Like many of you reading this newsletter, I have a very personal connection to Markey.  Cancer took the lives of both my grandmothers: one in 1955 and the other in 1985.  In 1994, as part of my seminary education, I spent a year in the department of pastoral care and was assigned to the Markey Cancer Center to work with cancer patients and their families. I repeatedly saw the effects of cancer from diagnosis to treatment to resolution. I came back in 2005 as a patient with prostate cancer. Thanks to the grace of God and skillful work by people who have dedicated their lives to changing ours, I am now

6+ years cancer free!  Over these years, I have seen, first hand, enormous strides in the treatment of cancer and the positive effects of continued research in the fight against this dreaded disease.  Much has been done, but there is still so much to do.

As you know, the research effort at Markey is funded, in part, through the Markey Cancer Foundation which is supported in no small measure by charitable gifts from people like you and me.  My career has been devoted to helping others make better decisions with their money.  Today we deal with giving in general, and planned giving in particular.

We are all familiar with gifts to charities coming from current income.  I have long maintained that there are five things, and only five things, to do with all your income each and every year: 1) pay your taxes, 2) pay your debts, 3) save some, 4) give some, and 5) spend the rest.  The total income goes out--into some combination of those five places.  Obviously, the amount used for taxes has been determined by law and the amount used to pay debts has been determined when you took out the loan. But the saving vs. giving vs. spending decision is at least in part, discretionary in the here-and-now. Intentionally determining the allocation between those three categories is always invigorating and often provides freedom for our clients.

As surely as gifts can be made from income, they can likewise be made from assets, now and in the future, even upon death.  Gifts of assets, as opposed to current income, are generally referred to by financial advisors, estate attorneys, and foundation officers as “planned giving.”  

It’s important to note that the same types of choices are present for planned gifts as exist for the allocation of this year’s income.  All of one’s resources will end up going somewhere: 1) to the government (taxes), 2) to the future spending needs of beneficiaries, or 3) as gifts to charities.  One of the chief reasons to engage in some sort of planned giving is to reduce the tax burden.  I have always felt that any estate tax imposed is simply a tax on the unwary—since it can be eliminated with proper planning. Currently, the federal estate tax rate is 35% and there is a $5 million exemption for estate taxes, $10 million for a married couple.  That high exemption has led many to erroneously believe that there is no need for estate planning, but without Congressional action the rate and exemption will expire at the end of 2012.  Everyone needs a plan and your plan should be flexible enough to handle this year’s higher exemption and the potential for a much lower exemption in the future. 

Of course, the needs of present and future family members are a concern. However, we are told that the leading reason for estate planning last year was to eliminate chaos and avoid disputes between beneficiaries.  Even if your desire is to leave an estate for future generations, sound planning can be utilized to accomplish the goal.

In his book, What Your Money Means and How to Use it Well, Frank J. Hanna eloquently spells out the 3 vocations of those with money: Virtue, Wealth Creation, and Giving.

Before we discuss the practical aspects of planned giving, let’s first explore the question of why a rational person might decide to give away part of his or her wealth?

Reasons to give are always personal:

• To leave a legacy. 
• To avoid taxes.
• For stewardship.
• It brings joy to fill a need.
• It is truly a “calling” to give and to share.
• It extends power.
• It builds character.

Beyond addressing to whom gifts will be made, professional advice about giving generally revolves around two practical questions:  1)   How much shall I give? And 2) When will I give it? 

As we do financial planning, we consider the amount of resources available to the client during his or her lifetime. We can then determine the maximum sustainable living standard between now and age x (typically age 100). That’s the amount available to spend or give each year, adjusted for inflation. For the questions at hand, we can then properly gauge the effect that giving away a portion of the assets will have on living standard.  Analyzing alternative scenarios can quickly assess the impact of timing the gifts as well as various estate planning tools.

Finally, after addressing why, when, how much, and to whom; we must address the how to give.  Generally, planned giving involves a Last Will and Testament or a Trust document. These documents do not have to be overly complex but should be prepared by a competent estate attorney and should always reflect your true goals.

In addition to gifts transferred upon death via a last will and testament, charitable trusts are popular charitable giving tools.  The two most popular forms are: remainder trusts and lead trusts.  The charitable remainder trust is one in which the trust is used to provide income to the trust maker or other beneficiaries for a certain period. The remaining trust assets get passed on to a charity after that period of time. A current income tax deduction is available for the present value of the remaining gift to the charity.

Current low interest rates make it a good time to set up a charitable lead trust to transfer wealth to children in a tax efficient manner, while currently benefiting charity. The trust provides a charity with an annuity stream for a certain period, and at the end of the period the trust is returned to the client or passed on to family.  If the trust’s investment performance over the period beats an interest rate that is published each month by the IRS, the excess earnings that pass to the beneficiaries are tax-free.

Planned giving can also take the form of gifting an insurance policy or appreciated assets that are no longer needed by the family. 

Giving, when planned properly, can have lifetime benefits for the donor and ongoing lasting benefit to society.  To paraphrase that southern curmudgeon Jerry Clower, “There ain’t no wrong reason to give.”   

Scott Neal, CPA, CFP is President of D. Scott Neal, Inc. a fee-only financial planning and investment advisory firm. He can be reached via email scott@dsneal.com or by calling 1-800-344-9098.