Charitable Planning

"There are two systems of taxation in this country—
one for the informed and one for the uninformed."

 SOCIAL CAPITAL—WHAT IS IT?

Social capital is that part of your total wealth consisting of income plus assets that you have earned but are not allowed to keep. You are not allowed to keep it because the Unified Federal Gift and Estate Tax law decrees that once your total wealth exceeds a certain limit (currently $1,500,000 for individuals and $3,000,000 for married couples), a portion of the excess must be shared with society. That portion that you must share is your social capital.

 HOW MUCH OF YOUR WEALTH IS SOCIAL CAPITAL?

To find out, first of add all your income and assets to determine your total wealth. Then subtract everything you are allowed to keep; this is called your personal capital. It consists of what you consume to support your lifestyle, plus what you retain and ultimately leave as an inheritance. What is left is your social capital. It consists of the part you do not control, government-directed social capital, and the part you do control—self-directed social capital.

     • It is the power to capture the "dollars you cannot keep" and use them to increase your income and leave more to your heirs.
     • It is the power to personally direct the "fruits of your labor," empowering you to shape the future in the way you believe is best.
     • It is the power to achieve lasting significance. "What man fears most is not so much extinction, but extinction without significance." This quote, from a famous American psychologist, identifies the depth of motivation people have for lasting personal significance. The social capital you create, if directed solely by the government, is simply a default on your part to someone else's agenda; you have no input and direct impact. On the other hand, if you capture and self-direct a portion of the social capital you have created, you directly, personally, and powerfully affect the future and leave a lasting legacy.

 THE NEED FOR SOCIAL CAPITAL

The Federal Government's Inability to Fund Social Needs

The theory behind charitable tax deductions is the basic truth that the federal government simply cannot afford to fund all of the services required by a complex society such as ours. Hence, the government offers tax incentives to private citizens as a means of motivating the private sector to fund more and more of those services each year. The federal government's ability to fund any discretionary social programs in the future will be severely limited due to the growing burden of funding entitlement programs such as Social Security, Medicare, and federal and military pensions, as well as servicing the multi-trillion-dollar national debt. However, recognizing the need to continue funding social programs at both state and local community levels, the government affords you the opportunity to choose which of those programs should receive your hard-earned dollars. The Internal Revenue Code contains the "tools" that enable you to self-direct your social capital. In other words, the tools of social capital allow you to prevent the unnecessary loss of income and assets to capital gain and estate taxes.

The Responsibility of Individual Citizens

One of the things that truly make America a great nation is the sense of "community" that we all share with our family, friends, and neighbors. This is not about avoiding one's sense of responsibility for giving back to the community; it is about exercising your right to choose the method of giving. After all, we are indeed a grateful people, because we have been greatly blessed as a nation. As citizens of this blessed nation, we are all called upon to share part of our good fortune with those in society who are less fortunate.

The Choice Between Taxpayer and Philanthropist

The tools of social capital have been in place within the Internal Revenue Code for the past thirty years. The tragedy of life, as Justice Brandeis so aptly stated it, is that so few people know that these tools even exist. Once you are sufficiently informed about the availability and benefits of using these tools to self-direct your Social Capital, you are in a position to make the critical choice of just how to go about doing it: as a Good Taxpayer or as a Philanthropist. Don't you wish all of life's choices were that simple?

THE TOOLS OF SOCIAL CAPITAL

 In order to personally benefit from and then self-direct the social capital you worked so hard to create, you must first gain control of it. If you do not proactively do so, you lose personal benefit from it and it immediately becomes, by default, government directed. The same Internal Revenue Code that established the Unified Gift and Estate Tax also established the tools that allow you to minimize or even completely avoid the tax. These tools are:
     • charitable bequest
     • charitable bargain sale
     • charitable gift annuity
     • charitable lead trust 
     • charitable remainder trust
     • private family foundation

How Do I Self-Direct My Social Capital?

 THE FAMILY LEGACY

How To Achieve Lasting Significance

Another tool of social capital that can be effectively incorporated in an estate distribution plan is the family foundation. In the Zero Estate Legacy Plan diagrammed in this link, instead of having the remainder of the charitable trust distributed outright to charity in the form of a one-time gift, the remainder flows directly to a family foundation that will make perpetual gifts to charity.

Family-Controlled Influence

Once a family foundation is established, a board must be formed to manage the foundation's assets and direct annual grants to charity. The foundation must distribute a minimum of 5% of the value of its assets each year. Representatives from the community may be involved, or the board can consist of family members only. Thus, a family foundation can give the family absolute control over which charities benefit from annual distributions, allowing the donor's family to maintain family-controlled influence, generation after generation.

Financial Parenting

Another advantage of the family foundation is the concept of financial parenting. By establishing a family foundation, parents can have a lasting influence on their children. Giving children the responsibility for managing the foundation's assets and determining which charities should benefit from the foundation's annual distributions affords parents a unique opportunity to teach them problem-solving and administrative skills, give them management and investment experience, build their self-esteem, and foster leadership. In short, a family foundation can provide a family with a wonderful legacy and is perhaps the most powerful example of how donors can maintain ultimate control of their social capital, while bequeathing the value of philanthropy and social responsibility to their children and grandchildren.

By structuring an estate distribution plan that incorporates just one of the tools of social capital described above, it is possible to significantly reduce the tax burden on your estate. In some cases, it is even possible to establish a zero tax legacy plan and effectively self-direct 100% of your social capital in the Zero Tax Legacy Plan charitable remainder trust. In addition, they also prevented the unnecessary loss of $504,000 in capital gains tax, giving them substantially more income during their lives from the reinvested sale proceeds. Some of the additional income from the charitable remainder trust was used to purchase $3.65 million of survivor life insurance in a wealth replacement trust. Finally, the balance of the surviving spouse's estate, $1.65 million, is also contributed to local charities at death. The end result is a total inheritance of $5 million for their heirs – 100% of their total wealth. In the end, rather than have their estate pay $2 million in estate taxes to the government, as in the traditional legacy plan, they directed $3.65 million to local charities.