To give or not to give, that is the question… With the ever changing tax environment, making Estate Planning decisions have become more and more complex. Uncle Sam has designed a sociological system requiring people who are financially successful to give back to society either in the form of taxes or through charitable gifting.

So the question is... would you rather fulfill your civic obligations by paying taxes and leaving the stewardship of your tax dollars to Uncle Sam toward education, defense, high ways, etc. OR would you rather take charge and control the direction of your dollars through philanthropy. If you choose the latter, then designing a charitable gifting strategy is important in optimizing your wealth.

Considering that a gift, once executed, is irrevocable and with a plethora of charitable gifting strategies to choose from, making the right gifting decision or a combination thereof is critical. Unless you are an experienced philanthropist, here are a few tips to prepare you in making the right charitable gifting decisions:

DECISION #1: DO I HAVE A GENUINE CHARITABLE INCLINATION?

This is the first question you should ask yourself. Don’t get involved with charitable gifting for the wrong reasons (i.e. tax benefits, someone sold you on it, etc.). If your answer to this question is YES, then you can proceed by answering a few more questions as follows:

• How much should I give?
• To whom should I give?
• What do I wish to accomplish in my giving?

These are all basic questions which should be answered, before you can know how to effectively accomplish your plan. Do you have a long term giving plan? If you do not, then we would encourage you to establish one.

DECISION #2: SHOULD MY GIFT BE MADE FROM CASH FLOW OR NET WORTH?

• An outright gift of cash either from discretionary cash flow or existing assets may provide a better current tax advantage vs. a gift of net worth. Discretionary cash flow leads to more savings and investments, which leads to increasing your net worth, which may also lead to more estate taxes.
• Gifts of net worth may not immediately affect cash flow, and many times will not affect it in the long term, either. This is especially true of property that does not pay dividends or produce income, such as real estate, or low income investments such as many stocks and mutual funds. Gifts of net worth avoid the capital gains tax payable on the sale of appreciated property.

Example: You purchased stock for $10,000, and it is now worth $20,000. If you sold the stock, you would pay a capital gains tax on the $10,000 of growth. However, if you gave that stock to charity, rather than sold it, you would avoid the capital gains tax. And if you are in a 22% combined federal and state tax bracket, your gift would result in a capital gains tax savings of $2,200. In addition, you would receive a current income tax charitable deduction for the full value of the stock.

DECISION #3: CAN I MAKE THE GIFT OUTRIGHT, OR DO I NEED TO RETAIN INCOME?

Many of our friends do not realize that they can make a gift to charity, and retain the income for as long as they need it. This is very important if you have low income producing property from which you need a higher income, or if you have highly appreciated property which you wish to sell. If you sell the property, you will have a substantial tax liability. But as noted above, if you gift the property to a charitable organization, the capital gains tax will be avoided. In addition to avoiding taxes on the gain, which would be payable if you sold appreciated property, you also receive an income tax charitable deduction, which will provide additional tax savings, even when you retain the income produced by the property. And in reality, all you have done is guaranteed today that the charity(ies) will receive your gift at some time in the future.

DECISION #4: HOW LONG DO I NEED TO RETAIN THE INCOME?

You can design your gift agreement to pay income for:

• A fixed period of years -- up to twenty years
• Your lifetime
• Your lifetime and the lifetime of a spouse or other beneficiary
• A combination of lives plus years

The options are very flexible. You can design your gift agreement to meet your income needs.

DECISION #5: DO I DESIRE A FIXED INCOME OR A VARIABLE INCOME?

You can design your gift agreement with income to meet your personal goals and objectives. Some people are very comfortable with a fixed, guaranteed income. Others are concerned about inflation, and design their gift agreements so that income will increase in future years, as the value of the assets appreciates.

DECISION #6: HOW WILL MY HEIRS FEEL ABOUT GIVING THEIR INHERITANCE TO CHARITY?

Unless you have an open line of communication with your heirs about the purpose of your charitable gifting strategy, they may feel cheated out of their inheritance after you have gone. Although charitable gifting strategies are usually coupled with wealth replacement strategies to make their inheritance whole again, it might still be a good idea to discuss your gifting plans with your heirs and get them involved in your philanthropic work.

DECISION #7: WOULD IT BE BETTER IF ALL THE INCOME I RECEIVE IS TAXABLE, OR SHOULD I DESIGN THE GIFT AGREEMENT SO THAT I RECEIVE A PORTION OF THE INCOME TAX-FREE?

Under certain types of gift agreements, a portion of the income is automatically received tax-free. Other types of agreements can be designed so that most of the income will be favorably taxed. The taxation of the income from some gift agreements is dependent upon the property transferred to fund the agreement.

DECISION #8: HOW DO I CHOOSE WHICH CHARITY TO GIVE TO?

You need to determine what motivated you to give to charity in the first place. Was it because some one close to you suffered from a deadly disease and you want to provide hope for others? Perhaps you are religious or believe in education and other special interests. Whatever it is, let your heart show you the way. On the other hand, in order to take a tax deduction on a charitable donation, you must make your donation to a qualified organization, according to Internal Revenue Service guidelines. Qualified nonprofits - generally identified as 501(c)(3) organizations by the IRS - include groups that are religious, charitable, educational, scientific or literary in purpose, as well as those that work to prevent cruelty to children or animals. You may check the organization's status in IRS Publication 78, which lists most qualified organizations or call the IRS at (800) 829-1040 to verify a new organization's status.

DECISION #9: DO I NEED TO COORDINATE MY GIFT AGREEMENT WITH MY ESTATE TAX PLANNING?

With the recent economic crisis and bail outs, the estate tax resolution seems to be taking a back seat at congress. If congress fails to act on it by next year, the estate tax exemption will go back to where it was in 2001. This means that people with a net worth of $1,000,000 or more will most likely have some estate tax problems unless they plan appropriately. One of the ways to combat this is through the proper design of a charitable gifting strategy to transfer assets which would have been required to pay estate taxes to a number of qualified charitable organizations and foundations.

FINAL DECISION (#10): WHERE DO I START?

The first step is to ensure that you have the right team on your side to guide you through this maze of charitable gifting strategies. Your first line of defense will be to consult a competent financial planner who understands the intricacies of planned giving and estate planning (not to be confused with your broker, insurance agent, financial advisor, etc.). For a referral to a competent financial planner to get you on the right track, feel free to drop me a line. You will also need an estate attorney to execute the necessary legal documents for your plan. Also make sure you keep your accountant in the loop and consult them on tax issues. You will also need reliable trustees and administrators to make sure everything goes smoothly even long after you have gone. And of course, you will need to pick the charitable institutions you wish to work with.

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