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IN THE FACE OF TRAGEDY THE SENTIMENT TO SHARE

October 2002 - By Eden Rose Brown J.D. Attorney and Counselor at Law

The tragic events of September 11th are still fresh in our minds and the pain still lingers in our hearts. At times of tragedy, be it natural or human-caused disasters, Americans have always had the sentiment to share with those less fortunate; To help those that help others. In the past few weeks, thousands of donors have lined up at Red Cross centers to give blood, hundreds have volunteered to assist in rescue, recovery and care of the grieving, and millions of American have reached into their pocketbooks and donated much needed cash to rescue organizations.

The desire to share comes from within each of us. For those who choose to donate to worthy causes, our tax laws provide additional benefits.

Gifts During Life

The simplest form of charitable gift is a check, made payable to a charity and delivered before the end of the year. For those who itemize deductions on their income taxes, this will result in a direct and immediate deduction against taxable income. (There are some limitations, but generally only if total charitable gifts exceed 30 percent to 50 percent of adjusted gross income, or where gifts are made to a private foundation).

In many cases, people want to support charitable organizations but do not have the cash, or perhaps they seek greater tax advantages than one can get with giving cash. If this be the case, then a gift of some other asset may be appropriate, and may provide an even greater tax benefit for the donor.

Lifetime Gift of Appreciated Assets

One example is stock that has been owned for some time and may be worth considerably more than its original price. It may be paying little or nothing in the way of dividend income, or may represent too large a portion of your investment portfolio. Selling the stock (in order to diversify your portfolio, for example) would create taxable capital gains.

If the stock is transferred directly to a charitable organization, however, then little or no income or cash is given up, no capital gains tax is incurred; but a deduction equivalent to the stock’s full current value may benefit the donor. Having your estate planning attorney draft a charitable trust for your donation provides even more benefits, including the ability to diversify an investment, a steady stream of income for your (and your spouse’s) lifetime and an immediate income tax deduction.

Similar benefits can be obtained through the transfer of appreciated real property or even valuable collectibles such as artwork, coins or stamps.

Gifts at Death – Life Insurance

In other situations, people may prefer to benefit a charity at the time of death. One way is to include a provision in your estate plan for a distribution to one or more charitable organizations. Another is to name the charity as direct beneficiary under a life insurance policy.

Perhaps an insurance policy was acquired many years ago to provide cash for education or to pay off a mortgage in the event of your early death. It may be that your children are now adults and the mortgage is paid off, so the needs for the life insurance no longer appear to exist.

Before terminating the policy, however, consider its potential benefit to a charitable organization. The policy may be paying little or nothing in the form of dividends, and future financial security may be assured without its cash value.

In this case, naming one or more charitable organizations as beneficiary under the policy may be the easiest way to create a legacy and benefit your favorite causes. Also, because of deductions under the estate tax law, that insurance passes completely free of estate taxes. Indeed, if the policy itself is transferred to the charity now, it may even generate an income tax deduction equivalent to its current cash-value.

Gifts at Death – Retirement Plans

Another tax-advantageous way to make gifts at the time of death is through an IRA or similar retirement account. Where a surviving spouse or children receive such accounts following a person’s death, account distributions will be subject to income tax as the beneficiary receives them. In certain highly taxable estates, IRA, 401K or similar retirement plan assets can be subject to combined estate and income taxes of as much as 75 percent.

But if the beneficiary designation is changed to provide for direct distribution to a charity at the time of death, the charity will receive the entire amount of the distribution, free of taxes. The beauty here is that the actual “cost” to family beneficiaries for this type of charitable gift could be as little as 25 percent. (The beneficiary who really comes up short on this arrangement is the IRS).

Finally, there are some situations where a charitable donor can obtain three tax benefits: current charitable deductions against income taxes, exemption from estate taxes, and a “partnering” arrangement by which the donor can obtain the benefits of the tax-free status of a charitable beneficiary. These gifts will be the subject of upcoming articles.

There is no better time to open up your hearts and your wallets to aid your favorite charitable causes and show the strength we have as a national community. The many tax advantages allowed for these gifts only reinforces our willingness to share.

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Attorney Eden Rose Brown is dedicated to providing comprehensive, highly personalized estate planning counsel to couples, families, individuals and businesses. She holds the highest standard of scholarship, client service and lawyer accessibility. The Law Office of Eden Rose Brown is located downtown in the Pioneer Trust Building, 117 Commercial St. NE, Salem, OR 97301. 503-581-1800. Eden@EdenRoseBrown.com