Botanical Society of America - "Ways to Give"

Give the gift of tomorrow - become a member of the Botanical Society of America's Legacy Society -
http://www.botany.org/BSA-Legacy/BSALegacyForm.pdf

Thank you for taking the time to explore some of the options available for providing charitable gifts to the Botanical Society of America. Below we outline several mechanisms for giving and provide examples of how each might work for you and benefit the BSA. We thank The Dini Partners for their input and advice. Please note: the information is provided as an example only. Please consult your tax advisor for the option(s) that best fits your goals.

Your Goal
Your Gift
How to Make the Gift
Your Benefits
Make a quick and easy gift Write a check, make a donation on the website, ask the organization to put it on your credit card Income tax deduction
Make a quick and easy gift Using the stock transfer form, transfer stock directly to the Society Income tax deduction and avoidance of capital gains tax
Eliminate capital gains tax on the sale of a home or other real estate Donate the property to the Society or sell it to the Society at a bargain price Immediate income tax deduction and avoidance of capital gains tax
Give your personal residence or farm, but continue to live there Transfer the deed of your home to the Society, but retain occupancy Charitable income tax deduction and lifetime use of home
Make a large gift with little cost to yourself Give a policy with the Society as owner and beneficiary Current income tax deduction; possible future deductions
 
Avoid the twofold taxation on retirement plan assets Name the Society as beneficiary of the remainder of the retirement assets after your lifetime Avoidance of heavily taxed gift to heirs, allowing less costly gifts
 
     Retirement Plan Assets to the Society
       example 1
       example 2
     
Create and/or increase income from assets Create a charitable annuity that pays you a set income annually Immediate income tax deduction and fixed income for life, remainder of the corpus passes to the Society
Create and/or increase income from assets; Create a hedge against inflation over the long term Create a trust that pays you a fixed or variable percentage of the trust's assets, valued annually Immediate income tax deduction, annual income for life that has potential to increase, remainder of the corpus passes to the Society
Reduce gift and estate taxes on assets passing to heirs Create a trust that pays the Society a fixed or variable income for a set term, and the remainder passes to your heirs Reduced size of taxable estate; keeps asset in family with reduced taxes ramifications

CASH

When a donor makes a "cash" gift to the Society, if he or she itemizes tax returns, that gift is fully deductible, up to 50% of his or her adjusted gross income. If the total gifts exceed this limit, the excess may be carried forward for tax purposes for up to five years. Some employers will match charitable gifts, making the gifts worth even more to the Society.

Example:
Sue writes a check for $10,000 to the Society. At her 33% tax bracket, she saves $3,300 in taxes. Thus, her actual cost of the gift is $6,700. If her gift were matched, for her net gift of $6,700, the Society would receive $20,000.

TRANSFER OF STOCK

In most cases, a gift of appreciated securities entitles the donor to an income tax charitable deduction for the fair market value of the securities on the effective date of the gift. The donor avoids the capital gains tax that would be due if he or she sold the stock. Public and privately held securities must be marketable and convertible to cash within a short-term timeframe. Gifts of publicly traded securities will be valued at the average market value on the date the full interest in the transferred property is received.

Gifts of closely held stock will be valued based on a qualified independent appraisal at the time of the transfer. Generally, gifts of privately held securities will be accepted only when conversion into cash within a five to ten year timeframe is expected.

Example:
Harry and Sally have pledged a $100,000 gift to the Society. They own stock valued at $100,000 to use for the gift, but have not yet decided whether to give the stock or sell the stock and gift the proceeds. The stock was purchased pre-IPO for $10,000. Harry and Sally believe the stock price has peaked.

 
Sell Stock:
Gift of Stock:
 
Value of Stock
$ 100,000
$ 100,000
 
Basis of Stock
  $ 10,000
 
Gain on Sale
$ 90,000
 
Capital Gains Tax Rate
20%
 
Capital Gains Tax
$ 18,000
 
 
 
Net Gift to Charity
$ 82,000
$ 100,000
 
 
 
Tax Deduction
 
Assuming A 40% Tax Rate
$ 32,800
$ 40,000
 


Harry and Sally would be better off donating the stock to the Society as then they will never be taxed on the $90,000 of appreciation. Selling the stock and gifting the proceeds results $18,000 worth of capital gains tax and only credits them $32,800 in tax savings. The $100,000 gift of stock generates $40,000 in federal tax savings. As such, the net cost of the $100,000 gift to Harry and Sally is only $60,000. In addition, gifting the stock allows Harry and Sally to avoid a $90,000 increase in income that would have resulted from the stock sale.

