Planned Giving

Gift Scenarious

Bargain Sale

Goal: Reduce capital gains on appreciated property
Benefit: Cash to pay off mortgage or other loans and charitable tax deduction for the gift portion

What/How: A bargain sale occurs when a donor sells property to LBCC Foundation for less than the property's fair market value. The amount of fair market value over the sales price is the donor's charitable contribution, which may be reduced by allocation of tax basis and reduction rules relating to unrealized gain. Almost any type of asset may be sold in a bargain sale, depending on the cash available for purchase and the suitability of the asset.

Example: Elizabeth and Ken had acquired some property as an investment that they were renting out. Ken had always taken care of the management and maintenance but since he passed away, it had become a burden for Elizabeth. As much as she enjoyed working in her backyard, the idea of hiring and monitoring workers for the rental property didn't appeal to her.

As a result, she asked her CPA about selling it or perhaps giving it to her favorite charity. Using it as a gift appealed to her except that they still had a $125,000 mortgage on the property. Her CPA did the calculations and found out that a bargain sale allowing her enough to pay off the mortgage and other closing costs would still provide her with a generous income tax deduction that would more than offset the capital gain tax due.

"This was very much a win - win solution for me. By making sure that the mortgage and the selling costs were covered, I was free to donate the property. I also was able to take a burden off my shoulders and not have to worry about all the details anymore. I get an income tax deduction and I get to see the impact of my gift today.

The capital gain portion of a bargain sale is a little tricky. Even if the donor proceeds are equal or less than the asset's cost, there is an allocation of gain formula that needs to account for the gain. Basically, the market value minus the cost is multiplied by the selling price divided by the market value. For example, an art museum acquires a painting worth $100,000 from a donor for the donor's cost or $25,000. The reportable gain is then calculated by subtracting cost basis ($25,000) from market value ($100,000) which equals $75,000 and multiplying that times the selling price ($25,000) divided by the market value ($100,000) or .25. The result is a gain of $18,750.

Market Value   -   Cost Basis      x

Selling Price 
Market Value

 =   Reportable Gain

$100,000   -   $25,000               x

$25,000   
$100,000

=   $18,750

In this example, the donor will report a long-term capital gain of $18,750 (assuming a holding period that qualifies as long term) and simultaneously has a federal income tax deduction on the gift portion of the bargain sale of $75,000.

Charitable Gift Annuity

Goal: Receive guaranteed fixed income that is partially tax-free
Benefit: Current and future savings on income taxes, plus fixed, stable payments

What/How: A charitable gift annuity can provide tax benefits now and a life-time income for the donor and a beneficiary if desired.

Charitable gift annuities are the gifts that keep on giving. Rates on charitable gift annuities are based on age and whether the contract is immediate or deferred. Contact us for an illustration of this life income to address your particular situation, or to look at specific rates on current gift annuities, or to see a generic example of a charitable gift annuity.

Example: Joyce and Burton had been married for forty-seven years. Not long before he died, Burton looked into converting some of their certificates of deposit into a charitable gift annuity.

After meeting with their tax advisor, they saw the income they would have for the rest of their lives compared to what they were receiving from CDs. Plus there were tax benefits that helped them immediately.

Joyce said happily, “It was something Burton and I did together, and I'm really happy we did it when we could do it together!"

Charitable Lead Trusts

Goal: Pass assets to heirs at potential tax savings
Benefit: Charitable tax deduction, favorable estate tax circumstances
What/How: [link to new PDF to be provided] – need short description

Example

Phil and Alicia had a successful business developing both residential and commercial real estate. They realized that their assets provided more income than they need for their family's current living expenses; however, they wanted to maintain their assets to ensure their grandchildren would have resources for college. One of their first charitable gifts had been a gift of appreciated stock. Their financial advisor showed them how they could make a charitable gift now so they could see the results in their lifetime.

Phil and Alicia wanted to contribute $250,000. They placed a sufficient amount of income producing commercial property into a Charitable Lead Trust (CLT) that would make annual payments of $25,000 over ten years. This will provide the charity with $250,000 in total and after ten years, the assets will pass to the donor's heirs. Because the gift tax deduction and the amount subject to gift tax is determined at the time the assets are contributed to the CLT, any appreciation of the assets that takes place during the term of the trust is not subject to additional gift or estate tax.

