Gifts of Real Estate
If you've owned your home or other real estate for a long time, no doubt it has increased in value significantly. What happens if you sell the property?
First of all, the sale is subject to capital gains tax on the property's appreciation. If the property has been your main home for at least two of the past five years, you can exclude up to $250,000 of gain ($500,000 for married couples). However, this opportunity to avoid capital gains tax doesn't apply if the property is a vacation home, land or any real estate other than your primary residence. Plus, there's the cost of marketing and selling real estate, which takes time and effort, even if you use professional assistance.
Before you sell real estate, consider a new option. If you'd like to help fulfill our mission, your property opens the door to a unique giving opportunity: donate the property to the Foundation. You can give the property outright, place it in trust, retain the use of it for life or give it by will. All of these methods will enable you to enjoy personal financial benefits while supporting our work in a meaningful way.
Tax Benefits of an Outright Gift
When you make an outright gift of real property held for more than a year, you receive an income tax charitable deduction equal to the property's full fair market value. This deduction lets you reduce the cost of making the gift and frees cash that otherwise would have been used to pay taxes.
By donating the property to the Foundation, you also avoid capital gains tax on the property's appreciation. Furthermore, the transfer isn't subject to the gift tax, and the gift reduces your taxable estate.
Your deduction for a gift of appreciated real estate in any year is generally limited to 30 percent of your adjusted gross income, with a five-year carryover of the unused deduction. If you elect to base your charitable deduction on the cost of the property, this raises your AGI limitation to 50 percent with a five-year carryover, but this has implication for all gifts made during or carried over to that year.
For real estate you've held only short-term, your charitable deduction is limited to the property's cost basis, but there's still no tax on the appreciation. The deduction may be claimed up to 50 percent of your adjusted gross income, again with a five-year carryover for any excess value.
Your gift is usually effective when a properly executed and notarized deed, suitable for recording, is delivered. The amount of your deduction for a gift of real estate (if more than $5,000) must be substantiated by a qualified appraisal of its fair market value.
Give Your Home but Enjoy Life Use
Let's assume you like the tax advantages a charitable gift of real estate would offer, but want to continue living in your personal residence for your lifetime. You'd like to retain the right to rent your house or make improvements. You may also want a survivor (perhaps a spouse) to enjoy life occupancy. But, ultimately, you'd like for a charitable organization to receive the property.
By deeding your home to us now, subject to all these rights, you can still obtain valuable tax savings. This arrangement is called a retained life estate. Even though the Foundation would not actually take possession of the residence until after the lifetimes of the tenants you've named, you receive an immediate income tax charitable deduction because the gift cannot be revoked. The amount of the deduction depends on the value of the property and your age (and the age of any other person who is given life use).
Tax Savings for Partial Use
Say you have a home you don't occupy year-round. You can make a deductible gift to us of an undivided interest, allowing us exclusive use of the property for part of each year.
A vacation home can be ideal for this purpose. For example, you could give the Foundation a half interest. You would continue to use the property for six months of each year while the Foundation, as half owner, would use it for the remaining six months. You receive an income tax deduction for the fractional interest contributed to us, based upon its market value. That interest will also lower estate taxes.
You can also give the Sedalia School District Foundation a remainder interest in the part of the property you retain. Then you would receive an additional income tax deduction, based on your age and other factors.
Bargain Sale Tax Benefits
You can sell long-term appreciated real estate to the Foundation for less than its value, subject to our consent. This transaction is part gift and part sale. You receive a charitable deduction for the difference between the sale price and the higher fair market value.
A bargain sale accomplishes the gift and provides you with immediate cash, while also relieving you of the time, effort and costs of a normal sale.
Giving Real Estate through Your Will or Living Trust
If making an irrevocable gift of the property through one of the options we've discussed is not to your liking, consider giving it to the Foundation in your will or living trust. Because your will or living trust is revocable (that is you can change your mind at any time during your life), you will not be able to take an income tax deduction, but the property will not be taxed in your estate.
If you wish, you can give another person life use before unrestricted ownership passes to the Foundation. Or you can bequeath full title to an individual if that person survives you, with our organization as the contingent recipient. When an individual is given life use, it is best to make it clear that he or she is responsible for maintenance, insurance, repairs and improvements.
If you don't need to make a new will or trust now for any other reason, ask your attorney to draw a brief codicil or trust amendment for this purpose.
A Summary of the Benefits
A charitable gift of real estate is advantageous for many reasons.
- Either an outright gift or a remainder interest results in valuable income and estate tax deduction, and tax on the capital gain can be avoided.
- A "bargain sale" gives you some money back and reduces your capital gains tax exposure.
- A gift in your will assures that the value of the property will qualify for a charitable deduction for estate tax purposes.
- Giving the Foundation outright use of the property now will free you from the responsibilities and costs of looking after it.
