Dairy Excel: Charitable gifts: Too good to be true?

Sometimes charitable giving is sold like the snake oil of the past. We may be told it will “solve” all our income tax and estate tax problems.

Well, the claims are not all snake oil. The truth is, the federal government encourages gifts to schools, churches, hospitals and other publicly supported charities by allowing charitable deductions for a variety of gifts. Gifts can solve a variety of tax and income problems, including some that are not so obvious.

Recently I was asked if it is possible to give a farm to a charity, avoid income tax on the transfer, lower or eliminate estate taxes, and get a guaranteed income for life? The answer is yes, plus the persons making the gift may deduct part of the gift on their income tax return. The tool that will do this is the “Charitable Remainder Unitrust.”

Other charitable tools may help you accomplish different objectives.

Getting information.

One of the easiest and least expensive ways to learn what tools might work for you is to contact a charitable organization and ask to meet with someone knowledgeable about charitable gifts.

Are there disadvantages to charitable giving? Of course! There are potential additional advantages as well. The potential advantages and disadvantages in each case will depend on the type of property transferred to the charity and each individual’s circumstances.

Charitable gifts certainly deserve a careful look by persons who have accumulated substantial assets, some of which are not needed by the next generation. Many families in northeastern Ohio own a farm or other rural property that has appreciated substantially. Some of these same families have little cash and low annual incomes. At least some of these families could give all or part of their property to charity, increase their income and have fewer worries.

Example.

Here is a simple example. Let’s assume a married couple gives a farm worth $500,000 to charity in order to fund a charitable remainder trust that will pay them income for life.

* Unlike a sale, there are no capital gains taxes on the transfer to the charity. The property transfers tax free.

* Assume the husband is 65 and the wife 60, the charitable remainder trust will pay them a predetermined percentage, but not less than 5 percent of the fair market value of the trust’s assets, as revalued annually.

In our example, if the predetermined payout rate is 6 percent, the husband and wife may receive $30,000 (6 percent x $500,000) in the first year of the trust. The net proceeds are invested, so the actual amount received will fluctuate, depending on how the investments do.

* The husband and wife have reduced their estate by $500,000, plus any costs they incurred to make the transfer.

* They are entitled to an itemized income tax deduction of over $125,000, which may be used in the year of the gift and five additional years, if necessary.

* The proceeds will be managed by professionals who work for the organization and have every incentive to invest well because the charity ultimately gets the proceeds.

* They can help one or more worthy causes of their choice.

Disadvantages:

In order to generate an income for the donor family, the charity will immediately try to sell the property for the best price possible; if the property is not sold immediately, the donor family may receive little or no income from the trust until the property is sold.

* Generally the property gifted to the charity must be free of debt.

* The property owner’s heirs normally receive nothing from the property given to the charity. However, the annual income payments can be paid to persons other than the ones who made the charitable gift.

* The annual income payment is a fixed percentage of the investments in the individual’s account. The percentage is guaranteed, but the value of the underlying investments will fluctuate.

* The costs of making the gift (such as title work, the appraisal and legal work prior to the charity accepting the gift) are usually paid by the person(s) making the gift; other costs associated with acquiring and holding gifts of real estate will be charged against the sale proceeds.

Getting started.

One of the most important steps for most people is to seek professional advice about your charitable gift plan. Persons who may provide wise counsel include your accountant, attorney, and your financial adviser.

You may wish to discuss your gift plan with several charities, although talking to more than one at one time may get confusing. You may know you want to give all or at least most of your property to your college alma mater or church, but if you are considering a substantial charitable gift, you also would be well advised to visit representatives from at least one other charity.

Some factors that are somewhat negotiable and vary between charities include: the annual payout percentage, who pays the legal and other transfer costs, their ability and willingness to work with a potential donor, and their investment ability.

It is important to compare different charities’ historical investment records, particularly if a substantial portion of your future income is dependent on the investment ability of the charity.

If you don’t know how to compare their investment history, ask your accountant to help. If future income is not an issue, but selling the property is, some charities may be much more willing and able to guarantee the future use of the property in ways you wish.

A charitable gift of real estate may help you solve some of your income tax problems. It may also provide you with the satisfaction of knowing your contribution will provide a substantial benefit to the charity of your choice.

Funding a charitable remainder trust with real estate requires thorough analysis and consideration. Hopefully, you will find substantial benefits to you and your family. The choice is ultimately yours.

(The author is the northeastern Ohio farm management specialist with OSU Extension. Questions or comments can be sent in care of Farm and Dairy, P.O. Box 38, Salem, OH 44460.)

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