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Sarah Delano Pavlik and Tom Pavlik write a monthly column on legal and business issues for the Springfield Business Journal.


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Not-for-profit organizations are a central part of American life and the American economy.  Each year Americans give over $300 billion dollars to charitable organizations.  Many of these gifts come in the form of unrestricted cash gifts.  However, many people are not in a position to make an immediate gift or they want to make a gift in such a way that it has a long lasting impact on the charity.  There are a number of options for these situations, including charitable trusts, donor advised funds and private foundations.

If you want to make a gift to an existing charity, but cannot write a check today, then you may wish to include a gift in your will or trust agreement to take effect at your death.  Another option is to name a charity as the beneficiary of your retirement plan, which is often the best choice from an income tax standpoint.  For example, assume you leave your traditional IRA account worth $100,000 to your child.  If your child withdraws all of the account assets and he is in the 28% income tax bracket, he will pay $28,000 in income taxes.  However, if you leave the IRA to a qualified charity, it will receive the entire $100,000 amount.  Therefore, IRA proceeds are worth less to your children and more to charities.

Another way to make a future gift to a charity is by using a charitable remainder trust ("CRT").  A CRT must make an annual distribution of a set amount to one or more individual beneficiaries.  The term of a CRT can be a set number of years (up to 20 years) or the life or lives of named individuals.  Upon termination, the remainder must either be held in continuing trust for charitable purposes or be paid to charity.

For example, you can transfer assets to a CRT and provide that the trust will pay you 5% of the value of the trust assets each year for the rest of your life.  If you transfer $100,000 to the trust, you will receive $5,000 per year until your death (or until there are no assets remaining in the trust if the investments decline in value).

In order to qualify as a charitable remainder trust, the value of the charity's interest must be at least 10%.  This amount is calculated based on the length of the trust, the age of the beneficiary and the current IRS interest rate.

A charitable gift annuity is similar to a charitable remainder trust, however, it is a contract between a charity and a donor.  The donor transfers property to the charity.  In return, the charity agrees to pay the donor a fixed amount each year. The term of a gift annuity must be measured by the life/lives of one or two beneficiaries, so a husband and wife can have a joint gift annuity.  Because a charitable gift annuity is a promise by a charity to pay money to the donor, the State of Illinois has set forth minimum financial standards for any charity that wishes to offer such annuities.  Therefore, they are not available from all organizations.

Another charitable option which is very popular is the use of a donor advised fund.  These funds allow a donor to receive an immediate tax deduction while postponing decisions regarding the recipients of the donations.

A donor advised fund is similar to a private foundation.  A donor gives property to a communities foundation or other fund.  (Fidelity and other brokerage firms also offer donor advised funds.)  The communities foundation invests the property, and the donor makes recommendations regarding the grants made from the fund.  For more information on this option, you can visit the Sangamon County Community Foundation's website at www.sccf.us.

Some donors want to create their own organizations rather than contribute to an existing charity.  These donors have several options, but the costs and administrative burden can be high.

If a person wants to create his own charitable organization, then the organization will most likely be classified as a private foundation. A private foundation is generally a not for profit corporation with the donor's family member's or associates composing the board of directors.  The private foundation is "private" in the sense that it depends typically on a single donor or a single family of donors for its funding, and does not receive financial support from the general public. Because of perceived abuses and opportunities for abuse, the IRS closely scrutinizes the activities of private foundations.  Contributions to private foundations are subject to lower deductibility thresholds than apply to contributions to public charities.  In general, private foundations are limited in their activities to making grants to publicly supported charities.

A private foundation must apply for tax-exempt status and file annual reports with the IRS and the State of Illinois.  It must distribute a certain amount to charity each year.  Certain types of investments are prohibited, as is self-dealing with donors or their families.  Because of the costs associated with compliance, many professional advisors suggest that a private foundation should not be created unless it will be funded with at least $1,000,000.

If you are interested in any of these options, you should talk to your attorney or to the director of development at your intended charity.  Each of the options discussed here has different income and estate tax consequences, and may provide significant tax benefits depending on your situation.  However, the focus should be on your charitable vision.  Once you have determined your goals, your tax advisors can work with you to select the best vehicle to help make your vision a reality.
Posted in: October, 2007
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