Giving Corner: A Holiday Gifting Story

This month’s Giving Corner article is a bit different than those sharing complex Estate Planning strategies.  I’d like to share a simple personal story with you that you may find you’d like to emulate.  This strategy involves a current gift.  It is quite simple to put into practice and it may provide both .

. . .Income Tax as well as Transfer Tax savings.   

My extended family of 13 folks are fortunate in that we all live rather comfortably and are in a financial position to share gifts generously among ourselves.  Several years ago, our situation had become what I’d refer to as “out of control.”  Each member of the family would provide not one, but several gifts for everyone else.  The pile of gifts under the tree at Mother and Daddy’s house, despite being clustered closely, extended almost halfway across the room!  As we spent our Christmas morning unwrapping all that “stuff” one-by-one so everyone could see and admire, the process could consume up to a couple of hours.  I recall one year some family friends had dropped by as we were starting to open gifts and it became clearly uncomfortable for them being subjected to this lengthy process of gift gluttony.  

That experience is what really convinced me it was time to institute a change; this tradition in our family had become ridiculous.  The following year, as the holiday season approached, I reached out to my family members and announced that most of my giving would be for charity.  I would offer one thoughtfully chosen, modest gift for each family member, while otherwise benefiting charity with gifts in their honor.  Since we are a farming family, I identified Heifer International as my charity of choice and I strongly encouraged others to follow suit.  Some folks indicated that they had other favorite charities they’d prefer to support – or prefer that if I were making a gift in their honor it would go to a different cause.  It took a few years to convert my family members to this practice, but gradually we got to a more reasonable exchange of special, thoughtfully-chosen personal gifts and helped a lot of very worthy causes in the process. 

When you are making such “in honor of” gifts, some charities will follow up and notify the person in whose name you make the donation.  Being an artist myself, I always enjoy creating that notification myself.  I’ve often made bookmarks “While you are enjoying your favorite book, remember that a gift of – bunnies or bees or whatever – was made in your honor.”  Then I’d add a picture of whatever animal I’d donated.  Of course, NAZCCA would appreciate your gift if you are so inclined.  The cause of combatting the Climate Crisis is so very dire, any donation you may choose to share would be welcomed.  We are working on adding to our website the functionality to send that notification to your “in honor of” recipient and hope to have that completed soon. 

To recap this month’s strategy of making a charitable gift in honor of your family member or friend, it would be a current gift to the charity.  It is simple to accomplish and, depending on your personal financial situation, it may provide some income tax savings in the form of an income tax charitable deduction.  If your wealth is such that your estate would be subject to estate taxes upon your death, making charitable gifts can serve to reduce the value of your taxable estate.  NAZCCA is a 501(c)(3) charitable organization and would welcome your contribution in whatever amount your heart and finances dictate.   

Bonnie Lane

Verde Volunteer

Member, Board of Directors

NAZCCA is not licensed to give legal or tax advice and any planned giving strategies you choose to pursue should be discussed with licensed tax and legal counsel

Giving Corner: Current Gift from IRA Directly to Charity

As we approach the end of the year, many people who have not yet taken their Required Minimum Distribution (RMD) from their IRA are arranging to do that now.  This month’s giving strategy involves a tax-favored way that you can make a gift directly from your IRA to a cause that is near and dear to your heart.  As you can see from our little chart above, this would be a current gift.  There’s a bit of complexity to it and  . . .  (See More).

it can be beneficial for income tax purposes.  When you have money in an IRA account, the law requires that once you reach the age of 72, you must take distributions from your IRA and the money distributed to you is taxable for income tax purposes.  Some people in a comfortable financial position don’t really need that required distribution to meet their retirement income needs and it can be viewed as a burden because of the income taxes that must be paid.  The Qualified Charitable Distribution (QCD) may be the answer if you find yourself in this position. 

The Qualified Charitable Distribution is available for taxpayers over the age of 70½ -- the age was not changed with the SECURE act a few years ago that changed the RMD age to 72.  You can give up to $100,000 per year via the QCD ($200,000 for married couples filing jointly.)  It is very important that the distribution be made directly from the IRA custodian to the charity – if you were to take possession of the money and then give it to the charity, that would be a taxable distribution to you and you lose out on the tax advantages of this strategy.  The distribution that goes directly to the charity via the QCD can satisfy your obligation (or part of your obligation, depending on your individual circumstances) for the Required Minimum Distribution from your IRA.  The distribution must be made to a qualified charity – an organization that is recognized by the IRS as a 501(c)(3) entity.  When you make this kind of gift directly to charity using the QCD, you are not eligible to claim an income tax charitable deduction for that gift – the IRS doesn’t allow you to “double dip” in that way.  If you are also making other charitable gifts that may be deductible, you should talk with your tax adviser so that you can correctly coordinate the QCD with other charitable giving during the year.  For taxpayers who do not itemize their deductions, if you were making an outright gift to charity, it’s possible that you could not take full tax advantage of that gift as you may if you were itemizing.  The QCD may provide a better tax advantage than a deduction for an outright gift, depending on your personal tax picture.  

We’d mentioned that the QCD strategy has some complexity to it.  As with all the strategies we have presented through our Giving Corner articles, you should confer with licensed tax, investment, and/or legal counsel to ensure the strategy is a good fit for your needs and that you’re following all applicable laws.  While the law creating the Qualified Charitable Distribution has been around for several years, it is not used very frequently and it’s possible that not all IRA custodians are well familiar with the process.  It could take a bit of time to get things arranged when you want to make the gift.  Since your RMD from your IRA must be satisfied by the end of the year, you would be well served to start the process in plenty of time to get it accomplished before December 31st.  You should also be aware that the tax reporting sent from the IRA custodian to you and to the IRS (your form 1099R) will not specify that this particular distribution is a QCD that went directly to the charity.  You need to take the responsibility to notify your tax preparer that you have made this type of gift so it can be correctly entered into your income tax return. 

