Escolar Documentos
Profissional Documentos
Cultura Documentos
GROUP MEMBERS:
Ummi Fadhilah Binti Mansor
221410
221357
221536
224031
LECTURERS NAME:
PN ROHANA @ NORLIZA BT YUSSUF
SUBMISSION DATE:
12 OCTOBER 2015
Executive Summary:
Elaine White is a financial advisor for two couples; the Anne and William Carson was uppermiddle class client. Carson planned to save large portion of his additional income and also
interested in making charitable distribution. They also wanted to learn more about charitable
vehicles which would allow them to received tax deduction this year but delay distribution
decision until a later date. Second customer of White is Mary and Jack Bradley is a wealthy
couple with substantial assets, a more complex tax situation, and a desire to control the
1 | Page
timing and recipients of their charitable contributions. White must consider the objectives of
these families in the context of several charitable giving vehicles, including Public Charities,
Private Foundations, Charitable Remainder Trusts, Charitable Lead Trusts, Donor-Advised
Funds, and Pooled Income Funds.
Contents
1.0 INTRODUCTION................................................................................................ 3
2.0 STATEMENT OF PROBLEMS.............................................................................. 4
2.1 Anne and William Carson..............................................................................4
2.2 Mary and Jack
Bradly4
3.0 CAUSES OF THE
PROBLEM.5
3.1 Anne and William
Carson.5
3.2 Mary and Jack
Bradly...5
4.0 ALTERNATIVE SOLUTIONS
6
5.0
RECOMMENDATION.7
2 | Page
3 | Page
1.0 INTRODUCTION
Donation to charity can be deducted in calculation for tax payable for individual.
Donation can reduce taxable income and lower the tax bill. Not everyone can deduct their
charitable contribution, but they can itemize the tax deduction in order to claim any charity
however, charitable for qualified organization only can be itemize in deduction. There are
type of organization that qualify for deduction; churches, temples, mosques and other
religious organization, federal, state, and local government, contribution for public purpose,
non-profit school , hospitals, public park and recreational facilities.
There are limit in donation that can be deduct. Not all donation made by tax payer can
be count for tax deduction. Contribution for public charities, collage and religious groups
cannot be exceeding 50 percent of Adjusted Gross Income (AGI). When it comes to donation
of property, the limit is 30 percent of AGI. If contribution of capital gains the limit is 20
percent of AGI. There are different between public charities and private foundation. Public
charities is generally support to the public for the example is government and engage in grant
making activities but for private foundation, the foundation is for individual, family or
corporation. A private foundation does not solicit funds from the public.
A charitable remainder trust is a trust that provides for a specified distribution, at least
annually, to one or more beneficiaries, at least one of which is not a charity. The distribution
must be paid at least annually for life or for a term of years, with an irrevocable remainder
interest to be held for the benefit of, or paid over to, one or more qualified charities.
Charitable lead trust not force to name a specific charitable recipient in the trust who would
receive the remainder. Donor-advised fund is a charitable giving vehicle administered by a
public charity created to manage charitable donations on behalf of organizations, families, or
individuals. To participate in a donor-advised fund, a donating individual or organization
opens an account in the fund and deposits cash, securities, or other financial instruments.
4 | Page
A pooled income fund is a charitable mutual fund that from securities or cash donated by an
individual, a family or a corporation to a charity, and then invested to provide dividends for
both the donor and charity. The donations are irrevocable and tax-deductible and must be
from personal assets.
which focused on improving the lives of cancer patients and their families.
So they seek for Elaine White to learn more about the options which existed for them.
White must consider the objectives of these families in the context
of several charitable giving vehicles, including Public Charities, Private
Foundations, Charitable Remainder Trusts, Charitable Lead Trusts, DonorAdvised Funds, and Pooled Income Funds. Elaine noted that her clients
were trying to solve the same problems which are hoping to make a
charitable contribution this year but trying to determine the best
charitable vehicle to use.
cancer patients and their families. They also concerned about the
possibility that their daughters cancer could both contribute to a
charitable cause and provide an income stream for their daughter and her
families.
