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Do You Have a Tax Problem?

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by Bill Hurd '61

Do you have a tax problem? If so, you owe it to yourself and your family to consider a well-planned charitable gift. There are many circumstances where such a gift can reduce and defer taxes so much that you and your family will have greater income, assets and security than if you did not make the charitable gift.

Do you have unrealized capital gains that you would like to defer? Will your estate be subject to estate taxes? Would you like to diversify your investments without taking a big tax hit? Do you have a business you would like to sell, but the capital gains tax is keeping you from selling? Would you like to generate more investment income? If you have these problems, be happy about it, because you have done very well in your financial life. But also be smart about it, and investigate various options.

If you have these problems, it is likely that Clarkson can help you. Unfortunately, very few financial advisors and estate planners have in-depth knowledge of planned charitable giving and its benefits to the donor – their client. In many cases, well-planned charitable giving can actually increase income, lower investment risks, and build the value of the estate. Each financial situation is unique, so it can take an expert advisor to determine the best approach for a family. When this is done by a knowledgeable advisor who puts the client first, a high percentage of the clients include significant charitable giving in their financial plan.

The basic way one benefits from making a charitable gift is to put the gift into a split-interest entity wherein the charity and the donor (or other beneficiary) have different types of interest. Examples are charitable trusts, charitable gift annuities and pooled income funds. When the gift assets are sold by the charitable entity, there is no capital gains tax. Typically, the non-charity beneficiaries get lifetime income. This is a good deal for the donors when the donated assets would have been subject to a lot of tax, because the charity can invest the full amount of the gift without any taxes. As a result, the distributions to the beneficiaries are much higher than would be realized by selling the assets and reinvesting the after-tax proceeds. In addition, the income is partially tax sheltered because it is taxed as a combination of regular income, capital gain and tax-free return of capital.

What does the charity get? The charity gets whatever is left over when there are no longer any income beneficiaries, or when a specified fixed number of years is reached. The amount that is left to charity is random. Statistically, the terms of the trust or annuity must be such that the expected amount the charity will receive is at least ten percent of the donated amount (net present value). This is a small price for a donor to pay compared to the tax benefits, income, investment diversity and investment management that the donor and beneficiaries receive.

I’m sure readers can understand what’s happening when the gift is simple, such as appreciated stock. But what if the asset is a business that has a large capital gain? This can work also. The business can be donated into a charitable trust, and then sold by the trust. The donor can maintain control of the sale, because the donor can be the trustee of the trust. This type of deal has to be done carefully, so it is advisable to have it put together by a real expert. When done properly, it can be a real benefit to the donor. I note that it is even OK to have a potential buyer in mind before making the gift, but there cannot be an actual agreement. A gift of investment real estate works similarly to the business gift.

A home can also be donated, and the donor can keep the right of lifetime use. Sometimes the donor can get both lifetime use of the home and income from an annuity. It depends on the value of the property, the age of the donor(s) and the deal that can be worked out with the charity.

All of these complicated arrangements can be very beneficial to the donors, but they do require expert help. Sal Cania at Clarkson can help you, and may be able to arrange trustee and investment services to economically meet your needs.

I hope I have given you some ideas that can benefit you. I also hope that you consider Clarkson as the charity or one of the charities.

Bill Hurd

Read Bill's article, "Family First with a Charitable Trust"                         
Read Bill's article, "Trust Your Children or Trust a Trust"  
Read Bill's article, "Retirement Income for Financial Conservatives"     
Read Bill's article, "A Charitable Trust Might be for You"
Read Bill's article, "Charitable Giving May Be Easier Than You Think"
Read Bill's article, "Take Care of Yourself First"
Read Bill's article, "Why and How We Give to Clarkson"


Footnote: Bill Hurd passed away in 2016.  This article is published in thanks and admiration to a loyal Clarkson alumnus.

(rev. 12/2016)