To recap our strategy for this month, the QCD is a direct gift from your IRA to a charity that is available to taxpayers over the age of 70½.  This gift can satisfy your obligation for your RMD and because you never take possession of the distribution, it does not add to your adjusted gross income for income tax purposes and you do not owe income tax for the distribution.  You should work carefully with your IRA custodian to ensure the process happens smoothly and appropriately and you need to make sure your tax preparer knows you’ve made the QCD so that it can be accounted for correctly in your income tax return.  

Northern AZ Climate Change Alliance is a 501(c)(3) entity and donations can be deductible for income tax purposes.  NAZCCA would welcome your gift, whether current or future, in whatever amount your heart and finances dictate.  (https://www.nazcca.org/donate) 

Bonnie Lane

Verde Volunteer

Member, Board of Directors

NAZCCA is not licensed to give legal or tax advice and any planned giving strategies you choose to pursue should be discussed with licensed tax and legal counsel.

Charitable Gift Annuity

This month we’re continuing our review of charitable giving strategies that are “split gifts” in which the charity benefits, but the donor also receives benefit from the gift (frequently an income stream) for a period of time. We’re approaching that time of the year when we may be getting solicitations from charitable entities inviting us to establish a Charitable Gift Annuity with them. You can see in our chart above that the Charitable Gift Annuity would be a current gift to the charity. It is relatively simple to establish and may provide income tax as well as transfer tax benefits to the donor.

You may have seen these “offers” to establish a Charitable Gift Annuity in the past – I’ve gotten them regularly through the years.  The charity somehow knows my age and sends me a nice, slick illustration showing annual income I could receive for the rest of my life from a Charitable Gift Annuity of a specific amount established with them.  This type of gift is essentially a simple contract between the donor and the charity in which the charity promises to pay an income stream for the lifetime of the donor in exchange for a gift now.  As this is a split gift and the donor is going to be receiving income from the gift for a period of time, the full amount of the donation cannot be claimed as an income tax charitable deduction.  Similar to the Charitable Remainder Trusts we have been reviewing in the last few months, there is a calculation done when the annuity is established that determines the amount of deduction the donor may claim.  As time goes by, the donor enjoys the income stream generated by his gift, which may be taxed on a favorable basis; typically a portion of the income received is treated as a tax-free return of the principle that the donor gave. 

These gift annuities offered by charities are loosely overseen by the self-regulatory group The American Council on Gift Annuities (ACGA).  There is not Federal regulation in the Gift Annuity arena.  The various states differ widely on how closely they monitor and/or regulate Gift Annuities.  The ACGA establishes “recommended” annuity payment rates from time to time, based on the then-current interest-rate environment.  They also monitor the regulatory activities in various states in the Gift Annuity arena and specifically any concerns that arise regarding ethics, accountability and appropriate consumer protection for donors.  The ACGA doesn’t have any legal authority, however is a well-respected entity and the vast majority of charities offering Charitable Gift Annuities collaborate with them.  

Many years ago there was a particularly egregious incident in Arizona in which an organization had devised a Charitable Gift Annuity that was essentially a scheme to sell commercial annuities to unsuspecting elders.  As Arizona has a substantial population of older citizens, after this scheme was uncovered, the state put into place regulations designed to protect consumers regarding Charitable Gift Annuities.  Not all states have taken such steps.  When considering incorporating a Charitable Gift Annuity into your planned giving strategy, as always, be sure you are consulting competent licensed legal and tax professionals well versed in working in this specific area.  

It is also prudent to carefully consider the charity with which you would be entering into this agreement.  Remember, the Charitable Gift Annuity is a simple contract between the donor and the charity.  You would be giving your gift to the charity in exchange for their promise to pay you an income stream for the remainder of your life.  The charity has the responsibility to appropriately and prudently invest the funds it has received from donors.  The charity must keep up with proper accounting on each donor’s individual gift, pay the promised income at the rate agreed upon when the arrangement was established and report out to the donors and the IRS the information needed for annual tax preparation.  Many larger, well-established charities have the wherewithal to appropriately administer a Charitable Gift Annuity program.  Northern Arizona Climate Change Alliance is a smaller, still relatively new charity without the resources to offer such a program.  

To recap this month’s topic of Charitable Gift Annuities, it can be relatively simple to establish.  It is a split gift that provides benefit to the charity as well as an income stream to the donor.  The donor may be able to claim an income tax charitable deduction at the time of the gift and may also enjoy transfer tax savings.  Regulation of Charitable Gift Annuities varies widely from one state to another.  When contemplating this type of gift, it can be a matter of “buyer beware” and it is important to carefully consider the future viability of the charity and the likelihood they would be able to continue paying the promised income. 

Northern AZ Climate Change Alliance is a 501(c)(3) entity and donations can be deductible for income tax purposes.  NAZCCA would welcome your gift, whether current or future, in whatever amount your heart and finances dictate.  Donate Here

Bonnie Lane, Verde Volunteer

Member, Board of Directors

NAZCCA is not licensed to give legal or tax advice and any planned giving strategies you choose to pursue should be discussed with licensed tax and legal counsel

