Charitable Opportunities

     Who will forget the year 2001? Do you remember where you were that morning of 9/11? The terrorism of that day sent shockwaves throughout America (and the world) that continue to reverberate. Despite the evil of others, Americans remained generous, giving an estimated $212 billion to charity that year.
     Since then, in the midst of rebuilding the economy and fighting an overseas war, Americans continued to increase their charitable giving. They contributed $241 billion in 2003, and $250 billion in 2004, according to the Giving USA Foundation (www.givingusa.org). Interestingly, more than 80 percent of this total generosity came from the wallets and the estate bequests of individuals, not from corporations or charitable foundations.
     Are you a generous giver, perhaps even a philanthropist? If you are a taxpayer, then the answer is yes. How so, you ask? During your lifetime, your wealth is subject to taxes in a variety of forms, including income taxes levied on your wages, interest and dividends; and capital gains taxes on the sale of appreciated assets. All of these taxes tend to make April 15th the most disliked day of the year.

Voluntary Taxes

     Our tax system is voluntary in its form, but the civil and criminal penalties for noncompliance make the process involuntary in its substance. Thankfully for our national defense and other essential programs of the federal government, most taxpayers voluntarily comply with the Internal Revenue Code (IRC) and pay their fair share.
     Beyond the essentials of government, however, are there any programs funded by the federal government that you personally consider nonessential and perhaps even wasteful? If there are, then you are an involuntary philanthropist by your financial support of such causes as selected for you by Congress and the White House.
     Perhaps there are private sector charities you deem more worthy of your tax dollars? Chances are you already support these charities. If so, then you should know about IRS § 664 and how you may convert your involuntary philanthropy into tax-savvy voluntary philanthropy.

Voluntary Philanthropy

     Charitable tax deductions have been part of the tax code since its inception. Why? The government’s own research determined that private sector charities deliver social services more cost-effectively than the government itself. [Anecdotally, we have seen that confirmed in the wake of hurricane relief efforts over the past several years.] The government, in turn, sought to encourage increased charitable giving to private sector charities by enacting IRC § 664 in 1969. In essence, this tax code section created Split-Interest Gifts so generous givers could increase their voluntary philanthropy.
     A Charitable Remainder Trust (CRT) is a popular split-interest giving tool. Through a CRT, you may increase your current income, enjoy current charitable income tax deductions and leave a substantial financial legacy for your favorite charity(ies) upon your death (or upon the death of your spouse, if later).
     Here is how it works. First, you create a CRT and contribute an asset to it. [Note: Appreciated assets, i.e., assets that would be subject to capital gains taxation were you to sell them yourself, are commonly contributed because they tend to be low income producers and have a low income tax basis.] Second, the CRT sells the asset without capital gains taxation and then reinvests the proceeds in an income-producing portfolio that grows income tax free inside the CRT. Third, you (and your spouse) receive an enhanced lifetime income plus valuable income tax deductions for up to six years. Fourth, upon your death (or upon the death of your spouse, if later), the CRT distributes any remaining assets probate-free directly to your selected charities (or to your Donor Advised Fund to endow ongoing distributions to charities involved in causes important to you).
     Ultimately, voluntary philanthropy benefits you, your charities, and the government. It makes good common sense, too.