There are many ways to contribute to the Mississippi Fish and Wildlife Foundation, which is a charitable organization. It is classified by the Internal Revenue Service as a charitable organization under Section 501(c)(3) of the Internal Revenue Service Code. As such, all contributions are tax-deductible to the fullest extent allowed by law.
There are many ways that one can contribute to the Foundation. You may choose to give a gift of cash, mutual funds, stock or land that has substantially increased in value over the past several years. Due to changes in the tax laws, the appreciated portion of long-term capital gain property is not taxed as a preference item under the Alternative Minimum Tax.
Another way to help conserve Mississippi's fish and wildlife resources is through a Charitable Remainder Trust. It pays an income to the donor with the remainder passing to charity at the death of the donor.
Finally, with a Charitable Lead Trust, the charitable organization receives the income interest first for a period of years and non-charitable beneficiaries (usually the donor's children or grandchildren) are the remaindermen.
Consider Appreciated Assets When Making Donations
If you are considering a gift to the Mississippi Fish and Wildlife Foundation, think about how your gift can benefit you as well. The truth is, "wrinkles" in Uncle Sam's tax code mean that not all gifts are created equal. Here are some tips that Laura Saunders, a Mississippian and a Senior Editor of Forbes Magazine, has provided to the Mississippi Fish and Wildlife Foundation.
According to Saunders, "If you want to make a gift during your lifetime, consider donating appreciated assets, such as stock, land or part of a house that have significantly increased in value since the time you purchased the asset. In fact, you might want to consider giving it before you give cash." To see why, Forbes's Senior Editor has provided the Foundation a comparison of the tax benefits for several different types of gifts worth $100.
If you write a $100 check to a charity, you get a tax deduction for $100.
Saunders states that if you sell a share of stock worth $100 today that you bought years ago for $20, you will owe as much as $16 of capital gains tax on the sale. You could then donate the remaining $84 to charity and get a tax deduction of $84.
However, if you choose, you can also donate the share of stock worth $100 to the charity. In this case, Congress has decided that you get the full $100 deduction for the gift, even though the stock is worth only $84 to you after-tax. (Stock splits further complicates the tax.)
The result? The more highly appreciated an asset is, the more tax benefit there is in giving it away. (This doesn't mean that you can make money by giving it away, its just more efficient to give away low basis appreciated assets rather than high basis assets or cash.)
Saunders tells us that almost any asset can be donated. It's easy to give away shares of publicly traded stocks. In fact, all you need to do is call your broker and inform him or her that you want to donate the stock and where it should go.
Donating Other Appreciated Assets
It's also possible, for example, to give 10% of a house that you intend to sell. Or part of a parcel of land.
On the other hand, if you want to leave a legacy at death, experts say that the most "tax efficient" way to do it is with an Individual Retirement Account (IRA). Many people now have very large IRAs, thanks to rollovers from company pension plans and the long bull market. Yet all IRA assets are subject to income taxes at death (or some point afterwards) and, if the estate is taxable, to estate taxes as well. The combination means that IRAs face taxes as high as 70%.
The Forbes Magazine Senior Editor tells the Mississippi Fish and Wildlife Foundation, "Yet, if the IRA goes to charity, the tax isn't owed. Once again, this doesn't mean you can make money by giving away an IRA, just that it is the best asset to give if you plan to leave a legacy at death".
"It is also a relatively easy thing to do. Uncle Sam allows IRA owners to subdivide their accounts. So if a taxpayer had a $500,000 IRA, he could split off, say, $10,000 of it into a separate account that names the Mississippi Fish and Wildlife Foundation as the beneficiary. And mandatory distributions for those over 70 ½ can come from any 'pot'. So if he has to withdraw $25,000 from the total IRAs listed above, it could all come from the $490,000 'pot'. Or, if he changes his or her mind about the legacy, he could drain that 'pot'. Leaving an IRA legacy may slightly speed up the mandatory distribution after age 70 ½, for complex reasons. Suffice it to say that if your legacy is a small fraction of your total, this shouldn't be a problem," states Saunders.
"Congress is even considering a law that would allow taxpayers to donate IRAs to charity while alive, which is not now possible," continued Saunders.
The rules about charitable giving can be tricky. If you want to make a large gift to the Foundation, run it by a tax expert or a Certified Public Accountant (CPA) who can help you to do good and do well at the same time.
Charitable Remainder Trust
Mississippi ranks high in donating to charity and most Mississippians don't give to charity solely for their own financial benefit, yet major donors appreciate thoughtful gift structuring that reduces their cost of giving, addresses estate planning concerns and maximizes the effectiveness of the gift. The Mississippi Fish and Wildlife Foundation offers this kind of structuring to its donors while enhancing its own fundraising professionalism.
