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Justine Tenney
Justine Tenney
Translating Family Values Into a Tax Planning Tool
How charitable goals can be used to save taxes while achieving a family’s significant, long-term objective.

February 17, 2011
by Justine Tenney, CPA, PFS

“Charity begins at home.” Many families take that to heart and use their charitable intentions as a power tool in their tax- and wealth-transfer strategies and, equally important, to preserve their family’s values and bring their family members closer together.

Our society still benefits from the philanthropy of the last century, when wealthy industrialists shared the fruits of their labors and helped the arts, medicine and education to flourish. Today’s famous philanthropists come from economic sectors that were insignificant or nonexistent 100 years ago, such as media, technology and entertainment. And their gifts are often directed towards improvement of the human condition worldwide as opposed to cultural and religious activities. But nevertheless, the theme is the same — to give back to society and by so doing, to help make the world a better place.

Some of the wealthiest and most renowned families led by Warren Buffet and Bill and Melinda Gates have recently been making news by pledging major portions of their fortunes to charity. Through their efforts, 40 billionaires to date have done the same. But charitable giving is not limited to the richest among us. American charities have been the recipients of approximately $300 billion in donations annually and approximately 65 percent of all American households engage in some form of charitable giving.

We are often consulted by our clients as they consider making charitable gifts. Many clients are at least partially motivated to give by the immediate financial tax benefit that charitable giving provides. We can advise them on the benefits of gifting appreciated securities as opposed to cash and crunch numbers that let them know what the net cost of making charitable gifts will be. Sometimes clients may benefit from making qualified contributions directly from their individual retirement accounts (IRAs) as a substitute for paying tax on a required minimum distribution (RMD). There are instances in which clients have artwork, real property, collectibles or inventory to donate and financial specialists assist them with complying with the technicalities of making those types of donations, when independent appraisals and contemporaneous acknowledgments from the donee organization must be obtained.

Clients sometimes consider making major contributions simultaneously with the occurrence of another event. For example, a mother had transferred her apartment to her three children via a residence trust. Sometime after the trust term expired, the mother decided to relocate and the apartment was sold. Since the apartment had carryover basis, there was a large gain. The siblings decided to donate a tract of land that they owned jointly to a preservation trust in order to reduce the gain. There was an obvious financial benefit to the contribution, but they were also motivated by a shared desire to see the natural area in which they spent summers as children preserved for posterity.

Both charities and donors can benefit from a Charitable Retained Annuity Trust (CRAT) or a Charitable Retained Unitrust (CRUT). In this type of vehicle, the donor makes a contribution, frequently of appreciated property, to a trust, while retaining the right to receive the income from the assets contributed either for a specified period or for the remainder of his or her lifetime. This is known as a split-interest trust. The value of the retained interest reduces the deductible charitable contribution. The tax savings from the contribution can be used in combination with the funding of an insurance trust, which allows proceeds from a life insurance policy to pass to heirs free of estate tax. The insurance proceeds replace the assets going to charity.

A private foundation is a powerful vehicle to enable a family to continue its charitable goals over future generations. Funding a private foundation transfers wealth without incurring gift or estate tax and actually provides tax benefits. Establishing a private foundation and including younger family members on the governing board enables those children and grandchildren to have the intangible benefit of making charitable contributions. Similar results can be obtained with the use of a Donor Advised Fund (DAF) created through a communal charitable fund. A DAF requires less administration than a private foundation and may be more appropriate when the amount being contributed is less than $1 million.

In addition to the typical tax benefits of an immediate deduction for donations of cash or appreciated stock, another strategy exists when a trust is in the picture. For example, a client is the beneficiary of a marital trust and wishes her family to continue her practice of supporting the arts. She exercises her right to take a five percent principal distribution from the marital trust and she and the independent trustees agree to make the distribution in low basis appreciated stock. The distribution value is the market value of the securities. The client then contributes the stock to the family foundation. The client has a deduction of the market value of the securities (there is a 20-percent limitation on the contribution of appreciated securities to a private foundation) and the tax at the foundation level will only be at the rate of one percent or two percent. There is a net-tax benefit to the client for the donation and virtually all of the appreciated value has been transferred to the foundation.

While there are rules against self-dealing in private foundations, there are definite intangible benefits that attach to the ability for future generations to make substantive charitable contributions. In addition, the family foundation provides a forum for family members to work together and to continue the charitable goals that the founding generation valued.
A similar strategy can work for families that are politically inclined. The family can establish a Political Activities Committee (PAC) and fund it. While there are no tax deductions for transfers to a PAC, this strategy removes assets from an estate and provides future generations with the ability to make contributions to political candidates and help to shape public policy.

For many of our wealthy family clients, charitable giving and philanthropic goals are considered and adopted in their plans to transfer wealth. As trusted advisors, you can inform your clients of the strategies available to them and assist them in reaching their objectives to benefit society and preserve wealth, with the corollary result of strengthening intergenerational bonds and preserving their family values.

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Justine DeVito Tenney, CPA, PFS, CFP, MBA, is a partner with WeiserMazars LLP, specializing in providing audit, tax, and consulting services to law firms, professional service firms, not-for-profit organizations, high net worth individuals and family groups. She also provides outsourced family office functions, including business management for high net worth individuals and family groups, as well as their trusts and foundations.