DreamMaker Legacy Circle: - Futures for Children

DreamMaker Legacy Circle:A Guide to Charitable Givingto Invest inFutures for ChildrenFutures for Children9600 Tennyson Street, NEAlbuquerque, NM 87122800.545.6843 or 505.821.2828www.futuresforchildren.org

Table of Contents1. Introduction2. Outright GiftsA. Gifts of CashB. Gifts of SecuritiesC. Gifts of Closely Held StockD. Gifts of Real EstateE. Gifts of Tangible Personal Property3. Charitable Remainder Trust4. Charitable Gift Annuity5. Charitable Lead Trust6. Charitable Bequests7. Life Insurance Gifts8. Retirement Plan Gifts9. Private Foundations10. Community Foundations11. Conclusion2

1. Introduction“We will be known forever by the tracks we leave.”-American Indian Proverb, DakotaYour charitable tracks can create a brighter path for American Indian students to walk in,all while obtaining significant tax benefits and accomplishing important personal goalsfor you and your family.Your charitable gift to Futures for Children will help American Indian children, the mostunderserved population in the United States, thrive in a world despite all the challengesthey face – i.e. poverty, no running water, no electricity, dismal high school dropout rate,high teenage suicide, alcoholism, drugs, obesity and diabetes. Your gift will make aprofound impact on these children, who in turn, will be future leaders thanks to yourgenerosity.Suppose that you could:Retain dollars during your lifetime that you would otherwise pay to the IRSas income, capital gain, inheritance and estate taxesPut these dollars to work for youProvide benefits for yourself, your family and other loved onesReceive a current income tax deductionBenefit Futures for Children from your charitable givingSince 1968, Futures for Children has provided mentoring and training in Hopi, Navajo,and Pueblo and Mescalero tribal communities in Arizona and New Mexico as well as theCheyenne-Arapaho Tribes of Oklahoma to more than 20,000 American Indian studentsand their families.Would you be interested?The process that benefits these wonderful Futures for Children students is called“PLANNED GIVING.”3

The standard is applied as follows: if the use of the contributed property is related tothe exempt purpose of the charity, (example: the gift of a painting to a museum orrare books to a library), then you will be entitled to a charitable income tax deductionfor the full fair market value of the property.If the use of the contributed property were unrelated to the exempt purpose of thecharity (example: the gift of a stamp collection), then you would be entitled to acharitable income tax deduction for the cost basis of the property. In almost everycase a donation of property to Futures for Children will be an unrelated use since ourmission is really focused on education. This will limit the contribution deduction asabove. Nevertheless, Futures for Children welcomes such donations and is pleased towork with you to help them accomplish their philanthropic, tax planning and othergoals. Bear in mind that when tangible property is donated special arrangements willhave to be made with an auction house or other firm to accept the property on behalfof Futures for Children and to then sell it to provide us with the proceeds for ourcharitable efforts.3. Charitable Remainder TrustThe power of a Charitable Remainder Trust (CRT) allows you to contribute assets toFutures for Children some time in the future and immediately retain certain lifetimerights. This technique was quite popular when capital gains rates were higher and astrong economy and stock market created taxable gains taxpayers wanted to shelter. Itstill can have valuable use in the right circumstances in the current environment, andif income tax rates rise in the future, its usefulness and popularity will grow. CRTscan provide you with the following benefits:Generate a regular cash flow to you, and even another person (e.g., spouse) if youso determine. You can plan your CRT to control the amount and timing of the cashflow distributed to you or other designated recipients. Oftentimes resulting in anincrease in cash flow from that asset base.Decide on the duration of the payments; for a period of years, for a lifetime, or thelifetime of other recipients.Design, with the trustee, the investment allocation for the assets to achieve yourgoals.Obtain a current charitable income tax deduction for the future interest received byFutures for Children.Allow all of the assets in the trust, at the end of the trust period, to pass free ofestate taxes to Futures for Children.Designate Futures for Children that will receive the remainder of the assets at thetermination of the trust.7

