However you define it, ‘planned giving’ can pay off

“Planned giving” is a term often used by financial advisers and charitable organizations. But what does it really mean? After all, to give any gift requires some forethought. For purposes of financial and estate planning, the term refers to strategies, often created with the assistance of financial and legal advisers, that help you 1) maximize your charitable impact while 2) achieving your family’s financial objectives.

Planning makes a difference

Perhaps the best way to define “planned giving” is to describe how several donors’ situations might differ with and without it.

Donating cash versus appreciated securities – Take two couples who want to donate $10,000 to their alma mater, for example. One couple simply sends in a check for the amount. The college gets a sizeable cash donation while the couple reduces their estate value for tax purposes and may be able to deduct the gift from their taxable income for the year, subject to adjusted gross income (AGI) limitations.

The other couple, meanwhile, consults their financial adviser and learns that they may give $10,000 in another way that will stretch their philanthropy budget considerably. They give the school $10,000 worth of stock that have appreciated significantly over the last several years. Even though the shares cost them only $5,000 initially, the couple is entitled to an immediate income-tax deduction for the sharesÂ’ full appreciated value because theyÂ’ve held the shares for more than a year (again, subject to AGI limitations). WhatÂ’s more, they avoid paying any capital gains tax on the sharesÂ’ appreciation since they gave them away. This double tax benefit helps boost the benefits from the gift, while reducing the taxes they might otherwise have paid.

Bequest after death versus charitable remainder trust – Here’s a different situation involving two wealthy couples. Both of them would like to continue benefiting from their investments, but they want to share their wealth with a favorite charity as well.

The first couple simply sends their charity a check once a year, which may be deductible for income tax purposes, subject to AGI limitations. Although this couple has provided in their will that a substantial share of their assets will go to the charity after theyÂ’re gone, theyÂ’re not sure how they could make a greater impact while they are still alive.

The other couple asked their attorney how they could give a large amount of assets to their charity now. The answer: Place assets to be donated into a charitable remainder trust, which pays income to the donors for their life or a specified term (the amount can be fixed or fluctuate with the trust asset balance). Because the gift is irrevocable, the donors may claim a charitable income tax deduction for the portion of the gift that will go to the charity (subject to AGI limitations) and, if the assets have appreciated, may avoid paying any capital gains tax. Perhaps best of all, the donors may be able to enjoy the emotional benefit of giving while theyÂ’re alive. The charity knows it will receive whatever amount is left in the trust at the end of its term.

Estate tax uncertainty

One objective of planned giving is to reduce the donorÂ’s estate and other taxes. With sweeping changes in the estate and gift tax introduced by the Economic Growth and Tax Reconciliation Act of 2001, however, many taxpayers have decided they no longer need to plan. But, although estate and gift tax rates have dropped steadily over the last few years and the estate tax exemption amount has risen, the relief may be brief. Gift tax exemption has remained at $1 million since 2002. The estate tax will disappear completely in 2010, only to return in 2011 to where it wouldÂ’ve been had EGTRA not been enacted, unless Congress acts. So planning remains important to making the most of your charitable gifts.

Utilize professional advice

Thoughtful planning can boost the benefits of charitable giving – for recipients and for you. Many planned-giving strategies and tools are available beyond what we’ve discussed here. A financial adviser can help you choose the right ones for your goals. Because planned giving may involve complex and binding legal instruments such as trusts, you’ll also want to consult your legal and tax advisers as well.

Derrick Kinney is a financial adviser with Ameriprise Financial and specializes in retirement and investment planning. Kinney can be reached at 817-419-6001 or at derrick.t.kinney@ampf.com.