Public Charities
Public charities generally derive their funding or support primarily
from the general public, receiving grants from individuals, government,
and private foundations. Although some public charities engage in grant
making activities, most conduct direct service or tax-exempt activities.
Those starting a new organization usually prefer public charity status, not
just because it better describe the organizations purpose. Public charities
also enjoy some advantages such as higher donor tax-deductible giving
limits and the ability to attract support from other public charities and
private foundations. Basically, a Public Charity is a charitable organization
that has broad public support, actively functions to support another public
charity, or is devoted exclusively to testing for public safety. Public
Charities are the organizations people usually think of when they hear the
word charity. These non-profits missions range from helping the poor to
easing community tensions to advancing religion, education, or science.
Private Foundations
A private foundation is a form of tax-exempt organization that must
be organized and operated exclusively for charitable purposes. The
charitable activities of a private foundation generally concentrate on
receiving charitable contributions, managing its charitable assets, and
making grants to other charitable organizations to support its charitable
activities.
8 | Page
9 | Page
11 | P a g e
differ significantly from those for CRT. For example, CLTs are not taxexempt entities as are CRT. The rules governing CRT are designed to
protect the charitable remainder interest, whereas the rules governing CLT
protect the charitable income interest. During the term of the CLT, a
charitable beneficiary retains an income interest, known as the lead
interest. At the completion of the trust term, a non-charitable beneficiary
receives the remaining trust assets.
How the CLT works?
12 | P a g e
If a CLTs remainder interest does not revert to the donor or the donors
spouse, but passes to other non-charitable beneficiaries, there will be
transfer tax consequences.
The other solutions that can be used in determining the charitable giving vehicle to the
clients of Elaine White glanced are by using the Charitable Vehicles for the Upper-Middle
Class. In this options of charitable giving vehicle, there have two type charitable vehicles
which are Pooled Income Funds and Donor-Advised Funds.
1) Pooled Income Funds (PIF)
13 | P a g e
14 | P a g e
1. Client will transfer cash, securities or other property to the pooled income fund. A
minimum initial donation of $20,000 is required, after which subsequent minimum
donations of $5,000 may be made. Contributions of restricted and/or privately held
stock have a $100,000 minimum and are accepted on a case-by-case basis.
2. Client will received an income tax deduction and pay no capital gains tax
3. The fund will pay clients share of its income each year to the clients or to the anyone
that they named as beneficiary for life
4. When the gift term ends or after the death of the last beneficiary, client share of the
funds principal passes to the charitable trust
Example:
Clients contributes $10,000 to a pooled income fund. Assume his participation represents 1
percent of the fund. If the fund's net annual earnings are $40,000, clients becomes entitled to
1 percent of $40,000, or $400. When clients include a pooled income fund gift as an itemized
deduction on their federal tax return in the year of the gift, they also benefit from significant
15 | P a g e
tax savings. But according to this fund donor client has contract or signing document about
term of the PIF
Benefits of Pooled Income Funds (PIF)
Potential immediate partial tax deduction, based on your life expectancy and the
As far as tax considerations, donors may be eligible to take a tax deduction of up to 30% of
their adjusted gross income for contributions of securities, and up to 50% for cash
contributions.
How Donor-Advised Fund (DAF) works?
1. Client can transfer cash or appreciated asset to the donor advised funds. A minimum
initial donation of $10,000 is required, after which subsequent minimum donations of
$1,000 may be made. Contributions other than cash, stocks or mutual funds may have
different minimums, may require prequalification, involve longer processing time and
are accepted on a case-by-case basis.