These plans become effective through outright gifts during the donor’s lifetime orthrough testamentary gifts at death. To qualify for the charitable income taxdeduction, the plan must conform to the requirements of a Charitable RemainderAnnuity Trust (CRAT) or a Charitable Remainder Unitrust (CRUT). The annuitytrust distributes annual income based upon the valuation of the gift at the time of thecontribution. The Unitrust distributes annual income based upon an annual valuationof trust’s assets. Unitrusts are often used by younger donors to provide an inflationhedge on the payments they will receive. Although inflation has been very low inrecent years, if you are looking at a long time horizon of 10+ years, this is a planningapproach you should consider with your advisors.Assets inside the trust, such as appreciated securities, can be sold and diversifiedwithout any current income tax costs. In addition, earnings can accumulate on a taxfreebasis inside the trust as well. As the trust is a tax-exempt entity, there are not anyincome taxes paid on any income received by the trust. There is also no capital gaintax liability on the sale of appreciated assets sold by the trust. This includes anyappreciated assets that are contributed to the trust.Distributions made by the trust to the income beneficiary (usually the donor) can bedepending upon the individual characteristics of the assets contributed to the trust beeither income taxable, taxable as capital gain, tax favored, tax free or anycombination of the above.CRT planning, for people at various times in their lives, can have a great financialand social impact. For an individual selling highly appreciated assets – stocks, realestate, business interests, etc. – it creates the means to defer capital gain tax andtherefore dramatically increase the total economic benefit. This occurs because theentire proceeds, not just the after-tax proceeds, from the sale are invested by the trustto generate the annuity payment. Avoiding a current capital gain tax and thecharitable income tax deduction will substantially reduce the cost of the creation ofthe CRT.Example: Mr. And Mrs. Miller, age 70 and 68 respectively, own stock valued$400,000.00 in a fortune 500 company. They purchased this stock a number of yearsago for $20,000.00. The dividend yield is a modest 1.9%, producing an annualdividend yield of $7,600.00. They would love to have more money to spend duringtheir retirement years but are very reluctant to sell their shares and reinvest theproceeds to produce more income due to the capital gain tax that will be due on thesale of the stock. *Instead of selling their shares, they contribute them to a newly created CharitableRemainder Unitrust (CRUT) and select a payout rate of 8%. Their annual incomestream will immediately increase from $7,600.00 to $32,000.00. This represents a420% increase in annual income. This income amount will grow over the years if thetrust assets appreciate in value.*8

The gift to the trust in the month that they made it will produce an immediate federalincome tax deduction of $108,000.00. In their 33% tax bracket they will save$35,640.00 in actual taxes. They will also avoid a potential capital gain tax of$76,000.00 (20% of $380,000.00). The total tax savings will amount to $111,640.00.This will reduce the net cost of the gift to $288,360.00. Based upon the net cost of thegift their first year annual income will result in an 11.09% yield. *In addition, the Millers have for years had a special soft spot in their heart for Futuresfor Children. For a number of years they have sponsored one of the Futures forChildren programs. Now with this gift to the CRT to Futures for Children, they willhave the opportunity to fund a number of programs in perpetuity. Ideally the Millerswould continue their current annual donations to help Futures for Children in itsongoing mission. Then upon their deaths, the remaining assets in the CRT wouldinsure to the benefit of Futures for Children and if sufficient fund their annual gifts inperpetuity.4. Charitable Gift AnnuityThe Charitable Gift Annuity is among the oldest, simplest and most popular methodsof making a deferred charitable gift. A gift annuity is a combination of a gift and aninvestment. For a gift of cash or readily marketable securities, Futures for Childrenwill contractually guarantee to pay a specified annuity to the donor and/or anotherbeneficiary. This can provide similar benefits to the CRT discussed above, but can bedone much more simply and without the cost and complexity of a customized trustthat is required for a CRT.The annuity payment can take the form of an immediate annuity or a deferredannuity. The deferred annuity will start payments at some time in the future. In boththe immediate and the deferred gift annuity the donor can claim a current federalcharitable income tax deduction for the portion of the transfer, which represents thepresent value of the charitable gift. A portion of each annuity payment is treated as areturn of the original capital sum and is therefore received by the donor over theirlifetime on an income tax free basis. The balance of the annuity payment is taxed asordinary income or capital gains depending on the property used to buy the annuity.5. Charitable Lead TrustA Charitable Lead Trust (CLT) is the reverse of a Charitable Remainder Trust (CRT),in that it provides for an annual gift of the income interest from an asset to Futures forChildren. This annual income will be for a period of years, after which, the asset willrevert back to the donor or pass to a non-charitable beneficiary (children) designatedby the donor. CLTs can provide an incredibly powerful tool to transfer large wealth to9