REAL ESTATE GIFT

Quite often families have real estate for sale that has appreciated significantly in value - residential property, vacation property, farmland, or commercial property. Prior to the sale of the real estate, it is possible to make a gift to the Society through an undivided interest in the property. Upon the sale of the property, the Society's attorneys attend the closing proceedings along with the majority owner. The title company writes a check to the Society for the value of their ownership in the property, and the donor receives a charitable tax deduction for the current fair market value of the property given to the Society. No capital gains taxes are levied on the appreciated value of the property given to the Society. The Society could then dispose of the real estate as they wish. However, if the property is sold lower than the appraised value within three years of the gift, there are donor tax consequences.

Example:
Mary gives the Society a vacation cottage she no longer uses. It originally cost $50,000 but is now worth $150,000. She gets a $150,000 charitable deduction, which represents a tax savings of $42,000 in her 28% tax bracket. She also completely avoids tax on the $100,000 of appreciation. Now she no longer has to maintain the cottage, and the property will not be taxable in her estate.

RETAINED LIFE ESTATE

A family with a personal residence or farm - preferably one on which there is no existing debt - can transfer the deed to the Society and reserve for themselves the right to live on or use the property for their lifetime. While the donor is required to maintain the property and pay the taxes, the donor also receives a tax benefit for the gift based upon their age and life expectancy. The donor receives immediate recognition for this irrevocable gift.

Example:
Mrs. Smith, age 78, donates her home, valued at $200,000, to the Society for a retained life estate. She continues to pay for its maintenance, taxes, and insurance, and lives there for the rest of her life. In exchange for her gift, she qualifies for a charitable income tax deduction of $115,949. After she passes away, the Society will sell the home and use the proceeds for the funding area she designated.

LIFE INSURANCE GIFT

When a life insurance policy is initially purchased, it is usually intended to ensure the financial stability of a family should a tragic event occur. However, life insurance can be a tool with many purposes. If a family has a whole life insurance policy they no longer need for its original intent, they can contribute it to the Society. Purchasing a new policy and naming the Society as beneficiary is another possibility. This often makes a significant future gift feasible and affordable, especially for younger donors. Alternatively, perhaps someone is considering a sizable bequest to the Society, provided his or her family's future inheritance is not affected. Life insurance can play a part in meeting this goal, too, by replacing the amount donated back to the estate.

Naming the Society as Beneficiary - If an individual names the Society as beneficiary of a life insurance policy that the individual owns, no income tax deduction is available because the donation is not a complete interest in the policy. Thus, an individual may fulfill his charitable intentions by naming the Society as beneficiary of a life insurance policy; however, the individual will not receive the benefit of a lifetime income tax deduction.

Transferring Policy Ownership to the Society - Contributions of a life insurance policy to a charitable organization generates an income tax deduction generally equal to the fair market value of the policy, reduced to the donor's basis in the contract (generally, the total of the premium payments).

Paying for a Policy and Naming the Society as Beneficiary - A donor may choose to buy a new policy or transfer an existing policy to the Society while premium payments are still being made. The subsequent payments made each year by the donor are tax deductible, or the donor may write a check to the Society and have the Society continue the payments. Under either scenario, the payments are tax deductible.

Example:
Bill owns a $250,000 whole life policy with a cash value of $50,000. He chooses to transfer the policy to the Society, naming the Society as the new owner and the beneficiary. Bill receives a charitable tax deduction for $50,000. If Bill continues to make the premium payments each year, those payments are also tax deductible.

Indirect Use of Insurance for Wealth Replacement - In recent years, probably the greatest increase in using life insurance in philanthropic plans has been to replace for heirs of an estate a value given, by one means or another, to a charitable organization like the Society. A significant outright charitable gift might reduce the projected value of inheritances for family members. However, depending on the age, health, and marginal income tax rate of the donor, income tax savings from use of the charitable deduction can be enough to purchase life insurance, whose death benefits equal the value of the gift.

