The Wealth & Wisdom Blog

“Wessman…Wessman….Oh yes, I recognize your last name–your wife sends me all those fundraising emails!

My wife Heather is the associate development director at Avail Academy, a private school in Edina.  When I first meet some Avail Academy parents, they claim to recognize our last name by reason of Heather’s numerous fundraising emails sent to them on behalf of the school.  Ahead of the year-end charitable solicitation season, the season when your email inbox is filled with year-end requests for charitable contributions, in this month’s update I provide some thoughts on how lifetime charitable giving can be coupled with post-death (“testamentary”) charitable giving.

• Tax-Deductible Charitable Contributions:

While our clients make charitable contributions for a variety of reasons, everyone who makes charitable gifts should attempt to make full use of the income tax and estate tax deductions available for gifts made to tax-exempt organizations.  Subject to the limitations specified below, gifts made to “tax exempt” organizations permit the donor to receive an income tax deduction.  Testamentary gifts to tax-exempt organizations and/or to donor advised funds receive an unlimited charitable estate tax deduction, and thereby pass free of any state or federal estate taxes.

Deductibility Limits as a Percentage of Adjusted Gross Income

Direct Gifts to Public Charities and Private Foundations. Still the most common type of charitable gift, donors can make gifts directly to public charities or private foundations.  In the absence of specific provisions within a client’s documents, or a legally-binding commitment to the charitable organization, the donor’s ongoing charitable gifts must cease upon the donor’s death.

Indirectly through Donor Advised Funds.  As noted previously, donor advised funds (“DAFs”) have become increasingly common to serve as a “charitable checking account” by which donors can manage their charitable giving.  In comparison to private foundations, DAFs can be administered far more cost-efficiently, and provide the donor more flexibility, in the timing of distributions to public charities. Donors can direct that recurring gifts can continue even following their death.  Earlier this summer, certain members of Congress signaled a desire to make significant changes to how DAFs must be administered, including requiring a minimum payout to public charities annually.  While such proposals have not yet been enacted, we will certainly keep you informed of any changes.

• Partially-Deductible Charitable Contributions

Charitable Remainder Trusts permit the donor to take an income tax deduction for a portion of the value of the property contributed.  These types of trusts are called “split interest trusts” because there is both an individual beneficiary as well as a charitable organization beneficiary.  During the initial (non-charitable) term, the individual retains the right to receive an annual distribution.  By reason of the individual’s receipt of assets, some portion of these annual distributions may be subject to income taxes.  Following the end of the initial term, the remaining assets pass to charity.  The strategy might allow for the individual to delay, or altogether avoid, the imposition of capital gains taxes that would otherwise be due upon the sale of a highly-appreciated asset.  A charitable remainder trust could also be funded with “testamentary” gifts at death, and thereby allow a family member (e.g., a spouse) to continue to benefit from trust assets, with remaining assets passing to charity.

• Non-Deductible Charitable Contributions:

In additions to “deductible” charitable contributions, I have assisted a growing number of clients consider and implement certain giving strategies that, while not “deductible” from a tax perspective, are intended to achieve important charitable planning objectives.

• Gift Trust for Specific Individuals.  I recently assisted a group of wealthy donors create and fund an irrevocable trust for the benefit of the young children of a terminally-ill colleague.  This trust was funded with cash contributions, with the named trustee directed to make distributions primarily for the educational costs of the colleague’s children.  While these donors are not entitled to any charitable deductions, the donors benefit from the certainty that their contributed funds must be used by the trustee for the educational costs of the named beneficiaries.
• “Go Fund Me” Gifts.  In stark contrast to the legal requirements of a trustee to use assets for specified purposes, gifts made directly to an individual provide the donor no legal assurance that the amounts contributed will be used for their intended purposes.  The “Go Fund Me” platform has been used by individuals seeking financial support for their personal trips, unpaid medical bills, educational expenses, or even personal vacations.  While most of the “Go Fund Me” campaigns seem laudable in their intended purposes, there is no legal accountability on the part of the recipient individual for using the contributed assets in the manner stated.
• The “Slush Fund” Trust.  I have assisted some of our clients create a trust strategy that would allow for a designated trustee to continue to manage the “go fund me”-type gifts, as well as tax-deductible gifts, following the donor’s death.   One of my clients, who might be accused of watching too many television shows, nicknamed this type of trust his “Slush Fund Trust.”  The Slush Fund Trust permits a named trustee to make non-deductible gifts to individual recipients, as well as deductible gifts to charitable organizations, and to make gifts either on a one-time basis or on a recurring basis.  Since this type of trust is not a tax-exempt trust, clients are advised of the administrative and tax burden of preparing, filing, and paying income taxes for the trust.  Also, clients who use the name, “Slush Fund Trust” should be advised of an increased audit risk.

As in other areas of estate planning, I would be glad to speak with you and/or your clients about how their charitable planning strategies should tie into their comprehensive estate plan.  Whether entitled to a tax deduction or not, many of us share the belief that the act of “giving” is not only beneficial for the recipient organization or individual, but provides tremendous blessing to the giver as well.  I want to wish you and your family a “Happy Giving Season!”