Steve Okamoto
While it’s uncommon to transfer a gift to beneficiaries before death, you can choose to support your family or JACL now with a gift rather than waiting until after you pass away.
Early gifting can help your loved ones or JACL during crucial times to potentially reduce the size of your estate, leading to lower taxes and probate costs. Here are three techniques that are employed by many donors wanting to support their favorite charity.
The first is probably the most well-known technique. You could donate to JACL directly from your IRA or 401(k). It’s called a Required Minimum Distribution charitable distribution or Qualified Charitable Distribution.
The RMD is an IRS requirement for those taxpayers who are over a certain age, usually 73-1/2 and must come from your IRA or 401(k). There is no income tax on the transfer and no charitable deduction from your taxes. The transfer must come directly from your retirement fund and go directly to your charity. The maximum per year is $100,000, and you can share the QRD with several other charities.
The second technique is by creating a charitable trust and making your loved ones or your favorite charity the trust’s beneficiary. The technique is called a Charitable Remainder Trust.
Here’s how it works: A CRT is a type of financial instrument involving assets, such as your apartment house that you own. You may not want to bother with cleaning up after a tenant just vacated or you don’t want to go through the hassle of interviewing prospective tenants. You then put your apartment into a trust that will provide income to you for your lifetime or a specified period of time. After your death, any remaining assets in the trust are distributed to one or multiple charitable organizations.
CRTs offer tax benefits, income streams and opportunities to give to charitable organizations. It secures your legacy, increases cash flow and your estate will have some tax savings.
The cons are that it is irrevocable. In other words, you cannot make any changes, even if your financial situation changes. It provides a fixed income and does not protect against inflation. Finally, all remaining funds must be distributed to a charitable organization at the end of the CRT’s term.
The final charitable technique that you could use while you are still living is a most underutilized gift. It’s called the Retained Life Estate. For many donors, their home is their most valuable asset. They most likely plan to live there for many years, and it might never occur to them that they could use their home to make a charitable gift during their lifetime. The retained life estate may offer the key to unlocking just such a gift.
With a retained life estate, the donor irrevocably deeds the personal residence to JACL but retains the right to live in it for the rest of the donor’s life, a term of years, or a combination of the two.
One of the appealing features of a retained life estate is that the donor gives up nothing while alive other than the ability to sell the residence and receive the proceeds. The donor continues to live in the house, still has access to all other assets and still has the same cash flow as before the gift. Most importantly, the donor also has the responsibility to maintain the property, pay utilities and taxes and handle other routine expenses.
In return for making an irrevocable gift of the property while retaining the right to use it, typically for life, the donor receives an income tax deduction in the year of the gift for the calculated remainder value of the gift of the residence.
The usual IRS 30 percent of AGI limitation and the five years carry forward apply to a gift of long-term appreciated real estate.
For example, a 75-year-old who puts a $400,000 home into a retained life estate and reserves the right to live in it for the rest of their life will receive an income tax deduction of about $329,000 based upon a discount rate of 0.6 percent.
Transferring the deed to create a retained life estate is the easy part. The JACL would have to create a detailed agreement with the donor regarding a variety of responsibilities, especially a comprehensive dispute resolution process. The relationship can change over time, and an agreed-upon process for resolving disputes may help avoid major headaches later on.
For more information about these gift-giving techniques, please call Steve Okamoto, JACL’s legacy planning officer, at (415) 921-5225, extension 140, or email him at sokamoto@jacl.org. The opinions expressed in this article are the author’s own and do not necessarily reflect the view of the Pacific Citizen.
