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Notes on Gift Planning Read



Finding the right tax strategy for your donor - commentary by Prof. Samuel A. Donaldson

Seven-Figure Gift for the Rackley Center for Cardiac and Interventional Radiology Lab at Baptist Medical Center Beaches APRIL 2015

Heaton Smith is the leader in documented and naming

gifts in the legacy and charitable estate planning space.


In this Issuu - April 2015 Our new clients

Finding the Right Tax Strategy for Your Donor Pg 4

Pg 7


$2M gift

Gary Snerson

The Rackley Center for Cardiac and Interventional Radiology Lab


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Heaton Smith

Heaton Smith Group, LLC

Items of interest

1380 West Paces Ferry Road Suite 1100 Atlanta, Georgia 30327 404.812.1722

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WELCOME to our Spring 2015 issue of Heaton Smith: Notes on Gift Planning. We are pleased to share with our broad network what we are learning as a firm, what we are hearing from clients, and giving trends in the donor community.

The latest edition of Giving USA’s annual report shows that bequest dollars totaled $27.73 billion in 2013 (the most recent data available), and increased by 8.7% from 2012 to 2013. Overall, bequests made up 8% of philanthropic dollars in 2013, demonstrating once again that a well-rounded fundraising program should include an estate component. Yet, statistics show that 86% of all planned gifts are bequests. While bequests fit the bill for the majority of estate donors, a significant portion take advantage of other planned gift vehicles. How can you help guide your donors toward the right direction? In this issue we are pleased to share an article by law professor Samuel Donaldson on this important topic. One of Heaton Smith’s consultants, Elisa Smith, had a chance to hear Professor Donaldson speak at the Central Indiana Community Foundation’s fall seminar, and was greatly impressed by his insight and straight-forward approach. We were delighted when he accepted our invitation to be part of this issue of Heaton Smith: Notes on Gift Planning. What continues to differentiate Heaton Smith’s work in our space is the number of documented and naming gifts we secure with and on behalf of our clients. Part of that comes from our willingness to listen closely to donors as they describe their goals – starting with what they want to do for their family or other heirs. Not only does Heaton Smith have a systematic way of helping donors determine what they want to do for heirs, but we have a systematic way to help donors determine the nonprofits they want to support – and how and when. Our goal is to make Heaton Smith: Notes on Gift Planning a valued resource for you and your team as you read, discover and implement an idea or two from each issue. Please share your feedback, and we look forward to hearing from you. Best regards, Dave Smith President, Heaton Smith Group 3


by Samuel A. Donaldson Professor of Law, Georgia State University Samuel Donaldson, J.D., L.L.M., is a professor of law at Georgia State University’s College of Law. He has written and co-written many books and articles regarding taxation and estate planning issues, including the Price on Contemporary Estate Planning treatise published by CCH and the West casebook, Federal Income Tax: A Contemporary Approach. He has also had crossword puzzles published in The New York Times, The Chronicle of Higher Education, and other outlets. We asked Professor Donaldson to share his thoughts on how development professionals can best identify the right tax strategies to suggest to their donors. Albert Einstein allegedly quipped that “the hardest thing in the world to understand is income taxes.” And since the time of Einstein’s observation, the United States income, estate, and gift tax regimes have become even more complex. No wonder so many potential donors turn to the executives at the nonprofits they want to support for help. Yet the typical executive at a nonprofit already has too much on the plate as it is just with working on the organization’s goals. Short of going back to school for an advanced degree in taxation, what can the executive or major gift officer do to better serve donors? Most start by diving into the various planning options, quickly filling their heads with acronyms like CLAT, CLUT, CRAT, CRUT and NIMCRUT and mastering the technicalities of donor-advised funds, pooled income funds, and private foundations. The statutes and regulations here are dense and offer little by way of hand-holding. It’s not a light-hearted trek to say the least.


