Pledges | Pooled Income Funds | Remainder Interest in a Residence | Charitable Gift Annuities | Lifetime Charitable Remainder Trusts | Lifetime Charitable Lead Trusts

Pledges

1. Summary
A pledge is a promise to make a gift in the future.

2. Pros
The benefit to an individual of making a pledge is that the individual is not required to make the gift currently. Instead, the gift will not be made until some time in the future.

3. Cons
Since the gift is not being made currently, an individual making a pledge will receive no tax benefit from the pledge until the individual fulfills the pledge by actually making the gift. Also, personal pledges cannot be satisfied from a private foundation or a donor advised fund.

Pooled Income Funds

1. Summary
A pooled income fund (or “PIF”) is like a mutual fund that is administered by a public charity. Individuals make contributions to the PIF in exchange for units of participation. The number of units received is calculated based upon the value of the property contributed to the PIF and the value of the entire PIF at the time of the contribution. A contribution to a PIF is irrevocable, but an individual may make as many separate contributions as he or she wishes. Each owner of units in a PIF will receive a pro rata share of the PIF’s income, at least annually. Upon the death of the owner of the units, the charity maintaining the PIF receives the principal attributable to those units. A contribution to a PIF will result in a charitable income tax deduction for the actuarial value of the remainder interest passing to the charity. Sometimes the donor names another individual to receive the income from the PIF. If the donor names an individual other than his or her spouse, the value of the right to receive the income is a taxable gift for gift tax purposes.

2. Pros
A contribution to a PIF will provide the donor with a stream of income for his or her life. The contribution of appreciated property to a PIF generally will not cause the donor to recognize any gain or loss from the contribution. If, however, the property contributed is subject to liabilities (e.g., mortgage indebtedness), the donor may recognize gain or loss from the contribution.

3. Cons
Distributions received by the income beneficiaries of a PIF are taxable as ordinary income. A PIF cannot hold tax-exempt bonds.

Remainder Interest in a Residence

1. Summary
A gift of a remainder interest in a person’s personal residence is an irrevocable gift of the residence, subject to the donor’s retained right to use the residence during his or her lifetime. In order to make this gift, the owner will typically sign a new deed to his or her residence, conveying the remainder interest to charity. The charity thus becomes the full owner of the property only at the donor’s death. The donor and the charity often will execute a separate agreement that specifies who will be responsible for the costs of maintaining the residence (e.g., real estate taxes, maintenance, structural repairs and insurance). This separate agreement, however, is not required because local law normally will state who is responsible for these costs. In most cases, the donor will be responsible for the cost of maintenance, though the costs of structural repairs and capital improvements often are divided between the donor and the charity unless there is an agreement to the contrary.

2. Pros
An individual can make an immediate charitable gift and receive a current deduction for the actuarial value of the remainder interest while still retaining the use and enjoyment of the residence for life. The donor does not have to move out of the house during life and cannot be forced to sell it by the charity.

3. Cons
The gift is irrevocable once it is made. Thus, a donor cannot later change his or her mind. In addition, if the home is sold, in most circumstances the donor and the charity will divide the sale proceeds in proportion to the actuarial value of their interests. This means that the donor’s share of the sale proceeds may not be sufficient for the donor to purchase a comparable replacement residence.

Charitable Gift Annuities

1. Summary
Many charities offer charitable gift annuities. Donors transfer assets to the charity in exchange for a charitable gift annuity. Under the annuity’s terms, the charity provides a fixed payment for the life of the donor (the “annuitant”) and, if desired, up to one additional individual. Annuity rates are set at the time of the gift and are based on the age of the annuitant(s) at that time. The net amount remaining at the death of the annuitant(s) passes to the charity. A charitable gift annuity is a form of contract between the donor and the charity and is not a trust.

2. Pros
Charitable annuity rates are often higher than the return on other kinds of investments and the annual payment is fixed at the creation of the annuity. The donor does not recognize any immediate capital gain when funding a charitable gift annuity with appreciated property. Rather, the gain is spread out over time as the annuity payments are received. A current charitable contribution income tax deduction is available to the annuitant for the actuarial value of the remainder interest that will pass to charity.

3. Cons
The gift is irrevocable once made. Most organizations have a minimum gift size, such as $10,000 or $25,000. Charities also usually limit the minimum age of an individual creating a charitable gift annuity - such as a minimum age of 60 or even 70.

In addition, the amount of the annuity received by the annuitant is based upon a calculation that will theoretically result in the annuitant, if he or she lives to life expectancy, receiving an annuity benefit with an actuarial value equal to fifty percent of the amount contributed in exchange for the annuity. Thus, when compared with a commercial annuity, the amount received by the annuitant for a charitable gift annuity is substantially less. The fifty percent foregone is what the charity is expected to receive from the transaction. Charitable gift annuities therefore are appropriate only for those who are motivated by charitable desires, rather than the desire for market rate investment return.

