Our primary mission at Pinnacle Advisory Group is to give our clients the peace of mind to enjoy the things in life they find most fulfilling, including not only relationships, activities, and hobbies, but also philanthropic endeavors. Contrary to popular belief, support for charities and causes isn’t a one-way financial street – there are several charitable giving instruments that will actually help you streamline your cash flow and reduce your taxes. By using them, you can experience the joy of giving while also receiving a financial benefit.
Here are three of the more popular instruments.
“Man’s Best Friend”
At 65, Molly was considering retirement. A dog enthusiast, she had recently become more involved with her local animal welfare shelter, which served a population of canines and other animals. She had saved and invested over the years, but wanted to feel more secure about her sources of income. She was also hoping to reduce the risk in her portfolio, which included certain highly appreciated securities.
Through her advisors, Molly was educated on the concept of a charitable gift annuity — a contract under which a charity agrees to make periodic fixed payments for life to a donor, or other chosen beneficiary, in exchange for the donor’s gift. By proceeding to establish a charitable gift annuity with the animal shelter, Molly received a sizable income tax deduction for the year of the gift, and avoided capital gains taxes on the appreciated stock she used to make the donation. She will also receive income — partially tax free — for the rest of her life, while she watches joyful families adopt new pets for their households.
Though retired from his career as an engineer, Miguel remained busy, serving as a board member of a nearby food bank in addition to managing two rental properties he had owned for several years. However, after growing weary of landlord duties, and with his wife Angela nearing retirement, he wanted more freedom to travel and relax. The properties, well kept and in a prime location, had increased significantly in value since his original purchase, and had also been a source of income for him. Faced with the complexity of tax and investment considerations, and in light of his evolving goals and circumstances, Miguel sought advice.
Through discussions with a food bank representative, his attorney, and his financial advisor, he found the tool that could serve his needs. A charitable remainder trust is an instrument which, when funded, provides the grantor or his designated beneficiaries with periodic payments for life or a term of years, after which a designated charity receives the remaining trust assets. By gifting the condominiums into a unitrust with the food bank as a remainder beneficiary, Miguel shifted his administrative burdens to the trustee, received a significant income tax deduction, and avoided taxes on the appreciation of the properties. In addition, he’ll now receive from the trust income distributions of potentially increasing amounts (depending upon market performance) for life.
Freed from the responsibilities of property management, he and his wife look forward to travel and leisure. At the same time, they have the satisfaction of knowing that at the end of the trust term, the food bank will be able to use the remaining trust principal to provide food to those in need.
Joan was a loyal alumnus of the college she attended — a regional school with a growing reputation. She credited the school with forming her values, furthering her career, and enabling her to meet her husband. At 78 and a relatively recent widow, she knew the substantial size of her estate raised transfer tax issues. She was familiar with charitable bequests made through a last will and testament, but thought it would be nice to actually witness the impact of her generosity. She also wanted to plan well enough to pass on a significant inheritance to her two sons, Andrew and Matthew.
Consultations with her advisers revealed that her concerns with estate taxes, her desire to provide for family, and her charitable intent could all be addressed by a non-grantor charitable lead trust. The converse of a remainder trust, a lead trust provides an income stream to the charity for the designated trust term, with the remaining principal reverting back to non-charitable beneficiaries at the end of the term. Using a portion of her portfolio composed of blue chip stocks primed for growth, Joan funded a lead trust naming her alma mater as current income beneficiary and her sons as equal remainder beneficiaries. As a result, the school will receive a considerable income stream, which will be used to create an endowed scholarship fund in the name of her and her husband. In turn, Joan’s sons, once they receive the remaining trust principal, will benefit from any growth in the assets during the trust period and from the sizable gift tax deduction applied on Joan’s estate. In the meantime, Joan knows she’ll be providing educational opportunities for generations to come, and looks forward to meeting her scholarship recipients at campus stewardship events.
As these anecdotes show, in addition to providing satisfaction and fulfillment, there are also financial benefits in donating to charity, involving income and estate taxes, cash flow, and other variables. And these are only a few examples of the many charitable giving instruments available. If you wish to combine your charitable goals with your financial objectives, consult your Wealth Manager. We’ll be happy to help you experience the joy of giving while living the life you have worked so hard to enjoy.