60-Second Course on Charitable Gifts

Here’s a 60-second course in charitable giving. If you understand this, you’ll have a framework to help understand complex charitable gifts. Start your stopwatch.

Picture in your mind Bessie, the milk cow. (You can read about her on the famous cows website.)

That’s it. That’s all you need to know. If you can picture Bessie, you understand even the most complex charitable gifts. Well, perhaps I should give you a little more.

If you have a cow standing out in your back yard and you’re interested in helping others by giving a gift to your favorite charity, what options do you have? When you think about it for a moment, you’ll realize you have really only 3 options.

Although there may well be combinations of the 3, all charitable gifts break down into one of three types.

• You can give both the cow and the milk.
• Or you can give just the milk (and keep the cow).
• Finally, you can give the cow (but keep the milk).

You can go to that charity and say something like this: “Folks, I have a cow. However, I need milk for my bowl of Cheerios® every morning. I’m more than willing to give you the cow right now if you’ll let me keep the milk. When I die (and no longer will be eating that bowl of cereal in the morning), you can have the milk as well as the cow. (You can also agree that the charity will get the milk after a certain number of years instead of after you die.) When you do that, you’re making a gift of a remainder interest – the charity is getting the rest (or remainder) after you’ve taken the income. Because of tax rules, that’s usually that’s done with a charitable remainder trust.

Of course, maybe you are lactose intolerant and don’t need the milk. So you go to your favorite charity and say, “Folks, I have a cow. I don’t need the milk; you can have it. But I’d like to be able to give the cow to my nieces and nephews when I die. So I tell you what. I’ll let you have the milk until I die. When I die, the milk stops and my family gets the cow and the milk.” When you make that kind of gift, you’re making a gift of an income (or “lead”) interest. Tax rules again dictate how you do this – it’s usually done through a charitable lead trust.

If you decide you don’t need either the milk nor the cow, your final option is to give the whole cow. “Folks, I don’t need this cow. And I don’t need the milk. Please take them both and put them to good use.” That’s an outright gift. You are, effectively, saying that you’re confident enough about your future financial situation that you won’t need either the milk (the income) or the cow (the principle) anytime in the future.

Sixty seconds – maybe even a few less. Now you know what you need to understand some rather sophisticated charitable gifts – and to explain the concepts to others.

Related articles from WalterBristow.com:

1. Charitable Giving in Tough Economic Times — Up or Down?
2. Obama Calls for More Estate and Gift Taxes to Pay for Healthcare
3. The 2009 IRS Dirty Dozen Tax Scams
4. Estate Planning and the Five Rights
5. Senate Estate Tax Bill Would Exempt $3.5 Million