Lifetime Charitable Remainder Trusts

1. Summary
A lifetime charitable remainder trust (or “CRT”) is a trust that grants a current right to annual payments to one or more non-charitable beneficiaries (the “income beneficiaries”) for the lives of those beneficiaries or for a term of years, and provides that the remaining trust property will pass to one or more charitable beneficiaries at the end of that period. The donor makes a completed gift to the trust when it is created, a portion of which is treated as charitable. The charitable component of the gift is equal to the difference between the fair market value of the property contributed to the trust and the value of the income beneficiaries’ interest in payments from the trust. The charitable and non-charitable interests are valued using actuarial tables published by the Internal Revenue Service. If the donor retains the current interest in the trust and/or designates his or her spouse, then there is no taxable gift for gift tax purposes, though a gift tax return may still need to be filed. The value of the gift to charity qualifies for an income tax deduction for the donor of the CRT, subject to the applicable percentage limitations discussed on the chart shown in Section I.

There are many different types of CRTs, each providing different benefits (and detriments) to the creator of the trust. One type of CRT is a charitable remainder annuity trust, or a “CRAT” for short. A CRAT provides that the non-charitable beneficiaries will receive a fixed specific dollar amount from the trust each year (e.g., $50,000 per year). A charitable remainder unitrust (or “CRUT”) is a trust in which the income beneficiaries receive an annual payment from the trust equal to a stated percentage of the fair market value of the trust as valued on a fixed date each year (e.g., distribute to the income beneficiary 5% of the fair market value of the trust as determined on the first day of each year). Thus, the amount of the payment from a CRUT may vary each year as the value of the trust assets changes.

There are several different variations on a basic fixed percentage CRUT that an individual may establish, each providing different benefits and detriments. Regardless of which type of CRT is established, the minimum payout percentage can never be less than five percent, nor more than fifty percent. In addition, the value of the charity’s actuarially-determined interest in the trust may not be less than ten percent of the value of the trust at the time the trust is established.

Given their different structures, CRATs and CRUTs may be appropriate for different types of donors. CRATs offer greater simplicity in administration. They also may be more attractive for donors and income beneficiaries who require a set payout, rather than one that fluctuates with market conditions. A CRUT is more appropriate for donors and income beneficiaries who are not risk averse, and who are willing and able to participate in the upside and downside of the trust’s investment performance. The possibility for rising payments also may be attractive for individuals who wish to use a CRUT as a hedge against anticipated future inflation.

Example of a Lifetime CRAT

Assumptions: A 70 year old donor contributes assets to a CRAT valued at $1,000,000 during August 2010. The CRAT will pay to the donor a fixed annuity of $50,000 per year for the donor’s life. Also assume that the donor funds the CRAT with marketable securities that were purchased for $1, but which the CRAT will immediately sell and reinvest.

Results: The donor is deemed to have made a charitable gift that will be eligible for the charitable income tax deduction for the year 2010. The actuarially-determined amount of the deduction is equal to $463,745. Neither the donor nor the CRAT pays any income tax when the stock is sold. Each year, when the donor receives a distribution from the CRAT, the donor will have income equal to the amount of income earned by the CRAT, but not in excess of $50,000. To the extent the CRAT does not have income equal to $50,000 for the year, the donor will have capital gain income (but not in excess of $50,000, minus the amount of other income the donor is treated as receiving from the CRAT), to the extent the CRAT has capital gains that are not treated as previously distributed to the donor.

2. Pros
Charitable giving through the use of a CRT is a common strategy for an individual who is both philanthropic and who has highly-appreciated securities that he or she would like to sell without paying an immediate income tax. A distinct advantage of such a trust, to the extent that it is funded with highly appreciated securities, is that future income is based on the full value of the assets given undiminished by capital gains taxes, because such a trust is not subject to income taxes on gains from the sale of appreciated assets. This means that one can receive income from the full fair market value of the contributed assets, as opposed to income on only the net after-tax proceeds from the sale of the assets. A CRT thus allows an individual who owns highly appreciated assets to diversify his or her portfolio without reducing the size of the portfolio by the tax on the built-in gains. A CRT also can be created at death to obtain estate tax savings. The CRT would provide an income stream to one or more individuals starting at the death of the donor and benefit charity at termination of the CRT.

3. Cons
Except for the income payments described above, assets contributed to a CRT eventually pass to the charitable beneficiaries when the trust ends. The “cost” to the heirs is partially offset by (a) the donor’s income tax charitable deduction, (b) the avoidance of capital gains taxes on the given assets when such assets are sold by the CRT, and (c) estate tax savings. This usually leaves a larger amount to produce income for the life income beneficiaries of the trust than if the assets were sold, the capital gains taxes were then paid and only the net after tax proceeds were reinvested.

