Archive for January, 2013



I am going to use the graphic in this and future posts to illustrate the use of tax and legal tools and techniques in charitable planning.  The Philanthropic Continuum is what I call the evolutionary path from casual donor, giving when asked but without much thought, to protophilanthropist, having a more formalized view of giving, to serious (or serial) philanthropist, where truly significant gifts and amounts are involved.  We all fall somewhere along this continuum; those who are serious about their philanthropy will take steps to move further using some or all of these techniques.  That’s not to say that a serious philanthropist cannot achieve all his/her goals using mainly cash, it’s just to say that the “3E test” – effective, efficient, and elegant – may make some of these other tools and techniques more desirable and useful in philanthropic planning.


For example, the Charitable Gift Annuity (CGA) is a terrific way to have your cake and eat it too.  It has particular use in the philanthropic portfolio of a family where one spouse is gung-ho about making a significant gift to a particular charity while the other may have reservations because of lifetime cashflow concerns.  In many ways it is a lower end or beginner’s tool in that many charities will establish such accounts for as little as $10,000, kind of like a lifetime CD with charitable legs.  It is a contract between the donor and the charity whereby a gift is made to the charity in exchange for a guaranteed lifetime income stream.  Simpler to establish than a trust, assets are transferred directly to the CGA which is then administered by the charity.  The income stream may be immediate or deferred and is determined and set based on the donor’s single or joint life expectancy.


Before you even go there, realize that comparing a CGA to a commercial annuity is an apples and oranges comparison.  CGA’s are designed so that on average the charity will end up receiving 50% or more of the initial investment (and must receive at least 10% in order to generate a charitable deduction for the donor).  Commercial annuities obviously are not, so financially they may be comparatively better investments.  However, that is not the point.  The donor retains an income stream AND benefits a charity.  This split interest makes it a compromise investment between the donor and charity.  As long as the guaranteed payment is sufficient for the needs of the donor, the haircut should be inconsequential.


CGA’s are better investments for older donors as the payout rates tend to increase with age.  For example, current rates published by the American Council on Gift Annuities for joint lives of couples aged 50, 60, and 70 are 3.1%, 3.9%, and 4.6% respectively.


The following table details some of the advantages and disadvantages of CGA’s.  Additional information can be found in a recent article in Forbes Magazine or at the website of the American Council on Gift Annuities.



  •   Converts an asset into an income stream benefitting the donor during life and the charity at the donor’s or beneficiary’s death.
  •   Converts an asset into a fixed stream of payments, an “anchor to windward” in the donor’s portfolio.
  •   Provides an immediate income tax deduction for the establishment of the annuity based on actuarial assumptions.
  •   Acts as a form of “installment sale” spreading out any capital gain on the sale of the asset over the life expectancy of the   donor.
  •   Removes the asset from the donor’s estate for estate tax purposes.



  • Donor is relying on the financial health, discipline, and longevity of the charity – be careful of shoestring organizations!
  •   Longer term inflation can erode the purchasing power of the annuity.
  •   The ultimate charity is determined at the time the annuity is established.  There is no flexibility to change the charity down the line.
  •   Unlike a charitable remainder trust, which can be structured to minimize or eliminate any built-in capital gain, the capital gain associated with a CGA must be recoginized over the life expectancy of the donor.
  •   Not all states allow charitable gift annuities – check with your tax and legal advisors.


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Last week I discussed a charitable planning technique for 2012 that admittedly had limited application.  Today, I want to discuss how the same technique impacts 2013 and why it may make sense for the right taxpayer who wishes to juice up his/her charitable contributions.


First, the “right” taxpayer – s/he must be over 70 ½ years old and be pretty comfortably set.  It helps to be in the upper tax brackets, i.e., more than $250,000 in adjusted gross income (AGI) for single taxpayers and $300,000 for married taxpayers. Finally, it helps to have a sizeable traditional or Roth IRA that is not “needed” to live on and can be used to fund charitable contributions.