According to Phil: "We sat down with our kids and our advisors and talked about what was important to us and what we really wanted. Our kids are all doing fine on their own. We certainly don't need more. Our attorney told us about something called a charitable lead trust funded with some of our excess assets." 

Alicia added, “It sounded great to us - some tax benefits and our estate remains intact for our grandchildrens' education. While we are helping to make a difference in other people's lives, we're able to do it while we're here and can be part of it. It really feels good to see firsthand how the income from the trust can really make a difference."

Charitable Remainder Trusts

Goal: Secure payments for life while reducing market risks
Benefit: Potential increased income and tax benefits

What/How: There are two different types of charitable remainder trusts:

  • A charitable remainder unitrust (seeexample) is a popular way to achieve tax benefits as well as a fixed annual percentage on the value of the assets in the trust. The assets are revalued annually and, if the trust value changes, the payment to the beneficiary(ies) changes.
  • A charitable remainder annuity trust is set up to pay a fixed rate of return based on the initial valuation at the time the property is placed in the trust. The trust assets are never revalued.

Some additional information on charitable remainder trusts is also available. Charitable Remainder Trusts provide a good degree of flexibility that is valuable in charitable gift planning. For example, a variation on remainder trusts can be an effective way to make gifts of real estate. See the graphic example of a charitable remainder trust, above. 

Note: This is an educational illustration and does not represent legal or tax advice. The value and cost numbers have purposely been selected as round numbers to allow for personal interpretation. The value used is not a minimum, maximum or suggested amount. Please consult your legal and tax advisors about your specific situation. 

Example:

Mary and John Smith, both 70 years old, have a condominium they purchased a number of years ago. Initially they used it as a vacation home, but over the years, it gradually became an investment property. It is now fully depreciated and provides a return of about 4 percent after expenses. 

Condominium Value 

Value:
Cost:
Gain:

$1,000,000
$200,000
$800,000

They wish to avoid working with tenants and repairs to the condo. The Smiths have considered selling, but they have been slowed down by circumstances: Whom would they consider as the real estate agent? What about the necessary cleanup? What about capital gains tax (15 percent) or the recapture of depreciation tax (25 percent)? The Smiths considered donating the property; their attorney suggested a Charitable Remainder Trust.

In their tax bracket, they could place the property in a charitable remainder trust that would sell the property and invest the proceeds in other investments without having to pay capital gain tax. The Smiths would receive an income for life based on a percentage of the assets in the trust. The trust would be revalued every year, and if the assets increase, their income would rise as well. After their lives, the remainder in the trust would go to the nonprofit organization of their choice. 

The attorney ran some numbers and suggested that the Smiths take a 6 percent payout from the trust ($60,000 the first year as opposed to the $40,000 they are currently earning). The attorney estimated that the trust could earn 7 percent and would continue to pay the Smiths 6 percent each year of the value of the assets in the trust. 

 

Unitrust

First Year Income:
Total Estim. Income:
IncomeTax Savings:
Capital Gains Tax Savings:

$60,000
$1,214,868
$146,199
$120,000 

 

At their deaths, the remainder in the trust would pass without taxes or probate to the nonprofit organization they chose. Based on assumptions and his calculations, the nonprofit organization would receive $1,485,947 in 20 years. It would increase from the initial $1,000,000 because it was earning more than it was paying to the Smiths.

Furthermore, the Smiths would be able to take a current year charitable tax deduction (depending on their taxable income) of $417,710 with a tax saving in their 35% tax bracket of $146,199 (not including any state tax savings) and they would save $120,000 in capital gains tax (estimated capital gains tax liability had they sold the property outright). In addition, they could look forward (again, based on assumptions and current rates) to a total gross income of $1,214,868* over their estimated lifetime of twenty years.

Example assumes a 2.4 percent applicable federal rate (AFR). The IRS allows the AFR from the current or one of the two previous months to be used. A higher AFR increases the charitable tax deduction for remainder interests. 

*The assumptions are the trust earns 7 percent comprised of 3% income and 4% appreciation with the difference between the 6 percent payout and the 7 percent earnings reinvested in the trust each year. The estimated term of the trust is twenty years.

Deferred Charitable Gift Annuity

Goal: Decrease tax paid on income.

Benefit: A deferred gift annuity enables a donor to make a gift now and take a charitable income tax deduction now while in a high income tax bracket.