Gifts of Retirement Plan Assets
Like many Americans, you are probably aware that the accumulation of assets in your retirement plan is the basis for a financially secure future. To preserve your retirement assets after your lifetime, consider the benefits of using them in a totally different way.
Retirement accounts are often exposed to income taxes and estate taxes, at a combined marginal rate that could rise to 65 percent or even higher on large, taxable estates. Yet many of these taxes can be avoided or reduced through a carefully planned charitable gift.
Other considerations come into play when deciding on using retirement plan assets for charitable giving. Your account can pass directly to a charitable organization as your primary beneficiary, or it can be transferred to a deferred giving arrangement that will pay an income for life to a family member, after which the remaining assets pass to the organization. You might even consider a deferred gift that is designed to pay a life income to yourself.
How Retirement Accounts Are Taxed
Qualified retirement plans are those that receive favorable income tax treatment during an employee's lifetime. No income tax is due on the funds as contributed, and no income tax is due on the earnings and appreciation while in the plan. You pay taxes on the funds only when you receive them.
Generally, the undistributed balance of qualified retirement plans is fully includable in your gross estate tax purposes. Since the funds in retirement accounts usually represent deferred compensation that has not been subject to income tax, giving the accounts to individual heirs exposes the funds to income taxes. Your retirement dollars can be seriously depleted by the double taxation.
A qualified retirement plan often makes a large, taxable distribution shortly after an employee's death. As a general rule, qualified plans other than IRAs will specify how quickly distributions must be made from the plan. In the case of an IRA, if the owner dies before reaching the required beginning date, the plan benefits must generally be distributed within five years, but a designated beneficiary may stretch the distribution over his or her life or life expectancy. If the owner dies after the required beginning date, then the entire balance can be distributed over the length of what would have been the deceased owner's remaining life expectancy or the designated beneficiary's remaining life expectancy. Only a surviving spouse can roll over an inherited distribution to his or her own IRA and benefit from further income tax deferral; all other beneficiaries are taxed according to the above rules.
By donating retirement assets, those funds avoid estate taxes, and you can be certain that 100 percent of the balance of your retirement funds will support your philanthropic objectives.
How to Donate Your Retirement Account
The simplest way to leave the balance of a retirement account to the Foundation after your lifetime is to list us as the beneficiary on the beneficiary form provided by your plan administrator. Never make a beneficiary change, however, before discussing your desires with your professional advisor. For an IRA or Keogh plan, you administer personally, notify the custodian in writing and keep a copy with your valuable papers.
If you are married, your surviving spouse is entitled by law to receive the entire amount in these qualified plans: money purchase pension, profit-sharing plan, 401(k) plan, stock bonus plan, ESOP or any defined benefit or annuity plan (though not an IRA). In order for the assets to be transferable to the Sedalia School District Foundation, your spouse must execute a written waiver (even though you may designate a charitable organization as beneficiary on your employer's forms). Your spouse can execute one after your death, if necessary. In that case, the document must also include a qualified disclaimer.
If you prefer to make your spouse the primary beneficiary of the retirement account, you can name the Sedalia School District Foundation as the secondary beneficiary.
Perhaps you want your children to benefit from your retirement account, too. In that case, you might designate a specific amount to be paid to the Foundation, before the division of the rest of the money to your children.
Gifts of Life Insurance
When you first bought a life insurance policy, you probably hoped to ensure the financial stability of your family should something happen to you or your spouse. Have your circumstances changed since then?
Life insurance can be a tool for many purposes. For example, it can provide liquidity for paying taxes and other expenses at death. But, believe it or not, some of the most satisfying uses for life insurance policies are connected with charitable giving!
If you have a life insurance policy you no longer need, you might contribute it to a charitable cause in which you believe. Purchasing a new policy and naming the Sedalia School District Foundation as a beneficiary is another possibility.
Perhaps you are considering a sizable bequest to the Sedalia School District Foundation, provided your family's future inheritance is not affected. Life insurance can play a part in meeting this goal, too, by replacing for your heirs the amount donated.
This versatility of life insurance makes revisiting its uses a good idea.
Indirect Use of Insurance for Wealth Replacement
In recent years, probably the greatest increase in using life insurance in philanthropic plans has been to replace for heirs of an estate value being given, by one means or another, to a charitable organization like the Sedalia School District Foundation.
A significant outright charitable gift might reduce the projected value of inheritance for family members. However, depending on the age, health and marginal income tax rate of the donor(s), income tax savings from use of the charitable deduction can be enough to purchase life insurance, whose death benefits equal the value of the gift.
Gift of an Existing Policy
You may own an insurance policy that has a substantial cash surrender value, yet the original purpose for the protection no longer applies. The policy might have been purchased initially to provide financial security for a spouse now deceased, to educate children now grown or for liquidity to pay death taxes when liquid assets were in short supply. This policy can be a hidden asset, available to be used for your philanthropic purposes.