The technique is known as a “qualified charitable distribution” from an IRA.  It enables the taxpayer to direct a distribution from his/her IRA to a public charity (no private foundations or donor advised funds for this technique) while including neither the distribution in income nor the charitable contribution in deductions.  As a sweetener, the directed distribution can also count toward fulfilling the taxpayer’s annual required minimum distribution (RMD).  This charitable planning tidbit was thrown in as an extender in the American Taxpayer Relief Act of 2012.  It is a case of “go directly to the bottom line, do not include in income, do not include in deduction.”  It’s not a new technique – in fact, it existed in temporary mode from 2006 to 2011 and now again in temporary mode for 2012 and 2013 – but has not always been very relevant.  In 2013 it will have far more relevance when paired with an oldie but goody that is unfortunately returning from the dead – the so-called “Pease limitation.”


Now, the “Pease limitation” is a questionable legacy from the first Bush Administration (that is, George H.W. “Read My Lips, No New Taxes” Bush).  It was authored by Congressman Don Pease, Democrat of Ohio.  I don’t actually recall ever referring to it as the “Pease limitation” back in the day but suddenly, that is its name.  Anyway, it is a limitation that reduces a taxpayer’s overall itemized deductions by 3% of excess adjusted gross income (AGI) realized over certain levels (for 2013, $250,000 for singles, and $300,000 for married filing jointly).  Got that?  Your income increases so they reduce your deductions – but in no event by more than 80% of the total deductions!  How magnanimous!  The “Pease limitation” enabled the government to bring smoke and mirrors to a new level by effectively increasing taxes without increasing tax rates (“read my lips….”).  The limitation went away for a couple of years as part of the tax cuts of the second Bush Administration (George W. “Tax Cut” Bush) but came roaring back in 2013, albeit at higher income levels than before.  Now I don’t know about you, and I certainly don’t know about Don Pease, but I wouldn’t want such a taxpayer-unfriendly device named after me – I mean, give me Bill Roth’s mighty “Roth IRA” any day over the weasly  “Pease limitation.”  But to each his own.  Suffice it to say, the “Pease limitation” has always peased me off royally.


Now for the planning – Let’s see how a qualified charitable distribution from an IRA gets around Pease.  Irving is a single taxpayer with $450,000 of AGI who fits the criteria outlined above.  He wishes to give $100,000 from his IRA directly to a qualified charity.  Absent the exclusion, a $100,000 distribution from his IRA would increase Irving’s AGI to $550,000 and he would then claim a corresponding itemized deduction for his charitable contribution.  But his additional $100,000 of income would also produce an unfortunate additional Pease limitation of $3,000 (3% of the excess AGI over $250,000).  So effectively, only $97,000 of his charitable contribution would be tax deductible.  Put another way, the “Pease limitation” generates an additional $3,000 of taxable income to Irving.  He may be withdrawing $100,000 and giving the whole thing to charity, but for his efforts his federal income tax will also increase by 39.6% of $3,000, or $1,188.


Having the IRA custodian pay the $100,000 directly from his IRA to the public charity eliminates this extra tax.   This is not an issue if the taxpayer is otherwise subject to the alternative minimum tax (AMT) because the “Pease limitation” does not factor into the calculation of the AMT.  However, using the qualified charitable distribution has another favorable impact regardless of the applicable tax (regular or AMT) – it keeps AGI lower by excluding the amount of the distribution, which effects items that are tied to AGI, like the deductions for medical expenses, casualty losses, and even charitable contributions.


If you fit the criteria outlined above you should seriously consider the qualified charitable distribution for 2013.