Charitable Remainder Trust Design Customization

This month we’ll delve a bit deeper into some design customization you can do when creating a Charitable Remainder Trust (CRT) that best suits your individual needs. We’ll discuss a strategy using a CRT as a means of saving for retirement on a tax-favored basis and providing a retirement income stream prior to paying out to the charitable beneficiary. We see from our chart above, the CRT would provide a future gift to the charity; it is a complex strategy best served by a professional trustee; and it can provide both income and transfer tax advantages to the donor. This month, we’ll look specifically at a Net Income CRT (NICRUT) and also giving your trust more flexibility by adding a Flip provision to your NICRUT.  Both of these strategies require careful drafting by competent legal counsel well versed in charitable trust planning.  It is in the drafting of your trust document that you add in the correct terminology to make it operate as a NICRUT or further add the Flip Provision for greater flexibility.  For many donors contemplating the use of a CRT, these strategies arise as they are approaching retirement – and in their highest-income-earning years.  Bear in mind that the Charitable Remainder Unitrust (CRUT) can receive additional gifts in subsequent years, each of which may be eligible for an income tax charitable deduction in the year of the gift.  A donor interested in the CRT strategy and with substantial annual income may be attracted to the idea of offsetting some of that income by receiving an income tax charitable deduction each year for annual donations into the trust.  However, with a standard CRT that must pay out the stated income amount each year, that additional trust income can further exacerbate her income tax scenario.  

With the use of a NICRUT, you add into the trust document instructions that the trustee will pay out EITHER the stated payout percentage amount OR the Net Income the trust portfolio is producing.  By creating a trust investment portfolio that is designed to purposely hold down the income produced by the investments each year, the trustee may be distributing payments to the donor/income recipient that may not substantially add to her taxable income.  If she were making additional contributions into the trust each year, that provides another means of retirement savings and may offer income tax charitable deductions related to each of those donations – depending, of course, on her overall income tax scenario.  With this NICRUT strategy, you are subject to the whims of the investment markets.  We talked about in the early years of the NICRUT, the trustee designing a portfolio to purposely hold down income, ideally producing enough to cover the trust fees, but not creating too much added taxable income for the donor/income recipient who already has substantial earned income.  Then, upon the donor’s retirement when she wants to have an income stream from the NICRUT, the trustee would adjust the trust investment portfolio so that it could be more likely to produce income.  Again, you are taking a bit of a chance on the whims of the market.  Remember, the NICRUT is designed to pay out EITHER the stated payout amount drafted into the document OR the Net Income the portfolio is producing, whichever is less.  This could lead to erratic payments for the income recipient who wants to rely on trust income to support retirement needs.   

By including a Flip Provision in the NICRUT trust document, you add the flexibility to take advantage of a potentially lower trust payout in the early years of the trust, by holding down portfolio income as described above.  The “Flip” occurs as the trust converts to operate as a standard CRT at the beginning of the year following the occurrence of a triggering event described in the document.  After that point, the trust would then pay out each year at the stated payout percentage amount identified in the trust document.  This may allow for a more steady payment to the income recipient who is relying on trust income for retirement.  There is considerable flexibility in the tax code regarding what can be chosen as the triggering event after which the NICRUT would convert or “flip” to a standard payout.  With the strategy described in this article, a reasonable choice for triggering event could be to choose a specific date in the future at which the donor/income recipient plans to retire.  According to IRS rules, a specific future date is an allowable triggering event to include in the trust document defining when the NICRUT would convert. 

To re-cap our strategy for customization of Charitable Remainder Trusts, we discussed using the CRT as an additional means of saving for retirement and providing retirement income prior to ultimately paying out to the charitable beneficiary.  The trust would need to be a CRUT instead of a CRAT, so that it could receive additional donations through the years and could have the flexibility to pay out only the Net Income from the trust portfolio as defined in the trust document.  With the NICRUT strategy, the trustee can alter the trust portfolio to purposely hold down investment income, thus potentially paying out minimal taxable income for a person with substantial other income prior to retirement and then, by adjusting the portfolio mix later, the trust may be able to pay out a higher amount as retirement income.  The “Flip” provision can increase the flexibility of the NICRUT by including language in the trust document that will allow it to convert to operate as a standard CRT at some point in the future, thus potentially providing a more stable retirement income stream.  As these are complex planning strategies requiring specific charitable trust expertise, it is essential that you consult competent tax and legal counsel to discuss their suitability for your specific requirements.

Northern AZ Climate Change Alliance is a 501(c)(3) entity and donations can be deductible for income tax purposes.  NAZCCA would welcome your gift, whether current or future, in whatever amount your heart and finances dictate.  Donate Here

Bonnie Lane, Verde Volunteer

Member, Board of Directors

NAZCCA is not licensed to give legal or tax advice and any planned giving strategies you choose to pursue should be discussed with licensed tax and legal counsel

Charitable Remainder Trust Design Considerations

In this month’s article, we will delve a bit deeper into the design of a Charitable Remainder Trust (CRT) and how some of the design elements can customize your trust more specifically to your needs.  We see in our little chart above that the CRT would provide a future gift to charity, it is a complex strategy and can have both Income Tax as well as Transfer Tax advantages.  As mentioned in last month’s article, there are strict IRS regulations that govern how a CRT must be drafted and designed.  However, there are some nuances that can be built into trust documents to provide some flexibility and to customize the trust to your specific needs.  We’re reminded of that complex IRS calculation that must be done when the trust is established to determine that its design meets the criteria to be valid as a CRT and therefore provide the tax advantages the donor is seeking.  Under IRS rules, the CRT must be designed to pay out income to a non-charitable income recipient (frequently the donor) at least annually during the term of the trust.  The percentage amount the trust pays out annually must be between 5% and 50% of trust value.  When determining the payout percentage amount for your trust, the first thing to keep in mind is that IRS calculation that is going to tell you whether what you are designing meets regulations.  There is calculation software available that legal, tax, and trust services professionals use to do this calculation.  One variable that goes into the calculation is the payout percentage amount.  Another is the term of the trust – how long it is going to last before paying the remainder amount out to the charity.  The third variable is an interest rate that is set monthly by the IRS and is related to the current prevailing interest rates.  

