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Charitable Giving

August 29, 2015

Charitable giving can play an important role in manyestate plans. Philanthropy cannot only give you greatpersonal satisfaction, it can also give you a currentincome tax deduction, let you avoid capital gains tax,and reduce the amount of taxes your estate may owewhen you die.

There are many ways to give to charity. You canmake gifts during your lifetime or at your death. Youcan make gifts outright or use a trust. You can namea charity as a beneficiary in your will, or designate acharity as a beneficiary of your retirement plan or lifeinsurance policy. Or, if your gift is substantial, you canestablish a private foundation, community foundation,or donor-advised fund.

Making outright giftsAn outright gift is one that benefits the charityimmediately and exclusively. With an outright gift youget an immediate income and gift tax deduction.

Tip: Make sure the charity is a qualified charityaccording to the IRS. Get a written receipt or keep abank record for any cash donations, and get a writtenreceipt for any property other than money.

Will or trust bequests and beneficiarydesignationsThese gifts are made by including a provision in yourwill or trust document, or by using a beneficiarydesignation form. The charity receives the gift at yourdeath, at which time your estate can take the incomeand estate tax deductions.

Charitable trustsAnother way for you to make charitable gifts is tocreate a charitable trust. You can name the charity asthe sole beneficiary, or you can name anon-charitable beneficiary as well, splitting thebeneficial interest (this is referred to as making apartial charitable gift). The most common types oftrusts used to make partial gifts to charity are thecharitable lead trust and the charitable remaindertrust.

Charitable lead trustA charitable lead trust pays income to a charity for acertain period of years, and then the trust principalpasses back to you, your family members, or otherheirs. The trust is known as a charitable lead trustbecause the charity gets the first, or lead, interest.

A charitable lead trust can be an excellent estateplanning vehicle if you own assets that you expect willsubstantially appreciate in value. If created properly, acharitable lead trust allows you to keep an asset inthe family and still enjoy some tax benefits.

How a Charitable Lead Trust Works

Example: John, who often donates to charity, createsand funds a $2 million charitable lead trust. The trustprovides for fixed annual payments of $100,000 (or5% of the initial $2 million value) to ABC Charity for20 years. At the end of the 20-year period, the entiretrust principal will go outright to John's children. UsingIRS tables and assuming a 2.0% Section 7520 rate,the charity's lead interest is valued at $1,635,140, andthe remainder interest is valued at $364,860.Assuming the trust assets appreciate in value, John'schildren will receive any amount in excess of theremainder interest ($364,860) unreduced by estatetaxes.

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Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2015

IMPORTANT DISCLOSURES

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is notspecific to any individual's personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purposeof avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or herindividual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believedto be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any timeand without notice.

Investment advisory services are offered through a separate entity, Portfolio Medics, a registered investment advisor. Sovereign RetirementSolutions and Portfolio Medics are not affiliated. Sovereign Retirement Solutions provides insurance services to clients through Paul M TarinsLLC.

Charitable remainder trustA charitable remainder trust is the mirror image of thecharitable lead trust. Trust income is payable to you,your family members, or other heirs for a period ofyears, then the principal goes to your favorite charity.

A charitable remainder trust can be beneficialbecause it provides you with a stream of currentincome--a desirable feature if there won't be enoughincome from other sources.

How a Charitable Remainder Trust Works

Example: Jane, an 80-year-old widow, creates andfunds a charitable remainder trust with real estatecurrently valued at $1 million, and with a cost basis of$250,000. The trust provides that fixed quarterlypayments be paid to her for 20 years. At the end ofthat period, the entire trust principal will go outright toher husband's alma mater. Using IRS tables andassuming a 2.0% Section 7520 rate, Jane receives$50,000 each year, avoids capital gains tax on$750,000, and receives an immediate income taxcharitable deduction of $176,298, which can becarried forward for five years. Further, Jane hasremoved $1 million, plus any future appreciation, fromher gross estate.

Private family foundationA private family foundation is a separate legal entitythat can endure for many generations after yourdeath. You create the foundation, then transfer assetsto the foundation, which in turn makes grants to publiccharities. You and your descendants have completecontrol over which charities receive grants. But,unless you can contribute enough capital to generatefunds for grants, the costs and complexities of aprivate foundation may not be worth it.

Tip: One rule of thumb is that you should be able todonate enough assets to generate at least $25,000 ayear for grants.

Community foundationIf you want your dollars to be spent on improving thequality of life in a particular community, considergiving to a community foundation. Similar to a privatefoundation, a community foundation acceptsdonations from many sources, and is overseen byindividuals familiar with the community's particularneeds, and professionals skilled at running acharitable organization.

Donor-advised fundSimilar in some respects to a private foundation, adonor-advised fund offers an easier way for you tomake a significant gift to charity over a long period oftime. A donor-advised fund actually refers to anaccount that is held within a charitable organization.The charitable organization is a separate legal entity,but your account is not--it is merely a component ofthe charitable organization that holds the account.Once you transfer assets to the account, thecharitable organization becomes the legal owner ofthe assets and has ultimate control over them. Youcan only advise--not direct--the charitableorganization on how your contributions will bedistributed to other charities.

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