Yet while the technical knowledge is certainly helpful, it’s better to start by understanding and accepting this simple but essential principle: there is no panacea, no one-size-fits-all planning tool that works for very potential donor in every situation. The right giving tool for any particular donor depends on all kinds of variables, including the donor’s tax bracket, life expectancy, risk tolerance, investment portfolio, and level of sophistication. This article will consider those variables and how they affect the selection of the right giving technique. Tax Bracket. Few donors are in the lower income tax brackets, and every donor appreciates an income tax break that accompanies a significant gift. But that tax break will be more significant for those with the greatest Samuel A. Donaldson incomes. Think about it: a $1,000 cash donation generates a $1,000 income tax deduction. For a taxpayer in the 25% bracket, then, the deduction will save $250 in tax. But for the taxpayer in the highest tax bracket, currently 39.6%, the same deduction saves $396 in tax. And don’t forget that taxpayers in the highest bracket also face an additional 3.8% tax on their “net investment incomes,” which covers common income sources like interest, rents, royalties, dividends, and capital gains. So the $1,000 deduction could save the most affluent donor $434 in tax—and that’s just the federal tax bite. By the time you factor in state income taxes (where they apply), the $1,000 deduction can in some cases save over $500 in tax. The take-away is this: the wealthier the donor, the more important the income tax deduction becomes. That means the wealthiest donors will be interested in lifetime giving techniques that give them an immediate income tax deduction that can save them dollars today even though the ultimate gift to your organization may be deferred. For these clients, charitable remainder and lead trust strategies, for example, can be especially appealing. Donors with more modest incomes will get some tax break from their gifts, but the break is comparatively smaller and thus does not mean as much as the other rewards from gifting. Of course, those with fewer dollars may be more inclined to make testamentary gifts instead of lifetime transfers out of fear that they are still in a wealth-accumulation phase. But you get the idea: the donor’s tax bracket matters. Life Expectancy. So too does the donor’s lifespan. A donor who has little time remaining on the mortality clock may be in full gifting mode and thus more apt to pull the trigger on a larger lifetime gift. But donors with a long time horizon will be more cautious about making large gifts too soon, for fear that another significant economic downturn might leave them with too little for retirement, large medical bills, or other anticipated future expenses. For younger donors, the right plan might be to start a habit of regular, modest gifting that can grow over time. Wealthy younger donors might be more attracted to donor-advised funds and private foundations, as they can allow the donor to be more involved in the use of gifted funds. More seasoned (notice we never say “older” or “senior” or “knocking-on-death’s door”) donors have unique needs too. They may prefer the predictable income stream from a CRAT to the uncertain stream from a CRUT or NIMCRUT; however, the 10 percent rule considerations are important with regard to an annuity versus a unitrust. The remainder trust may be even more attractive for these donors since the income tax deduction is likely to be larger. So yes, age matters. Risk Tolerance. It’s a little too stereotypical to say that seasoned donors are more risk-averse than younger donors. That’s why the executive should also ascertain the potential donor’s tolerance for risk. If the donor establishing a remainder trust, for example, expects to live off the payments coming back from the trust, the donor might be best advised to use a CRAT where the payment stream will be predictable. But if the donor can tolerate variance in the payment stream, the CRUT might well be the better vehicle. 5

Often, the donor’s risk tolerance correlates to the donor’s need for control. Donors with high risk tolerance are often comfortable with ceding control, at least temporarily. Control freaks will want strategies that allow them or their family members to retain either the cash flow benefits from the gifted property or the direction as to the ultimate disposition of the property. Investment Portfolio. What does the client have to donate? For some assets like residences and farms, it might easiest for the donor simply to retain a life estate in the property and convey a remainder to your organization. That won’t work for other assets, though, so make sure a donor thinking about conveying less than his or her entire interest in an asset speaks to a tax professional. If we are talking about cash donations, outright gifts are probably the easiest option. But for investment assets—particularly those that can and will be liquidated in the near term—the remainder trust is very attractive. The trustee can sell the donated property immediately but the income tax bite to the donor can be deferred over the period in which the payments are made back to the donor. Some assets limit the number of gifting options, and executives must be sensitive to this. Stock in an S corporation, for example, cannot be gifted to a charitable remainder trust. But S corporation stock can work with certain charitable lead trusts and with charitable gift annuities. Another tricky asset is a personal residence. As mentioned, one can gift a remainder interest in a house and still qualify for a tax deduction. But a house is not a good asset for a remainder trust since living in the home would be considered a prohibited act of self-dealing. In addition, if the donor is thinking about a long-term gifting plan as opposed to a one-time transfer, certain tax strategies should be avoided. A CRAT, for instance, can only receive a single donation at the trust’s onset; future contributions are not allowed. But the CRUT can accept ongoing contributions from the donor, and each time the donor can claim a charitable contribution deduction for the value of the remainder. Donor Sophistication. Finally, a donor wants to understand how a particular charitable vehicle works and how it will affect the donor’s day-to-day life. Some clients can follow the structure and mechanics of a complex plan easily; others will be intimidated by the complexity and perhaps become distrustful. If the executive senses that a potential donor has a low tolerance for complex strategies, the best result overall might be the simpler gift plan even if it is less efficient from a tax perspective.