2. Clients will get benefit of tax deduction and avoidance from capital gains tax for gifts
of long-term appreciated securities. The immediate tax deduction, up to 50% of
adjusted gross income for cash, 30% for appreciated assets
3. The DAF can often accept many types of assets and will engaged in professional
investment management
4. Clients can decide when and how much to gift to the charities that they recommended.
5. The clients grants can be anonymous
Example:
17 | P a g e
If clients itemize deductions on their 2013 tax return, they can write off the amount of their
grant, up to 50 percent of their adjusted gross income for cash or 30 percent of income for
appreciated investments. Clients can even delay a decision on which organization will
ultimately get the money. If they will be donating stocks or mutual funds that have
appreciated in value, they can get the full write-off on the donation, but avoid the capital
gains tax by transferring the investment to their DAF, which will then sell and grant it. For
example, if they sell $15,000 worth of stock and have a $5,000 capital gain, they can claim
$15,000 as a deduction and won't owe taxes on their $5,000 profit so for the current year
they will get the tax deduction and about which charity they want to choose to give grants
can be decided later on.
18 | P a g e
4.0 RECOMMENDATIONS
In this case, we recommended that Anne and William Carson for using the Charitable
Vehicles for the Upper- Middle Class for their best tax implication. We are choosing the
vehicle charitable of Donor Advised Funds rather than Pooled-Income Funds for Anne and
19 | P a g e
William Carson because it suit with the condition and their desired.
45
*$20,000.00
28/12/2013
2.2%
Benefits
Charitable deduction :
$4,538.40
Payment Rate:
5.00%
$1,000.00
*Notes:
minimum donations of $5,000 may be made. Contributions of restricted and/or privately held
stock have a $100,000 minimum and are accepted on a case-by-case basis.
CHARITABLE DEDUCTION:
INCOME TAX SAVINGS (33%):
ESTIMATED INCOME FIRST YEAR:
ii.
$4,538.40
$1, 4978
$1,000.00
20 | P a g e
directly to donor-advised
$15,000
$15,000 x 15% = $2,250
$15,000- $2250 =$12,750
fund
$15,000
$0
$15,000
charity
Charitable tax
deduction
Net tax savings
$4,208-$2,250 = $1958
$4950
*Tax benefit of donating cash VS stock. A minimum initial donation of $10,000 is required,
after which subsequent minimum donations of $1,000 may be made.
Pros and Cons of Pooled Income Funds versus Donor Advised Funds:
ADVANTAGES
Donor-Advised Funds(DAF)
Professional
management.
The
organization,
21 | P a g e
not
the
donor.
The
clients.
on
22 | P a g e
request
anonymity
with
one
DISADVANTAGES
Unpredictable
Income.
The
consistent
designated charities.
Less
flexibility
than
private
foundation
may
offer
more
In this case, we know that the situation of the William Carson had faced the situation
where actually his normal income is about $60,000 per year but he experiences fortuitous
23 | P a g e
earned amounted $170,000. Given his current wealth, William Carson wants to donate
$15,000 to charities in this years but hes not ready to choose where to donate that much
money all at once, but is concerned that after his income reverts back to normal so DAF
would be the best strategies for them to applied. Anne and William Carson are advisable to
choose this charitable giving vehicle because it match their desire whereby the minimum of
donation can be made is $10,000 for initial compared to the Pooled Income Funds required
minimum donation amounted of $20,000.
By taking all the consideration, we think the most suitable and beneficial charitable
vehicle for Anne and William Carson are using Donor Advised Funds. In this case, Anne and
William Carson was mentioned earlier that they want receive a tax deduction in this year
2013 but delay distribution decisions until a later date. So the DAF is a good fit any time
theres a desire to contribute now and get the tax deduction, but make the actual grant to the
final charity at some later date. In fact, the whole point of a donor-advised fund is to separate
the timing of when the tax deduction occurs from when the charity ultimately receives the
money. In addition DAF may be the ideal solution for clients who want to secure a tax
deduction today and benefit from professional management of their charitable donations.
Besides, it can give benefit to clients such as allows them to donate assets for charity
today and receive a tax deduction now even though the actual funds may not be granted to the
final charity until some point in the future. The clients may be eligible to take a tax deduction
of up to 30% of their adjusted gross income for contributions of securities, and up to 50% for
cash contributions.
