NYT: As Economy Declines, Donors Rethink Estate Plans

The New York Times reports that the current economic crisis is causing many people to rethink their charitable giving both during their lifetime and to be included in their estate plans.

According to Lawrence P. Katzenstein, a lawyer with Thompson Coburn in St. Louis, gifts made during your lifetime can be much more tax efficient. One benefit is being able to take an income tax deduction for the year in which the gift was made. Another benefit available for people with more than $2 million in assets and thus subject to estate taxes, is that a donation reduces your net worth and leaves less that could be subject to the 45% estate tax. In contrast, if you make a gift in your will, your estate can take a charitable deduction against only the estate tax — there is no income tax write-off.

The article reports that people’s concerns are: (1) not being able to fulfill a pledge, (2) the fact that they depend on income from their investments, (3) they are having second thoughts about remainder trusts, (4) they assumed they had more money, and (5) a charitable bequest might shortchange their family.

To address the 1st concern, the article reports that in most cases and in most states, a promise to make a gift is not enforceable. But if the charity has relied on your promise — for example, in building a hospital — or given you something in return, like naming that hospital in your honor, the pledge may be enforceable. The article suggests that donors try to modify the terms of their donations. As a practical matter, “charities generally do not sue donors who walk away from enforceable pledges,” said Reynolds Cafferata, a lawyer with Rodriguez, Horii, Choi & Cafferata in Los Angeles, but the state attorney general, who oversees charities, might bring suit. A donor who is on a charity’s board could face tax consequences under what is known as the excess benefit rule, if the charity forgives the pledge or agrees to renegotiate it. The rule says is that if a charity enters into an economic transaction with an insider, and the value that the charity gives to the insider exceeds the value that the insider gives back to the charity, the difference is considered an excess benefit. The insider must return the excess benefit to the charity and pay a penalty equal to 25% of it.

Regarding the 2nd concern, the article reports that donors who rely on income from their investments are increasingly exploring life income gifts, which can provide a lifetime income stream for the donor or any designee while benefiting charity. Of the available choices, the one that appeals to the largest number of people right now is the charitable gift annuity, experts in charitable giving say. With this arrangement, the donor contributes assets — typically cash or marketable securities — and the charity agrees to pay a fixed amount of money annually to that person and perhaps the surviving spouse. The size of the annuity payment varies, but is typically based on the individuals’ ages and suggested maximum rates from the American Council on Gift Annuities.

For people who are having second thoughts about remainder trusts, the article reports that how the trust was structured determines whether you are insulated from the vicissitudes of the market. With a charitable remainder annuity trust, you receive a fixed amount each year based on the initial value of the trust. A down market does not affect the donor but might leave less for charity in the end. Donors are much more vulnerable with a charitable remainder unitrust, in which charitable beneficiaries get a percentage of the value of the trust, which is reappraised each year. If you are now in that situation and you need the money, you may want to end the arrangement early, experts in charitable giving say. Technically, all charitable remainder trusts are irrevocable, but there are ways to collapse them legally, said Conrad Teitell, a lawyer with Cummings & Lockwood in Stamford, Conn. One strategy involves exchanging the income interest for a charitable gift annuity and its preset income stream. In that case you can take a charitable deduction for the difference between the value of the unitrust interest you are trading and the present value of the annuity — a complex calculation. Alternatively, after computing the value of the two interests, you can simply divide the trust or sell the unitrust interest to the charity and reinvest the proceeds. However, either of these strategies can have significant tax drawbacks.

For those who assumed they had more money, the article suggests that one solution is to amend your will to impose a floor, so family members get at least the amount you specify (subject to an inflation adjustment) before anything goes to charity. Or if your will provides for charity to get a fixed amount, you can add a “circuit breaker,” so that it does not exceed a certain percentage of your estate, said Alan S. Halperin, a lawyer with Paul, Weiss, Rifkind, Wharton & Garrison in New York.

And for those concerned that their heirs may not have enough money, the article reports that you can give your heirs the option of shifting assets to a charity through what is called a disclaimer. A disclaimer specifies that if the heirs say “no thanks” to an inheritance, the assets go to the specific charity or charities that the donor — not the heirs — name.

SS