When we started writing this book, we thought of charity as only doing good for those in need. However, the definition of charity—“benevolent goodwill toward or love of humanity”—is much broader. That’s why, in this chapter, we focus on the things you can do to care for your family, friends, and nonprofit organizations.
With that said, we want to remind you that the decision to care for others is a personal decision. It isn’t for everyone. For some, the goal is to die “when the last check bounces” or to “spend it all” before taking that final breath. If that’s the case, we wish you great success. Our experience, though, is that most individuals are concerned about sharing their good fortune with others, whether it’s done now or in the future.
For many, “charity begins at home.” Luckily, there are many ways to take care of your family—starting with the wills and trusts that we discuss in Chapter 15, “Estate Planning Wills: Testaments, Trusts, and Other Tools.” But estate planning isn’t limited to wills and trusts. It is the overall plan you set in place to distribute your assets in a manner that achieves your goals, including your wish to care for your relatives. What follows are additional things you can consider to share your goodwill with those you love.
Many younger individuals want to provide for their parents. (Elvis Presley did by providing a trust for his daughter, father, and grandmother.) Before you do, though, talk to your parents. If they have sufficient assets, we recommend not leaving your estate to Mom and Dad because it could result in some double taxation: Assets that could be taxed on your death pass to your parents to be taxed on their deaths. In this situation, you can avoid the potential double tax by just leaving these assets to your siblings, for example. But what if your parents need some financial assistance? Again, talk to them. If they’re working toward qualifying for Medicaid or other government benefits, any money you leave them could jeopardize their receipt of these benefits. If that’s the case, talk to an elder law attorney and provide for them with a supplemental benefits, or special needs, trust. Alternatively, a trust providing your folks with an income stream and principal as needed works well. If drafted correctly, such a fund would not be included in their estates for tax purposes, and you can decide where the money goes when Mom and Dad are no longer living.
The single biggest concern of every parent who completed our survey was “How do I make sure my kids are taken care of if I die?” Despite these concerns, though, recent studies show that only 26 percent of parents with minor children have a will. As we noted in Chapter 13, “Estate Planning Wants: Purpose, Preparation, and Protection,” if you have little ones, you need a will. Period. There is simply no excuse for not having one.
In addition to a will, what can you do to provide for your off-spring? You have many options. Many states offer Section 529 plans. This is a state-authorized education savings plan. Funds contributed to a 529 plan grow tax-free. Federal income tax is never imposed as long as the funds are used to pay college expenses. State income tax isn’t imposed until funds are used. If the funds aren’t used, there may be penalties on withdrawing the funds. Because the plans are sponsored by the state, though, the investment options are limited. There are also Uniform Transfers to Minors Act (UTMA) or Uniform Gifts to Minors Act (UGMA) accounts. These are accounts opened in the name of a child, grandchild, niece, nephew, or other youngster with a parent or other adult serving as custodian. Taxes are paid annually and could be taxed to the parent depending on the child’s income level and age. The investment can be in stock, securities, cash, certificates of deposit, and more. When the beneficiary reaches the age of majority (18 in some states, 21 in others), the account is his or hers to control (or spend). Check with a certified financial advisor for more information.
We tell you about “spending” the UGMA or UTMA account for a reason. Although these accounts are terrific for small amounts, we don’t recommend them for large gifts to young ones. Our experience has been that large sums of money in the hands of an 18- or 21-year-old often ends up as a few lavish trips to Las Vegas or a very fast car. Unfortunately, teaching children the importance and value of money has not been a priority for many in this country. It often takes several years in the real world for kids to understand saving, nest eggs, and rainy day funds. That’s why we encourage our clients who want to make gifts to their children or other young relatives to consider a trust (see Chapter 15). This allows you to determine what the money is used for and when your kids can receive the funds outright.
Regrettably, many individuals need a helping hand. We’re talking about people suffering from a disability, whether it’s emotional, mental, or physical. Our government provides some really terrific benefits to these individuals, young and old. But the benefits provided only go so far. That’s why you may want to provide for the “extras” with a supplemental benefits, or special needs, trust. This type of trust does not jeopardize your loved one’s government benefits. Instead, it provides a fund that “supplements” the benefits. For example, the trust assets could be used for vacations or to buy a specially equipped vehicle, computer, music equipment—anything else you can think of. An elder and disability law attorney can provide more guidance.