children without any gift tax. Some donors use CLTs in their will to minimize estatetax in light of the uncertainty in the law. They will coordinate bequests to childrenwith the CLT so that the heir will have the use of the bequest initially, and then insome number of years, say 15, when the CLT ends, the child will receive additionalfunds.In order for the donor to obtain a charitable deduction for gift and estate tax purposes,the transfer of the income interest from the lead trust must meet one of the twofollowing conditions: the income interest must be in the form of a guaranteed annuity(Charitable Lead Annuity Trust) (CLAT); or, expressed as a fixed annual percentage ofthe annual fair market value of the trust property (Charitable Lead Unitrust) (CLUT).For purposes of the charitable income tax deduction, additional requirements areimposed upon the donor with regard to the ownership of the income interest. TheCharitable Lead Trust (CLT) has to be created to qualify as what is referred to as a“grantor” trust in tax jargon, a trust whose income is taxed to the donor. These can bemore fully explored on an individual basis with potential donors.6. Charitable BequestsEach year, thousands of individuals exercising their privilege to determine the finaldistribution of their estate, decide that all or a portion of their assets be used for thebenefit and support of a charitable organization. Gifts by will (bequests) havebecome an intrinsic part of American philanthropic tradition. This often occurs,because such gifts enable individuals to make significant contributions to causes andorganizations that they support, which may not have been possible during theirlifetime.Bequests of all sizes are encouraged as a means to provide ongoing support forFutures for Children. Gifts by will are generally established in the following threemanners: 1) for a specified dollar amount; 2) for a percentage of the total estate; 3) forthe remainder of the estate after debts, taxes and other specific bequests have beensatisfied.A donor may designate just Futures for Children, outline a particular purpose. Orfund a specific program, i.e. the youth leadership, or any of our other programs.Using a charitable bequest in your will can be a very effective tool in reducing anestate for federal estate tax purposes. Bequests are also a wonderful way for donors todemonstrate to their heirs that giving back to society, and to help those less fortunate,is an important value. Estate planning can and should be about more than merely thetransmission of wealth, it should also be about the transmission of values. A bequestto Futures for Children can help accomplish that important personal goal.10

7. Charitable Life InsuranceLife insurance can be a worthwhile asset to donate to Futures for Children. Theoutright gift of a life insurance policy can often lead to a substantial federal incometax deduction. Both existing and new life insurance contracts can be utilized, whetherit is paid-up or not. A brand new policy purchased expressly for gifting to Futures forChildren, with Futures for Children or a charitable trust named as the owner andbeneficiary of the policy, also makes a viable income tax deductible gift. At death,the proceeds of the policy are excluded from the donor’s estate.Merely naming Futures for Children or a charitable trust as the beneficiary of a lifeinsurance policy does not in itself create a charitable income tax deduction. Thedonor still is the owner of the contract and retains all of the attendant rights ofownership. For the premiums to qualify for a charitable income tax deduction theownership of the policy must rest with Futures for Children.The gift of a life insurance policy to Futures for Children or to a charitable trustrepresents the opportunity for the donor to dramatically leverage the impact of theirgift. The life insurance proceeds payable at the death of the donor (insured) willdramatically exceed the cumulative premiums paid and result in a significantly highercontribution to the organization.8. Retirement Plan GiftsOver the last two decades an enormous amount of personal wealth has been built upin both corporate and self-employed pension plans and IRAs. Under currentlegislation there is strong potential for onerous taxes, up to 80% on the fundsremaining at death in these types of plans. While a retiree is alive, the possibility ofgifting all or part of these assets to a charity is burdened with heavy taxconsequences. The withdrawal from the plan triggers an income tax liability to therecipient, which will dramatically reduce the subsequent charitable gift. In past yearsdonations of up to $100,000 from IRA accounts were permitted, but this law has beenallowed to lapse. Check with your tax advisor to find out the current status of theserules before making a distribution from your IRA to Futures for Children.At death a gift of that same retirement asset to Futures for Children will entirelyeliminate all of the taxes that could otherwise be due. In order to accomplish this, abeneficiary designation must be made before the retiree’s death.11

