Planning Your Charitable Legacy

Mark Seruya

When our children see us donate clothes and toys to a shelter, or clean up a park, we teach them about giving back to the community.  When they help us cook for the hungry, visit someone who is sick, or walk for a cause, we teach them about charitable giving.  And when we write a check to our favorite charity, we not only show them what is inherently good and generous in our spirit, but also convey a crucial lesson on wealth management.  This is how we create a legacy for our future generations.

We traditionally define “legacy” as the passing on of wealth to specified beneficiaries.  But a legacy is as much about the opportunities we leave to our children as it is about personal wealth.  When we volunteer, when we fundraise, when we empower our children with new skills and knowledge, when we speak up for what is right – all of these become the legacies we leave behind.

You don’t have to be rich to create a legacy. You just have to leave the world a better place than when you entered it.  In this economy, when many families are living month to month, philanthropy requires a methodical, long-term strategy, which can be rewarding not only from a tax liability or investment standpoint, but also from an emotional one.

Charitable giving can both help a designated cause and generate personal tax benefits and advance your overall wealth management plan.  Consider:

  • Charitable remainder trusts allow people to donate to a worthy beneficiary while potentially deferring capital gains and income taxes.  Charitable remainder trusts allow for donors to receive an income stream for a fixed period or lifetime, at the end of which remaining funds are distributed to designated charities.
  • Gift annuities are a contract between a donor and a charity, whereby the donor transfers cash or property to the charity in exchange for a partial tax deduction and a lifetime stream of annual income from the charity. When the donor passes on, the charity keeps the remainder of the gift. The amount of the income stream is often determined by payout rates defined by the American Council on Gift Annuities as well as other factors, including the donor’s age and the policy of the charity.
  • Pooled income funds, which ensure a lifetime income, let you claim a current tax deduction, and make a future gift to charity. A pooled income fund is a type of mutual fund comprised of gifts that are pooled and invested together. Income from the fund is distributed to both the fund’s participants and named beneficiaries according to their share of the fund. If you are a donor to the fund, you and the other income recipients you choose receive quarterly payments for life, and after death the value of the assets is transferred to the beneficiaries.
  • Life insurance policies can actually replace estate and gift tax liabilities, providing a significant benefit at a comparably lower cost.  The proceeds from these policies are typically income tax free for the beneficiary.
  • Donor advised funds are easy to establish, low cost, and flexible. Administered by a public charity and created to manage donations on behalf of a family or individual, these are administratively convenient with tax advantages.  Naming a DAF as a beneficiary of your retirement accounts can circumvent both estate and income tax on the gift.
  • A private family foundation can be the basis of long-term charitable giving, though there are considerable legal issues to consider.

Education is an example of a legacy. Funding a child’s or grandchild’s higher education may be a rewarding use of wealth.  Its attendant vehicles include a custodian account for minors, or Section 529 college savings plans, and other options.

No matter what your strategy, keep in mind the limits of giving and what they mean for tax liability.  For instance, the lifetime federal gift tax exclusion amount will be $1 million after 2012.  However, whatever portions are used will reduce dollar for dollar the estate tax exclusion amount available at death. Consult a personal tax or legal advisor to understand the tax consequences of any actions.

Second, document everything when assessing the benefits of philanthropy.  If you choose to work through existing non-profits when embarking on giving, ensure the beneficiary meets the qualifications under the IRS code and provides proof that the funds are used for charitable purposes

Third, and most important, the beneficiary organization must be reputable.  IRS regulations are in place to guard against corruption, but also protect philanthropists by ensuring that charitable gifts are put to good use, in a transparent fashion.

My wife and I have long been supporters of the Sephardic Food Pantry, Angel Fund, SAFE, and Kingsborough College, all of which provide critical services to our community.  We hope we have made a tangible difference in bettering the lives of our neighbors – and have taught our children the significance, and benefits, of giving back to the community.

Mark Seruya is a Brooklynresident and an Executive Directorwith the Global Wealth Management Division of Morgan Stanley Smith Barney in New York.  He can be reached at 212-903-7699.

The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.  Investing involves risks and there is always the potential of losing money when you invest. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Smith Barney LLC, Member SIPC, or its affiliates.