The term of the trust is frequently tied to the lifetime of the income recipient, so it would pay income to that person (frequently the donor) during the term of the trust and then pay out the remainder to the charitable beneficiary at the death of the income recipient.  It is also possible to create a trust that has a term of a specific number of years, not to exceed 20 years.  When you have a younger donor with a lifetime payout to himself (a longer trust term) that could impact how high you could push the payout percentage amount – and in fact, it may not be possible to design a valid trust for a younger income recipient with a lifetime payout.  Typically, an older donor/income recipient (shorter life expectancy) may be able to design a valid CRT with a higher annual payout than one for the younger person.  When you are working within a low interest rate environment, as we have now, that third variable (the monthly IRS-established rate) is also going to drive down the amount you can choose for your annual payout.  

As mentioned last month, this calculation arrives at how much the donor can claim as an income tax charitable deduction when a gift is made into the trust.  Remember, the IRS is looking out for the charity here.  Depending on interest rate conditions, it may be possible to design a valid trust with a higher payout percentage amount (as an example a 10% annual payout) and a relatively long term, however that’s going to drive down the amount of Income Tax charitable deduction that may be claimed.  And, if your trustee is paying out 10% of the trust value every year to the income recipient, you need to also consider whether the investment performance of the trust portfolio is going to be able to keep up with that payout amount.  The trustee has a fiduciary mandate to manage the trust portfolio prudently and in the best interest of the trust.  If, as an example, a trust is paying out 10% annually, but with prudent management of the trust portfolio, it is only earning a net 5% annually, the trust is going to be depleting through its term.  This may be something that the donor is perfectly happy to experience.  However, in many instances, the donor who is also the income recipient is counting on that trust income to help fund retirement income needs.  Having trust income that depletes each year may present a serious concern for the donor/income recipient.  In my years of working as a trust services professional and collaborating with attorneys and CPAs designing CRTs, I was typically comfortable with a CRT designed to pay out something in the range of 5% - 6% annually.  Taking into consideration that the trustee needs to prudently manage a trust portfolio that may hopefully show slight growth each year, therefore a little increase in income, something in the range of a 5% - 6% payout seemed prudent.  Obviously, donors need to work closely with licensed tax and legal advisors who are well versed in working with these specific strategies, and engaging a professional trustee to administer this complex trust is highly recommended.  And, of course, in a fluid investment market, the performance of a trust portfolio cannot be guaranteed.  

To recap our lesson for this month, when working with licensed tax and legal counsel to design a Charitable Remainder Trust that best meets your individual needs, there are some nuances that can be built into a trust document.  Keep in mind that it must be designed such that it meets IRS regulations.  In the current low interest-rate environment, you have less flexibility in designing a specific valid CRT and it is possible, given the terms of the trust you want, that the trust would not successfully pass that IRS test – the calculation that determines it is a valid CRT.  Next month, we will continue to delve into some more design considerations when creating a CRT.

Northern AZ Climate Change Alliance is a 501(c)(3) entity and donations can be deductible for income tax purposes.  NAZCCA would welcome your gift, whether current or future, in whatever amount your heart and finances dictate.  Donate Here

Bonnie Lane, Verde Volunteer

Member, Board of Directors

NAZCCA is not licensed to give legal or tax advice and any planned giving strategies you choose to pursue should be discussed with licensed tax and legal counsel

Charitable Trust Basics

This month’s article delves into the basics of Charitable Trust strategies.  In future months, we’ll add in some of the bells and whistles that can add flexibility to these strategies.  Let’s start with the difference between Charitable Lead Trusts and Charitable Remainder Trusts.  In general, Remainder Trusts are more frequently used than Lead Trusts.  You see that we still have a lot of “maybes” in our little chart because those answers depend on exactly how your particular trust is structured.  The basic difference between the Lead Trust and the Remainder Trust is when the charity will receive the gift.  Generally, the tax treatment – whether you are seeking Income Tax advantages or Transfer Tax advantages – differs for Lead Trusts and Remainder Trusts.  As we saw last month, these are known as “split gifts” in that there are payouts to the charity as well as to one or more non-charitable recipients.  There are strict IRS regulations as to how Charitable Trusts must be designed in order to be recognized as a valid instrument by the IRS – and provide to the donor those tax advantages (s)he is seeking. 

With a Charitable Lead Trust, the charity receives income from the trust initially during the term of the trust and then, at the end of the trust term, whatever is left in the trust pays out to non-charitable recipients – often to the donor’s family.  Typically, although not always, the Lead Trust strategy is used to pass along assets to future generations with a savings on transfer (estate) taxes.  There is a complex IRS formula (imagine that – a complex IRS formula) that determines if the trust is recognized as a valid Charitable Trust and how much tax savings a donor may receive.  Some variables that go into this calculation are the regular income being paid out to the charity during the trust term and the length of time the charity will be receiving that income before the trust ultimately pays out.  It is possible, with a properly structured Lead Trust, to “zero-out” the transfer tax liability for the donor’s family.  Be sure to consult competent, licensed tax and legal counsel when designing a strategy that best meets your needs.  

With a Charitable Remainder Trust, the income recipient and ultimate beneficiary are opposite than with the Lead Trust.  For a basic Remainder Trust, during the term of the trust, an income stream pays out to a non-charitable income recipient (frequently the donor) and at the end of the trust term, the remainder of the trust assets pay out to the charitable beneficiary.  There are nuances that can be built into a trust document, but here we are discussing the most basic sort of trust strategies.  There is a complex IRS formula (there’s that complex IRS formula again) that must be calculated at the beginning of the trust to determine whether what you are designing will be recognized as a valid Charitable Remainder Trust by the IRS and to determine how much income tax charitable deduction could be available to the donor at the time that the gift is made into the trust.  Oddly enough, the IRS is looking out for the charity here; some key variables that go into that calculation are “How much is going to be coming out of this trust annually before the charity ever sees theirs?” and “For how long is this trust going to be paying out before the charity ever sees theirs?”  While it’s possible to design a valid trust with a higher payout annually back to the donor or other income recipient, that could negatively impact the available income tax charitable deduction.  With the Remainder Trust, it may also be possible to recognize an Estate Tax Charitable Deduction upon the death of the donor that may reduce the amount of transfer tax owed at that time. 