The charitable remainder trust (CRT) is a popular way to make charitable contributions. It lets donors make major gifts now while keeping income from the assets for use during their lifetime. The CRT also lets donors sell highly appreciated securities through the trust, reinvesting proceeds to obtain a desired level of income without incurring capital gains taxes. The remainder interest is the asset.
When donors give assets to the Mississippi Fish and Wildlife Foundation through a remainder trust, they transfer ownership of the assets to the trust, which then pays income to them during their life, the life of their designated beneficiary, or for a specified term of years. The amount of income the donor will receive is based on a percentage of the fair market of the donated asset, generally not less than 5%. At the death of the donor or beneficiary, or at the completion of the trust's term, the trustee will distribute the balance of the trust assets to the chosen charity.
Figure 1 compares donating versus selling and reinvesting stock. As it illustrates, if the donor had sold the asset and reinvested the net proceeds directly rather than using the CRT vehicle, the amount reinvested and resulting income would be less.
The donor is entitled to a current income tax deduction when the CRT is established. The amount deductible is a percentage of the value of the property placed in the trust. The actual deduction is calculated using IRS tables. The deduction amount depends on the annual payout, the age of the donor or beneficiary (or the trust's specified term of years, and the published interest IRS rate for the month. The donor's tax advisor will determine the amount of the deduction.
Estate Tax Shelter
When the CRT is set up for the life of the donor and the donor's spouse, all the assets in the trust avoid estate taxes, which can result in a substantial tax savings. If a beneficiary other than the donor's spouse is designated, a portion of the trust assets may not escape estate or gift taxation. For example, if the donor's will sets up a CRT for the life of the donor's child, the value of the child's income interest may be taxable in the donor's estate. See the example in Figure 2.
Two Types Of CRTs.
An annuity trust pays the donor a fixed amount each year for life or for a specified number of years, much like an annuity from an insurance company. The payout is a percentage of the original amount contributed to the trust and is fixed for the trust's term. Only one contribution to the trust can be made. Once the annuity trust is established, the donor cannot add to it.
With a unitrust, the payout is also a fixed percentage of the value of the trust, but the value is recalculated annually and based on the fair market value of the trust assets. As a result, the annual payments in a unitrust will vary as the fixed percentage is applied to a fluctuating principal amount. This feature makes the unitrust a valuable hedge against inflation. The donor may make additional contributions to a unitrust over the trust's term.
Wealth Replacement For The Donor's Beneficiaries
One disadvantage of a CRT for the donor is that the gifted assets used to create the trust won't be available for the donor's heirs. Assets donated to the Mississippi Fish and Wildlife Foundation, or any other charity, through a CRT are irrevocable gifts. This problem can be alleviated by using the tax savings or the additional income generated by the trust to create a separate wealth replacement trust - that is, an irrevocable life insurance trust designed to replace the wealth donated to the charity. As long as the irrevocable life insurance trust or the heirs own the life insurance policy, the insurance proceeds will not be included in the donor's estate. The net assets the heirs receive will generally be greater than they would be by simply leaving the original wealth to the heirs at death, because the proceeds will now avoid the estate tax.
How An Irrevocable Life Insurance Trust Works
Suppose the donors transfer $1 million of stock now paying a 2% dividend to a charitable remainder annuity trust. The trustee sells the stock and begins paying the donors $70,000 per year in accordance with the terms of the trust.
Assume that both donors are 60 years old and can purchase a $1 million life insurance policy for $18,400 per year. The donors set up an irrevocable life insurance trust for the benefit of their two children, paying $18,400 each year to the trustee of the life insurance trust who uses that money to purchase the life insurance and pay the annual premiums. By transferring the donors' stock to the charitable remainder annuity trust, the donors' investment income would increase from $20,000 (the 2% dividend) to $70,000 per year. Subtracting the insurance premium of $18,400 and income taxes of $25,200 at 36%,, the net investment income to the donors would be $26,400 compared with only $12,800 after tax without the trust.
In addition to the substantial increase in annual income the trust provides, the donors would also receive a $90,526 tax benefit based on an income tax deduction of $251,461 and a 36% tax bracket. The heirs will receive $1 million from the proceeds of the life insurance, while the nonprofit named in the charitable trust receives its $1 million endowment. Without the two trusts, there would be no charitable donation, and the benefit to the donors' heirs would be cut in half by estate taxes. See Figure 3 for an illustration of this example.
Benefits Of A CRT With An Irrevocable Life Insurance Trust
Figure 4 shows how a CRT can be combined with an irrevocable life insurance trust. Benefits of such a combination include the following:
* Low income is converted to high income producing assets.
* Highly concentrated equity position is diversified.
* The donor realizes income tax savings generated by the charitable tax deduction.
* The Mississippi Fish and Wildlife Foundation receives funding to carry on its conservation work.
