You probably won't donate $1 billion to your favorite charity, challenge your peers to do the same or make the cover of Newsweek. But like Time Warner Vice Chairman Ted Turner, you can give some of your wealth away and enjoy some tax benefits from doing it.
In fact, charitable organizations in Western New York and elsewhere are countingon Baby Boomers to begin using some new and old tax-saving strategies to direct some donations their way.
"The real strategy is targeted for retirement years and done in preretirement planning," said Gail Johnstone, director of The Buffalo Foundation. She said the charity is considering offering some new options for giving, particularly one that Boomers could employ with their 401(k) plans, IRAs or other retirement funds.
Called a charitable family IRA, it reduces taxes, provides steady income to heirs, and leaves a charitable legacy down the road that will benefit the community.
The idea for this new form of giving started in California, where it has become a hot item, explained Gordon Gross, chairman of the Buffalo Foundation. He cited this example for why it has caught on out west:
Let's say a person dies leaving $1 million in retirement fund accounts with his or her children as the beneficiaries. The estate tax due would be about $550,000, and income taxes due would total $218,400. That's a total tax bill of $768,400, leaving $231,600 to the children and zilch to charity.
Now consider the same situation with the charitable family IRA.
The $1 million in retirement accounts is left to a charity. The estate tax due is reduced to $412,500, and income taxes due are zero. The charity invests the remainder -- $587,500 -- in a trust fund, which pays a 20-year stream of income to the children at a set percentage of the principle.
Assuming the trust fund earns 10 percent annually and the children each year get 7 percent of the growing principle, at the end of 20 years the children will have received $674,700 and the permanent charitable legacy will have grown to about $1 million.
Everybody wins, Gross says.
A couple of caveats about the above example. It is based on California state income tax schedules, which are similar to but somewhat different from New York's. The example assumes the beneficiaries are children or someone other than a spouse, because inheritances pass tax free to spouses. And the transfer to the charity needs to take place when the donor is retired, dead or at least 59 1/2 to avoid early-withdrawal penalties, said Edward T. Nowak, a Principal Financial Group pension manager.
Charitable remainder trusts
However good the idea may be, especially for people of means, it is new for Western New York. "I have yet to see anyone willing to give up the retirement account while they're alive," said Dale Demyanick, a tax partner with Lumsden & McCormick.
Charitable remainder trusts are more common, he said.
These are used by investors with stock or mutual fund shares that soared in value.
Instead of cashing in the shares and paying capital gains taxes, the investor can give the shares to a charity. The charity passes them to a trust, which pays no taxes on the gains. The trust pays the investor a set amount from the funds. The investor must pay income taxes on distributions from the trust. But the investor gets a tax deduction of the calculated value of the gift.
Robert Fine, a partner in the Hurwitz & Fine law firm who specializes in estate planning and is assisting the United Jewish Federation's endowed giving programs, said many executives, particularly those who exercise stock options, use the trust format for giving. "You find a lot of substantial people giving away substantial amounts of money; it could be pieces of land, it could be other assets," he added.
The strategy doesn't result in free giving; it just costs less to give, he said. "There's no free lunch," he said. "There's always some cost. The key is you don't always have to pay 100 cents on the dollar."
He said he thinks with the publicity about charitable giving in the wake of the deaths of Princess Diana and Mother Teresa, many people may be emotionally drawn to donating right now. He said people considering donations should do some estate planning first, particularly if they might use retirement funds for their giving.
For instance, 401(k) plans can grow significantly if an employer is contributing as well as the employee, he said. The money put in by the employer has never been taxed and so that principal plus gains must be taxed upon withdrawal at retirement. If the employee dies, the income taxes and estate taxes could wipe out 80 percent of a fund, Fine said.
A way to avoid the taxes is to draw up a will to include a charitable gift of some of the retirement money, Fine said.
By doing this, a retiree probably won't leave more money for his or her family, said estate planning lawyer Edward C. Northwood, of Hodgson, Russ, Andrews in Buffalo. But he said, "it may cost the government more than you."
Give away non-performing assets
Northwood, a member of the steering committee for the Western New York Consortium for Planned Giving, said another way of giving involves assets that don't provide cash flow, such as stock without dividends or real estate without rent.
You can move the assets to a trust and take a tax deduction in the year you give away the assets and potentially get cash flow never before derived from the assets. That money could be used to buy a life insurance policy.
When you die, the policy would pay your beneficiaries an estate-tax-free death benefit. Further, Northwood said, the insurance policy itself could be placed into a trust, protecting the death benefit from both income and estate taxes.
Northwood said he recommends using IRAs, 401(k)s and other retirement accounts for gifts to charities, but clients aren't committing to tapping the accounts yet. "I wish I could tell you there's been a real clamor," he said.
James P. Hayes, director of development for Catholic Charities, said he's hoping that more people will cash in stock and mutual funds for donations now that the capital gains tax is reduced to 20 percent from 28 percent. But he hasn't seen a trend yet.
Typically, he said, donors with valuable securities or real estate will set up the trusts to allow for current income, a tax deduction and charitable gifts. Most of the donors are elderly, he said, and the charity is willing to pick up the costs for setting up a trust.
To create the charitable trusts, one needs to appoint a trustee, file annual income statements and tax returns with the government and have an administrator, Demyanick said. "Usually, it's not done unless they have $200,000 or more, but you can do it with smaller estates by getting involved with the charity's pooled income fund," he said.