Either the Charitable Lead Trust or the Charitable Remainder Trust could be designed as an “Annuity” trust or as a “Unitrust.”  That’s where that alphabet soup of CLUTs and CLATs and CRUTs and CRATs comes in.  These terms refer to how the income payout is calculated.  With an Annuity trust, the specific dollar amount that will be paid out annually is determined right up front when the trust is established.  Based on the value of the trust and the percentage amount payable annually that is defined in the trust document, the trustee calculates the set dollar payment that will be paid each year.  Because this calculation is done right up front, an Annuity Trust cannot receive additional gifts in the future.   

With a Unitrust, the document defines the percentage payout that will be paid as income each year, however rather than doing that calculation right up front when the trust is established, the trustee does a new calculation at the beginning of each year, based on the then-current value of the trust.  This adds in the flexibility to make future gifts to the trust.  With a well-designed trust that incorporates a reasonable payout amount and a prudently managed trust portfolio (and cooperative investment market) it is possible that the value of the trust could increase from year to year.  Under this circumstance, when that income calculation is done at the beginning of each year, there could be an increase in the payment that will be made.  Obviously, if the trust is designed with a high payout percentage or due to market conditions – or less prudent investment management – it is also possible that the value of the trust could decrease in some years.  Therefore, when the income calculation is done at the beginning of the year, the income recipient could be getting a smaller amount.  A Unitrust does allow for additional gifts in the future which could offer availability of additional income tax charitable deductions.  

Charitable Trusts are complex split-interest gifts that could be designed to meet a number of different charitable giving and estate planning needs.  Because of the complexity of these strategies, it is essential that donors work closely with competent, licensed legal and tax counsel who are well-versed in working in this specific area of Planned Giving.  As these trusts have features requiring in-depth understanding of trust law as well as the tax implications of specific investment strategies for the trust portfolio, entrusting their administration to professional trust services is highly recommended.  In next month’s article, we will look more closely at Charitable Remainder Trusts and discuss considerations for and impact of some of the variables that can be added into them.  

Northern AZ Climate Change Alliance is a 501(c)(3) entity and donations can be deductible for income tax purposes.  NAZCCA would welcome your gift, whether current or future, in whatever amount your heart and finances dictate.  Donate Here

Bonnie Lane, Verde Volunteer

Member, Board of Directors

NAZCCA is not licensed to give legal or tax advice and any planned giving strategies you choose to pursue should be discussed with licensed tax and legal counsel

Split Gifts

The charitable giving strategies we have been discussing have involved making outright gifts to the charities near and dear to your hearts, whether current or future gifts.  Over the next few months, we will shift our discussion to some planned giving strategies that involve “split gifts.”  These are strategies, many times trusts, that provide a benefit to  charity but also give back to a non-charitable beneficiary (frequently the donor.)  We’ll begin our discussion with the various forms of charitable trusts – a veritable alphabet soup of CRUTs and CRATs and CLATs and CLUTs and NICRUTs and Flip CRUTS and NIMCRUTs or a Charitable Remainder Trust with an accompanying ILIT.  There are a lot of “maybes” in our little chart above.  These trusts could involve either current gifts to charity or future gifts, depending on exactly how you structure your trust.  They are very definitely complex legal entities for which a professional trustee is highly recommended.  Again, depending on the exact type of trust you establish and your personal financial situation relative to potential transfer taxes at the time of your death, these trust strategies may provide some Income Tax savings and/or savings on Transfer Taxes.  

This is an area of planned giving that is especially near and dear to my heart and I look forward to sharing with you over the next several months some more detailed information on the alphabet soup of the various charitable trust strategies, their complexities, why you want a knowledgeable, professional trustee, potential tax advantages – and how you and/or your loved ones can benefit from this type of “split gift.”  

Northern AZ Climate Change Alliance is a 501(c)(3) entity and donations can be deductible for income tax purposes.  NAZCCA would welcome your gift, whether current or future, in whatever amount your heart and finances dictate.  Donate Here

Bonnie Lane, Member, Board of Directors 

NAZCCA is not licensed to give legal or tax advice and any planned giving strategies you choose to pursue should be discussed with licensed tax and legal counsel

Using Life Insurance for Charitable Giving

We are all familiar with the purpose of Life Insurance to provide for loved ones should you suffer an untimely death.  However, a current policy that you own may also be an asset to consider for a charitable gift.  This could be a current as well as a future gift.  It is fairly simple to accomplish.  It may provide some income tax savings and, taking into consideration  the value of your estate and current tax law at the time of your death, it may provide some transfer tax savings.  

As we age, we may find the life insurance policies that gave us the comfort of knowing our loved ones would be provided for in the event of an untimely death are no longer needed for those original reasons.  Some types of life insurance policies are designed to accumulate cash value during the life of the policy, while others (term policies) could be considered more “pay as you go” insurance coverage.  A policy with cash value would more typically be considered for a charitable gift, so that is where we will focus this discussion.  

