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Sharing Your Legacy
Making a Difference in Your Community While Protecting Your Loved Ones.
The prior information about business, estate, charitable and retirement planning techniques is not intended to be tax or even legal advice.
It is provided for general education purposes only. You must consult with your own tax or legal advisors concerning your individual situation.
Why Do People Give?
Obviously, we live in a very charitable society. But why do individuals give? There are many reasons, such as:
• To have a positive impact on society;
• To create a family legacy;
• Because of guilt;
• Because it can be good business;
• To elevate personal status in society;
• To show gratitude;
• To support others in the wake of disasters, such as the 9/11 attacks or Hurricane Katrina;
• For personal reasons, such as when a close family member is diagnosed with an illness; and
• For religious reasons.
The type of policy
There are certain policies that lend themselves better to charitable giving. For example, a term life policy may not be the ideal choice, only because it can potentially expire before you die.
Permanent policies such as whole life or universal life don’t carry an expiration date, as long as premiums are paid, and could better ensure a pay-out is made to your charity.
The tax deductible benefit for leaving your life insurance to a charity is equal to the policy’s cash value, plus any premiums paid on the policy after the gift is made.
However, to take advantage of the income tax benefit, you would need to name your charity as both the owner and the beneficiary.
Charitable Tax Deductions
Some individuals are also motivated by the tax benefits associated with charitable giving. Depending on the situation, donating to charity may qualify the gift for an income, gift and/or estate tax charitable deduction:
• When contributions are made during the donor’s lifetime, there may be an income tax deduction and a gift tax deduction.
• When contributions are made upon the donor’s death, the deduction may be an income tax deduction and/or estate tax deduction. How do charitable gifts qualify for a tax deduction?
In order for a charitable gift to qualify for a full tax deduction, the charity must receive some benefit from the donated property and the donor cannot expect to receive any economic benefit from the charity in return for the donation.
The law also requires that contributions of $250 or more in cash or property be substantiated by a contemporaneous written acknowledgement of the contribution from the charitable organization as well as other requirements, depending upon the value of the contribution and the type of asset gifted.
The deduction is also limited based on various factors, including:
• Whether the charity is considered a public charity or a private charity;
• The type of property donated;
• If the donation is “to” the charity or “for the use” of the charity
What Do Americans Give?
“Time and talent”
People give of their time through volunteer efforts. When you volunteer, you generally are also giving your “talent” to a particular project.
Volunteerism comes strictly from the heart because there is no financial incentive.
You do not get a tax deduction for your time and labour; merely the satisfaction of knowing that you made a difference and contributed.
Treasures can consist of your hard-earned money, publicly traded securities, art work, interests in closely held businesses, retirement accounts, life insurance policies, real estate, tangible personal property, partial interest rights, and other assets.
Gifts of your “treasures” may entitle you to a tax deduction.
The simplest way to give your “treasures” is through cash donations.
This may also be the best type of gift from the charity’s perspective, since the charity can immediately put the donation to use in any manner it chooses.
Probably the most common way for most Americans to give cash is by writing checks to their favourite organizations. This is often referred to as “check book philanthropy.”
Tangible Personal Property
Tangible personal property generally consists of items such as automobiles, furniture, art work, jewellery and other collectibles.
The calculation of the tax deduction for donations of tangible personal property is generally dependent upon whether or not the property is related to the charitable purposes of the organization.
This is known as the “related use” doctrine.
If the property is related to the charitable purposes of the charity, then the deduction is based upon the full fair market value of the property, instead of its cost basis, which may be significantly lower.
For example, the donation of a painting to an art museum is probably a related use and the deduction would be based upon the fair market value of the painting.
However, donation of a painting to some other type of charitable organization, such as a youth centre, is probably not a related use and the deduction would be based upon the lesser of the cost basis or the fair market value.
For related use property, the deduction would be based upon the 30% limit (20% if the contribution is made to a private foundation).
Publicly traded securities and mutual funds are probably the most frequently used assets, other than cash, for charitable gifts.
Publicly traded securities are considered capital assets that, if held for:
• More than one year, are entitled to capital gains treatment on the growth (long-term capital gains property is subject to the 30% deduction limit and the value of the gift and the calculation of the deduction are based upon fair market value);
• Less than one year, are considered ordinary income property (the deduction would be based upon the lower of cost basis or fair market );
Many financially successful individuals find themselves in a position where they don’t need some or all of the retirement assets that they have accumulated. If you were to leave your retirement plan assets to individual beneficiaries at your death, these assets could be depleted by as much as 75% by income and estate taxes, if you have a taxable estate, leaving very little inheritance for your heirs.
Using retirement assets and IRAs for testamentary charitable giving avoids this erosion, making them the most tax-efficient assets to donate to charity at death because of the charitable estate tax deductions that may be available.
• For married couples, spousal consent is required to change the beneficiary designation of a qualified retirement plan (e.g., profit sharing/401(k) plans, defined benefit plans, and defined contribution plans) to someone other than the spouse. That rule does not apply to IRAs.
The use of life insurance in charitable giving is one of the most overlooked methods for donors to make a significant impact on the community and society. There are generally four common methods for using life insurance as a charitable giving vehicle:
1. Naming a charity as the beneficiary of your group term life insurance.
2. Naming a charity as the beneficiary of your individually owned life insurance.
3. Gifting an existing policy that you may no longer need for your own purposes to a charity.
4. Gifting money to a charity so that a charity may purchase insurance on your life and continuing to make the premium payments over time through additional charitable gifts.
Depending upon the strategy used, there may also be tax deductions available. Gifts of money to the charity to pay ongoing premiums that may still be necessary may also be deductible.
Though life insurance policies give policy owners several options in donating all or portions of their pay-outs to charity, there are some considerations that donors should take into account.
These factors can make the process of donating to charity through life insurance more complicated and include:
• Tax implications
• Donor estate values
• Contested pay-outs
Keeping your options open
If you definitely want to donate your life insurance policy to a charity but aren’t 100 percent sure which one (or think you might change your mind about an organization some point in the future), then you should maintain ownership of the policy and simply name the charity you have in mind today as the beneficiary.
This may exclude you from being eligible for an income tax deduction, but it allows you to easily change the beneficiary in the event you change your mind.
Regardless of your charitable intentions, you have numerous options to help you realize your philanthropic goals — while financially protecting your loved ones.