Charitable giving for high-net-worth families, Pt. 1

By ariastwin

To most people, wealth is normally perceived as the amount of assets one owns, including but not limited to money, cars, houses, land, etc. This perception is, for the most part, a simple yet accurate description. However, for families with most of the world’s wealth, it should be about the effects their wealth can have on causes, charities and organizations that have true meaning in their lives.

A 1987 study by author Eugene Steuerle (Charitable Giving Patterns of the Wealthy) finds that most charitable giving was done by the wealthy upon their deaths. It seems appropriate for people of wealth to bequeath their fortunes at death by means of life insurance proceeds, stocks and real estate, which is advantageous when taking taxes into consideration. With the advent of computers and the Internet, this perspective has changed somewhat, and the wealthy are now giving more while they are alive, as opposed to transferring wealth at death.This cultural change is intriguing to say the least.

Charitable giving

Until I started working in the financial services industry, I really didn't know what charitable giving was. The middle income earner in the United States probably considers charitable giving to be writing a check to the United Way for $100 a year or contributing to the Japanese Relief Fund for $50 charitable giving, and it is, but for the high-net-worth families of the world, these types of contributions wouldn't allow them to impact the world the way they feel they should and can by means of donating large portions of their wealth. Investopedia defines charitable giving as "a gift made by an individual or an organization to a nonprofit organization, charity or private foundation."

Charitable donations are commonly in the form of cash, but they can also take the form of real estate, motor vehicles, appreciated securities, clothing and other assets or services. Most contributions made by high-net-worth families easily meet this basic definition of giving, but the intricacies of giving large sums of money or property come with many tax implications and exemptions when properly structured through estate planning.
When discussing high-net-worth families with regards to article, we are discussing families with $5 million or more in liquid net worth. Families in this category of wealth have either inherited family fortunes passed down from previous generations, like the Rockefellers of New York, or like many modern day dot-com millionaires like Mark Cuban, owner of the Dallas
Mavericks or Bill Gates, the original dot-com millionaire turned billionaire. It can be hard to imagine this kind of wealth and what to do with it when one is living or dead, and that dilemma is where estate planning and charitable giving really matter.

These high-net-worth families must take on the responsibility of how to distribute their wealth while they are alive and how to pass it on when they die; this is how true philanthropy is measured. Like the old saying goes: You can’t take it with you when you die. That really holds true when enormous wealth is left to be distributed.

The importance of giving

The value in giving should be driven by more than helping the high-net-worth family limit any tax consequences they may suffer due to their enormous wealth. But taxes are important, and limiting the detrimental effect they can have on one's fortune must be kept at the forefront of the charitably-minded individuals who know and have been taught the value of being philanthropic and the responsibility that comes with it.

According to a study conducted by Boston College’s Center on Philanthropy and Wealth, “For America’s wealthy, accumulating millions of dollars is not necessarily a recipe for happiness, but philanthropy is proving to be a popular balm to alleviate their anxieties, according to a new foundation-supported study of households with as much as $25 million or more in assets."

The study of the ultra-high-net-worth individuals and families shows that they tend to be generally dissatisfied a lot and worry about how their wealth distances them from non-wealthy people. They also worry about how their wealth will impact their children. With all that being said, most families in this category either have family foundations or other charitable endeavors which they fund in order to provide giving to the charities or organizations which lay near and dear to their hearts.

Burdens that comes with enormous wealth include how to wisely spend it where it will have the most positive influence on others' lives and how to keep it generating additional money in order to keep the giving going. In addition to providing financial help to a cause, there is also a tax advantage for giving up their parts of the family fortune. These advantages mean millions of dollars in tax breaks and income-bracket-lowering benefits of which the wealthy and their advisors are keenly aware.
The tax advantages to giving

In light of the few ultra-high-net-worth families per capita there are in the world, the average-income citizens may assume that the only reason these families donate money is for the tax breaks. While it is true that there are advantages when the wealthy give, a philanthropic family also gives to help with issues and causes that mean something to them.

According to Giflaw, a comprehensive charitable giving and tax information service, "there are deduction limits depending on the type of gift and the charity it is being given to.”

