Professor Philanthropy Archive
- I have a life insurance policy that I no longer need. Can I give it to a charity?
- What is the least expensive way to get a will?
- What is an estate plan?
- When should I start working on my estate plan?
- When should I re-draw my will?
- Why make my charitable gifts using stock?
- What are charitable trusts and why is there so much talk about them?
I have a life insurance policy that I no longer need. Can I give it to a
charity?
It is easy and beneficial to give an insurance policy to a charity. Contact
your insurance agent or, if he or she is not available, the home office
of the insurance company. Ask for the forms necessary to transfer ownership
of the policy to a charity. Execute those forms and return them to the
agent or company. This is a very good way to make a significant gift with
otherwise non-productive assets.
You will get a current
income tax deduction, if you itemize, for the amount of the cash surrender
value. I would suggest that you talk to the charitable recipient for two
reasons. First, you need the proper substantiation letter and Form 8283.
Second, you need to tell the charity the nature and purpose of the gift.
Is it unrestricted? Is it for the youth program, inner city playground,
or what? This increases the probability that your gift will be used for
your intended purpose. And be sure to put it in writing. I call that a
letter of instruction. It can be changed from time to time without changing
the insurance policy or other forms.
[Back]
What is the least expensive way to get a will?
Some people believe that the least expensive way to get a will is to buy
a book, buy a software program or plagiarize an existing will. I have
seen all three done with very expensive results. In one case a gentleman
wrote a very nice holographic (in his handwriting) will. He had lots of
friends, relatives and charitable interests. So he gave away his estate
and more. He actually divided his estate into 128 units and gave various
numbers of those units to the numerous beneficiaries. Unfortunately he
gave away 129 units. It took four years of legal work and unknown amounts
of legal fees to get each beneficiary to accept their portion divided
by 129 rather than 128. If he had paid an attorney $10,000 to draw the
will, his estate would have saved much more than that.
Another women had what appeared to be a will drawn by a prominent law firm in town. Unfortunately, the depository provisions (section where the assets are given away) were so poorly drawn that the will had to be thrown out of court. A previous will was used in its place. Upon investigation, it was observed that the law firm in question had no record of this will. It was also noted that the blue cover on the will used the name of the firm as it last appeared over a decade prior to the executive date of the will. The woman had evidently typed her own will and placed it in the cover of her previous will. So the court used an old will which the women obviously did not want. She saved money but did not accomplish her purposes.
I would suggest that you go to a lawyer who specializes in wills and estate planning. It may seem expensive but is money well spent. (No… I am not a lawyer.)
To lessen the hours needed and to get a better end product, I would suggest that you make a detailed list of your assets and liabilities (see net worth form at this web site). I would also suggest that you develop your ideas of how your estate assets should be distributed including your charitable gifts and discuss that plan with a trusted friend or financial advisor. This will speed the drafting process and, hopefully, reduce the fees.
When you draw your will, I would strongly suggest that you draw a durable health care power of attorney and living will at the same time. You never know when you will need them and they are so important to have in a critical medical situation.
In summary, this
is not the place to save money or you may pay a lot more in the long run.
[Back]
What is an estate plan?
An estate plan is the structure of a person's assets at the time of death
so that they may be disposed of in the most effective manner in line with
the person's wishes. It is supposed to meet the unmet needs of the person's
family, pay outstanding bills and leave a charitable legacy if he or she
so desires. The primary instrument for accomplishing this is under a will
although there are several other methods to accomplish these goals.
A comprehensive estate
plan considers the family situation, income sources, investments, tax
consequences and needs and fears of the person in question. It starts
with people and ends with people. It involves not just the will, but also
asset registration, lifetime gifts to individuals and charity, trusts,
insurance coverage and multiple other aspects. It is not a job to be undertaken
lightly or without professional advice.
[Back]
When should I start working on my estate plan?
The conventional wisdom is that estate plans are for the elderly. It is
my position that estate plans are for everyone. Typically, before you
are independent of your parents you have no significant estate. But, even
that is changing with significant gifts during ones lifetime from parents
and grandparents.
