By JAN M. ROSEN - New York Times
ALTHOUGH many critics have denounced the tax deal reached in December by Congressional leaders and the Obama administration as tax cuts for the rich, personal wealth advisers who specialize in philanthropy also foresee benefits for charities.
“I view the changes that are effective as of Jan. 1 as a catalyst for action,” said Janine Racanelli, a lawyer who is head of the Advice Lab at J. P. Morgan Private Bank, which advises wealthy clients on taxation, investing, philanthropy and other areas of personal finance.
The new law was unexpectedly generous in the area of gift and estate taxes, exempting $5 million a person from taxation. That means that a couple can give or bequeath assets worth up to $10 million tax-free during this year and next, when the law is in place. Consequently, as families sit down with their lawyers and advisers to update their wills and plans for giving to children and grandchildren, many will want to expand their charitable giving as well, Ms. Racanelli predicted.
“There is a very different dynamic in giving today,” she said. Many families want to bring their children, especially adult children, into philanthropic activities, through family foundations and donor-advised funds, for example. With lower tax liabilities, they will have more money available for these channels. “It is definitely a component of the advice we give,” she said.
Robert F. Sharpe Jr., president of the Sharpe Group, a firm that advises leading educational and other nonprofit organizations nationwide in regard to philanthropy, said that most wealth was divided among family members, philanthropy and taxes. Careful legal planning can “take taxes out of the equation,” he added, or at least minimize them.
“A lot of wealthy people choose how much they want their children to have,” he said. “A lot of people believe in limits, say $5 million or $10 million,” and if they have substantially more than that, they are likely to want much of it to go to philanthropy, both during their lifetimes and through bequests. Citing statistics from the Internal Revenue Service, he said that 8 percent of the 2.4 million people who died each year left money to charity, but that 16 percent of those who had wills did so.
Charitable lead trusts are one way to maximize new gift-tax exemptions while making significant charitable gifts, Mr. Sharpe said. Income from the trust goes to a designated charitable beneficiary, and at the end of the trust’s term, the remaining principal becomes a gift to one or more heirs.
For example, a widow with $20 million in assets might put $5 million into a 20-year trust that will go to a grandchild when it terminates. Because of the present value of the payments to the charitable recipient for the duration of the trust, the taxable value of the $5 million would be entirely offset, so none of her unified gift and estate tax credit of $5 million would be used by her grandchild’s inheritance.
At a rate of 6 percent, for example, the trust could pay $300,000 annually to a university scholarship fund, for a total of $6 million over the 20 years. The present value of those payments offsets the taxable value of the gift to the grandchild. At the end of the 20 years, the grandchild would inherit the principal tax-free, even if it turned out to be more than the original $5 million, as it would if the trust assets earned more than the 6 percent paid to the university each year. The donor can then use her $5 million in gift and estate tax credits to offset other gifts during her lifetime and at her death.
The gift annuities sponsored by many charities are another way to meet both personal financial and charitable goals. Mr. Sharpe gave this example: An affluent 55-year-old is supporting his 79-year-old mother in a continuing care retirement community where she has a nice apartment, nutritious meals, community activities and access to health care. The cost is $5,000 a month. He could give $1 million to a recognized charity for a gift annuity that would pay his mother 7 percent for life. That is $70,000 a year, which will cover living costs and incidental expenses.
He will get an upfront income-tax deduction of more than $470,000, and the payments, which may be monthly, quarterly or annually, will be only partly subject to income tax because they are in part a return of principal. The principal that remains when she dies belongs to the charity. He will be making a taxable gift of just over $500,000, but he can use 10 percent of his $5 million lifetime gift tax credit to eliminate tax on that amount.
Conrad Teitell, chairman of the national charitable planning group at the law firm Cummings & Lockwood, said, “People give because they want to help the charity,” and the new tax law, while not the reason for giving, can be a boon for the charitably inclined. Among his clients is the Salvation Army, which is a beneficiary in many trusts.
Charitable remainder trusts allow donors who need current income to receive it for life or a set period of up to 20 years. They put assets into a trust and get a current income tax deduction for the legally determined future value of the gift to charity. The trust may sell the assets and reinvest them for higher yields — in dividend-paying stocks, for example — with no capital gains tax liability. When the trust ends, the assets in it go to charity. This can be especially useful for people who inherited highly appreciated assets in 2010, when there was no estate tax, but who, under a wrinkle of last year’s law, might owe capital gains tax if they personally sold and reinvested the assets.
Another way for people who want to benefit a charity while they are alive and get an income-tax deduction is to give a home to the charity while retaining a lifetime interest. They continue to use the house and pay all the expenses. The charitable deduction is the home’s future value, based on its appraised value and actuarial tables. If the amount is more than they may deduct in the current year, the excess can be carried forward for up to five years.
Alan E. Weiner, partner emeritus in Holtz Rubenstein Reminick, an accounting firm, discussed the one area of charitable giving that was directly authorized in the new law until the end of this year — people over age 70 1/2 may make donations to charity directly from their individual retirement accounts, and the donations will count against their required minimum distributions.
Donations from a regular I.R.A. are not tax-deductible because pretax money goes into such an account. The possible tax benefit to a donor is that gifts directly from an I.R.A. do not raise adjusted gross income. That, in turn, can affect how Social Security income is taxed and whether — and to what extent — miscellaneous itemized deductions and deductions for medical expenses are allowed.
But the important aspect to many people, Mr. Weiner says, is that they care deeply about their church or synagogue, for example, and the I.R.A. is where their money is.