Cash to public charities is deductible up to 50 percent of the contribution base. Stock can also be contributed with a 50 percent election for donors who wish to make large gifts of appreciated stocks which have reasonably high basis. It is important for high-net-worth families to determine when a gift is deductible. The basic rule is that a gift to a charity is deductible when the property or cash is delivered to a charity. Since title to property is normally governed by state law, the delivery is usually complete when, under state law, the charity has legal ownership of the property. However, in some specific circumstances, there are examples in income tax regulations that supersede the state laws. Gifts of cash are deductible at face value. The IRS Reg 1.170A states that “most gifts of appreciated property are deductible at fair market value. Value is usually defined as the price that a willing buyer would pay to a willing seller.”

However, some types of property gifts are not deductible at fair market value. For specific policy reasons, these gifts will be reduced in value for deduction purposes. IRS Sec.170(f)(3) also states, “property gifts are normally transfers of an entire asset. If a person gives the charity all rights and title, the gift is normally considered a long-term capital gain gift deductible up to 30 percent of adjusted gross income. However, if a person gives only part of the property rights, the gift may not be deductible.”
The families must also take into consideration the state laws for tax deductions of giving. Some states, such as California, Massachusetts and New York, to name a few, allow taxpayers to take the same deductions mentioned above, as taken against their federal taxable income, and apply these deductions against their state income tax. Other states, like Minnesota, Louisiana and New Jersey only allow taxpayers to take a deduction which is less than the federal return allows or use a completely different method from the IRS. Yet other states, like Connecticut, Illinois and Ohio do not allow donors to deduct the value of a charitable gift on their state tax returns.

The IRS Reg 25.2522(a) specifically regulates gifts to qualified exempt charities which are deductible for gift tax, as well as income and estate tax purposes. Qualified charities include government organizations, charities that receive broad public support, religious organizations and other public entities. There is also an unlimited charitable gift tax deduction for transfers to private foundations.

Another concern that must be addressed for the ultra-high-net-worth families is the estate tax. An estate tax may be levied on the transfer of property when a person passes away. The value of the property must be determined by qualified appraisers; they are typically assigned by the state in which the person dies. Life insurance in the owner’s name will also be included in the estate for tax purposes. On December 17, 2010, President Barack Obama signed into law The Tax Relief, Unemployment Insurance Re-authorization and Job Creation Act of 2010. This act included Temporary Estate Tax Relief in Sections 301, 302, 303 and 304 and these provisions will carry over to the years 2011 and 2012.
Sec. 301 reinstates the estate tax and repeals carryover basis.“Executors of decedents who passed away in 2010 are permitted to elect either to file IRS Form 706 and apply the 2010 existing laws, or to elect to use the new $5 million applicable exclusion amount and 35 percent estate tax rate. Because some decedents passed away early in year 2010 and the normal tax payment date has passed, the required due date for the tax return or payment of tax will be nine months after the date of enactment. For 2010 decedents, the filing date for GSTT returns will also be nine months after date of enactment.”

Sec. 302 addresses the gift, estate and GSTT exclusion amounts. “The applicable exclusion amount will be $5 million for 2011 and for executors who elect to apply that amount to 2010. This amount will be adjusted for inflation starting in 2012 in $10,000 increments. The estate tax rate will be 35 percent. Estate tax equals $155,800 on the first $500,000 and 35 percent of the excess over that amount, reduced by the unified credit. The unified credit (renamed the applicable credit amount) calculated based on a $5 million estate will be $1,730,800.”

Sec. 303 creates marital deduction portability. "The applicable exclusion amount for a surviving spouse will be the basic exclusion amount of $5 million with cost of living increment plus the deceased spousal unused exclusion amount. The unused exclusion will be the basic exclusion amount of the deceased spouse in excess of the basic exclusion amount used in the estate of that spouse. The unused exclusion amount will not be adjusted further for inflation. In order to benefit from this provision, the deceased spouse must die after 2010 and the surviving spouse must die before 2013, or Congress must extend portability."

These are some of the issues that must be confronted with an experienced tax attorney and estate planning specialist when gifts are planned at the death of a donor. The complications of estate taxes and the effect of taxes on any gifts that a donor wills to a qualified charity or organization will have an incredible impact on the value of a gift being donated and should be discussed well before death. Most affluent families have had some discussions as to what happens to some of the wealth that will be distributed including gifts, and when this conversation is not had prior to death it can wreak havoc on an estate and much more devastating effects on the family.

Editor's note: The second article in this series will be published soon. Part two covers the strategies of giving, including a list of items that the donor should check before setting a donor-advised fund, advice on whom to give to, how much to give and summary of the information outlined in both parts.