As soon as you are
out of school and employed, there may be an insurance coverage and other
assets of your estate. When you get married, the need to consider a spouse
and, later, possibly children becomes important. In middle age, the needs
change and so does the estate plan. Then in later life, when the children
are independent (hopefully) and the assets are more significant, the needs
change again.
[Back]
When should I re-draw my will?
The typical time to reconsider your estate plan and, therefore, re-draw
your will is when one or more of the following happens:
- The death or incapacity of a spouse.
- The birth of a child.
- Significant changes in your financial situation for better or worse.
- A change in insurance coverage that make the disposition of assets under the will inappropriate or infeasible.
- The change in the lives of one of your family members that would cause them to be more dependent upon you. A critical injury of a child might be a good example.
- Significant changes in your estate plan through trusts, charitable remainder trust or other such vehicles that would change the needs under your will.
- Change in your state of residence.
- Change in your marital status or signing a post-nuptial agreement.
- Significant life-time gifts or unequal gifts to children.
- Change in your charitable giving plans.
- Change in your desires for executors, guardians for children or trustees.
- Changes in tax law.
The best way to determine when a will needs to be re-drawn is to ask your attorney and inform him
or her of any of the above events.
[Back]
Why make my charitable gifts using stock?
If you give stock to a public charity, you get to deduct the fair market
value of the gift up to 30% of adjusted gross income if you itemize deductions.
Furthermore, any excess amount over the amount deducted in the year of
the gift can be carried forward for up to five additional years. Since
most people do not exceed 30% of AGI for charitable gifts in any year,
the stock gift becomes, essentially, the same as a cash gift.
But, the real advantage of the gift of stock is that you avoid the tax on the capital gains (assuming there are some) while getting the advantage of the itemized deduction. In other words, you gift the stock and keep the cash. If you really like the stock you gifted wait a few months and buy the stock back. You then will be back in the same position but with a high cost basis.
This gifting only makes sense if the stock has appreciated (market value is higher than cost). If you have a loss in the stock, you should sell the stock and gift the cash.
Care must be taken
to document a stock gift. There is excellent information available on
this web site about the process for giving stock. Visit the Planned Giving area to find out more.
[Back]
What are charitable trusts and why is there so much talk about them?
Charitable trusts tend to fall into two categories: Charitable Remainder
Trusts (CRTs) and Charitable Lead Trusts (CLTs). In a charitable remainder
trust, the donor establishes the trust with a gift, usually stock. The
donor then retains the right to pay the income (minimum of 5%) to one
or more income beneficiaries. This is often the donor and his or her spouse.
At the end of the term of the trust (either in years or the lives of the
income beneficiaries) the trust terminates and all of the remaining assets
are paid to a named charity or charities. That is the simple version of
what happens.
In a CLT, just the opposite takes place. A donor establishes a trust with a gift. The trust pays the income to the charity or charities for a period of years or a lifetime. When the trust terminates, the assets remaining go to a non-charitable beneficiary, often a child or grandchild. Again, this is the simple version. An attorney who specializes in this area needs to advise you on the best vehicle in your situation.
Why "so much talk"? There are some real advantages for both of these types of vehicles. A donor must have charitable intent to make these attractive. But assuming a charitable intent, both vehicles offer some real benefits. With a CRT, you can take a highly appreciated stock that pays a 1% dividend and convert it to a 5% payout. You can also get an immediate charitable deduction and effectively remove the assets from your estate. The negative is that the transfer is irrevocable and, therefore, not to be done with assets that you may need later. Since the assets are not in your estate, they cannot be left to your children. But the charities of your choice can benefit greatly.
A CLT also has significant benefits. The payout to the charity can be used while the donor is alive. It can also outlive the donor. Many people use this vehicle to pass assets that they don't currently need to their children or grandchildren with little or no tax if properly structured. It is one of the very few ways to avoid a generation skipping tax.
Again, both of these
vehicles are complex and have several variations. The advice of an experienced
attorney is needed since both vehicles require irrevocable transfers of
assets.
[Back]
