Charitable Giving: Mapping Out a Lasting Legacy

October 30, 2012

Charitable Giving: Mapping Out a Lasting Legacy

Join Us on Facebook Join Us on Twitter Planning for the distribution of your wealth can take many paths, depending on your intentions regarding charitable and noncharitable beneficiaries. Whatever your aspirations, there are many strategies and techniques that can be tailored to help you achieve your charitable giving objectives. If you had the opportunity to leave a legacy that included making resources available to help family members lead more comfortable lives or to help a favorite charity continue its mission, and save estate taxes while doing so, wouldn’t you do it? In the book, Cultivating the Middle-Class Millionaire, (Wealth Management Press, 2005) authors Russ Alan Prince and David A. Geracioti studied more than 850 individuals with a net worth of between $1 million and $10 million. Their research revealed that nearly 38% of those interviewed had not updated their estate plans in the past six to ten years; another 35% had not done so in three to five years. Think for a moment about your own situation. When was the last time your estate plan was updated? What has changed since then? At a minimum, the tax laws in theUnited Stateshave changed, and will undoubtedly continue to do so (see “Estate Planning—An Exercise in Uncertainty” at the end of this article). Are you making full use of the current IRS rules pertaining to estates and charitable giving to help optimize the impact of your legacy? In addition to tax changes, you may have experienced significant changes in your professional and/or personal life. If so, does your existing estate plan reflect your current intentions and values? A career move or promotion could mean higher annual income and other forms of enhanced compensation. Your family makeup may have changed: you may have gotten married or divorced, had a child or grandchild or lost a loved one. In terms of your charitable intentions, perhaps you no longer feel connected to or passionate about a charity or cause that you had previously included in your estate. There is much you can do for those you love and for those causes you are passionate about, if you take the time to plan. Create a Unique Giving Legacy Planning for the distribution of your wealth can take many paths, depending on your intentions and your personal giving style. Family groups may work together to channel their charitable goals and build a philanthropic legacy that can be passed down through generations. Entrepreneurs may approach charitable giving with the same drive and commitment they apply to building their businesses. Others may approach philanthropy as an investment, and base their giving decisions on disciplined research and a long-term commitment to a particular organization. Whatever your charitable aspirations, when selecting a giving strategy, donors with significant wealth must evaluate a number of factors, such as their need for current income, the desired level of involvement for themselves and other family members today and in the future, as well as important tax considerations. Vehicles to Drive Your Giving Agenda There are many strategies and techniques that can be tailored to help achieve most, if not all, of your charitable giving objectives. Donor-advised funds, family foundations, charitable trusts and gift annuities round out the field of essential options that are available to donors and their families. Donor-Advised Funds—Offer Convenience and Flexibility. A donor-advised fund (DAF) is a tax-advantaged charitable giving vehicle that offers individuals maximum flexibility to take tax deductions and recommend grants to charitable organizations. By definition, donor-advised funds are administered by public charities and contributions to such funds are tax deductible. Donor-advised funds are particularly family friendly, as parents and children can consolidate their giving activities through a single fund account. In addition, children can be named as successors to a fund, ensuring the continuation of a family's giving legacy. Another significant advantage of a donor-advised fund is its capacity to accept any one of a variety of assets as charitable contributions. Checks/wire transfers, commercial paper, CDs, mutual fund shares, publicly traded securities, certain privately held securities, bonds and restricted stocks are all potentially acceptable assets. Donors are able to recommend how their contributions should be allocated among the available investment choices. Plus, the account has the potential to grow over time—increasing the donor's giving power. The convenience and administrative simplicity of a donor-advised fund allows donors to spread their charitable giving out over months or even years, in accordance with their own personal giving agenda. Family Foundations—Building a Legacy, Reaping Tax Benefits. Family foundations offer an effective way to pursue philanthropic objectives, involve family members in charitable activities and reap tax and estate planning efficiencies. A family foundation derives its assets from the members of a single family, in which the donor and/or the donor's relatives play a significant role in governing and/or managing the foundation throughout its life. Aside from helping families channel their philanthropic ambitions, family foundations can form a legacy of community involvement and responsible citizenship for generations to come. And, as their founders soon realize, family foundations offer potential tax and estate planning benefits. While gifts made to famly foundations  are generally tax deductible, the treatment of these deductions differs depending on the foundation's structure, the type of property/asset contributed and the donor's income level. But, as a general rule, all gifts to a family foundation are removed from the donor's estate, thereby avoiding estate and/or gift taxes. Trusts: Combine Charitable Intent With the Need for Income While the tax deductions and/or transfer tax benefits associated with most charitable giving vehicles help reduce the cost of making charitable gifts, an individual's own income or wealth transfer needs often have a bearing on his or her ability to give. To address both goals, individuals may want to consider other charitable vehicles such as a charitable remainder trust, a charitable lead trust or a gift annuity. A charitable remainder trust (CRT) can guarantee a lifetime income stream for you and your spouse, while minimizing current income taxes since you generally may deduct the fair market value of the charity's remainder interest in the CRT in the calendar year the CRT is funded. A CRT can also be an integral part of a family business succession plan. Lifetime stock transfers can be made to a CRT and subsequently redeemed by the closely held corporation. The redemption funds the CRT with tax-free monies that subsequently can be invested to provide an income stream to the business owner and spouse. A charitable lead trust (CLT) provides control over and enjoyment of your assets during your lifetime, an estate tax deduction at death equal to the present value of the charity's future income interest and a legacy to family heirs or a family trust with potentially little or no estate tax consequences. A charitable gift annuity (CGA) is in some respects even more cost and tax effective than CRTs/CLTs. CGAs have no administrative or setup fees. Virtually any asset can be used to fund a CGA, and the charitable organization itself guarantees either immediate or deferred lifetime payments to the donor. The typical tax deduction available in the year assets are transferred to a CGA ranges from 30% to 45% of the fair market value of the asset. Including charitable giving strategies in your estate plan can be an effective way for you and your family to enjoy an income stream during your lives, take advantage of  tax savings, and maintain a significant degree of control over assets—all while fulfilling your charitable goals. If you are creating a charitable giving plan, consider seeking the guidance of an attorney, accountant or other trusted professional who is familiar with trust & estates and nonprofit law. Obtaining assistance from the beginning—and retaining such counsel on a continuing basis—is key to making responsible decisions. Table Head: Charitable Giving Vehicles at a Glance