* The donors' beneficiaries receive an asset free from estate and income taxes.
* The donors' assets are invested at full value without deduction for the payment of capital gains taxes.
Who Will Benefit From CRTs?
Those who should consider charitable remainder trusts include:
* Donors who own highly appreciated assets and want higher income.
* Those who are charitably inclined.
* Those who can use a current income tax deduction.
* Those who want to reduce their estate tax.
* Those who want to diversify a concentrated equity position.
Implementing a charitable remainder trust plan takes a lot of teamwork with donors and their tax, legal and investment professionals. But the benefits for the Mississippi Fish and Wildlife Foundation and the donor can be substantial.
Charitable Lead Trust
Like the Charitable Remainder Trust (CRT), the Charitable Lead Trust (CLT) is also a short term, split-interest trust that has an income interest and a remainder interest.
A CLT allows you to transfer appreciating property to family members at little or no gift tax cost while benefiting charitable causes, such as the Mississippi Fish and Wildlife Foundation.
The CRT pays an income to the donor with the remainder passing to the Mississippi Fish and Wildlife Foundation at the donor's death. With a CLT, the Mississippi Fish and Wildlife Foundation receives the income interest first for a period of years and non-charitable beneficiaries (usually your children or grandchildren) receive the interest for the remaining years.
In addition to the timing of payments to charities and non-charitable beneficiaries, other differences exist between these split-interest charitable trusts.
A CLT allows you to transfer appreciating property to family members at little or no gift tax cost while benefitting the Mississippi Fish and Wildlife Foundation. Generally, a CLT allows you to (1) create an income stream for one or more charities for a term of years, (2) avoid federal estate tax on the value of the assets transferred to the trust, as well as the appreciation on those assets, and (3) ultimately transfer a substantial amount of assets to your family at little or no gift tax cost.
A CLT can be created during your lifetime or as part of your testamentary plan. As the Grantor of an intervivos CLT you would transfer specific properties to the Trust which would then provide an income interest to qualified charities for a specific number of years. You may either retain the remainder interest yourself as a reversion or give the remainder interest to family members. A testamentary CLT will allow you to give an income interest to charity at your death for a term of years, then the remainder to family.
The traditional CLT is created during your lifetime. The charitable income interest, (the "Lead") must be in the form of an annuity or unitrust to one or more qualified charitable organizations for a term of years. An annuity Lead Trust will pay a specific dollar amount each year to Mississippi Fish and Wildlife Foundation. A unitrust will pay a specific percentage of the value of the trust each year to the Foundation.
Usually, a CLT is Non-Grantor Trust instead of a Grantor Trust. Tax consequences are the major difference between the Non-Grantor and Grantor Trusts.
With a Non-Grantor CLT, you will not receive an income tax charitable deduction for interest given to the charitable beneficiary. Instead, the CLT itself receives a charitable deduction for the amounts paid for a charitable purpose. If the Trust does not pay all income to the charity, and the income is retained by the Trust, the Trust must pay income tax on the retained income according to trust tax rates.
If the Trust is structured as a Grantor Trust, you can take an income tax charitable deduction for the present value of the charitable income interest on the date of the transfer of the assets to the trust. But the down side is that you will be taxed on the subsequent income of the CLT.
For example, if you have a fairly substantial estate and are charitably minded, you could establish a Non-Grantor CLT with $50,000 in securities. A guaranteed annuity amount of $50,000 would be contributed annually to the named charities for a period of fifteen years. When the Trust terminates, remaining assets will pass to your children. Assuming the current Federal midterm rate is 7.4% and the charitable contribution is to be made quarterly, the value of the remainder interest to your children is approximately $43,700.00. This amount must be reported by you as a gift and applied against your lifetime exemption equivalent amount ($650,000 in 1999). You will not receive an income tax deduction for a charitable contribution, but neither will you have to report or pay taxes on any of the income generated by the trust assets. The Trust takes the income deduction each year for the amount it pays to charity.
Assuming the assets in the Trust yield a return in excess of the 7.4% federal mid-term rate, your children will receive assets at the end of the trust income term valued in excess of the $500,000 you originally contributed. You will have paid a gift tax of $43,700 on the original $500,000 instead of an estate tax of $275,000 at death ($500,000 x 55%).
If, on the other hand, you choose to structure your CLT as a Grantor Trust, you may take an income tax charitable deduction for the present value of the charitable income interest on the date of the transfer of the asset to the trust. In our above example, your income tax deduction would be approximately $456,200. The gift to your children would be the same as above $43,700 approximately. However, the immediate charitable deduction must be weighed against your personal liability for tax on any income generated by the Trust in each of its fifteen years. For obvious reasons, most people choose a Non-Grantor CLT over a Grantor CLT.
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