Why Charitable Gift Planners are Important to Financial and Estate Planning Professionals
Donors’ primary motive for gifts to charities is philanthropic. Many individuals support the not-for-profits that have meaning to them and their families through planned gifts. A simple definition of a planned gift is a gift where some professional assistance is required. Examples of this are wills and trusts that are drafted by attorneys or stock transfers that a financial advisor helps the donor complete. Most often, that professional is the individual’s attorney, accountant or financial advisor.
Professional advisors have a fiduciary obligation to look out for the best interest of their clients and a professional obligation to help their clients meet their goals. When philanthropy is an important part of what a client seeks to achieve, it is important for the professional advisor to see that the advisor’s role is allied with the non-profit and philanthropic sector in order to best achieve the client’s objectives. Charities want to honor their donors’ intentions and clear communications between the client, the advisor and the charitable gift planner will help insure that the donor’s wishes are followed.
Advisors typically develop trusting relationships with their clients and are often in a position to provide advice on the most advantageous ways these clients may distribute their assets to both heirs and charitable organizations. In recent years, many non-profit organizations and professional advisors have built mutually beneficial relationships in order to achieve the goals of their clients. It is a “win-win” situation for the advisor, client and non-profit organization.
The charitable gift planner has an expertise in the tax benefits associated with charitable giving and the IRS rules and regulations that govern those deductions. This is especially important in the area of split income gifts, such as charitable gift annuities and charitable remainder and lead trusts. These gifts allow a donor to make a gift, while retaining the right to income for life or a fixed period or in the case of the lead trust, to retain the right to have the property revert to a designated beneficiary after a period of time.
A charitable gift annuity is a planned gift in which a charity pays a fixed annuity to one or two individuals for life in exchange for a donation of money or other property. It is a split-interest gift, since a portion of the price paid for the annuity is considered a current charitable gift deductible under IRC Sec.170 by the donor and a portion is considered the cost of the annuity, which is not deductible.
Calculation of the income tax charitable deduction for a charitable gift annuity is based on a number of variables, including the ages of the income beneficiaries, the applicable discount rate (the Section 7520 rate published monthly by the IRS), the amount of the gift, the payout rate and the payment frequency. Generally, the shorter the income beneficiary’s life expectancy, the lower the value of his or her income interest and the higher the charitable deduction. Also, the higher the discount rate (essentially the assumed rate of investment performance during the term of the gift), the greater the projected remainder for charity and, therefore, the higher the charitable deduction.
Another popular split interest gift is a charitable remainder trust (CRT). A CRT is an irrevocable, tax-exempt trust that pays an initial, income interest to one or more beneficiaries for life or a term of years, then distributes the remaining trust property to charity. The grantor of a charitable remainder trust claims an income tax charitable deduction based on the present value of the charitable beneficiary’s remainder interest. Because of their greater administrative complexity and cost to establish, CRTs are typically funded with larger amounts than charitable gift annuities. The CRT’s tax-exempt status also makes it ideal to fund in kind with appreciated assets (such as publicly traded securities) that can be liquidated by the trustee of the CRT without recognition of capital gain.
These gift vehicles only benefit clients with very specific tax and financial objectives. The charitable gift planner has software to run projections and draw on the experience of working with many donors to identify the best gift vehicles and how those vehicles may be structured to meet the donor’s goals. These complement the expertise of the attorney and financial advisor.
There is a broad range of choices available to donors, and gift planners are experts on the advantages of different vehicles. Working with a non-profit organization with gift planning services will provide the professional advisor with more options to offer their clients and distinguish themselves from other professional advisors.
By Gloria C. Kaplan, MBA
Senior Gift Planning Officer
Southeast Florida American Red Cross
335 SW 27th Avenue
Miami, FL 33135
South Florida Legal Guide 2011 Financial Edition