Although a donor may make multiple contributions to a CRUT, a CRAT may not accept additional contributions after it is initially funded.

If the CRT’s investments fail to perform to expectation, it is possible that the trust maybe depleted of assets before the end of the income beneficiary’s interest in the trust. In that case, the trust will terminate, the income beneficiaries will cease to receive any payments and no assets will pass to charity. (Note that, if a CRT does fail, it means that all of the assets have been paid to the income beneficiaries.) This possibility of depletion also is a way of differentiating a charitable gift annuity and a CRT. The payments due under a charitable gift annuity are a general obligation of the charity and generally may be satisfied out of the charity’s entire assets. The payments due from a CRT may be satisfied only from the trust property itself.

Lifetime Charitable Lead Trusts

1. Summary
A charitable lead trust (generally referred to as a “CLT”) is a trust that grants an annuity or unitrust interest to various charities and provides for the remainder of the trust assets to pass to non-charitable remainder beneficiaries. The gift by the donor to the trust is a completed gift for gift and estate tax purposes. The amount of the gift to the non-charitable beneficiaries is the difference between the value of the property contributed to the trust and the value of the interest payable to the charities. These amounts are valued using actuarial tables published by the Internal Revenue Service. The trust can be structured so that the value of the gift can be zero for gift tax purposes. For income tax purposes, as described more fully below, the trust can allow the donor an immediate income tax deduction equal to the value of the charity’s income interest, or the trust can be structured in a manner that will permit no immediate income tax deduction at all for the donor but also will prevent any of the trust’s future income from being taxed to the donor.

A charitable lead trust may be designed to provide that the charitable term (known as the lead interest) will be based upon either a specific number of years or the life or lives of one or more individuals. A charitable lead trust that pays a fixed annuity is called a charitable lead annuity trust, or a “CLAT”. A charitable lead trust that pays a unitrust amount is called a charitable lead unitrust, or a “CLUT”. A CLAT can be structured to produce a gift valued at zero for gift tax purposes, but a CLUT cannot.

A CLT may be structured so that the trust is responsible for paying its own income tax. In such an arrangement, a CLT is required to report and pay income taxes on all of the trust’s income (including capital gain or loss). However, to offset the income reported by the CLT, the trust will receive a charitable deduction each year equal to the amount that the CLT distributed to charity. The donor does not receive an income tax deduction for establishing such a CLT, but also is not responsible for paying tax on the income generated by the CLT’s assets.

In the alternative, if the CLT is formed as a “grantor trust,” the donor will receive an income tax deduction in the year that the trust is formed. The amount of the income tax deduction is the value of the income interest passing to the charity. Thus, if the CLT is designed to result in a zero gift, the entire value of the assets contributed to the trust will be deductible as a charitable income tax deduction. Any charitable deductions that are not used in the current year may be carried forward for up to five years. Although a CLT that is a grantor trust will provide the donor with an immediate income tax deduction, the donor (and not the trust) is required to report all of the trust’s income, gain and loss on his or her personal income tax return each year. Because the donor of a grantor CLT receives a personal income tax deduction in the year that the trust is formed, no additional income tax charitable deductions are permitted in subsequent years.

Example of a Lifetime CLAT

Assumptions: Donor contributes assets to a CLAT valued at $1,000,000 during August 2010. Assume that the CLAT is going to pay to charity a fixed annuity of $81,370 per year for a period of 15 years and the CLAT is structured as a grantor trust. At the end of the CLAT term, the balance of the CLAT assets passes to the donor’s children.

Results: The donor is deemed to have made a gift to his children valued at $0. The donor is also deemed to have made a charitable gift that will be eligible for the charitable income tax deduction for the year 2010. The amount of the deduction is equal to $1,000,000, subject to any applicable percentage limitations for the year. If the trust investments return at least 8.137% each year, then the entire principal of the trust will pass to the donor’s children at the end of the 15 years.

2. Pros
An individual forming a CLT can provide benefits to both a charity and his or her family at the same time because any assets remaining in the CLT at the end of the lead interest will pass to the non-charitable remainder beneficiaries. For individuals seeking to transfer wealth to family members without paying a gift tax, or by paying a reduced amount, a CLT may be an appropriate strategy to consider. A CLT also can be created at death.

3. Cons
Establishing a CLT requires the creation of a trust, and that will generate some additional costs (as compared to making an outright gift of an asset).

Should the CLT’s investments fail to perform, it is possible that the CLT will be depleted before the end of the CLT. In that case, the CLT will terminate, the charitable beneficiaries will cease to receive any payments and no assets will pass to the non-charitable remainder beneficiaries.