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Charitable Giving

What Techniques Can Be Used For Charitable Giving?

Why Should a Charitable Gift Be Considered?

How Does Charitable Gifts Affect Estate Taxation?

How Can Retirement Income Be Supplemented With a Charitable Remainder

What Techniques Can Be Used For Charitable Giving?

Gifts to charity during lifetime or at death will reduce the size of the gross taxable estate.  An additional benefit of lifetime gifts is that an income tax deduction is available within certain percentage limitations. 

Split-Interest Gifts
If the estate owner is not willing or able to contribute the entire asset during lifetime, he or she may consider a split-interest, deferred gift. 

The ownership interests in an asset can be split or divided into two parts, a stream of income payable for one or more lifetimes or a term of years (the income interest) and the principal remaining after the income term (the remainder trust)?.  In a split-interest gift, one portion is given in trust for the charity and the other portion is retained. 

Charitable Remainder Plans
When the estate owner retains the right to the income but transfers his or her rights in the remainder to a trust, it is called a charitable remainder trust. 

To qualify for an income tax deduction the trust must be a unitrust, an annuity trust, a pooled income fund or a charitable gift annuity.

• Charitable remainder unitrust: In this type of trust the donor usually retains a right to a fixed percentage of the fair market value of the trusts assets, re-valued annually.  If the value of the assets increases, so does the annual payout and vice versa.  See IRC Sec. 664(d)(2).
• Charitable remainder annuity trust:  This trust is similar to the unitrust but instead pays a fixed dollar amount year after year.  The increases or decreases in the value of the trust do not affect the payments.  See IRC Sec. 664(d)(1)
• Pooled Income Fund:  Assets are transferred to a common investment fund maintained by the charity.  Each donor receives annually a share of the income from the fund, in proportion to the contribution made.  These annual payments continue for the lifetimes of the donor and the spouse.  At death, the corpus of the donor’s gift, together with any capital gains, passes to the charity.  Payments will increase or decrease with the investment performance of the fund.  See IRC Sec. 642(c)(5).
• Charitable gift annuity:  The donor transfers the asset directly to the charity in exchange for the charity’s agreement to pay a fixed lifetime annuity.

The amount of the income tax deduction is dependent upon the percentage of the income interest and the period over which it will be paid (usually the life of the donor and his or her spouse).  This is determined from the mortality tables published by the government. 

Charitable Income Trusts
The charitable income or lead trust is the reverse of the charitable remainder trust. 

The income interest is assigned to the charity, usually for a period of years, and then the remainder generally passes to the donor’s heirs.  The amount of the estate tax deduction and the amount left for the heirs will depend upon the number of years and percentage of annual payments and the investment results of the trustee.

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Why Should a Charitable Gift Be Considered?

 Considering a Charitable Gift
Areas of need in society, such as health, education, general welfare, etc., which are not addressed by private enterprise or charitable organizations, may eventually become a governmental responsibility. 

Many people are concerned with the growth of government and its increasing involvement in their lives.  Assisting the charities of one’s choice can decrease the need for government involvement in these areas of society. 

Reasons for Making a Charitable Gift
Many persons make gifts or bequests to charitable organizations for a number of reasons.  Some of the more common motivations would include the following:

• Compassion for those in need
• Religious and spiritual commitment
• Perpetuation of one’s beliefs, values and ideals
• Support for the arts, sciences and education
• A desire to share one’s good fortune with others

Whatever reasons, U.S. tax law is designed to encourage these gifts.

Different Types of Charitable Gifts
Some donors prefer to make outright gifts of cash or other valuable assets to their favorite charities. 

Other individuals, although they would like to make an outright gift, depend on the income from their assets for their daily needs.  Often, such donors decide to wait until they die to transfer assets to a charity, through a will or trust.

However, there are methods which allow a donor to make a gift now, while still retaining income for life.  The most popular of these methods are listed below:

• Charitable remainder annuity trust
• Charitable remainder unitrust
• Pooled income fund
• Charitable gift annuity

Another gifting technique assigns an income interest to the charity for a period of years (or the lifetime of a person), after which the remainder passes to the donor’s heirs.  Gifts made in this matter involve what are known as charitable lead trusts.