Example:
Joan makes a charitable gift of a building that has appreciated since she acquired it long ago. She knows that, among other benefits, this allows her estate to realize greater tax savings than if she had bequeathed the building to her children. (She might also have sold the building, but then she would have to pay capital gains tax.) She then purchases life insurance for the benefit of her children, an expense that she would have paid anyway in taxes, had it not been for the charitable deduction she received for her gift to us. Instead of receiving a building, her children will receive cash from the insurance policy - and all of this happens outside the probate process.

RETIREMENT PLAN GIFT

Retirement plan assets (e.g., interests in qualified plans and IRAs) often are a significant portion of an individual's taxable estate. These assets are income in respect of a decedent ("IRD") and subject to income tax when received by the owner or beneficiary. Because the combined estate and income taxes imposed on these assets may consume much of the plan balance, planning for their distribution is imperative. A charitable bequest of retirement plan assets is one alternative for minimizing the taxes imposed.

Retirement Plan Assets to the Society - When a donor has accumulated significant amounts in a retirement plan or IRA, one strategy to minimize tax under the IRD rules is to use retirement plan benefits to fund charitable contributions. Assets transferred to charities are sheltered from estate and gift tax because of the unlimited charitable deduction, and are deductible for income tax purposes as well (although certain limitations may apply.) Donors that desire to make charitable bequests at their death should consider using retirement plan assets. In this situation, the estate avoids recognizing taxable income related to the IRD items. Instead, the charity receiving the IRD recognizes the income but pays no income tax because it is tax exempt. In addition, the estate receives an estate tax charitable deduction equal to the fair market value of the donated IRD items. Thus, it owes no estate tax or income tax on the IRD items.

Example:
Sam had a $2,000,000 retirement plan account at the time of his death (the entire $2,000,000 is IRD.) Sam's Last Will and Testament makes a bequest of the plan assets to the Society. The Society will recognize the IRD when it receives the plan assets; however, it will not pay tax on the distribution because of its tax-exempt status. In addition, the estate receives a S2,000,000 estate tax charitable deduction and does not report the $2,000,000 IRD for income tax purposes.

If Sam had left the Society S2,000,000 in cash instead, his estate would still receive a $2,000,000 estate tax deduction, but would have to report the $2,000,000 RD for income tax purposes when the plan assets were received. Thus, the balance of the estate available to non-charitable beneficiaries would have been reduced not only by the $2,000,000 charitable bequest but also by the estimated $800,000 income tax paid on the $2,000,000 of IRD.

Example:
Under the rules governing her company's profit-sharing plan, Anne's account must be distributed within five years after her death. She estimates that when she dies, the account balance could be at least $200,000. If she were to name her daughter, Sandy, as the beneficiary, the entire amount would go to Sandy as ordinary, taxable income, incurring probable federal and state income taxes of more than $40,000. In addition, a federal estate tax of more than $90,000 would be due if Anne's other assets equaled more than the amount exempt from estate tax. Less than $70,000 of the $200,000 could be left for her daughter after payment of all the taxes!

Instead, Anne creates a charitable remainder unitrust and names it as the beneficiary of her profit-sharing plan. She arranges for the unitrust to pay 7% of the value of the assets to Sandy each year for life. The net result is significant income tax deferral. The entire $200,000 can be invested to produce investment income. The estate tax on the value of Sandy's interest would typically be paid from other assets. The partial estate tax charitable deduction for the present value of the charitable remainder interest will reduce Anne's estate tax.

CHARITABLE TRUSTS

Many families rely on investment income to maintain their standard of living, especially people who are retired. Quite often, these families are reluctant to sell assets that have appreciated in value due to capital gains tax liability. A form of charitable trust enables a family to transfer assets to a trust. These assets - corporate stock, real estate, etc. - may then be sold without being subject to capital gains taxes. The family enjoys the income from the trust for life. The assets of the trust then pass on to the Society after the death of the last beneficiary. A charitable trust may be a useful tool to families who fit the following pattern:

  • They have significant appreciated assets.
  • They have assets that are not producing income.
  • They are reluctant to sell the assets due to capital gains tax liabilities.
  • They would like to increase the income from these assets.
  • They have a desire to make a major gift to the Society.

Charitable Gift Annuity - This is a legal contract between the donor and the charitable organization, through which the donor exchanges cash, stocks, or other assets for an agreed-upon income for life. The donor qualifies for an income tax deduction the year when the gift is made. In addition, a portion of the income received is tax-free, and capital gains taxes may be reduced if the annuity is funded with appreciated stocks or securities. After the income recipient(s) have passed away, the corpus of the annuity will be used by the Society as designated by the donor.

