Considering Making a Major Gift? Here Are Some Questions to Ask

“Whoever saves one life saves the world entire.” – Jewish proverb

It’s true that most day-to-day situations don’t call for the heroic virtue of Oskar Schindler, who saved over a thousand men, women, and children from the Nazi death camps. Nor do most of us often have the opportunity to run into a burning building, push someone out of the way of an oncoming automobile, or perform CPR when someone is choking on her food in a restaurant. Most of our charity comes in quieter ways – getting a cup of coffee for a tired coworker we notice, smiling at the fast food worker we sense doesn’t get smiled at very often, or tossing a few coins or notes into a strumming street musician’s open guitar case.

There is another form of charity commonly practiced, however – the sharing of a substantial portion of one’s wealth with organizations expressly designed to use that wealth to benefit others. But what can potential donors do to ensure that their largesse achieves what they intend it to – for the community at large as well as their own families?

Here are some important questions that you should ask with respect to making a major gift:

How much can I afford?

It’s surprising how many people meet the proverbial description of “generous to a fault,” as a result of giving without thought to what they themselves may need. This is where “planned giving” becomes important. The first question, then, to ask before making any major gift is: how much can I afford to give without threatening my own family’s standard of living? The easiest way to determine this is to meet with a Infinite Wealth Inc. professional and figure out your core and excess capital. For more, see the author’s previous blog post.

Do I want to make a full gift, or a partial gift?

Full gifts are quite simple: they generally consist of a completed gift or bequest to a charitable institution without any intervening interest on the part of the donor or any related party. Partial gifts – sometimes known as split-interest gifts – are a bit more complicated. They consist of gifts in which the donor receives part of the economic benefit from the gifted property, with the charity to receive the other part.

Let’s look at one very common type of split-interest charitable vehicle here, called a charitable remainder unitrust (CRUT for short). This is a special type of trust that is set up expressly to distribute the remainder of any property placed in the trust to specific charities named in the trust document. Remaining after what? It depends, but a common scenario is for the charity to receive the remainder interest of the assets in trust after the second of two spouses passes away. During the lives of the spouses who are giving the gift to the CRUT, the trust pays out a fixed percentage of the trust assets’ market value, which is calculated each year. The donors may thereby save on estates, because the assets placed into the CRUT are immediately removed from the estate. Better yet, they receive an immediate income tax deduction for the estimated value of the remainder interest, as calculated using IRS tables.

How might this look in real life? Well, let’s say a 72-year-old couple gifts $350,000 into a CRUT in September 2015. They would receive a 2015 income tax deduction of about $161,000, an annual income stream of $17,500 for the rest of their lives (assuming a 5 percent payout, which is common), and remove $350,000 from their estates with the gift. If they have an estate over the federal exemption amount, which is quite high ($10.86MM for a married couple in 2015), their heirs would save $140,000 in federal estate taxes as a result of this gift. (This also doesn’t take into account state estate taxes, which vary throughout the U.S.)

CRUTs also work quite well for donors who have low-cost, highly-appreciated stock. This type of property can be ideal to donate to a CRUT, because not only does the donor receive an income tax deduction and potential estate tax savings, but she also avoids hefty capital gains taxes on the stock sale. The tax-exempt charity can then sell the stock to get its full appreciated value.

How much control do I want?

Many successful people like to delegate: they seek out diligent and competent professionals to help them meet their goals, and trust them to do their jobs. Some, however, are less comfortable with ceding control over their financial decisions. In the context of charitable giving, this means that different individuals gravitate towards different charitable strategies. For example, those desiring more control over their charitable dollars, and having sufficient means to do so, might consider a private foundation.

Private foundations are charitable institutions often set up by affluent families to further their philanthropic goals. Contrast these foundations with CRUTs. From a CRUT, the donor receives 5 percent (or so) of the trust assets annually for a specified time period, with the remainder going to an established charity. With a private foundation, the funds are paid out to charitable causes of the foundation board’s choosing. Thus donors who create a private foundation maintain ongoing control of the management of the charitable dollars; they can, for instance, direct these dollars to any number of charitable causes, and redirect these dollars as their own philanthropic interests change.

Private foundations have similar income tax benefits as CRUTs, and assets placed into them are removed from the donor’s estate. The additional control they afford donors comes at a price, however: excise taxes can be levied on them if they fail to pay out a specific amount of their assets each year (usually, 5 percent).

Roman poet Virgil said that fortune favors the brave. While this is undoubtedly true, it may also be said that fortune doubly favors charity: it favors both the giver of the gift with emotional satisfaction and financial benefits, and the recipient of the gift with the money for life’s needs and wants. So, if you are so moved, give! But make sure you work with a Infinite wealth Inc. professional who can help ensure you’re giving your gift in the wisest way possible.

This material is presented for informational purposes only and should not be construed as individual legal, tax or financial advice. When considering gift planning strategies, the donor should always consult with donor’s own legal, tax and financial advisors