As time goes by and your children age and become financially independent, you may find yourself owning a life insurance policy with some cash value built up in it that you don’t need for its original purpose.  There are a couple of options you could choose as you consider using that policy to benefit your favorite charity.  You should discuss with your financial advisor the options you have with your particular policy and how best to structure a gift to charity using that policy.  You could change the beneficiary to name a charity near and dear to your heart while you continue paying the premiums on the policy and keeping it viable.  Obviously, this would be setting up a future gift that the charity would receive upon your death.  You would continue to own the policy and the cash value of that policy.  Using this option would certainly be simple.  It would not provide tax advantages.  It provides flexibility in that you would be able to alter the beneficiary designation later should you have different feelings regarding which charity you wanted to benefit – or should your family circumstances change such that the life insurance benefit would be needed to support loved ones after your death.  

Another option you could choose to use life insurance for a charitable gift would be to actually give up ownership of the policy and make the charity the owner.  There could be a few advantages to this gift.  Obviously, the charity could receive the death benefit upon your death.  Under current law, life insurance proceeds pay to beneficiaries free of taxes, whether to charitable beneficiaries or to loved ones.  However, the cash value of a life insurance policy owned by the deceased is included in the estate of that deceased person.  If at the time of your death the value of your estate under the then-current tax laws were such that it would be subject to estate taxes, the cash value of that life insurance policy could add to the estate tax liability.  That is where the option of gifting the ownership of the policy to the charity can be attractive for tax purposes.  When you gift the policy – and therefore its cash value – to the charity, you may be eligible for an income tax charitable deduction related to the cash value.  By making an irrevocable gift of the policy to the charity, you have also gotten that asset out of your estate where it would not be subject to future estate taxes.  

That leaves the charity with the ownership of an insurance policy that likely will require continuing premiums to keep it viable.  Typically, it would be in the best interest of the charity to keep that policy viable in order to receive the full death benefit upon the death of the insured donor.  You may consider making regular financial contributions to the charity that would provide them with the necessary funds to continue making those premium payments.  When you make financial donations to the charity, you may be able to claim an income tax charitable deduction each time you donate.  Be sure to consult licensed tax and legal counsel regarding how to structure those gifts such that you ensure you’ve made an irrevocable gift of the policy to the charity and avoid the chance of it being pulled back into your estate as an asset potentially subject to estate taxes.  

As you consider your own personal financial circumstances and how best to design your charitable giving, give some thought to life insurance policies you may have.  Consider your loved ones’ present needs for life insurance benefits and whether the policies may be a source you could use as a part of your charitable giving plans.  NAZCCA would welcome your gift – whether current or future – in whatever amount your heart and finances dictate.  Donate Here

Bonnie Lane, Volunteer

Member, Board of Directors 

NAZCCA is not licensed to give legal or tax advice and any planned giving strategies you choose to pursue should be discussed with licensed tax and legal counsel

Donor Advised Fund

The charitable giving strategy we’re featuring this month is a Donor Advised Fund.  This can be a current and also a future gift.  It is a more complex strategy than some we’ve reviewed.  It can impact both current income taxes as well as potentially reducing transfer taxes later.  Sometimes, this strategy is referred to as “The Poor Man’s Foundation” and there are a couple of different ways to approach establishing a Donor Advised Fund.  Many local or regional Community Foundations will offer personalized Donor Advised Funds for which they serve as administrator for the Fund established by a donor.  As the poor man’s foundation terminology suggests, a Donor Advised Fund acts much like a private foundation, but can be established and maintained more simply and with a much lower financial contribution than setting up your own personal private foundation.  

The other way of establishing a Donor Advised Fund is to buy into a commercial fund offered through a mutual fund company.  Without showing any favoritism, some companies I’m aware of that offer this type of account are Fidelity and Eaton Vance.  As always, when you are considering any planned giving strategies, you should check with licensed tax and/or legal counsel.  Your own financial advisor may suggest different fund companies that offer Donor Advised Funds.  When you’re putting your gift into this type of account, the fund itself is registered as a charitable entity and subject to IRS regulations.  When you make your contribution, you may be eligible to claim an income tax charitable deduction.  Typically, you could contribute securities, and when contributing highly-appreciated securities, you may avoid paying capital gains taxes on the gifted assets.  The fund company manages your investment for you and administers your Fund.  Often, you would be able to name your account “The Jon Doe Family Charitable Fund” or some such personalized name you choose.  When you want to make grants from your account to the charities of your choice, you notify the fund administrators and they take care of that for you.  Understand that the fund itself is a charitable entity and must follow IRS rules regarding eligible gifts that can be made from the account.  

You may add to your Donor Advised Fund, thus generating another potential income tax charitable deduction.  Once you make a gift to your Fund, it is a completed gift and will not be a part of your estate nor subject to potential estate taxes.  You direct grants out of your Fund to the charities that are near and dear to your heart; you may change which charities you want to benefit in any given year.  You may choose not to make any gifts from your Fund in a particular year.  Another very nice feature of a Donor Advised Fund is that it can live on beyond your lifetime.  You can designate who will “advise” the fund in the future regarding making gifts from the account.  What a marvelous way to instill charitable giving habits in future generations of your family – and to establish a charitable legacy for the family. 

You may want to consider a Donor Advised Fund strategy that could provide current income tax deductions whenever a gift is made into the Fund, remove the assets from your estate and potential estate taxation, possibly save on capital gains taxes, make future gifts to charity when you choose, and create an ongoing legacy that may live on beyond your lifetime.  As always, NAZCCA would welcome your gift, whether current or future, in whatever amount your heart and finances dictate.  You may make your donation here.

Bonnie Lane, Volunteer

Member NAZCCA Board of Directors 

NAZCCA is not licensed to give legal or tax advice and any planned giving strategies you choose to pursue should be discussed with licensed tax and legal counsel

It’s Income Tax Season: What about the AZ Charitable Tax Credit?