Throughout this book, we’ve used the expression “loved ones.” That’s because we recognize that, for many, your friends, not blood relatives, are your caregivers, your companions, and your biggest concerns. For some, especially gay and cohabiting couples, having an estate plan is the only way to ensure that these individuals benefit from your estate.
In Chapter 15, we discuss at length wills and trusts. We give examples of providing for spouses and children. The same plans also apply to nonrelatives. You can make a specific bequest to your roommate. You can establish a trust to pay for the college education of a neighbor’s child. You can give your possessions and assets to a boyfriend, business partner, or best friend. If you want someone to have something, say it—in writing.
It’s important not to assume that others will know your wishes. When our colleague Becky, age 32, lost her live-in boyfriend on September 11, his family came to their apartment and started removing all of the furniture and electronics, as well as his personal effects. Although some of the items belonged to Bob, others they had purchased together. Becky couldn’t prove this, and Bob’s family didn’t believe that he’d want her to have his things. Becky, emotionally drained, decided it wasn’t worth it to put up a fight. If only Bob had made it clear that he wanted Becky to keep the furniture. But he didn’t.
Although we’d all like to think that our families would do the right thing in the face of tragedy, we could fill up every page of this book with examples otherwise. That’s why we constantly counsel our clients and patients to clearly express their wishes.
Sharing our good fortune with others is a lesson that our parents taught us. We’ve both been blessed with professional success and have tried to “give back” both in terms of time and resources. What we’ve discovered along the way is that behind every opportunity for giving are a thousand other opportunities. We begin with this sentiment so that, as we discuss the many methods of charitable giving, you’ll allow yourself to consider the countless ways to give of yourself.
The primal duties shine aloft, like stars; The charities that soothe, and heal, and bless, Are scattered at the feet of Man, like flowers. | ||
| --William Wordsworth, “The Excursion,” Book ix. | ||
We mention the many charities you can consider, in part, to excite you. Take a moment to consider your passions—the issues that make your blood boil, the images that bring you to tears, and the changes you’d like to see. Allow your mind to wander, to focus on what’s important to you. Our point: You don’t have to limit your charitable contributions to the big charities that you hear about all the time. You can also look into organizations that are smaller, closer to your home, or perhaps particularly focused on your passions.
Be creative. Long gone are the general donations to the operating funds of charities. Donors can earmark contributions for specific purposes. For example, if you’re interested in music, contribute to the music department of your college. If you’re interested in finding a cure for cancer, look for a small, start-up charity that supports research of a particular form of cancer or a new method to research cures. Love art? Consider a small museum where your dollars, no matter how modest, will truly be appreciated.
Our goal is not to pressure you into supporting charitable organizations. That’s not for everyone. But if you have an interest in caring for others, we want you to feel fulfilled. We’ve all read news stories reporting the incredible generosity of Warren Buffett and Bill Gates. You don’t have to be a billionaire to make a difference. Every gift, no matter how small or how large, is meaningful.
So how can you give? Where do we start! You can provide for charities during your life or at death. You can create trusts, as well as foundations. Donations can be in cash, securities, and real estate, as well as cars, paintings, and just about anything else.
As we tell our clients, patients, and friends, making charitable gifts during life has many benefits. First, you get to see your donation in action. Whether it’s a single paving stone in a memorial walkway at your local library or a college scholarship for a deserving young student, it’s heartwarming to see your contribution at work. Second, you can be a participant in your charity of choice. Perhaps you can provide suggestions, offer some elbow grease, or act as a director or trustee. Third, you get to attend the fun parties. While it may seem superficial to some, attending these events has benefits. You meet other donors, do a little networking, learn about other giving opportunities, and just enjoy some well-deserved recognition. If it’s not recognition that you’re after, remember that you can always remain anonymous.