Conclusion. Keep an open mind when you meet with a potential donor. Listen for information that relates to the variables described in this article and use it to craft the best possible strategy for your organization and your donor. Just as no two snowflakes are alike, no two gifting plans will be exactly the same. 6

Our new clients

UK HealthCare Lexington, Kentucky Established in 1957, UK HealthCare® is the brand name for the University of Kentucky’s health care system. UK HealthCare represents the hospitals, clinics, outreach locations, and patient care services and activities of the university’s six health profession colleges (Medicine, Nursing, Health Sciences, Public Health, Dentistry and Pharmacy). UK HealthCare is committed to the pillars of academic health care – research, education and clinical care- and includes the University of Kentucky School of Medicine and the Markey Comprehensive Cancer Center. UK HealthCare offers 80+ specialized clinics, 143 outreach programs and a team of 9,000 physicians, nurses, pharmacists and health care workers dedicated to patient health.

Catholic Charities Washington, DC Catholic Charities is the social ministry outreach of the Archdiocese of Washington. Motivated by the Gospel Message of Jesus Christ, and guided by Catholic social and moral teaching, Catholic Charities strengthens lives of all in need by giving help that empowers and hope that lasts. Their work helps people develop the skills and strength to move from crisis or isolation to stability and growth through comprehensive, integrated and culturally competent services. To that end, the ministry affirms and supports the dignity of all human life, strengthens families, and serves the poor and most vulnerable; especially the homeless, at-risk immigrant newcomers, and persons with mental and developmental disabilities.

Catholic Community Foundation Cleveland, Ohio The Catholic Community Foundation supports the mission of the Diocese of Cleveland to provide for the spiritual, educational and charitable needs of people throughout Northeast Ohio. Since its inception in 2000, the Foundation has raised more than $230 million to support our seminarians in their priestly formation, provide financial assistance to Catholic school students, and offer social services to our neighbors in need.

OhioHealth Foundation Columbus, Ohio The OhioHealth Foundation stewards philanthropic support for OhioHealth, a central Ohio family of faith-based, not-for-profit hospitals and healthcare services. Philanthropic support from individuals, corporations, foundations and organizations are utilized to continue our mission of achieving excellence in patient care, transforming the future of medical research and education, and developing programs that help us improve the health of those we serve.


Case Study: $2M gift The Rackley Center for Cardiac and Interventional Radiology Lab

CASE STUDY: $2 Million Gift CLIENT: Baptist Health System, Jacksonville, Florida GIFT: An Inter Vivos Charitable Remainder Unitrust for the Rackley Center for Cardiac and Interventional Radiology Lab at Baptist Medical Center Beaches Donor Profile • • • • • •

A retired financial services executive and spouse. Spouses are grateful patients of the hospital. Husband serves on the Baptist Medical Center Beaches development committee. Consecutive-year giving donors. Husband is in his 70s and wife is in her 60s. Donors have children and grandchildren.

Donors’ Goals • Lifetime financial independence. • Give a significant percentage of their estates to heirs. • Donors want to help their heirs but not hurt them with an inheritance that would cause heirs to lose their initiative to work. • Reduce their estate, capital gains and income tax liability. • Make a gift to Baptist Health Foundation to benefit Baptist Medical Center Beaches. • Receive income from their gift – if possible. • Inspire other Baptist Health donors to give. • Offset tax liability triggered by the conversation of a portion of husband’s traditional IRA to a ROTH IRA.

Solution An inter vivos charitable remainder unitrust (CRUT) funded with appreciated stock. The donors named themselves as the income beneficiaries and Baptist Health Foundation as the sole remainder beneficiary of the trust. Included in the trust language was a provision that allowed the donors to make additional gifts to the trust. The original gift to the CRUT was $1,000,000 of appreciated stock and an additional gift of $1,000,000 of appreciated stock was given to the CRUT the following calendar year (2013 and 2014 respectively). 8

Outcomes The donors avoided capital gains tax by gifting appreciated stock to the CRUT in-kind and allowing the trust to sell the stock. The cash from the sale has been reinvested in a diversified and personalized portfolio and provides the donors additional retirement income. The gift reduced the size of their estates and therefore reduced their estate tax liability. In addition, the donors received a significant income tax charitable deduction for years 2013 and 2014 with five years to carry-over any excess deduction. This deduction was used to offset the tax liability triggered by the husband’s conversion of a portion of his traditional IRA to a ROTH IRA The donors will receive income for life that may increase as the investment value of the trust principal may grow over time. Their heirs will receive a significant inheritance from other assets of their estates. Furthermore, the donors have met one of their philanthropic legacy goals by nameing Baptist Health Foundation as the sole beneficiary of their CRUT.

Heaton Smith

is the leader in documented and naming gifts in the legacy and charitable estate planning space. Documented and naming gifts range from $50,000 to a minimum $10,000,000.

Heaton Smith Group is a values-based legacy planning consultancy that routinely helps nonprofits secure six and seven figure gifts.


We do what we do to help donors fulfill their legacies and nonprofits achieve their


HOW? By asking donors the right questions about their family, financial and philanthropic legacies. We then make recommendations tailored to each donor’s objectives.