In other words, the donor-advised fund essentially functions as a conduit, where the
donor receives a tax deduction when the money goes into the DAF, but has discretion about
when the assets will finally leave the DAF and actually go to the charity and in the meantime,
24 | P a g e
assets inside a donor-advised fund grow tax-free. Through this DAF, clients can teach their
children about charitable giving while alive and also funds as a legacy family giving vehicle
after death. The virtue of doing so is that all funds that are inside the donor-advised fund can
grow and compound tax-free indefinitely to support future family charitable giving which are
the good ethics in the community.
The reasons why the pooled income is not recommended to the Anne and William
Carson is because it required them to donates more than what they want. Based on the pooled
income fund requirements, the initial minimum of the amount donation is $20,000 so this
charitable vehicle is against with Anne and William Carson because does not full filled their
desired whereby the just want to make contribution amounted of $15,000 for that year.
Besides the pooled income funds is more suitable for the people who wish to meet charitable
goals while addressing issues such as tax planning and retirement income may benefit from a
pooled income fund.
For the conclusions, in this case Anne and William Carson is kind hearted person who
always allocate the donation for the charity purpose previously which give donation to church
and local community, so by using DAF their money will go directly to the charity and can be
used by charity to help other who entitle to get it and in the same time they can gain benefit
on tax deduction on that year.
Extraction of income tax Calculation:
$
Income :
William
170,000
Anne
Adjusted Gross Income
*deduction to DAF (50% x 295,000)
125,000
25 | P a g e
295,000
147,500
Taxable Income
Tax Payable (33%)
147,500
48,675
*cash donation to DAF amounted $15,000 will get tax deduction immediate 50% from
Adjusted Gross Income.
The best charitable vehicle for Mary and Jack Bradley is Charitable Remainder
Trust (CRT). This is because A CRT is tax-exempt, so appreciated assets contributed to and
sold within the trust will not result in tax liability to the donor. Besides that, an income tax
deduction is available to the donor for assets contributed to a CRT. The deduction is equal to
the present value of the charitable beneficiarys remainder interest. Contributions to a CRT
are removed from the taxable estate of the donor and typically not result in gift taxes. Gift
taxes liability may be present if the income beneficiary is an individual other than the donor
or the donors spouse. Other than that, a CRT can provide an income stream for the income
beneficiarys life or for a term of years. If the income payment is not for life, then the trust
term is limited to a maximum of 20 years. CRT also allows clients to attain their charitable
goals by passing a significant amount of assets to charitable causes of their choice.
CRT was an attractive charitable vehicle to taxpayers who wished to provide a
dependable lifetime income for family members as well as future support for a specific
charitable organization. Because of Remainder Trust simultaneously created a charitable
deduction while providing a gift to a beneficiary, the vehicle would be especially attractive to
those looking to minimize estate taxes as the couples Mary and Bradley are particularly
interested in vehicles which could contribute to a charitable cause and provide income stream
for their daughter and her family.
26 | P a g e
Calculation:
Benefits
Charitable deduction :
$1,090,728
Payment Rate:
First Year Income:
5.00%
$150,000
Situation
Term of Years:
Gift Amount:
Gift Date:
20
3,000,000
20/10/2015
2.2%
http://ordercasesolutions.blogspot.my/2015/08/choosing-charitable-giving-vehicle-
case.html
http://taxes.about.com/od/deductionscredits/a/CharityDonation.htm
https://www.legalzoom.com/articles/charitable-contributions-how-much-can-you-
write-off
http://grantspace.org/tools/knowledge-base/Funding-Resources/Foundations/private-
foundations-vs-public-charities
http://www.pgdc.com/pgdc/charitable-remainder-trusts
27 | P a g e
http://www.aicpa.org/InterestAreas/PersonalFinancialPlanning/Resour
ces/PracticeCenter/ForefieldAdvisor/DownloadableDocuments/FFCha
ritableLeadTrustCaseStudy.pdf
http://www.fidelitycharitable.org/giving-strategies/give/charitablelead-trusts.shtml
28 | P a g e