Charitable giving can also be win-win. The elderly aunt of one of our colleagues was struggling to take care of her home. It was a burden physically and emotionally. She made the decision to move into an assisted living facility. In her will, she had already provided that her home be given to a local college. But she was concerned about leaving her house empty and uncared for after she moved because the local college wouldn’t receive the house until she died. We encouraged her to give her home to the college now. It benefited all involved. The aunt was relieved of a huge burden and received a big income tax deduction. The charity was able to begin using the property sooner rather than later.
You may have heard about a conservation easement. This is an easement on real property that restricts the uses of the property. It’s a means of preserving “green space” in rapidly developing areas. The gift of a conservation easement may be a charitable contribution, and it’s definitely a wonderful way to ensure that your favorite outdoor spot is preserved.
Some of the other creative charitable opportunities involve trusts and gift annuities. Charitable remainder annuity trusts (CRATs) or charitable remainder unitrusts (CRUTs) are trusts in which you or another person named by you receives the income from a trust during life. At death, the trust assets pass to the charity named in the trust. This is another win-win situation. You benefit during life. You also receive an income tax deduction for the current value of the trust remainder that will pass to the charity in the future. Even better, if you contribute low-basis assets (such as a stock that you bought for $5 a share that’s now worth $100 a share) to the trust, you can sell them without incurring a capital gains tax. This can also be a beneficial means to increase cash flow for certain individuals. If you sell the stock, you might have to pay capital gains tax.
A charitable lead trust (CLT) provides an opposite benefit. With a CLT, the charity of your choice receives all of the income from a trust for a certain amount of time—let’s say 10 years. At the end of the term, the trust assets, also called the remainder, pass to your named beneficiaries. You receive an income tax deduction for the income interest given to the charity. Unless you name yourself as the remainder beneficiary, there might be a taxable gift for the value of the remainder.
Because CRATs, CRUTs, and CLTs can be administratively burdensome, many charities offer to administer these trusts and also offer pooled income funds and charitable gift annuities. A pooled income fund allows for the donations of many donors to be pooled together to take advantage of certain investment opportunities. Each donor receives income from the fund based on the size of his or her donation. This is a great option for smaller donations. A charitable gift annuity is similar. A donor gives cash or securities to the charity, which invests the funds and provides a fixed income payment back to the donor (or another individual) for life. The benefit of pooled income funds and charitable gift annuities is that someone else is worrying about the details. Talk to your favorite charities. They’ll be more than happy to discuss giving opportunities with you.
If you’re concerned about having sufficient funds to care for yourself during life, you may want to postpone charitable giving until death. A charitable donation can be made in your will or trust. It can be a specific amount (such as $1,000) or a specific item (let’s say a valuable painting). You can also establish one of the charitable trusts we discussed earlier for a spouse or another person at your passing.
Individual retirement arrangements or other retirement benefits are terrific assets to pass to a charity. Why? At death, the IRA (Roth or traditional) could be subject to estate or inheritance tax. You’ll also have to pay income tax if you take out a traditional IRA as a lump sum distribution. Add estate and inheritance taxes together, and your beneficiary could get as little as 20 cents on the dollar. If you pass your assets to charity instead of a beneficiary, the charity receives the entire account, tax free, and your estate receives a charitable deduction. We think of it as a bigger bang for your charitable buck.
If you want to benefit several charities and are interested in making a significant contribution, you can contribute to a community trust or start your own foundation. Establishing your own foundation provides you the opportunity to control all aspects of your charitable contributions. You control how the foundation’s assets are invested. You also control which organizations receive benefits from your foundation. Your loved ones can become members of the foundation’s board and learn the importance of philanthropy. A foundation, though, can be expensive to establish and requires many IRS and other filings. Alternatively, there are community trusts located throughout the country. Community trusts are often nonprofit organizations that may act as administrator of your contribution. You direct how the funds are distributed. This allows you to benefit a variety of organizations without the headache of establishing your own foundation. Either way, you’re providing for others while maintaining control of decisions related to your contributions. Just remember, you can’t change your mind—these donations are irrevocable.
Whether you choose to benefit a charitable organization, your children, or someone else, you’re giving a piece of yourself. Take pride in what you do for others. But also make sure your wishes are effectively carried out. Planning well can take your good intentions and make them better. What more could you wish for?