Potential Financial Benefits of Charitable Gifts

• Can provide an income tax deduction
• In many cases can avoid or delay payment of capital gains taxes
• May increase personal after-tax cash flow
• May increase the amount passing to one’s heirs²

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How Does Charitable Gifts Affect Estate Taxation?

Charitable Gifts and Estate Taxation
Gifts to a charity or to a charitable remainder trust can reduce one’s taxable estate by not only the value of the gift but also its potential appreciation. 

If the donor retains the right to the income, as in a charitable remainder trust, the estate tax savings will not be as large.  However, the donor (or donors) may choose to make gifts of the income each year to children, grandchildren or to a trust on their behalf.

If certain requirements are met, these gifts will qualify for the annual gift tax exclusion of $11,000 from each donor to as many qualified beneficiaries as there are under the terms of the trust.

Assumptions:

Current estate size: $1,200,000
Estate growth rate: 6.00%
Value of charitable gift:  $100,000
Year of death: 2003
Applicable credit: $345,800
Congress will not permanently repeal the FET

Note: If both the income from the trust and the income tax savings from the charitable deduction are given to an irrevocable trust or to adult children that purchases life insurance on the life of the donor, one is able to transfer a substantial amount of money to one’s heirs which is not subject to either income tax or estate tax.

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How Can Retirement Income Be Supplemented With a Charitable Remainder

Another Way to Fund Retirement
In many instances, a charitable remainder trust is set up just before retirement, with the donor making a single, large gift to the trust.  Such a trust allows an individual who is on the verge of retirement to combine charitable goals with retirement income planning. 

A charitable remainder unitrust (CRUT) can be established some years before retirement.  The CRUT allows additional annual gifts to the trust.  For a person who is a number of years away from retirement, this type of trust can combine charitable objectives with retirement asset accumulation goals.

Who Should Consider a CRUT to Accumulate Retirement Assets?
A person who:

• Has a high level of current income;
• Has at least five to ten years before retirement and desires to put away more for the golden years;
• Has reached the maximum level of contributions to his or her qualified retirement plan, and /or
• Needs to shelter retirement funds from current income taxation

The “Flip” CRUT – A typical example

• The donor establishes a charitable remainder unitrust with income for life or for the lives of the donor and another beneficiary such as a spouse.³  Payouts are set at the annual minimum of 5% level or the income generated by the trust, whichever is less.  The trust document specifies that the trust will convert (“flip”) from its net income format to a standard form of unitrust at some pre-determined date or other triggering event.  At that point, the trustee will distribute a full 5% of the trust’s then value using both income and corpus if required.
• The donor makes annual gifts to the trust.
• In the early years, the trustee invests the annual gifts in capital gain assets which generate little or no current income.
• At the death of the last income beneficiary, the trust assets pass directly to the charity.

The result:  Due to very small (perhaps zero) payouts in the pre-retirement years, the assets in the trust can grow much larger.  When the 5% payments begin, the annual income can be substantially higher.

How It Works- A Hypothetical Example

Assumptions:

Married couple aged 45 and 42.  First spouse dies at age 77, second spouse at age 81
Gifts of $25,000 per year are made each year for 20 years
Net income CRUT for 20 years paying out less than 5% of the trust value, flipping to a standard 5% payout thereafter.  7% total return each year
Years 1 through 20 assume 1% paid as income, 6% as growth
Years 21 through 40 assume 5% paid as income, with 2% as growth

Total post-retirement income…………………………..$1,184,277
Charitable legacy (remainder)………………………….$1,488,529

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Call Robert Sayman today or Click Here for a free, no obligation consultation to learn more about the use of trusts and direct gifts, as well as a variety of other methods that do not require you to release control of an asset to help your charities.

704-542-5499

¹ Technically, the present value of the income share and the present value of the remainder interest.

² Under the Tax Act of 2001, the federal estate tax is gradually phased out until its final repeal in the year 2010.  If Congress does not act at that time to repeal it for the years following, it will automatically revert back to the rates in effect during the year 2001, with an exemption for the first $1,000,000 of assets.

³ Proposed regulations impose certain restrictions if an income beneficiary is other than the donor or the donor’s spouse.  Proposed Reg. 25.2702-1(c)(3)