Example:
Janice Smith, age 79, donates $25,000 cash to the Society for a charitable gift annuity. Based on her age, she will receive a fixed payment of 9% for life. This will produce an annual income of $2,250, of which $1,368 is tax-free. She will also qualify for an income tax deduction of $11,452.50. After her lifetime, the corpus will be used as she has designated.

Charitable Remainder Trusts - A charitable remainder trust (CRT) is a tax-exempt trust that pays all or a portion of its income to one or more beneficiaries for a specified term. At the expiration of its term, the remainder interest passes to the designated charity. Generally, a CRT is used when a donor would like to make a gift to the Society, but does not want to give up the present income stream that could be generated by the property. There are two forms of CRTs - the annuity and the unitrust.

Income from a unitrust is variable, increasing if the value of the trust increases and decreasing if the value of the trust decreases. Unitrusts invested for growth over the long term can be a hedge against inflation.

Through the annuity trust, the yearly payout amount does not change; it is set when the trust is established and must be at least 5% of the initial trust value.

Example:
Bill Smith, age 70, owns stock worth $1,100,000 for which he originally paid S100,000. He donates the stock to a charitable remainder unitrust to benefit the Society. He receives an income of 6% of the trust's value, which initially pays him $66,000 a year. After his lifetime, the Society will receive the assets remaining in the trust, which is estimated at $1,240,000 due to growth in trust assets.

 
Without a CRT
With a CRT
 
Value of Stock
$1,100,000
$1,100,000
 
Cost of Stock
-$200,000
-$200,000
 
Gain on Sale of Stock
$900,000
$900,000
 
Capital Gain Tax
-$180,000
$0
 
Net Cash for Investment
$920,000
$1,100,000
 
Payout Rate
6.0%
6.0%
 
Annual Payout to Donor
$55,200
$66,000
 
 
 
Charitable Tax Deduction
$0
$562,500
 
Assumed Tax Rate
40%
40%
 
Tax Savings
$0
$225,000
 
 
 
Estate Tax Savings
 
Value of Property Less Taxes on Sale
$900,000
$1,100,000
 
Charitable Estate Tax Deduction
$0
-$1,100,000
 
Taxable Amount
$900,000
$0
 
Top Estate Tax Rate
55.0%
55.0%
 
Estate Tax Due
$495,000
$0
 


Summary of Advantages of CRT versus Outright Sale of Assets:

  • $10,800 in increased annual income ($66,000 - $55,200 = $10,800)
  • $225,000 in income tax savings from charitable deduction
  • $495,000 in estate tax savings
  • Assets avoid probate
  • Satisfaction of leaving assets to a worthy cause

Charitable Lead Trusts - This trust is established by a donor transferring assets to a trust that provides income to a nonprofit organization for a period of years. At the end of that period, the trust assets revert either to the donor (grantor) or to someone else the donor designates (non-grantor). Therefore, the Society receives an income stream for a period of years, while the donor receives a current gift tax deduction for the value of the Society's interest in the trust. Gift tax is then due only on the present value of the remainder that eventually goes to a beneficiary and in some cases, no gift tax is payable. Even if trust assets appreciate by the time the trust term ends, no additional gift or estate tax will be due when the beneficiaries receives the trust assets. However, the beneficiaries may incur some capital gains tax ramifications.

Example:
John Jones establishes a lead trust, valued at $500,000, to benefit the Society. The arrangement will pay the Society an annual income 5% of the trust's value for 15 years, starting with an initial payment of $25,000. Over the term of years, the sum of payments to the Society is estimated to total $456,597. At the conclusion of the trust's term, the corpus of the lead trust, which has grown to $815,502, passes to Mr. Jones' family. In addition to benefiting the Society, Mr. Jones receives a charitable gift tax deduction of $236,585 at the time of the gift and is able to pass on $315,502 in growth to his family, which will end up saving $173,526 in gift or estate taxes.

Give the gift of tomorrow - become a member of the Botanical Society of America's Legacy Society -
http://www.botany.org/BSA-Legacy/BSALegacyForm.pdf

Special thanks to The Dini Partners for the preparation of the BSA "Ways to Give" materials. Please note: the information is provided as an example only. Please consult your tax advisor for the option(s) that best fit your situation/needs.

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