What/How: In this variation on a charitable gift annuity, a gift is made and the charitable organization promises in return to pay you an income stream that begins on a future date you specify. The annuity rate is calculated based on your age when the payments begin and will be greater than an immediate annuity based on your current age.

Income may be deferred, for instance, until after retirement, when the rate of tax will presumably be lower. A deferred gift annuity is a creative way to delay income to pay for a child’s or grandchild's college expenses, to supplement your retirement income, or to help with assisted-care living arrangements that may be inevitable.

A part of each payment, as in any gift annuity, may be tax-free for a period of years. However, the precise amount of each payment will depend on the tax rules in effect when the payments start.

A flexible deferred gift annuity allows you to pick a range of dates when the annuity payments will begin. For example, you might choose to begin quarterly payments on March 31st of any year not earlier than 2013 or later than 2018. The payment amount will be based on the year you choose in the future to have payments begin. The charitable gift deduction is based on the earliest possible beginning date (2013 in this case) and is taken in the year of the gift, subject to your tax circumstances. The charitable deduction, which you get to take in the year of the gift (subject to your tax circumstances), will also be based on when the payments begin and will also be greater than if it was an immediate annuity.

Gifts of Appreciated Assets

Goal: Avoid capital gains tax on securities sale
Benefit: No capital gains tax and charitable deduction based on fair market value

The gift of an appreciated asset, often common stock or mutual fund shares, is a valuable way to make a contribution to a charitable organization and receive tax benefits based on the value of the asset(s).

Suppose Richard and Terri had 300 shares of XYZ Corporation that they purchased at $15 a share some years ago. The current value in today's market is $36 a share. If they sold the stock in the market, they would have a taxable, long-term capital gain on the difference between their cost and what they would receive from the sale ($36 minus $15 = $21 capital gain per share. 300 shares X $21.00 = $6,300 in capital gains).

Richard and Terri could sell the stock, pay the tax on the capital gain, and either keep or donate the proceeds. If, however, instead of selling the stock, they gave the 300 shares to charity, they would not incur any capital gains and would be able to deduct the current value (300 shares X $36 = $10,800) on their tax return as a charitable gift. By donating the stock, the charity receives a larger gift than it would receive if Richard and Terri first sold the stock and then donated the proceeds after deducting the capital gain taxes. Also, Richard and Terri receive a greater tax deduction by giving the stock directly to the charity and avoiding the capital gain tax.

While the gift of appreciated assets often is stock, other marketable assets (called tangible personal property) can be utilized as gifts with the possibility of tax benefits. These are assets such as real estate, antiques, coin or stamp collections, and art. However, these are reviewed on a case-by-case basis.

Gifts of Life Insurance

Goal: Make a large gift with little cost to you
Benefit: Current and possibly future income tax deductions

What/How: There are several ways you can use life insurance as the basis for a charitable gift.

Making the Charity a Beneficiary of Your Life Insurance Policy 
You may wish to make the charity the beneficiary (or a contingent beneficiary) of a life insurance policy as a way to make a sizeable future gift. You retain lifetime ownership of the policy, keeping the right to cash it in, borrow against it, and change the beneficiary. A gift of this nature is treated much like a bequest made through your will. Because you retain the ownership of your asset (the policy), you will not receive an income tax charitable deduction for this future gift or for your premium payments during your lifetime. The policy's proceeds will be included in your gross estate, and your estate can take an estate tax charitable deduction.

Making a Gift of Your Policy 
You may wish to transfer ownership of a policy to the charity, or purchase a new policy with the charity as owner and beneficiary. If you make a charity the owner and beneficiary of a policy, you are entitled to certain tax advantages.

Example:
Since their children had grown up and begun lives on their own, the Walkers decided to review their finances. They realized that some of the insurance they carried while the children were dependent on them was now not really needed. They decided to donate a fully paid-up policy to charity. Their financial advisor told them that as the policy is paid-up, they are entitled to a charitable deduction equal to the lessor of the premiums they paid over the life of the policy or the cost of a comparable replacement policy if purchased today.

The Walker children were very supportive of the idea. In fact, one of their children purchased a small whole life policy and designated the charity as the owner and irrevocable beneficiary. As a result, the annual premiums that are paid are a charitable deduction.

