Economic turmoil impacts existing charitable planning in a myriad of ways. Following is a checklist of some.
◙ Charitable Lead Trust (CLT) Burn Out:
A common approach for a CLT is for a parent to establish a trust for a charity for a term of years, say 20. During the term an annuity payment is made to a designated charity or charities. At the end of the 20 year term the remainder goes to the parent's children. Sometimes the term of a CLT is designed not only to minimize gift tax consequences but to coordinate with the child's estimated retirement age. If the growth of the CLT portfolio is more than the payout rate to the charity, over the term the trust assets can grow significantly. However, the recent market meltdown may have derailed the target investment results so substantially that the parent may need to review the retirement assistance the child might need as the CLT may provide much less than anticipated. If the CLT were only recently formed, a substantial decline in value, especially if it had been invested to maximize the growth for the child/beneficiary, may be so severe that the CLT's annual charitable payments may burn out the trust so that it will end before the intended term with nothing left for the child.
◙ Testamentary Donations:
Review the size of your estate and the dollar figures of any charitable bequests to be certain that the significant changes in asset values has not undermined your goals. For example, if your estate was worth $5 million and you have four children, you may have been comfortable diving your estate equally between your four children and a favorite charity. But if the decline in your IRA and home values reduced your estate to $3 million, you might prefer to leave it all to your children. Instead of cutting the charity out entirely, you could draft flexibly and distribute the first $4 million or less equally to your children, the next $1 million tier to charity and then equally among your children and the charity above that threshold. This way, if asset values recover your original goals will be met. If not, your children will still be protected.
◙ Planned/Deferred Gift:
You had hoped to donate $100,000 to your favorite cause, but your earnings have been severely impacted by recent developments. Don't cut your commitment. Pledge the same $100,000 but commit to pay it over say 3 years. If circumstances improve, you can just pay it earlier.
You wanted to endow a perpetual gift that would support college scholarships for needy students whose parents who, as a result of chronic illness, are unable to pay for college. You had determined with the charity a target funding amount. However, in light of recent market performance, is that amount still sufficient to meet your goals? Review the status of the fund and the assumptions initially used as to what percentage could be paid out of that fund without depleting it (so it would in fact last in perpetuity). Increased funding may be necessary to achieve your goals.
◙ Insurance Gifts:
Using insurance to fund a large deferred gift for a charity is a common technique. If you want to make a large commitment, but fear because of market conditions it may not be viable, don't reduce your commitment, fund it with life insurance. Have an insurance consultant evaluate the performance of the policy, whether funding adjustments need to be made (perhaps you were able to stop premium payments several years ago, but the recent market declines again require annual gifts until the value of the policy is rebuilt).
◙ Real Estate Donations:
You donated appreciated real estate to a charity and received a substantial income tax deduction for the fair value of the property when donated, without every having to recognize the capital gain on the appreciation. The charity was going to sell the property. Review the status of this with the charity. If the charity was caught in a bad local real estate market crash, it may be stuck holding a property it cannot sell while it is paying carrying costs. You might need to make additional donations to defray this cost, or perhaps otherwise help the charity in its efforts to sell the property, to prevent a good deed from become a financial detriment.◙ Depreciated Securities: Don't do it. Donating securities that have appreciated to a charity is a great tax deal (you get a deduction based on the full fair value of the securities donated and don't have to recognize the otherwise taxable gain). However, donating securities that have declined in value is a lousy deal. You only get to deduct the fair value of the stock donated. You'd generally be better off selling loosers at a loss, and donating cash from the proceeds.
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