Proposed legislation may dramatically expand the charitable gifting potential ofretirement plan assets.9. Private Foundations and Donor Advised FundsA private foundation serves as a very important vehicle for charitable giving in that itcan enable wealthy donors to meet specific charitable goals, help involve their familyin philanthropy, and achieve a host of favorable tax benefits. Without privatefoundations some donors would find it difficult if not impossible to accomplish theircharitable objectives. Many affluent families have found that a private familyfoundation offers to them and their families the opportunity to come together as afamily unit and promote charitable endeavors as a family project. For familieswanting similar benefits without the legal and accounting costs, it may be feasible tomimic some of these benefits by making a donation to a public donor advised fund(DAF) and have family members recommend amounts to donate each year. Bothprivate foundations and DAFs can be used to help Futures for Children achieve itsvital goals.Besides potential family involvement, the majority of private foundations areestablished to promote the particular philanthropic passions of the donor. Control ofthe foundation and in turn the assets are other governing factors.Contributions to a private foundation are subject to a different level of federal incometax deductibility than are gifts to a public charity. There are also a significant numberof rules and regulations affecting private foundations that are designed to preventabuses by the private foundation emanating from the founder.One of the most important considerations in considering the establishment of aprivate foundation is the size of the contribution that will create the foundation andthe ultimate intended size of the endowment. The funding of a private foundationrequires a substantial contribution. If this does not occur, the operational andadministrative charges may be exorbitant in relation to the income and principal.10. Community FoundationsFor those donors who find the rules and regulations of a private foundation toodifficult and costly to follow, an attractive alternative may be the local communityfoundation. In recent years in communities all over the country, includingAlbuquerque, NM, community foundations have sprung into existence. There arealso a number of both for-profit and not-for- profit organizations sponsoring nationalcommunity foundations. These may be advertised as donor advised funds.12

The grant-making capabilities of the community foundations can have an enormousimpact upon the members of the community. By their very nature, these grantsbenefit organizations in the local community that follow the tax-exempt purpose ofthe individual funds within the community foundation.Contributions to a community foundation are eligible for the same classification forthe federal income tax charitable deduction as are gifts to other public charities. Inaddition to increased deduction possibilities, by utilizing a community foundation, thedonor can forgo the majority of the cost of operating their own private foundationwithout giving up the majority of its benefits.11. ConclusionWe thank you for your time and kind consideration of making a legacy gift to Futuresfor Children. We greatly appreciate your joining the Futures for ChildrenDreamMaker Legacy Circle and the difference you make will last forever in the livesof American Indian children we serve. Our heartfelt thanks to you for your pricelessgift.*Tax Note:The information contained in this brochure provides some guidelines for makingcharitable contributions that can benefit you and Futures for Children. It is not asubstitute for legal or tax counsel as tax laws change each year. You are urged toconsult your own legal and tax advisors before completing the arrangements for a gift.Futures for Children Volunteer Legal/Financial Advisors (DREAM TEAM) is able toassist you with any question you or your advisors may have.2012 CFC, LLC13