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Ok, so this is really late to be writing about this planning tidbit, but the fact is, the current use of this particular technique is very limited – certainly limited enough that I wouldn’t get too excited about it.  Later in the year, though, it may be a different story and I may get excited then.  But until then, I would be remiss if I did not point it out to you so here it is:


Until January 31st, taxpayers aged 70 ½ and older can direct up to $100,000 from their traditional or Roth IRA to a public charity (no private foundations or donor advised funds, please) and elect to include the transaction as if it occurred in 2012.  The distribution from the IRA will NOT be included in income nor will the contribution to charity be deductible.  For 2012, this is helpful mostly for:

  • Those who may have forgotten to take their required minimum distribution (RMD) in 2012 and want to correct the error.  Even though it will not be included in income, any such charitable transfer will count toward the 2012 RMD.
  • Those who bumped up against the income limitations for charitable contributions in 2012 and still want to give more.  Good for you – you are an inspiration to us all.
  • Those who have an IRA that they are looking to clean out during lifetime (for any number of reasons).


Other than that, it really seems to be a last minute planning tool in search of an audience.  Pretty amazing if you ask me, but then again, if the government can print money to try to solve monetary problems, why can’t it rearrange time and space as it sees fit?  The bottom line:  2012?  Not so good.  2013?  Has potential.  Stay tuned for the next edition of “Charitable Nation.”

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I have a claim to fame.  I graduated high school with Alec Baldwin.  Yes, that Alec Baldwin.  Back then he was known as “Alex” to the guys and “Zander” (short for Alexander) to the girls.  Generally the girls drooled and squirmed when they spoke of Zander.  Back then he was a pretty good guy, too, although you may not know it by his current public persona.   I’ll leave it to you to decide which of us has aged more gracefully…

Massapequa (Long Island) Hall of Fame, Then and Now: 


(Click to enlarge)


Anyway, I wouldn’t say that Alec is a friend as much as an acquaintance who does not necessarily remember my name.  After all, I only see him once every ten years at our high school reunions (Go Berner Bisons, Class of 1976 – the “Bisontennial Class!”)  Alec always plays the politician, working the room and speaking with everyone as if they were long lost relatives.  One year (2006 to be exact) Alec chatted up my wife about some charitable work he was involved in at the time providing money to day care centers so that “women like you can hold down jobs.”  My wife’s feelings vacillated between feeling insulted that Alec would assume that she required subsidized daycare in order to work and feeling complimented that she looked young enough to have daycare aged children.  But it got me to thinking – where do celebrities give their money?  And why does it matter?


Now, I know, this may be pretty far down the gossip chain for most people but guess what?  You too can find out quickly and easily whom these guys support.  http://www.looktothestars.org/ is a fun website where anyone can research these pressing issues.  Interestingly, however, there appears to be no information about the stars’ private foundations.  Alec’s mother, Carol Baldwin, heads up a public charity called the Carol M. Baldwin Breast Cancer Research Fund, Inc., which appears to be a family endeavor, but there was nothing listed about the Alec Baldwin Foundation (a large supporter of Mom’s charity).   For that juicy information I had to go to www.guidestar.com, one of the best charitable research sites out there.  I found that in 2011, Alec had contributed more than $3.5MM to the fund (up from $1MM in 2010) and the foundation apparently paid out almost all of that cash in the same year to a wide variety of arts organizations and environmental groups.


Another favorite son of Massapequa is the one and only Jerry Seinfeld.  The Seinfeld Family Foundation supports a fairly wide variety of Jewish causes as well education and human services.  Its 2011 990PF has not yet been posted, but in 2010, about $1MM came in and $1.8MM went out.  Nearly 65% of its grants went to an organization called Scholarship America, a nice chunk of change for any not-for-profit organization.


For charity geeks, this is pretty cool stuff – but it also shows you that PRIVATE FOUNDATIONS are the furthest thing from PRIVATE.  Wealthy individuals and families with charitable intent need to decide how important their anonymity is before using this type of charitable vehicle.  But other than providing fodder for those who wish to pass judgment pro or con on something that is none of their business anyway, how useful is this data?  Well, actually, it can be quite useful, particularly for smaller organizations that are trying to expand their contribution base and possibly get some good publicity but are not sure where to turn.  It is all public information and free for the asking and may make a huge difference, especially to those organizations with limited fundraising options.

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