Charitable Planning and Giving

Most persons make gifts or bequests to charitable organizations for a combination of reasons. Some of the more common motivations would include:

Whatever the reasons are, US tax law is designed to encourage these gifts. Areas of need in society, such as health, education, welfare, etc., which are not addressed by private enterprise or charitable organizations, will eventually become a government 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 need.

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

Others, although they would like to make an outright gift, depend on the income from the asset for their daily needs; and, therefore, decide to wait until they die to transfer the asset through their will or trust.

There are other methods, which allow the donor to make the gift now while still retaining the income stream for life. These are sometimes referred to as split interest gifts and come in several variations.

The most popular of these methods are:

Benefits of using Charitable Trusts:

Charitable Remainder Annuity Trust (CRAT)

A charitable remainder annuity trust (CRAT) is an irrevocable trust which pays a fixed dollar amount each year to a beneficiary, such as the donor of the trust assets, his or her spouse, child, etc.

After the death of the income beneficiaries or at the end of a set number of years, whatever assets remain in the trust are distributed to the charities named in the trust.

If additional contributions are desired in later years, new trusts must be established. The charitable income tax deduction is based on the current value of the charity's right to receive the trust assets at some time in the future. (This is called a remainder interest.)

There are several factors in determining this value:

All of these factors are applied to government tables to determine the current value of the charitable deduction. If the charitable deduction exceeds a certain percentage of the donor's adjusted gross income for the year of the gift, that portion must be carried over into future years.

If the income from the CRAT is payable to someone other than the donor, it may be subject to federal gift taxation. If certain requirements are met, the income gift can be made to qualify for the annual gift tax exclusion of $10,000 per beneficiary.

Also, the marital deduction will usually eliminate any tax on payments to the donor's spouse.

The value of the interest passing to the charity is deductible from the gross estate. If there are income beneficiaries other than the donor and his or her spouse, there may be an estate tax on the value of this income interest.

A taxpayer can contribute an asset (usually highly appreciated and low income producing) to a CRAT and receive a current income tax deduction.

The CRAT can sell the appreciated asset without paying any capital gain tax and can then reinvest the entire proceeds at a higher rate of return.

The trust will normally pay out a higher return than the donor previously received. This, coupled with the income tax deduction, can create a substantial increase in cash flow.

Thus far, the only ones to lose are the donor's heirs. To solve this problem, many taxpayers use a portion of the increased cash flow to purchase a life insurance policy (outside of the estate) to replace all or part of the value of the asset placed in the trust.

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Charitable Remainder Unitrust (CRUT)

A charitable remainder unitrust (CRUT) is an irrevocable trust which pays a fixed percentage of the value of its holdings each year to a beneficiary such as the donor of the trust assets, his or her spouse, child, etc.

After the death of the income beneficiaries or at the end of a set number of years (no more than 20), whatever assets remain in the trust are distributed to the charities named in the trust.

Assets must be revalued each year in order to determine the payout amount. Additional contributions can be made to the trust in later years if desired.

he CRUT may be drafted to pay out less than the established percentage if the trust income earned during the year is less than the required payout percentage. This shortage can be made up for in later years when the trust earns more than the required payout percentage.

The charitable income tax deduction is based on the current value of the charity's right to receive the trust assets at some time in the future. (This is called a remainder interest.)

There are several factors in determining this value:

All of these factors are applied to government tables to determine the current value of the charitable deduction. If the charitable deduction exceeds a certain percentage of the donor's adjusted gross income for the year of the gift, that portion must be carried over into future years.

If the income from the CRUT is payable to someone other than the donor, it may be subject to federal gift taxation. If certain requirements are met the income gift can be made to qualify for the annual gift tax exclusion of $10,000 per beneficiary. Also, the marital deduction will usually eliminate any tax on payments to the donor's spouse.

The value of the interest passing to the charity is deductible from the gross estate. If there are income beneficiaries other than the donor and his or her spouse, there may be an estate tax on the value of this income interest.

A taxpayer can contribute an asset (usually highly appreciated and low income producing) to a CRUT and receive a current income tax deduction.

The CRUT can sell the appreciated asset without paying any capital gain tax and can then reinvest the entire proceeds at a higher rate of return.

The trust will normally pay out a higher return than the donor previously received. This, coupled with the federal income tax deduction, can create a substantial increase in cash flow.

The only ones to lose are the donor's heirs. To solve this problem, many taxpayers use a portion of the increased cash flow to purchase a life insurance policy (outside of the estate) to replace the value of the asset placed in the trust.

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Charitable Lead Annuity Trust (CLAT)

A donor may transfer assets to an irrevocable lead annuity trust sometimes referred to as a charitable income annuity trust. The trust then pays a fixed dollar amount to a qualified charity for either a set number of years, or the lifetimes of individuals. When the term of the trust has ended, the remaining assets are distributed to the donor, his or her spouse, heirs, or other individuals.

The trust must pay out the same dollar amount each year without regard to its earnings. If the trust earns more than it pays out to the charitable beneficiary, those extra earnings (or asset appreciation) will pass to the non-charitable beneficiaries (children, grandchildren, others) without additional estate or gift taxes.

After the lead (or income period) has expired, if the beneficiary of the trust is other than the donor, or his or her spouse, there may be a taxable gift. The gift tax would be based on the present value of the beneficiaries' right to receive the trust remainder at some future time. This calculation is dependent upon the term of the trust, the amount payable each year to the charity, and the AFR (applicable federal rate) at the time of the transfer.

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Charitable Gift Annuity (CGA)

It is simply a contract between you and a charity. In exchange for your irrevocable gift of cash, securities, or other assets, they agree to pay one or two annuitants you name a fixed sum each year for life. Payments are guaranteed by the general resources of Charity.

Benefits include: You will qualify for a federal income tax deduction, subject to limitations and a substantial portion of income is tax-free. You may experience lowered probate and estate taxes. Generally speaking, the amount of the annuity is determined by the age of the donor. The older the donor at the starting date, the higher the rate of return. An example is shown below:

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