Charitable Planning Strategies

Charitable Planning Strategies

Warren Buffett, the billionaire investment guru, made international headlines recently when he announced his plans to donate about 85% of his stake in his company, Berkshire Hathaway, to a charitable foundation established by another business icon, Microsoft Chairman Bill Gates, and his wife, Melinda. These transfers are estimated to be $31 billion. Another $6 billion will go to four Buffett family foundations.

Buffett's generosity is unquestionable, but there was much more to his decision than just a desire to help other people. He was also engaging in efficient tax and estate planning. While the assets of most high-net-worth individuals fall short of Buffett's sizeable fortune, households with $5 million or more in investable assets face many of the same issues that Buffett confronted over his estate.

?There are essentially three boxes where your money can go: estate taxes, your family or a charity,? says Eric Reinhold, President of Academy Planning Group in Orlando, Fla. Reinhold is a registered representative and an investment advisor representative with Lincoln Financial Advisors.

Estate taxes are not earmarked for any special social program. ?The government taxes your estate and Congress decides if it's going to spend it on social, military and other federal programs,? says Reinhold. ?Wouldn't you like to be the charity instead and decide where your money goes??

Maximizing Tax Benefits
For most high-net-worth individuals, charitable donations are probably already a part of their tax reduction strategies planning. The biggest issues, then, are how to be the most efficient in your giving and how to maximize the tax benefits.

One way to do this is to reduce or eliminate capital gains on appreciated investments. Assume you usually make contributions to a favorite charity of $10,000 a year. This year, instead of giving cash, you make a gift of some stock that cost you $2,000, but is now worth $10,000. If the stock qualifies as long-term capital gains (LTCG) you may get to deduct the full value for the gift, subject to certain restrictions. In addition, you avoid paying the 15% federal tax on the $8,000 LTCG.

?I find many individuals holding on to a stock they inherited for emotional reasons,? says Reinhold. ?I encourage them to give appreciated stock to accomplish their charitable goals in a tax-efficient manner.?

Laying the Foundation
What are the merits of creating your own foundation? Individuals who come into sudden wealth, such as professional athletes, are increasingly choosing this course. But the same option is also open to individuals who have amassed significant fortunes, and Reinhold says the trend is likely to grow for a number of reasons.

The baby boomer generation is the wealthiest in history. The leading edge of that group just turned 60 this year, and many boomers want to stay active and productive in their retirement years. One way is to create and run your own foundation, says Reinhold. Of course, barriers must be overcome. One is the relatively high setup costs, which can run as much as $20,000 or more. Another is the expertise required to navigate the phalanx of rules and regulations imposed by the IRS. Warren Buffett chose to finesse these issues by making his gift to an existing foundation that already had a significant infrastructure. Not everyone will do that.

As the head of your own foundation, you can determine the causes you want to support and the recipients of funds. You can hire yourself and family members to run the foundation. Reasonable foundation-related expenses are tax-deductible.

Another option is to set up a charitable remainder trust in which you receive the potential for a tax deduction upfront and income while you are living; when you die, the remainder will flow to your foundation for your children to run, without the burden of paying estate taxes.

If you?re interested in establishing a foundation, there are quite a few organizations that can help you ensure it complies with all IRS regulations yet keep your costs relatively low. Generally, these organizations are a good solution for people in both the mid- and high-net-worth brackets.

Talk to Your Financial Planner About:
  • What type of charitable donation you?d like to consider.
  • The logistics of setting up and executing your philanthropic venture.
  • How to optimize your estate tax reduction strategies planning.


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