Estate Planning Guide: An explanation of charitable giving plans

Monday, March 7, 2011

Beneficiary on an IRA or 401k

This is one of the simplest ways to create a charitable giving plan, says Tim Domian, financial adviser with Edward Jones in Cape Girardeau. With this option, you're simply naming a charity as the beneficiary on your IRA or 401k retirement plan. You can also change your mind at a later date.

"When you pass away, and your retirement fund goes to a child or another nonspouse beneficiary, the IRS can take a lot out of that retirement asset for taxes. If you give it to a charity, there are no taxes due," says Trudy Lee, director of planned giving at Southeast Missouri State University.

Beneficiary on life insurance

The donor buys a life insurance plan and names a charity as the owner and/or beneficiary. This is also easy to do, says Lee.

"The premiums the donor pays are tax-deductible, like any other charitable gift, plus the life insurance policy, when you die, will go to the charity with no taxes due," says Lee.

Charitable remainder trust

Highly appreciated assets are placed in a trust to earn annual income, and the donor can access the funds as needed. When the donor dies, the remaining funds are paid to the charity. The donor also qualifies for a tax deduction when the trust is established.

"The donor is setting up a trust and receives a percentage back for life from that trust, but it's not given directly to the charity," says Lee. "When you die, the charity you have designated receives a remainder of the trust but for the income payments."

Domian says this is a good plan for someone looking for additional income or wanting to reduce their gross estate.

Charitable gift annuity

The donor transfers money or property to a charity in exchange for an annual income stream. The donor also qualifies for an immediate tax deduction. "The donor gives a gift to a charity, and the charity, by contract, commits to paying the donor back," says Lee. "You get a percentage of that gift in your income for life."

A charitable gift annuity is irrevocable, though, says Domian -- once the transfer is made, the donor loses control of that asset.

Bequests, wills, trusts and endowments

Simply name a charity in your will or place it in a trust or endowment. "The most popular and most flexible option is to place a charity or charities in a will or trust. That way donors can change it during their lifetime if they need the funds or have a change of heart," says Lee.

Keep this in mind, however: "Your estate and heirs may benefit form the tax savings, but you won't get tax savings during your lifetime for including a charity in your will," says Lee.

Tips from the experts

Ask for help

"The best advice I can give seniors is really to consult an attorney and a qualified tax adviser regarding their current situation," says Tim Domian, financial adviser with Edward Jones in Cape Girardeau. "Once you do that, then look at the other types of giving plans out there." Remember that tax laws change, and the type of plan that suits you best depends on whether you're still in the accumulation stage of life, or already retired.

"It's a complex program, but with the help of a financial professional, a CPA and an attorney, it can be a relatively streamlined process," says Domian. The early 50s are usually the best ages to start planning charitable gifts, he adds.

Have a plan in mind

First: Speak with the charity you want to help. Find out the charity's exact legal name and tax identification number, and make sure your gift will be usable to the charity, says Trudy Lee, director of planned giving at Southeast Missouri State University.

Next: Talk to a CPA, attorney and financial adviser. They'll help you come up with the appropriate plan for your situation and offer advice for tax purposes.

Last: Think about telling the charity what you plan to do. Most of the time, says Lee, the university doesn't find out about charitable gifts until after the donor has passed away. "It's really wonderful when people do this kind of thing, but a lot of people don't tell the charity. We like to say thank you to donors when they set something up," says Lee. "We really do appreciate the gift now, when you put it in your will." You can even remain anonymous, she says.

Know why you're giving

"I believe that we were put on this earth to love our neighbors, and we have to find many ways to do that," says Nancy Jernigan, executive director of the United Way of Southeast Missouri. We all have different skills and abilities, she explains, and some of us are trained to address specific issues in the community. One way to help those people help others is to support them financially in their work.

"There is so much work that needs to be done that requires money," says Jernigan. "The entire community benefits by the charitable giving of its citizens."

Charities should be glad to explain what can happen with a portion of your money, says Jernigan.

"People want to know the difference their contribution is making. They want to know and they have every right to know," says Jernigan. "What I have found is that the more you give, the more you receive. That's true with money, time, anything. You get more back than you give."

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