The Arizona Department of Revenue (AZDOR) offers an attractive tax credit against your AZ income tax liability when you are making charitable donations to certain charities.  This would be related to a current gift; it is simple to implement.  It can provide an advantage for your AZ income tax situation.  It is specific to AZ – doesn’t do a thing for your Federal taxes.  The good news is that the 2020 list on the AZDOR website of eligible charities is extensive – it’s 19 pages!  There is, however, some news that is not so good.  While your gift to many very worthy charities can be used to claim your AZ Charitable Tax Credit, unfortunately Northern AZ Climate Change Alliance (NAZCCA) does not meet the state’s stringent criteria for qualification, so your donations to NAZCCA cannot be claimed for this credit.  Among other criteria, the charity must be providing benefit for low-income residents or for people who are chronically ill or physically disabled.  The rules also require that the charity must be engaged in work that provides services that meet “immediate basic needs.”  Although supporters of NAZCCA may feel that our work is of benefit to ALL AZ residents, and certainly we would consider having clean drinkable water and air fit to breathe to be basic human needs, alas, NAZCCA doesn’t qualify under the rules of the program.  

But let’s explore this attractive little perk that AZ offers its taxpayers, so that you are prepared to discuss it with your tax preparer.  Let’s lay out a few basics: 

• This is a credit against a tax liability that you owe.  It can’t be used to create (or enlarge) a state income tax refund.  If you can’t use all your credit in the year of the gift, you can carry some forward to claim later.

• There are several different individual credits you can take; the most common being a $400 credit each individual taxpayer can claim ($800 for married, filing jointly).  You may claim multiple credits depending on where you are directing your charitable gifts and, structured properly, you may claim far more than the $400/$800.  

• You can make contributions up until tax-filing day (April 15, 2021) and claim those against a 2020 liability.

• You can’t double-dip.  If you are going to be claiming the Charitable Tax Credit against your AZ tax liability for specific donations, you cannot claim those same donations as a state income tax charitable deduction.  If eligible, you may be able to take a Federal income tax deduction for those donations.   

Although NAZCCA does not meet the stringent criteria set by the State of Arizona to qualify for this particular tax credit, we are a 501(c)(3) charitable entity and contributions to NAZCCA are eligible for both Federal and state income tax deductions.  As always, we encourage you to discuss your tax questions with licensed tax counsel.  The changes to the tax laws in the past few years, and particularly the rise in the standard deduction, have made income tax filing simpler for many people.  The downside to that rise in the standard deduction is that far fewer people are now itemizing deductions – which is where you reap the benefit of charitable deductions for your contributions.  

Both the IRS and AZDOR have made accommodations that provide some relief for those taxpayers who had been claiming charitable deductions when itemizing but now use the standard deduction.  For Federal filing, when you use the standard deduction, you may claim $300 of your charitable contributions as a charitable deduction.  AZ has put into place a similar option for claiming some charitable deductions on top of your state standard deduction.  AZ allows you to increase your standard deduction by adding on a figure equal to 25% of the amount you would have claimed if you were to itemize.  There is an additional form you must complete and add to your tax return if you are using this option and an extra box to check on the AZ form 140.   

NAZCCA would welcome your gift, whether current or future, in whatever amount your heart and finances dictate.  You may make your donation here.

Bonnie Lane - Member, Board of Directors

NAZCCA is not licensed to give legal or tax advice and any planned giving strategies you choose to pursue should be discussed with licensed tax and legal counsel

Making a Charity the Beneficiary of an Account

Because these articles are meant to present various planned giving strategies in a simple, high-level overview format, we’ve designed this little chart you can expect to see with each strategy we cover.   Making a charity the beneficiary of an account would be a future gift.  It’s a relatively simple strategy to implement.  While tax savings isn’t necessarily a major goal with this strategy, depending upon your own personal financial circumstances (and the state of transfer tax laws at the time of your death), there could be transfer tax savings.  For this strategy, we are discussing leaving a legacy to a charity that is near and dear to your heart by making it the beneficiary of a cash account or investment account that is non-qualified – not a tax-qualified retirement account such as an IRA.  This strategy is mostly focused on making sure that your wishes for your legacy are honored and helping to streamline the process for whomever is settling your estate.  

Different financial providers use different terminology for the process of “naming a beneficiary.”  It can also be different depending on the type of account, such as a cash account at a bank vs an investment account with a brokerage or other firm.  You may find that your institution refers to the process of naming a beneficiary as “Paid on Death” or “Transfer on Death” or it may be called “Naming a Beneficiary.”  When a beneficiary is named on the account with the financial institution where it is held, upon the death of the account owner, that asset passes by law to the named beneficiary.  In this way, it helps to streamline the task of the estate executor or personal representative. 

Current law considers first those assets that have a named beneficiary when settling an estate.  It is important when working with legal counsel to create a written estate plan – a will or a trust – that the instructions you write into your estate plan match up with the beneficiary designations you have put onto your accounts with various financial account providers (banks or other financial institutions.)  You may be surprised to learn how many people have very carefully crafted a written estate plan with their attorney that accurately reflects their current desires as to how their legacy will pass, only to find out upon death that a beneficiary designation on file with an account provider somewhere still lists the former spouse!  It is prudent to remember that beneficiary designations take precedent over provisions that may be included in a will or trust and to make sure your wishes for your legacy are congruous in this regard.  

Naming a charity as the beneficiary of an account can help to ensure that a portion of your legacy passes to those causes that are near and dear to your heart.  NAZCCA would welcome your gift, whether current or future, in whatever amount your heart and finances dictate. 

