Personal Business: INVESTING
`TIS BETTER TO GIVE--AND RECEIVE
The Salvation Army peddles its charitable remainder trust to would-be donors. Harvard University hypes its six pooled-income funds. The Metropolitan Museum of Art talks up its gift annuity. Even the Parkinson's Disease Foundation can arrange a unitrust.
Charitable organizations aren't content with just passing the plate anymore. Government cutbacks have long since eroded a big chunk of their funding, and individual donations have been spotty at best. To make up the shortfall, they have their eye on two massive income streams: the savings about to be passed from the current generation of 60- and 70-year-olds to their baby-boomer children, and the monies amassed by boomers in the bullish stock market of the '80s and '90s.
Originally designed as a tax-saving option for the wealthy, so-called planned giving is fast becoming the ultimate retirement savings vehicle. Programs offered by many big charities let you take an up-front charitable deduction, receive investment income, save on estate taxes, and, with appreciated property, avoid paying capital-gains tax--all in the name of giving to a worthy cause.
VARIATIONS. Here's how it works: You have stock worth $350,000 that you bought 25 years ago for $50,000. Were you to sell those shares tomorrow, you would pay a 28% capital-gains tax on $300,000. Instead, you donate the shares to a charitable remainder trust that names your favorite charity as the beneficiary. When the trust sells the asset, it pays no tax on the gain because it's a tax-exempt entity. The proceeds are plunked into an annuity, bonds, or some other investment, from which you and your spouse draw an income for the rest of your lives or for a specified term. You can write off a portion of the full market value, depending on your age and how much you elect to receive as a payout (interest and even principal, in some cases). If you can't take the full deduction in the year you make the donation, you have five years to carry it forward. When you die, the charity keeps the money that's left.
There are several variations on the charitable remainder trust. A charitable remainder annuity will pay you a fixed annual percentage of your donation of $100,000 or more. You set the percentage in advance, but by law it must be at least 5%. A charitable remainder unitrust (CRUT) pays a fixed percentage of the trust's total value, recalculated annually, so your income fluctuates.
It gets even better. A spin-off of the CRUT, dubbed NIMCRUT, for net income with makeup provision charitable remainder unitrust, lets you turn your income on and off as needed. In preretirement years, you can defer payouts while your investment builds tax-free. Later, when you want to boost your income, you can take higher payouts to make up for those missed years. Plus, you can keep socking away more money into your NIMCRUT, an important feature if you have already maxed out the allowable contributions to your individual retirement account and 401(k) plan. You're not subject to age limitations on withdrawals, as you are with most deferred-compensation plans.
TAX-SMART. In addition, you can bequeath the remainder of your 401(k) (or similar qualified retirement plan) to the trust if it's worth at least $25,000. Why? "One of the worst assets to have when you die is a lot of money built up in your retirement plan," says Davida Isaacson, director of planned giving at Channel 13/WNET, Public Broadcasting Service's flagship station in New York. Depending on your home state, your heirs could get socked with estate, income, and excise taxes. "They could lose up to 85 cents on every dollar," she says. With a NIMCRUT, the balance of your retirement fund is funneled through a "testamentary transfer" into the unitrust when you die, where it will continue to grow tax-free. You sign up your children as "income beneficiaries," and they draw a lifetime income from the trust.
A cheaper but less flexible alternative is the pooledincome fund, which requires an initial investment of just $5,000 to $10,000. A charity pools your money with other donations, and you earn a pro rata share of whatever the fund earns in a year. That means your income can rise or fall.
If you don't want to invest through a charity directly--or if your favorite cause doesn't have a pooled-income fund--Fidelity Investments offers a pooled-income fund through its Charitable Gift Fund. Requiring a $25,000 minimum, the fund yielded 6.75% in 1995, its first full year of operation. It lets you earmark the donation to up to 10 charities and change the beneficiaries at any time.
Although not trusts, charitable gift annuities appeal to older, conservative investors who want to be assured of a certain income. In return for a donation--generally at least $5,000--you receive a fixed income for life, depending on age. If you are 65 and donate $10,000 to the American Red Cross through a gift annuity, for example, you would receive 6.5%, or $650, a year.
SPREAD THE RISK. What's more, your income is 35% to 60% tax-free, and you can take a charitable deduction that depends on your age and annual payout in the year you make the donation. Younger investors can opt for the deferred annuity, which lets money build by giving no payouts in the early years. When you're ready to collect, you'll receive a larger amount. If you start at age 55, by 65 you get about 10%, or $1,000 of that initial $10,000 investment. And the charity? It gets about half your original gift.
Before you generously fork over any cash or securities to a cause, you'll need to do some investigating. All of these vehicles are irrevocable. Once you make a donation, you can't get the money back. You'd be smart, then, to consult an attorney, says Jay Steenhuysen, national director of gift planning at World Vision, a Christian relief organization.
If you choose not to go through a charity's planned-giving office because you want to remain anonymous or retain control over the investments, you can set up a charitable trust privately. But it's bound to cost more. Legal fees to draft the trust may run more than $1,000. Plus, there'll be an annual trustee's fee of as much as 1% of the assets. Such costs may be absorbed by the charity if it handles the trust from the start, says Channel 13's Isaacson.
One financial-planning firm, Renaissance Inc. in Carmel, Ind. (800 843-0050), will help you arrange a NIMCRUT of your own for as little as $2,000 a year. But it's expensive: You still pay legal fees, plus the annual administrative charge on $2,000 in assets is $120, or 6%. The more you contribute, the more competitive the rates get.
Committing money to a charitable trust is akin to investing in any other financial vehicle. Ask for the trust's prospectus and check out the investment strategy and performance record. If you're interested in a pooled-income fund, find out how many choices you can select from. Most charities offer just a balanced fund. Harvard has six funds, including equity growth, high-yield, and international bond funds. Although you can't shift money once you make the initial allocations, you can spread your investment risk from the outset in a diversified plan such as Harvard's.
Is it possible the charity or trustee could mismanage your money or use the funds inappropriately? Sure. "These are not risk-free strategies," says Craig Wruck, vice-president for development at The Saint Paul Foundation, which serves the St. Paul (Minn.) area. In one publicized case, the Internal Revenue Service is investigating a New York law firm for helping donors set up CRUTs that left very little money to charity. The federal government recently outlawed a practice, used by some Arizona-based charities, of kicking back hefty finder's fees to financial advisers who bring in donors. But problems have been few.
Still, the tax ramifications of these deals can be so complex that in most cases it would behoove you to talk to a knowledgeable adviser. In the meantime, you've gotten that warm, fuzzy feeling that comes from giving money to a pet cause--while receiving income and tax breaks in return.EDITED BY AMY DUNKIN By Barbara HetzerReturn to top