Gifts That Solve a Problem

People give to worthwhile causes primarily because it makes them feel good. But gifts often can advance personal or financial goals the donors have for themselves or their families, or may even solve a problem. Here are a few examples:

Goal: Assist an aging parent. Dr. C, who is in the top 35% tax bracket, sends a monthly $500 check to her mother, age 85. Dr. C wants to keep helping her mother, but would also like to reduce her income taxes and satisfy charitable objectives.

Gift planning solution: Dr. C’s advisers suggest she instead transfer $100,000 in securities to a charitable remainder unitrust that will pay mom 6% annually, with income continuing to Dr. C after her mother’s death. Result: Dr. C receives a substantial income tax charitable deduction, reduces her taxable investment income, and avoids capital gains taxes. Assuming her mother is in a 15% tax bracket, any dividends and capital gain paid to her from the trust will be tax free through 2010.

Alternative gift solution: Dr. C could transfer $64,000 in exchange for a charitable gift annuity that would pay her mother $500 a month for her life alone. (A larger amount would be required to fund a two-life gift annuity.) Dr. C receives a charitable deduction and can avoid making a taxable gift to her mother by keeping the right to revoke her mother’s annuity.

Goal: Retire from the “landlord business.” Eugene is 72 and owns a small apartment building worth $600,000 that he purchased many years ago for $200,000. Depreciation deductions have reduced his basis down to only $20,000. Eugene plans to move to a retirement community and wants to sell the apartment building and invest for a good retirement income – but capital gains taxes of $105,000 (including depreciation recapture taxed at 25%) are a challenge.

Gift planning solution. Eugene can transfer the apartment to a charitable remainder unitrust that will pay him a 6% income for the rest of his life. The $105,000 capital gains tax won’t be payable when the trustee sells and reinvests, so Eugene will begin receiving trust income based on the full $600,000 – about $36,000 a year, to start. Based on his age and other factors, Eugene also will receive a charitable deduction of about $307,000.

Goal: Maximize the value of savings bonds in an estate. Mr. P has been a patriotic saver all his life and is proud that he has accumulated $230,000 of U.S. savings bonds during his lifetime. He plans to leave the bonds to Mrs. P in his will, to provide for her security, but was surprised to learn that Mrs. P will have to pay substantial income taxes on every bond she cashes.

Gift planning solution. Mr. P decides to leave the bonds to a tax-exempt charitable remainder trust in his will. The trustee can cash the bonds without owing income tax, reinvest the proceeds and pay Mrs. P a good income for life.

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