Charitable gift planning does not have to be complicated, and sometimes, the simplest idea might come from unexpected sources. For example, how has the recent economic challenge of the corona virus created opportunities for charities and foundations and their high net worth donors to benefit from the today's near record low interest rate environment?
The answer lies in the current low cost of borrowing. Each month, the Federal Government sets minimum rates (known as AFR rates) for private borrowing, such as between family members, where the funds exchanged can qualify as a legitimate loan, as opposed to a gift. Gifts to family members and others are limited, for estate tax purposes, whereas loans carry no such limits at all, provided they carry qualifying rates of interest in accord with the AFR rates.
As a result of the current economic downturn, the cost of making a loan to a family member or a family trust is at or near an all-time low. This means that the funds loaned out can be used to generate investment gains that will be outside the lender's estate for estate tax purposes. Meanwhile, the estate only needs to recognize the original value of the loan plus any accrued interest when it comes time to pay any taxes due. This is critical because the current Federal Estate Tax rate is 40% and in addition, more than 20 states have some form of state-level Estate Tax or Inheritance Tax with rates up a high of 20%, which would be assessed on top of the Federal Rate.
And this is where charities and foundations can come into play. Because a loan-based strategy can now result in such a significant reduction in assets that are passed to the next generation free of onerous estate taxes, this opens the door for donors to increase their planned giving to the charities they wish to benefit. The loan can help make the children's share of the estate bigger, and that creates an opportunity for increased charitable giving from the estate. And while a gift before death carries the potential for a current-year income tax deduction, a gift from an otherwise taxable estate can result in close to twice the tax savings to the donor's estate.
Thus an intra-family loan can help generate larger net estates to the heirs all while generating substantial gifts to the charities and foundations donors may have been supporting for years. In fact, using the same loan techniques, it is even possible for a charity to reschedule a planned gift into an immediate gift without the donor losing the added tax benefits described above.
At Guideboat Financial, we have nearly two decades of experience in these matters, and we invite readers who are prospective donors as well as those planned gift professionals from potential charitable beneficiaries to contact us for more information about how this concept might improve both donor information and donor engagement, to the benefit of donor and charity alike.
Guideboat Financial
Christopher Burke, Principal
chris@guideboatfinancial.com
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