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Establishing a Planned Giving Program

A recent report compiled from census information by Wall St. Journal analyst Thomas C. Frohlich indicates Chester County is the richest county in Pennsylvania. Household median income, in fact, was not only at the top of the list in the state, but also among the highest in the nation.  The report notes that 13% of Chester County households make $200,000 or more per year. Median income is $86,050, while Pennsylvania’s median is $52,548.

A fact not covered in Frohlich’s findings concerns munificence. Chester County residents are involved in numerous charities and contribute large amounts of time and money to help nonprofits thrive. The 2014 Hoover Financial Advisors’ Fall Funds for Food is a perfect example. Because of the generosity of so many people, HFA’s goal of $10,000 was exceeded.

People give back for various reasons. It makes them feel good. They have a special cause that is important to them. Philanthropy is a family tradition. Charitable contributions provide certain tax benefits. The list goes on.

If you are contemplating any major financial donations this year, it’s important to organize your program and look at tax advantages. Charles Schwab offers some pointers to enable you to make the most of your contributions. The company summarizes four programs to consider.

  1. Charitable Remainder Trust (CRT). This is a private fund that provides you or the beneficiaries you select with taxable income for a certain number of years or for life. The monies left over or remainder pass tax-free to your chosen charities.

Establishing and maintaining a CRT requires a bit of work. You need an attorney to draft the document and it’s wise to consult a tax professional to determine proper tax treatment, annual reporting and compliance.

CRT features include:

  • You control the trust or you can designate a trustee.
  • Your contributions are tax deductible, based on the amount of money projected to go to charity.
  • You can donate cash, investments and property.
  • If you wish to diversify an over-concentrated position and avoid current income tax, contribute appreciated stocks, bonds and mutual funds.
  • The income you receive is fixed or recalculated each year, depending on the type of CRT you set up. Either way, your annual income from the trust is capped based on a minimum amount that must go to charity.
  1. Pooled Income Fund (PIF). Some charities allow you to contribute to a pooled income fund, which is similar to a CRT. The difference, however, is in management. The charity assumes administrative duties for an annual fee.  Features of this type of fund include:
  • The charity pools contributions from different people, invests the proceeds and makes annual taxable payments to you and other donors for life based on your donations and certain actuarial factors.
  • Contributions are generally tax deductible based on the money projected to pass on to the charity.
  • It makes the most sense to contribute appreciated stocks, bonds and mutual funds.
  • When a participant dies, the remainder interest goes to the charity.
  1. Private Foundation. A private foundation is a tax-exempt charitable organization set up and funded by a single person or a group of individuals or businesses. The net investment may be taxed at 2%. Within limits, you may deduct contributions to a private foundation on your federal tax return. State tax deduction rules vary. In most instances, the foundation must distribute 5% of its value to charity annually, minus any tax it pays on investment income.

Private foundations involve set-up costs, ongoing compliance and rules against self-dealing among others. If your net worth is very high, you have highly appreciated stocks, bonds or mutual funds and you want maximum control over your charitable gifts, such as having your name become a lasting legacy in philanthropic history, a foundation may be the best option.

  1. Donor-Advised Fund. A donor-advised fund, such as the Schwab Charitable Fund™, is a pool of money managed by a charitable organization on behalf of many donors. The organization handles set-up and compliance for an annual administrative fee. However, you must direct your segment of the fund, including how the money is invested and which charities receive distributions from your part of the fund. You may also name your donor-advised fund in honor of your family or opt for another title. You receive a tax deduction in the year you contribute to this type of fund.

Beginning with the 2013 tax year and beyond, the Pease (named after the congressman who introduced it) limitation on itemized deductions has been reinstated. Most itemized deductions, including charitable contributions, are reduced by 3% of adjusted gross income (AGI) over $250,000 for single filers and $300,000 for married couples filing jointly (up to a maximum of 80% of itemized deductions).

It is important to keep in mind the Pease limitation is driven by your income and should not be a disincentive for increased charitable giving. For example, assume a married couple filing jointly has an adjusted gross income of $350,000 with itemized deductions of $80,000, which includes $25,000 in charitable contributions. This couple’s AGI exceeds the $300,000 threshold by $50,000, reducing itemized deductions by 3% of $50,000 or $1,500. Therefore, of the $80,000 in itemized deductions, only $78,500 is allowable as a deduction against taxable income.

If this couple gives an additional $10,000 to a qualified nonprofit organization, bringing the total annual charitable contribution to $35,000, the Pease limitation remains the same ($1,500), because it is based on AGI, not the amount the couple gives. In short, it does not limit the tax benefit of additional charitable giving.

If 2015 is the year you want to establish a charitable giving program, HFA can help you sort through the rules, regulations and benefits. There are planners, tax professionals and attorneys with experience in setting up programs, who are ready to advise you on the best timing depending on your current income.

Note: The financial information provided in this blog was obtained from an October 29, 2014 article by Rande Spiegelman found at schwab.com/public/schwab/nn/articles/Giving-to-Charity-4-Smart Strategies.