Wealth Replacement Using Life Insurance 
A donor may make a current gift to charity and receive a charitable tax deduction. At the same time, the donor may purchase life insurance to replace the donated amount or perhaps, the amount after estate tax that the beneficiaries would have received. Depending on the circumstances, the charitable tax savings and any life income resulting from the gift may defray the cost of the wealth replacement insurance premiums.

Example: 
John Abbott, age 68, wants to make a gift that will ultimately be used to purchase equipment for a charity he has supported for years, but he is also concerned for his children and their futures. He creates a 6 percent Charitable Remainder Unitrust for $100,000, which yields a tax savings to him of $13,307. He then purchases a $100,000 whole life insurance policy that will maintain his children's inheritance. His annual premium payments are $4,500, which he pays for the first three years from his tax savings and subsequently with the increased income from his trust.

Creating a Life Insurance Trust 
You may want to set up an Irrevocable Life Insurance Trust (ILIT). An ILIT removes the life insurance from your estate to help reduce estate tax while providing other benefits. For example, upon one's death, the proceeds of the life insurance policy may remain in the trust to provide income for the surviving spouse, but stays outside of the spouse's estate for estate tax purposes. Or, the trust could be used to distribute proceeds to children of a previous marriage. Although ILITs can be expensive and more complicated than owning life insurance directly, they may be an attractive option in certain situations.

Gifts of Real Estate

Goal: Avoid capital gains tax on the sale of a home or other real estate
Benefit:  A charitable tax deduction and potential diversification with the possibility of reducing or eliminating capital gains tax. In addition:

  • There may be a charitable income tax deduction that would lower your income tax.
  • If your property has appreciated in value since you acquired it, there might be a large capital gain tax that would result if you sold it. By donating the property, you may be able to avoid realizing the capital gains.
  • Depending on your state regulations, you may be able to turn the property into a gift that is structured to provide income for you and a beneficiary.
  • If the property is your home or farm, you may be able to make a gift of it now and continue to live in it for the rest of your life and receive tax benefits the year of the gift.
  • If the contribution from your property exceeds the allowable charitable deduction limits, the deduction may be carried forward for five years.

What/How: Often our real estate holdings, be it our house, a second home or investment property, are a significant part of our net worth. Gifts of real estate, therefore, can enable us to make significant contributions. Each piece of property and its unique circumstances need to be reviewed to determine the suitability of the property as a gift. Generally speaking, a rule of thumb is that an acceptable piece of property is one that can be readily sold.

There are many ways to donate property. It can be an outright gift, a retained life estate, or placed in a trust.

Example:

Eileen and her husband, Paul, enjoyed their house. They had raised their three children there and had many family memories. But after Paul passed away suddenly, Eileen began to find that the old house was a burden. Without Paul to take care of things and with their children involved in their own families miles away, it seemed that the house was too big, too old and even a bit lonely.

Eileen: "Paul always said that I was the solid one. If there was a decision to be made I could get to the bottom line pretty quickly. Well, the bottom line was that I needed to make a change for a number of reasons. I decided to move into a smaller place in town, easier to take care of and one that was part of a neighborhood where I could make some new friends and be a part of activities and things. And where my grandchildren could still come and visit."

"Paul and I had talked about what to do when we got to this stage in our lives. I just thought Paul would be here with me, but that wasn't to be. We had planned and knew I would have enough money to live comfortably. Initially we thought I'd need the money from the sale of the house, but I really don't."

"My advisor went over the numbers with me. If we sold it, there would be a large capital gain and taxes to pay. But by putting the house in a trust that then sells it, I avoided having to recognize the taxable capital gain right away. The trust takes all the money from the sale of the house and invests it, and I get the income from the trust for life. Then, an organization that is doing great things will receive the remainder of the trust and that will even save some estate taxes."

Gifts of Retirement Assets

Goal: Avoid the twofold taxation on IRA or other employee benefit plans
Benefit: Lets you leave your family other assets that carry less tax liability

Contributions to retirement plans can provide an excellent opportunity for growth as they are invested tax-free. The earnings are taxed when they are withdrawn, but this has allowed more dollars to be invested for more growth. Additional savings can occur if the recipient is in a lower tax bracket when the funds are withdrawn (for example, during retirement) than when the investments were growing.

