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Why You Must Give Charitable Gifts Early

Last update on: Jun 23 2020
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This newsletter long has been a proponent of making estate planning and charitable gifts early, if the giver can afford to. Recently, this approach was endorsed by Warren Buffett, with his widely-publicized plan to give most of his fortune to a series of foundations in coming years. Buffett actually has been behind the curve. The “giving while living” movement has been gaining momentum for some time. For many people, whether contemplating gifts to heirs or charities, the logic is compelling.

The first rule, of course, is do not give away so much property that your standard of living is at risk. You should retain enough assets to finance a long life span, unless there are health conditions that indicate otherwise. A 65-year-old man today has a 50% chance of living to 85, which means half that demographic group will live beyond 85. A 65-year-old married couple should assume that at least one spouse will live into the nineties. But “excess assets” that won’t be needed to maintain your standard of living are candidates for giving now to either heirs or to charity.

Let’s first look at gifts to heirs, or estate planning gifts.

My advice for years has been that it is better to get an asset out of your estate now than later. The reasoning is simple. The estate tax is based on the value of property. If you retain the property, all the future appreciation will be included in your estate and taxed at its value on your death. If you give the property now, you will owe gift taxes or use part of the lifetime gift tax exemption on today’s value. But all the future appreciation will be in your heirs’ hands and will avoid the future estate taxes.

Even if the estate tax is repealed or your estate won’t be subject to it, there are reasons to consider making gifts now.

Many people enjoy seeing their children and grandchildren benefit from the gifts. That is more enjoyable than imagining what will be done with the assets later. In addition, with ever longer life expectancies it could be some time before your loved ones inherit anything. These days it is not unusual for people to receive inheritances in their sixties, when the wealth serves primarily to supplement a retirement fund. Perhaps the gifts would have reduced stress and made life easier if at least some of them could have been used earlier to reduce debt or enhance the children’s standard of living while their own children were at home.

Current gift giving also is a way to see how loved ones will handle wealth. Relatively small but meaningful gifts can be used as tests. If you believe the gifts are handled inappropriately, you can discuss that with the children and try again. Or you can make future gifts through trusts so that there is more control. Some people even decide that their wealth would be wasted and alter their estate plans.

You can see that current gift-giving to heirs serves a range of purposes. The wealthy can use it to reduce lifetime estate and gift taxes. Even beyond taxes, there are good reasons for current gifts.

Charitable gifts also should be considered now instead of later.

Tax benefits, of course, figure into the picture. Making charitable gifts now entitles you to income tax deductions. To take the deductions you have to itemize deductions on Schedule A. In addition, there are annual limits on the deductions. For cash donations to public charities, the deduction is limited to 50% of adjusted gross income. For other types of gifts, the deduction might be limited to 30% of adjusted gross income or less. Any unused portion of the deduction can be used in future years.

The deduction also might be limited by the type of charity receiving it. Contributions to public charities allow the maximum deductions. Contribution to private foundations and other types of charities have lower deduction limits. You need to work with a tax advisor to be sure you are getting the maximum tax benefit from your contributions. It is best to have the tax advisor involved early in the process so that you do not miss out on opportunities.

Charitable gifts provide estate tax benefits whether given now or later. Give through your estate, and the gift reduces the taxable estate. Give now, and the gift and its future appreciation are out of your estate.

There are a wide range of charitable giving strategies that can be structured to meet your financial planning needs.

If you continue to need income from the property, you can purchase a charitable gift annuity or set up a Charitable Remainder Trust. A charitable lead trust gives income to charity for a period of years, then has the property returned to you or transferred to one of your heirs. If you own property that you still want to use or live in, a gift of the remainder interest can be made.

There also are various investment vehicles that allow you to take the tax deduction today, manage or have someone manage the account, and designate specific gifts over time. These vehicles include supporting organizations run by public charities, community funds or pooled income funds, and donor-advised funds. The last type was pioneered by Fidelity Investments and now is offered by most major financial service companies. You receive a checkbook and write a check to charity when you want to make a gift. Of course, the very wealthy can set up a private foundation and control the entire operation.

Making charitable gifts now also offers non-tax benefits similar to those of the estate planning gifts.

The donor gets the satisfaction of seeing the gifts benefit people today and receiving recognition for the gifts. And the beneficiaries of the spending do not have to wait. The people and activities that have the need today receive help today.

Current gifts also are a good way to assess a charity to determine if it should receive larger gifts over the years. Donors generally receive more access to information and personnel, especially as gifts increase. You might find that a charity is not as efficient as you thought or does not target its spending the way you prefer. After such “exploratory giving” some people change their minds about the charities they thought would be appropriate for large gifts. They search for more appropriate recipients.

Lifetime charitable gifts also solve the problem of gifts being used in ways the donor did not intend. This has become a major problem in the charitable giving world. In recent years, several lawsuits and requests for refunds have received attention, because donors or theirs heirs demanded the return of gifts after charities were alleged to use them in ways contrary to the donors’ explicit wishes.

Many savvy donors now want the charitable portion of their wealth spent during their lifetimes so that they can see and control how the wealth they earned is used.

Whether making charitable or estate planning lifetime gifts, the key to remember is that once made the gift is out of your hands. You might be able to get support from loved ones if you run into financial hard times after the gifts, but you cannot retain legal strings if you want estate tax benefits. With charities, of course, you aren’t likely to get the money back if you gave too much. But for money you won’t need during your lifetime, giving now often is the best strategy.

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