HOW TO GIVE WISELY A Donor’s Guide to Charitable Giving By Marla Brill ECONOMIC EDUCATION BULLETIN Published by AMERICAN INSTITUTE for ECONOMIC RESEARCH Great Barrington, Massachusetts About A.I.E.R. MERICAN Institute for Economic Research, founded in 1933, is an independent scientific and educational organization. The A Institute’s research is planned to help individuals protect their per- sonal interests and those of the Nation. The industrious and thrifty, those who pay most of the Nation’s taxes, must be the principal guardians of American civilization. By publishing the results of scientific inquiry, car- ried on with diligence, independence, and integrity, American Institute for Economic Research hopes to help those citizens preserve the best of the Nation’s heritage and choose wisely the policies that will determine the Nation’s future. The Institute represents no fund, concentration of wealth, or other spe- cial interests. Advertising is not accepted in its publications. 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ECONOMIC EDUCATION BULLETIN Vol. XLVI No. 4 April 2006 Copyright © 2006 American Institute for Economic Research ISBN 0-913610-44-5 Economic Education Bulletin (ISSN 0424–2769) (USPS 167–360) is published once a month at Great Barrington, Massachusetts, by American Institute for Economic Research, a scientific and educational organization with no stockholders, chartered under Chapter 180 of the General Laws of Massachusetts. Periodical postage paid at Great Barrington, Massachusetts. Printed in the United States of America. Subscription: $25 per year. POSTMASTER: Send address changes to Economic Education Bulletin, American Insti- tute for Economic Research, Great Barrington, Massachusetts 01230. Contents I. GIVING 101 ............................................................................. 1 How Much Should You Give? .................................................. 1 II. SELECTING AND EVALUATING A CHARITABLE ORGANIZATION .................................... 5 Avoiding Scams......................................................................... 6 III. IRS GUIDELINES FOR CHARITABLE CONTRIBUTIONS .................................. 9 Contributions of Property .......................................................... 9 Timing Your Deductions ........................................................... 10 Recordkeeping ........................................................................... 10 Cash Contributions .................................................................... 11 Noncash Contributions .............................................................. 11 Automobile Expenses ................................................................ 13 IV. CHARITABLE BEQUESTS .................................................. 15 Types of Bequests...................................................................... 15 Benefits of Making a Bequest ................................................... 17 V. METHODS OF CHARITABLE GIVING ............................ 19 Pooled Life Income Funds......................................................... 19 Charitable Remainder Trusts ..................................................... 20 Charitable Gift Annuities .......................................................... 23 Charitable Lead Trusts .............................................................. 24 Private Foundations ................................................................... 26 VI. SPECIAL CONSIDERATIONS FOR GIFTS OF REAL ESTATE, STOCK, RETIREMENT ASSETS, AND INSURANCE ........................................... 27 Gifts of Real Estate .................................................................... 27 Gifts of Retirement Assets......................................................... 28 Charitable Bargain Sales ........................................................... 29 Gifts of Appreciated Stock ........................................................ 30 Gifts of Closely-Held Stock ...................................................... 31 Gifts of Life Insurance............................................................... 32 VII. THE IMPACT OF THE 2001 TAX ACT ON GIVING DECISIONS .......................................................... 33 APPENDIX: COORDINATING PLANNED GIVING WITH LIFETIME GIFTS TO FAMILY MEMBERS ..... 35 Family Giving: The Basics ........................................................ 35 I. GIVING 101 “Make all you can, save all you can, give all you can.”—John Wesley HE word “philanthropy” is derived from the Greek words that trans- late into “to love mankind.” Indeed, many individuals feel there is Tno better way to express their passion for the causes that matter most to them than through a commitment of their time and financial re- sources. People support nonprofits for a variety of reasons that extend beyond altruism. Having one’s name on a donor list provides a side benefit of signaling altruistic intentions and largesse. Others value the tax benefits associated with charitable giving, or use a planned giving program in conjunction with estate planning. Whatever your reason for giving, it is important to combine your good intentions with practical business sense. This means contributing in ways that minimize taxes to the greatest extent possible, investigating how the charitable organizations you favor are being run and how your donations will be used, and coordinating charitable donations with other aspects of your financial life. How Much Should You Give? The easy answer is “as much as you feel comfortable with.” That amount varies from person to person. If you grew up in modest surroundings and your family needed to budget carefully to get by, you may well have reservations about giving away a large share of your wealth, especially during your lifetime. On the other hand, if you have lived comfortably for most of your life, are satisfied with your standard of living, and have taken care of family obligations, you may feel more comfortable with donating generously. Statistics show that the amount people donate to charities does not necessarily keep pace with increases in assets or income. Affluent income- tax filers under age 65 are only half as generous as their more modestly situated peers, according to a recent report by NewTithing Group (www.newtithing.org), a philanthropic research organization and devel- oper of donor education tools. If affluent young and middle-aged filers had donated as high a proportion of their investment asset wealth to charity in 2003 as did their less affluent peers, concludes the report, total individual charitable donations could have been as much as $25 billion higher that year, an increase of at least 17 percent. Interestingly, the report found no 1 Families’ Wealth and Their Contributions to Charity According to the Congressional Budget Office’s analysis of the Survey of Consumer Finances, about 40 percent of the people surveyed contrib- uted at least $500 to charity in 2000. Families giving at least that much donated an average of $4,400. Not surprisingly, wealthier families were both more likely to contribute and contributed more. About a third of families with less than $500,000 in net worth contributed $500 or more. But about three-quarters of families worth between $500,000 and $1 mil- lion contributed at that level, and more than 90 percent of families with more than $3 million in net worth did so. Average contributions also increased from $2,300 for families with less than $500,000 in net worth to almost $400,000 for those with $50 million or more. Percentage Average of Families Contribution from Millions of Giving Families Giving Net Worth Families at Least $500 at Least $500 Less than $0.5 Million 90.79 32 $2,300 $0.5 Million to $1 Million 8.26 73 $3,000 $1 Million to $3 Million 5.21 82 $5,900 $3 Million to $5 Million 0.93 90 $19,200 $5 Million to $50 Million 1.28 95 $37,500 $50 Million or More 0.02 95 $391,400 Source: Congressional Budget Office based on Board of Governors of the Federal Re- serve System, Survey of Consumer Finances (prepared by National Opinion Research Center, University of Chicago, 2001). such generosity gap among seniors of different wealth levels. A number of factors go into gauging how much you can comfortably afford to give, including your income level, health, job security, financial obligations, and investment assets. As a “broad brush” benchmark, NewTithing suggests that someone with assets of $500,000 (excluding a personal residence, retirement accounts, and possessions) and salary and non-investment income of $300,000 could comfortably allocate 0.6 per- cent of the $500,000 in assets toward annual donations, or $3,000. An additional $2,000 could be donated from income, bringing the total