WHAT? The process is unique and works - and results in meaningful gifts and closer donor-institution relationships. 9


Gary concentrates his efforts on higher education institutions. For the 15 years before he joined Heaton Smith Group, he served as the Senior Vice President of Estates and Special Investments at the Harvard Endowment. During his tenure, Gary worked extensively with planned giving and development officers throughout Harvard University and implemented a variety of planned gifts funded with traditional and unique assets. Examples include inter vivos charitable remainder unitrusts and charitable lead trusts, charitable gift annuities, testamentary trusts, retained life estates and bequests. Credits: • 25-year law career specializing in Estate Planning and Trust Administration. His practice also included all types of business and commercial real estate law. • Former teaching faculty, Bentley University, Boston University and Lesley University instructing numerous undergraduate and graduate courses in finance, law, negotiation and estate planning • Speaker, NEPGG, IMI Institute and the Ivy League Plus Planned Giving Group Gary received his B.S. in Business Administration (cum laude) and M.B.A. degrees from Babson College in 1964 and 1974 respectively. He received his J.D. from Georgetown Law School in 1967 and a Master of Science in Finance (M.S.F.) degree from the Carroll School at Boston College University in 1995.

WE ASKED A FEW QUESTIONS TO GET TO KNOW THE PERSON BEHIND THE IMPRESSIVE RESUME. 1. What do you enjoy most about the fundraising profession? What’s kept you engaged through the years? I enjoy meeting people and discussing their family situations. Finding ways to help them achieve their philanthropic goals while improving their estate plans and saving them current year taxes is intellectually challenging for me.


2. Who has taught you the most about philanthropy in your career? The entire Planned Giving staff at Harvard University influenced my current career. The one person among them who influenced me the most is Charlie Collier, whose holistic approach to legacy planning is still the holy grail in this industry.

3. You’ve been with Heaton Smith nearly two years. What’s been your biggest surprise with regard to your work with our clients and their donors? How well our pledge of confidentiality allows donors to openly discuss their philanthropic desires and disclose their assets and liabilities allowing us to make a full range of suggestions on how they may fulfill those desires.

4. What book have you recently read? I spent a lot of time in DC this year so I enjoyed reading Stonewalled by Sharon Attkisson. Mostly, however, I read either fictional detective mysteries or political or historical non-fiction for fun.

5. Tell us one thing that most people don’t know about you but may find interesting. I am a political junkie. Although I never discuss politics with clients I find politics both fascinating and frustrating. I also consider myself somewhat of a Renaissance man with a little bit of knowledge about a lot of things.

Heaton Smith Items of Interest President Obama signed law (HR 5771) allowing the IRA charitable rollover to be retroactive for 2014 but it unfortunately expired January 1, 2015. The provision allowed each IRA owner who is 70 1/2 or older to make direct transfers of up to a total of $100,000 per year to one or more qualified charities. The IRA charitable rollover does not qualify as an income tax charitable deduction but it does qualify as a tax-free distribution so it is not included in adjusted gross income for the 2014 tax year, reported in 2015. Leading organizations such as the Association for Healthcare Philanthropy, Partnership for Philanthropic Planning and Association of Fundraising Professionals continue to advocate for a law to make the IRA charitable rollover permanent.

Many organizations receive non-cash gifts such as stock and real estate. Donors should be encouraged to complete IRS form 8283 to claim an income tax charitable deduction for non-cash gifts. If the claimed deduction exceeds $5,000, the donor must secure a qualified independent appraisal unless the gift is publicly traded stock. A helpful resource for donors is IRS publication 561, Determining the Value of Donated Property. If a charitable organization sells donated property within three years, then it must report the sale price to the IRS using form 8282 with an exception for publicly traded stock. All IRS forms and publications are available at


Heaton Smith Items of Interest Donor advised funds (DAFs) continue to be a very important source of charitable gifts. Qualified organizations that hold DAFs include local community foundations and national gift funds operated by firms such as the Fidelity Gift Fund. Special rules apply to grants from DAFs. For example, a DAF cannot satisfy a pledge that a donor may have with your organization. You must disclaim any pledge before accepting the DAF grant. Furthermore, DAF grants may be made anonymously. Gift receipts for DAF grants must be paid to the issuing community foundation or gift fund which the donor may or may not authorize to reveal his or her name.

Charitable gift annuities continue to be a very important source of gift planning revenue for many organizations. However, the decision to offer gift annuities must be made by your board of directors after careful consideration. The current recommended rates for gift annuities as well as other helpful information about this gift planning technique is available from the American Council on Gift Annuities at

Learn more about Heaton Smith Group If you’d like to learn more about us give us a call, send us an email or check out our website.

404.812.1722 | | Heaton Smith Group, LLC 1380 West Paces Ferry Road Suite 1100 Atlanta, Georgia 30327


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