Bonnie Lane - Member, Board of Directors

NAZCCA is not licensed to give legal or tax advice and any planned giving strategies you choose to pursue should be discussed with licensed tax and legal counsel

Making a Charity the Beneficiary of a Tax-Qualified Account

Making a charity the beneficiary of a tax-qualified account, such as an IRA or Retirement Plan, would be a future gift.  It’s a relatively simple strategy to implement.  There are income tax consequences to consider and depending on your own personal financial circumstances (and transfer tax laws at the time of your death), there could be transfer tax savings.  For this strategy, we are discussing leaving a legacy to a charity near and dear to your heart by making it the beneficiary of a tax-qualified account such as a traditional IRA or Retirement Plan.  You’ll recall from last month’s discussion, when a beneficiary is named on an account with the financial institution where it is held, upon the death of the account owner, that asset passes by law to the named beneficiary.  In this way, it helps to streamline the task of the estate executor or personal representative.  However, when dealing with tax-qualified assets, understanding the income tax implications of this type of gift is important as well. 

Many people will have both non-qualified assets as well as tax-qualified (traditional IRA or Retirement Plan assets.)  When you want to leave a gift to charity, it may be prudent to consider designating the tax-qualified (retirement) assets for your charitable gifts.  Under current law, upon your death your spouse may roll over your IRA to his or her ownership and continue to defer taxes.  However, when you have non-spousal heirs (such as your children or a non-marital life partner) your tax-qualified assets are considered “income in respect of a decedent” and subject to income taxation.  Basically, for these assets that have enjoyed tax deferral as they’ve grown, the IRS is determined to take their portion; frequently that tax must be paid immediately or in a relatively short period of time after your death.  Depending on the size of your estate and current transfer tax laws when you die, your tax-qualified accounts may also be subject to transfer tax. With this combination of taxes on your estate, it could consume up to 70% of the inheritance! 

When you name a charity as the beneficiary of your tax-qualified assets, it passes free from both income and transfer taxes.  It is important to designate the charitable beneficiary correctly with the financial institution where the account is held so that the assets pass directly to the charity and don’t pass through your estate.  When you are married and choose to name someone (or an entity) other than your spouse as the beneficiary of a retirement plan, the designation may require written agreement from your spouse.  This strategy calls for careful discussion with licensed tax and legal advisors to determine which type of your assets – tax-qualified or non-qualified – would be best to leave to your family and which to charity.   

Naming a charity as the beneficiary of an account can help to ensure that a portion of your legacy passes to those causes that are near and dear to your heart.  NAZCCA would welcome your gift, whether current or future, in whatever amount your heart and finances dictate.   (Link to Donate page)

Bonnie Lane - Member, Board of Directors

NAZCCA is not licensed to give legal or tax advice and any planned giving strategies you choose to pursue should be discussed with licensed tax and legal counsel

What’s Ahead in 2021?

Before we get to a sneak peek at 2021, I’d be remiss if I did not mention Giving Tuesday, this year Dec 1st.  In this season of celebrating gratitude and being caught up in spending on material goods, Giving Tuesday began in 2012 as a simple idea to dedicate the Tuesday after Thanksgiving to doing good to make a difference in the world.  The good you do may differ greatly from what others may give.

Whether you choose to help out a neighbor or stranger in need, to give of your time, to join a movement to create a better world for tomorrow or to make a monetary donation, your gift from your heart can make a difference.  NAZCCA would be grateful for your Giving Tuesday gift in whatever amount your heart and finances dictate.  You may make your donation here.  

So . . . what’s in store for Giving Corner in 2021?  Have you ever felt you’d like to make a meaningful gift to charity, but you’re uncertain of the best way to structure that gift?  Maybe your colleague, your brother-in-law or friend has been talking about how they plan to leave their legacy for the causes near and dear to their hearts.  The Planned Giving arena can be a daunting place to try to find your way around and our Giving Corner segment is designed to help you in that regard.  Some gifts are current gifts, some future, some are outright gifts, some split gifts that give something back (frequently an income stream) to the donor.  There are simple strategies and others more complex, from a legal perspective.  There may also be income tax or transfer tax advantages.  Our plans for Giving Corner during the new year are to help you understand, at a high level, the various planned giving strategies, presenting one strategy each month.  We’ll break it down simply for you to help you understand how you can work with estate planning professionals to design an optimal giving strategy that makes sense for your unique situation and desires for your charitable legacy.  

Bonnie Lane - NAZCCA Cottonwood Volunteer

NAZCCA is not licensed to give legal nor tax advice and any planned giving strategies you choose to pursue should be discussed with licensed tax and legal counsel. 

A Thanksgiving Story

I’d like to share a story that can be a beneficial strategy for any charitable donor, no matter what your level of giving may be. 

As the story goes, there is a family of substantial means who have their own family foundation from which they direct various charitable gifts.  Each year, as a child in the extended family reaches the age of five, that person is then able to direct $500 from the family foundation to the charity of his or her choice.  (S)he has to research the charity to which the gift will go and, when all the family are gathered at Thanksgiving, the child must give a report on the chosen charity and share why that choice was made.  When the child reaches six years old (s)he is able to direct $600 – and so on as the child ages.  What a wonderful way to instill charitable habits in young people.  What a rewarding experience it must be during the family Thanksgiving celebration. 

This approach can work for your family as well, no matter your financial circumstances.  While it is imprudent to gather this year during the pandemic and many will be missing those large family in-person celebrations, whatever method your Thanksgiving festivities may be enjoying, this strategy could be introduced.  It can be just as meaningful, benefit charitable causes and serve the purpose of instilling charitable habits in our youth whether that five-year-old is giving $5 or $5,000 or $50,000. 

Bonnie Lane - NAZCCA Cottonwood Volunteer

NAZCCA is not licensed to give legal or tax advice and any planned giving strategies you choose to pursue should be discussed with licensed tax and legal counsel.