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Charitable giving reaches all-time high in 2006

Roundup: Charitable giving

• New report on philanthropy. Charitable giving in the United States hit a new record in 2006 —an estimated $295.02 billion, according to Giving USA 2007, published by Giving USA Foundat-ionTM and researched and written by the Cent-er on Phil-anthropy at Indiana University.

The record-setting gift amount includes $1.9 billion that Warren Buffett paid in 2006 as the first installment on his 20-year pledge of more than $30 billion to four foundations.

Donors gave an estimated $11.97 billion more than in 2005, a 4.2 percent increase (1 percent when adjusted for inflation). However, the 2005 estimate included nearly $7.4 billion in extraordinary disaster relief giving for three major natural disasters: the tsunami that struck the Indian Ocean area, the Gulf Coast hurricanes in the U.S. and the earthquake in Pakistan. When these gifts are excluded from the total, giving in 2006 rose 6.6 percent (or 3.2 percent after inflation).

Giving by individuals rose by 4.4 percent, accounting for 75.6 percent of all estimated giving. Charitable bequests in 2006 were 7.8 percent of the estimated total; foundation grantmaking rose 12.6 percent. Donations by corporations and corporate foundations declined 7.6 percent, reflecting the extraordinary gifts in 2005 for disaster relief as well as a slowdown in the rate of growth for non-disaster-related corporate giving. Without the 2005 disaster relief gifts included, corporate giving is estimated to have increased 1.5 percent

• In Congress. The House Ways and Means Oversight Subcommittee met on July 24 to review several issues involving tax-exempt organizations.

Because it has jurisdiction over federal tax policy, Ways and Means helps set the agenda for many of the key issues that affect the operation of charitable organizations. The discussions touched upon changes made to charitable deduction rules introduced in the Pension Protection Act of 2006, including the provision that permits IRA owners to make tax-free distributions from their IRAs to charity. This provision is set to expire at the end of 2007.

Representatives from two groups, Independent Sector and Council on Foundations, appeared and recommended an extension of the provision beyond its expiration date. In addition, they asked for several changes to the rules: removal of the $100,000 annual limit on deductions; expansion of the types of groups that can receive the tax-free distributions; and allowing IRA owners to make their donations beginning at age 59 1/2 (instead of the current age 70 1/2 requirement). According to Diana Aviv of Independent Sector, charities have received tens of millions of dollars in new or increased contributions since the enactment of the new IRA rule. And, although there have been many contributions of large amounts, some people, who might not otherwise have done so, are making distributions from their IRAs in the range of $4,000 to $5,000.

• Use of “wealth replacement” trusts. Charitable trusts allow donors to achieve income tax benefits while retaining the right to continue to receive income from the assets that they are donating. These trusts may be created during the donor’s lifetime or in his or her will.

Although charitable trusts offer many benefits, they can operate in such a way as to unintentionally disinherit heirs. One possible solution that has become increasingly popular is for families to create what’s typically called a wealth replacement trust. A wealth replacement trust uses the proceeds from a life insurance policy to replace the amount donated to charity that would otherwise pass to beneficiaries. Of course, there are premiums to pay, but they are often, in effect, substantially reduced — or even eliminated — by the amount of savings from the tax benefits achieved.

The premium payments to the wealth replacement trust are considered gifts and, thus, are potentially subject to federal gift tax. However, the annual gift tax exclusion (currently $12,000) is available to help shelter the premiums from taxation.

• Retirement planning with a charitable twist. High-income executives and professionals generally take maximum advantage of the tax-deferred retirement plans that are available to them. One form of trust, a charitable remainder trust, offers additional means for investing for retirement.

The particular format is referred to as an “income only” charitable remainder unitrust and works like this: Let’s say that at age 45 Executive sets up an income only charitable remainder unitrust that pays Executive and Spouse a lifetime income of 5 percent per year, or the actual amount of trust income, whichever is less. The trust is funded with $50,000, and the annual exclusion amount available to both Executive and Spouse each year is added to the trust for 20 years. The trust is invested in growth stocks distributing little or no income. At the death of both Executive and Spouse, the funds in the trust pass to a designated charity or charities.

Suppose that the investments in the trust grow at approximately 8 percent annually. By retirement at age 65, Executive will have accumulated over $1 million. Now the trust assets can be reinvested to produce immediate income and allow Executive and Spouse to receive annual payments of $50,000 a year.

Jeff Francis is vice president and senior investment officer for First Tennessee Brokerage. For more information about this and other personal finance issues, call the center at 865-971-2321.


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