however, some pitfalls when trusts that name non-spouses as income recipients are involved. First, in the absence of a marital deduction, a portion of the trust will be included in the decedent's estate for estate tax purposes. The second is more complicated. IRC 691(c)(1)(A) provides that a person who receives IRD can deduct against his or her taxable income the federal estate tax attributable to IRD items paid by the decedent's estate. However, because of the current position taken by the IRS in Ltr. Rul. 199901023, this deduction is unavailable to the distributions from a charitable remainder trust. For these reasons, transferring retirement plan assets to a CRT for the benefit of a non-spouse that will result in an estate tax liability may not be as attractive.

Life Insurance Policies. A donor can also designate one or more charities as beneficiaries of all or part of one or more life insurance plans. The tax burden on distributing the death benefits from these policies to family is far less onerous than on qualified retirement plans because distributions are not generally subject to income tax, so a beneficiary designation of a retirement plan to charity gives a donor greater tax and planning advantages. As an alternative, a donor can also consider making a gift during life of the ownership and irrevocable beneficial interest in certain life insurance policies that s/he no longer needs to a charity, turning a revocable gift (beneficiary designation) into an irrevocable one and entitling that philanthropist to welcome income tax benefits and recognition.

Everyone can use an income tax break but only some of us will need an estate tax break. This is an important reality for advisors to consider as we counsel and advise clients. Most individuals also appreciate an eventual simplified estate or probate process—another reason to discuss lifetime charitable options with clients if and as their changing circumstances warrant. Something as simple as replacing a modest certificate of deposit income with an often higher charitable gift annuity payment, for philanthropy, offers an attractive return and income tax savings too.

Bequests

As mentioned earlier, bequests are the planned gift type we suggest most often to our clients and constituencies. However, many clients are uncomfortable discussing estate planning with advisors or concerned about the cost. I often tell the story of the alumni association of my former higher education institution inserting a question in its alumni survey asking if the respondent had included the university in his or her estate plan. Approximately 1,000 people said yes, but when we contacted them, fully two-thirds did not have a will but said we'd be in it when they did one. As such, charities cannot promote only bequests in their planned giving program because the prospect pool is much smaller (i.e., the approximately 35 to 45 percent of Americans who ever actually complete a will).

Charities should be using their exact legal bequest and beneficial designation language in their publications and marketing as they promote bequests and other planned gifts. If as many as 75 percent of planned gift donors never tell their designated charity they have included them in their estate planning, then promoting the charity's exact name with bequest language might result in prospects actually including a bequest while not contacting the charity for the language. As a long-time volunteer to our local public television station once commented, beware that some individuals don't know that a charity can be a recipient of an estate distribution.

Retained Life Estates

Charities have very real concerns about being owners of real property—primarily environmental, marketability, and valuation to name but a few. Throughout our country, farms, ranches, and other rural lands are being reconverted into residential or commercial development use, resulting in significant capital gains taxes for those sellers. Capital gains taxes today are at a very low 15% federal rate, but a wise seller looks for ways to avoid or reduce that tax and state income taxes as well. A gift using all or a portion of real estate can be a wonderful gift provided the charity is first given an opportunity to diligently do its homework on relevant issues.

Rarely considered is the retained life estate gift, which can be used with a personal residence, farm, vacation home, and even a yacht (provided it has a galley and a head!), but not with commercial or development property. This can be a great option for a donor and spouse to continue to reside in their property. Life tenants continue to pay property taxes, insurance, and maintenance costs just like always, but receive a significant income tax deduction and are recognized as significant donors during their lifetimes. This is a great option for older clients who tell us they intend to leave their farm or home to charity after they're gone.

Life estates are also particularly attractive with vacation homes. If the property is located in a state other than the donor's primary state of residence, the vacation home will be subject to ancillary jurisdiction in that other state, since only the state in which the realty is located can transfer it. A retained life estate gift, especially if there are no children or when children who want the vacation home, can obviate the necessity of an ancillary estate in that other state.

Are there concerns for the charity? Yes, if the donor does not maintain the property or pay its taxes or insurance, or there are other problems, the charity might have to step in to protect its remainder interest. The gift is simple for the donor to accomplish, deeding the property to the charity and retaining a life estate for self and spouse on the deed itself, and then recording the deed in the county where the property is located. The charity should be up-front with the donor and tell him or her that it will ultimately sell that gifted property unless it can be used in furtherance of its charitable purposes. Who has not met the donor who expects the charity to hold their property in perpetuity as a shrine to them?

U.S. Savings Bonds

Many of our older citizens have a virtual treasure trove of U.S. Savings Bonds, purchased at a discount and some even no longer accruing interest. These bonds can be poor candidates for lifetime gifts because a transfer to charity causes the donor to recognize the deferred interest for income tax purposes. Conversely, they are ideal assets to transfer on a testamentary basis because, like qualified retirement plans, they produce income in respect of a decedent and are therefore subject to income taxes in the hands of those who inherit them—unless they are bequeathed to charity. For this reason, I've even seen bequests in wills or trusts, of "all U.S. government obligations of all types and kinds, in equal shares to the following charities: listed."

Older bonds accruing little or no interest can be cashed in during life to fund an outright charitable gift or fund a charitable gift annuity. The charitable deduction can in some cases exceed any income inclusion.

Promoting Gifts Other Than Cash

I often use this term with donors, "gifts other than cash," hoping that after I say it a few times, they will ask me if there are gifts other than cash. This gives me an opportunity to introduce many ideas and concepts, guided often in gift planning by the asset choice and the donor's personal planning objectives. Our vision for our clients should be to make them better-informed consumers and to enable them to make good choices that fit their changing personal circumstances and goals. As advisors, an added benefit to us is real purpose and meaning in such charitable plans and, for the client, a legacy to community and charity.