Norman and Ruth had put some of their savings into the stock market. They were also employed by companies that had 401k plans. They kept investing and the value of their plans kept growing. They had long been active in charitable giving; one of their first charitable gifts had been a gift of appreciated stock. Over the years, their tax-sheltered retirement plans grew beyond their expectations and they rolled them into IRAs.

While meeting with their attorney to review their overall financial plans and ensure they had set up our affairs to best suit their needs, the attorney suggested they consider making a charity a partial beneficiary, knowing how much they enjoyed helping others.

In this type of scenario, careful planning concerning the withdrawals from retirement funds needs to be done. Not only is there a potential income tax burden, but if there is a balance in your retirement account at your death, there may be estate taxes as well. Estimates are that taxes could eat up as much as 70-75% of retirement assets under certain circumstances.


Using qualified retirement plan funds is an excellent source of assets to fund bequests. By designating Linn-Benton Community College Foundation as a beneficiary (or a contingent beneficiary after the death of a spouse - see sample bequest language) funds pass to the LBCC Foundation free of taxes. It is possible to set up the beneficiary as the recipient of the entire remaining funds in the account or establish a percentage to fund the bequest.

Please note - the designation of any charity as a beneficiary of retirement fund assets cannot be simply written in your will or trust. The charity must be designated as a beneficiary of the retirement plan. Everyone's personal circumstances are different, so please consult your tax advisor concerning the use of qualified retirement funds.

Gifts of Tangible Personal Property

Goal: Make a gift of real property, such as coins, stamps, antiques or art
Benefit: A charitable tax deduction and the possibility of income for life if done through a trust

Tangible personal property, such as art, jewelry, coin collections and household furnishings can be gifted recognizing that there are specific guidelines from the IRS as to the tax deductibility of the gift. A key issue to be considered before contributing a gift of this type is whether or not the item(s) can be put to related use (whether its use or function is related to the tax-exempt purpose of the charity to which it is donated).

The IRS has very specific guidelines for appraising and reporting gifts of tangible personal property, which must be followed to support a charitable income tax deduction. There are also requirements regarding the size and value of the gift and time frames within which reports must be filed. Gifts such as these may require approval by our Board of Directors.

Donors can give tangible personal property in a variety of ways depending on their personal objectives. The easiest and most common method is an outright gift allowing the charity to have immediate use of the property. Other methods may enable the donor to convert the personal property into a stream of payments. Depending on the property and its value, it may be possible to fund a charitable remainder trust or a gift annuity. Another option is using a bargain sale agreement that provides payment to the donor in installments.

Even though a gift of property for non-related use may not create a significant charitable tax deduction, other significant aspects may be advantageous to the donor. Avoiding or postponing tax on the capital gain for collectibles is significant as the tax is higher than on a gift of appreciated securities. Other financial benefits could include payments for life or a term of years and/or the exclusion of the property from a taxable estate.

Wills and Bequests

Goal: Defer a gift until after your lifetime
Benefit: Your donations are fully exempt from federal estate tax and you retain control of your assets

[BEQUEST DIAGRAM]

David and Ann originally established a fund that would help fund a small scholarship for students with severe financial needs. They had made an outright gift of appreciated stock. Later, after they had met some of their scholarship recipients, they changed their will to include a bequest that would magnify the fund tenfold.

According to David: “Over the years, we met with those who were receiving assistance from our fund. I can't describe how good it feels to sit with these young people, to hear them describe their dreams and ambitions and how we've helped. What a joy to realize that we have become a part of their future and that they have literally become a part of our family."

Setting aside the emotional rewards, this was a wise financial move. They enjoyed immediate tax benefits on the initial gift based not on the cost of the stock, but on its appreciated value. Second, their estate will benefit by having a write-off to charity through the bequest (see bequest information).

Read more about the benefits of utilizing a charitable bequest and how bequests enable you to keep control of your assets. Bequests are often used to build an endowment, a fund that provides a legacy for you and provides for the future of Linn-Benton. Codicils are a simple and easy way to make changes to an existing will.

Using funds from a retirement account to make bequests is often a good strategy. If there is a balance in your retirement account at your death, not only is there a potential income tax burden, but there may be estate taxes as well. Estimates are that taxes could eat up as much as 70-75% of retirement assets under certain circumstances. Careful planning concerning retirement funds needs to be done. Read more about retirement assets.

Also consider making a gift of life insurance policies that are no longer needed or necessary.