If you choose to name the Sedalia School District Foundation as the beneficiary of a policy that is not paid up and also assign all incidents of ownership of the policy, several good things happen. You receive an immediate income tax charitable deduction for the lesser of the premiums you have paid or the "interpolated terminal reserve" value for the policy. This is similar to the cash surrender value, a figure available for the insurer.
http://sedaliasdf.org/components/com_jce/editor/tiny_mce/plugins/anchor/img/anchor.gif);"> If you itemize deductions on your tax return, your actual income tax savings depends upon marginal tax rate. A person who does not normally itemize may find the additional charitable deduction boosts his or her total itemized deductions above the standard deduction.
For a paid-up policy, the deduction is the cost of replacing the coverage with a comparable policy. In either situation, the tax deduction cannot be greater than your net investment in the policy (total premiums paid less any dividends received).
When death benefits under the policy are removed from a taxable estate, there may be a future estate tax savings if your estate would have otherwise been subject to tax.
If premiums on the policy are still payable, there are two options to be considered. You may stipulate that the assignment of ownership of the policy at its current value is the total charitable gift, immediately available for our use. In that case, we might surrender the policy for cash. Or we might decide to accept an amount of paid-up insurance. In either case, you are relieved of the obligation to make further premium payments.
However, an alternative may be more attractive. The policy can remain in force so that the larger, original face amount will become your gift. You pledge to make unrestricted gifts at least annually, which we will use to pay the premiums. The gifts are deductible, and the policy is thereby kept in force with pretax instead of after-tax dollars for a lower actual cost.
Use of Beneficiary Clause as a Revocable Gift Arrangement
Other options are available if you would rather retain ownership of a policy as an asset for your own financial security or that of others. They include:
- naming the Sedalia School District Foundation as the only or a partial primary beneficiary of the policy, with you retaining the right to change the beneficiary clause as owner of the policy;
- naming the Foundation as the contingent beneficiary, receiving the death benefits only if a named individual beneficiary predeceases you;
These plans do not produce a current income tax charitable deduction, but they can provide the satisfaction of knowing we will receive some benefits if certain events take place and the arrangement is left unchanged. Any amounts payable to the Foundation at your death will not be subject federal estate tax.
New Policy for Future Charitable Gifts
Many of our friends and regular donors who would like to make a significant future gift to the Sedalia School District Foundation at a relatively low cost can do so through a new life insurance policy. With increasing longevity, older persons can now purchase insurance at more affordable premium costs than were possible in the past. Retired individuals enjoying a surprisingly high standard of living can use some annual discretionary income to perpetuate their support of our work without depleting their financial reserves or reducing the projected inheritances of family members.
Deferred Gift Annuity
It is also possible to create an annuity and defer income payments. This option, available to donors beginning at age 40 who choose to receive payments after they reach age 60, can be used as a retirement planning tool. The Deferred Payment Charitable Gift Annuity, for which the minimum gift is $10,000, allows a tax deduction when the gift is made, then lets you derive income from it during your retirement when your income is likely lower. You determine when income payments begin at the time you establish the annuity.
With this method of giving you transfer cash or securities to the Sedalia School District Foundation in return for a fixed income for you and/or your designee. Charitable deductions vary according to the amount of the gift, the annuity rate, and the ages of the income beneficiaries. Part of each payment will be taxed at ordinary income rates and depending on the ages of the beneficiaries part may be tax free for a period of years. If appreciated property is used, part will be taxed at capital gain rates. An annuity requires a gift of $5,000 or more, and the minimum age to participate in this type of plan is 60.
A Gift Annuity (also referred to as a "charitable Gift Annuity" or "CGA") is a contract (not a "trust"), under which a charity, in return for a transfer of cash, marketable securities or other assets, agrees to pay a fixed amount of money (payment) to one or two individuals, for their lifetime, not a term of years.
A person who receives payments is called an "annuitant" or "beneficiary". The payments (called the "annuity") are fixed and unchanged for the term of the contract. The annuity payments are NOT called "income", for a portion of the payments are considered to be a partial tax-free return of the donor's gift, which are spread "ratably" (in equal payments) over the life expectancy of the annuitant(s).
The contributed property (the gift), given irrevocably, becomes a part of the charity's assets, and the payments are a general obligation of the charity. The annuity is backed by the charity's entire assets, not just by the property contributed. Unlike a trust, annuity payments continue for the life/lives of the annuitant(s), and not ONLY as long as assets remain in the Gift Annuity Fund.
Charitable Lead Trust
When people think about providing an inheritance to children and making a significant charitable gift through their estates, a vehicle known as the "charitable lead trust" is an excellent method to accomplish both objectives.
