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Giving to Charity from Two Pockets

J Terwilliger 2014
James P. Terwilliger, PhD, CFP®
Senior Vice President, Senior Planning Advisor
[email protected]
(585) 419-0670 x50630
Have you ever considered charitable giving as being sourced from two pockets of wealth?

Doing so creates a perspective that can help guide giving decisions and even enhance the benefit provided to the receiving organizations.

“Cash Flow” Pocket – We all receive ongoing annual appeals from a variety of charitable organizations. Resulting donations typically are used to fund annual organizational operating expenses. Generally, it makes sense to fund such ongoing donations from your “cash flow” pocket. Treat the giving as you would your other expenses, all funded from the recurring income to your household on a year-by-year basis.

Charities appreciate all levels of giving for this purpose. No gift is too small, none is too big. Occasional extra-large gifts allow an organization to accomplish a special project or two in years when giving spikes.

“Accumulated Assets” Pocket – Gifts from this pocket tend to be larger, and in some cases, exceptionally-large. Such gifts might enhance an endowment fund, typically a fund that is invested by the charity to produce ongoing income to the charity in perpetuity. Another charitable purpose might be to fund a large capital project to construct a building or building addition or to purchase expensive equipment. Establishing or adding to a scholarship fund is another example.

Such gifts generally are too large to be funded from your cash flow but may be a perfect fit for money that is not needed for retirement but is intended ultimately to be left as a legacy for heirs and charity.

While the idea of leaving money to charity in a will is well-known and frequently used, there are many non-will options available that folks don’t generally think about or are not aware of.

Further, many options give us tax-advantaged ways to make lifetime gifts of accumulated assets. Lifetime gifts offer the satisfaction of seeing the money put to good use while we are still alive.

In this two-part series, we will explore vehicles for making gifts from this second pocket other than through a will.

Charitable Gift Annuity – Many larger charities offer guaranteed lifetime incomes for an individual or joint annuitants. The gift can be made in the form of cash or appreciated securities. An immediate tax deduction equal to a portion of the gift amount can be taken. A guaranteed lifetime annual payment is then made at an interest rate determined by the annuitant’s age. For example, the suggested rate for an 80-year-old donor is 6.8%. A portion of the annuity payment, representing return of capital, is tax-free for a number of years. This option is attractive to folks who want to establish a good rate of return on assets that are earning little-to-nothing and satisfy their charitable interests at the same time.

Life Insurance – A current gift of a life insurance policy can be useful to the charity in two ways. The charity may keep the policy in force and collect the death benefit at the donor’s passing. Or the charity may cash in the policy and take advantage of the availability of immediate cash. Either way, the donor is able to claim an immediate charitable tax deduction equal approximately to the policy’s cash value at the time of the gift. If the charity chooses to keep the policy in force, the donor may want to make annual contributions to the charity which it can then use to pay the premiums. These annual contributions are also tax-deductible.

One may also list a charity as a beneficiary of a life insurance policy. While this offers no income tax advantage, such a gift is excluded from the taxable estate of the decedent, offering a potential estate tax benefit for wealthy individuals.

Appreciated Securities – Gifting appreciated stocks or stock funds is a tax-efficient way to make charitable gifts during one’s lifetime. Long-term investors often find they have stocks or funds that have grown in value substantially. The beautiful thing about such gifts is that the donor can take a charitable tax deduction equal to the fair market value of the securities on the day the gift is made and no income tax is owed on the capital gains embedded in the investment. Otherwise, such gains can be taxed as high as 30% or so between federal and NYS. It is far better to donate the securities, rather than liquidate and donate the net proceeds after tax.

We will conclude this topic in a later article by exploring two ways to gift from IRAs as well as gifting through charitable trusts and charitable foundations.

This material is provided for general information purposes only. Investments and insurance products are not FDIC insured, not bank deposits, not obligations of, or guaranteed by Canandaigua National Bank & Trust or any of its affiliates. Investments are subject to investment risks, including possible loss of principal amount invested. Past performance is not indicative of future investment results. Before making any investment decision, please consult your legal, tax or financial advisor. Investments and services may be offered through affiliate companies.