Giving Method


Tax Treatment

Donor-Advised Fund A fund maintained by a qualified public charity, such as a community foundation or a charitable gift fund sponsored by a private financial institution and administered by a public charity. The donor makes an irrevocable gift to the fund in exchange for the right to recommend grants to charitable causes of his or her choice over time. Cash donations: tax deduction of up to 50% of adjusted gross income (AGI).Long-term appreciated assets: tax deduction of up to 30% AGI.
Family Foundation A private foundation funded by members of a single family. Family members have significant control over giving decisions and investment management. Cash donations: tax deduction of up to 30% of adjusted gross income (AGI).Certain appreciated assets: tax deduction of up to 20% of AGI. Must distribute 5% of assets each year and pay excise tax of 1% to 2% on investment income.
Charitable Remainder Trust (CRT) An arrangement whereby cash or property is transferred to a trust. The donor and/or other noncharitable beneficiaries receive income from the trust for a period of time, after which the remaining principal becomes the property of the charity. No capital gains tax on donated assets.An income tax deduction based on the present value of the remainder interest in the trust. Beneficiary is taxed on income received on a tiered system.
Charitable Lead Trust (CLT) Essentially, a CRT in reverse. Charities become the income beneficiaries, receiving a stream of income from the trust for a period of time, after which the named noncharitable beneficiaries receive the remaining trust principal. No capital gains tax on donated assets.The donor pays discounted gift taxes on donated assets.
Charitable Gift Annuity (CGA) An arrangement whereby cash or property is transferred to a charity in exchange for the charity’s promise to make fixed annuity payments to beneficiaries, typically the donors, for life. Tax deduction available in the year assets are transferred range from 30% to 45% of the fair market value of the asset.A portion of income received is usually tax free.
 Estate Planning—An Exercise in Uncertainty Many favorable tax laws, including those involving estate and gift taxes are scheduled to “sunset” December 31, 2012, unless Congress once again moves to extend them (see table below). The uncertainty surrounding the current tax landscape underscores the need for individuals to meet with their advisors and start putting a plan of action in place. If the current tax laws are allowed to expire, individuals with estates larger than $1 million will have a very narrow window of opportunity to utilize the $5.12 million in exclusions and other benefits of the current law. This is a year in which pre-planning—including a charitable giving strategy—is crucially important. Please contact me to learn more about charitable giving strategies.   Table Head: Estate and Gift Taxes—Past, Present and Potential Sunset Rates


Top Estate and Gift Tax Rate

Amount Exempt From Estate Tax



$3.5 million


Top individual tax rate (for gift tax only)

Unlimited—estate tax repealed



$5 million



$5.12 million



$1 million

1If current laws are allowed to expire.  If you’d like to learn more, please contact Angel Chavez, CIMA® 415-984-6008,   Tax laws are complex and subject to change.  Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors do not provide tax or legal advice. This material was not intended or written to be used, and it cannot be used, for the purpose of avoiding tax penalties that may be imposed on the taxpayer. Individuals are urged to consult their personal tax or legal advisors to understand the tax and related consequences of any actions or investments described herein.  Article by McGraw Hill and provided courtesy of Morgan Stanley Financial Advisor.  The author(s) are not employees of Morgan Stanley Smith Barney LLC ("MSSB"). The opinions expressed by the authors are solely their own and do not necessarily reflect those of MSSB.  The information and data in the article or publication has been obtained from sources outside of MSSB and MSSB makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of MSSB. Neither the information provided nor any opinion expressed constitutes a solicitation by MSSB with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned.  Morgan Stanley Financial Advisor(s) engaged to feature this article.  Angel Chavez, CIMA® may only transact business in states where he is registered or excluded or exempted from registration Transacting business, follow-up and individualized responses involving either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made to persons in states where Angel Chavez, CIMA® is not registered or excluded or exempt from registration.  Investments and services offered through Morgan Stanley Smith Barney LLC, member SIPC.                                                             CRC 530221 [08/12]    

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