A charitable lead trust is a trust that the estate owner establishes either during life (an inter vivos trust) or at death (a testamentary trust). The income from the trust flows to a charitable organization, like the Sedalia School District Foundation, typically for a stated number of years. After that period, the assets inside the trust are then distributed. The fact that the assets will one day be transferred to another person means that this trust has one further distinction: it is a "nongrantor" trust, as opposed to a grantor trust. "Nongrantor" means the trust assets are not owned by the person who established the trust, and the assets are not going to be returned to him or her someday. (A "grantor" trust is one in which the assets will eventually be distributed back to the donor. As a result, the donor is subject to tax on the trust earnings.)
Charitable Remainder Annuity Trust
With Charitable Remainder Annuity Trust, the Sedalia School District Foundation can be the designated trustee of your gift of cash or securities. The trust provides you and/or your designee an annual fixed income at a predetermined percentage that is at least 5 percent of the initial fair market value of the trust assets.
Income earned by the trust that exceeds the annuity amount is simply added to trust principal. If trust earnings are insufficient to meet the annuity amount, principal will be used to make up the deficit.
There are numerous tax benefits tied to Annuity Trusts. The plan allows a current year income tax charitable deduction for a portion of the value of your contribution. If your gift is appreciated property, you are relieved of capital gains tax on the sale of the property.
Annuity Trusts may be funded with a minimum gift of $50,000 and a minimum designee age of 60. Unlike Unitrusts, no additional contributions can be made to this type of trust, although additional trusts may be established easily.
Bequest Through Will or Living Trust
With a bequest in your will or living trust you may contribute either a specific sum or asset or a percentage of your residuary estate. Bequests offer you the flexibility of designating a specific purpose or endowment for your gift. This option affords great estate tax advantages. Here is sample bequest wording that you may wish to share with your attorney:
"I give to the Sedalia School District Foundation, Inc., a not-for-profit corporation for charitable and educational purposes, in Sedalia, Missouri...
- (Cash Bequest) the sum of _____ dollars ($______)
- (Stock Bequest) ____ shares of common stock of ___________ Corporation.
- (Percentage of Estate) ____percent (______ %) of the residue of my estate.
I request this bequest be used by the Sedalia School District Foundation for the following purpose: ________________ I direct that no federal estate tax or state death taxes be allocated to or paid from this bequest."
If you wish to restrict your bequest to a specific school, scholarship or grant program, contact the Foundation office to determine wording that will ensure its use according to your intentions. Charitable bequests are fully deductible for estate tax purposes.
Gifts of Appreciated Stock or Mutual Funds
Your gift of appreciated marketable securities to the Sedalia School District Foundation is an easy and prudent way to gain substantial tax benefits. Most gifts of appreciated securities that you have held long term (more than one year) are fully deductible at fair market value, and you do not incur a tax on unrealized capital gain.
Wise time to donate securities
Consider a gift of appreciated securities whenever you prefer not to incur capital gains tax, such as in these circumstances:
- When a takeover is contemplated
- When you wish to upgrade your portfolio
- When you wish to donate cash or holdings in your closely held corporation
- When you wish to increase your cost basis in a stock you intend to hold
- When you want a higher yield
Ways to donate appreciated securities
If your broker or bank holds your securities:
Instruct your bank or broker to transfer your gift of securities to the Sedalia School District Foundation. He may call the Foundation office for transfer instructions.
Send your unendorsed stock certificate(s) by registered mail to:
Sedalia School District Foundation
P.O. Box 2505
Sedalia, MO 65302-2505
- In a separate envelope, by regular mail, send to the same address:
- A signed stock power (one power for each certificate; complete the signature block only and exactly as the stock is registered) and
- A brief note identifying yourself (name, address, phone number) and describing the number of shares, the name(s) of the stock(s), and the purpose to which you wish to direct your gift.
Mail both envelopes on the same day. The "date of the gift" is determined by the postmark date.
Ways to donate appreciated securities (continued)
Bring your unendorsed stock certificate(s) to:
Sedalia School District Foundation
U.S. Bank Building, Second Floor
3615 W. Broadway
Sedalia, MO 65301
- Sign a stock power (one power for each certificate; complete the signature block only and exactly as the stock is registered). Receive a receipt acknowledging your gift and its purpose. The "date of gift" is the date you deliver the securities.
- Bring a brief note identifying yourself (name, address, phone number) and describing the number of shares, the name(s) of the stock(s), and the purpose to which you wish to direct your gift.
Gifts of mutual funds
Mutual fund shares that have appreciated in value are an excellent charitable gift with tax advantages similar to those from gifts of other appreciated securities. Generally, mutual fund shares must be transferred by the mutual fund company. To make a gift of mutual fund shares, you should ask your mutual fund company to provide you instructions and the forms necessary for making a charitable gift. Please call us a 660-829-2505 if we may be of help to you.