Gifting Options
Life Income Agreements
Gift annuities and charitable remainder trusts combine many advantages of a bequest with those of a gift, both for the charity and the donor. They can provide a donor, while he is alive, with the satisfaction of giving an irrevocable gift, with achieving public recognition, with securing a life income from the gift, and with saving a variety of taxes. The institution does not have to wait until the donor's death to benefit; it can plan, build, or borrow on the basis of a remainder interest that irrevocably will be transferred to it in the future.
Gift Annuity and Deferred Gift Annuity
The gift annuity provides a family member with a regular source of income while satisfying the donor's charitable intentions. Some organizations provide a fixed dollar income for life to a donor or beneficiaries under a gift annuity agreement. A donor may receive payments when the annuity is purchased or opt to defer receiving income payments until years after the purchase, often at retirement when he or she may be in the lower tax bracket. Both versions allow a charitable deduction at the time of purchase. The latter, termed a deferred gift annuity because it defers income payments, allows the rate of return to be higher because the original investment has grown over the early years when payments were deferred.
Since an annuity from a charity costs more than one from an insurance company, the difference between the costs of comparable annuities from the charity and a commercial source is the basis for the donor's immediate charitable deduction.
Comparison: An appropriate donor for a gift annuity must provide for his family or friends first but has no desire to retain the asset used to purchase the annuity after he and his beneficiary die. Vis-a-vis a charitable remainder trust (see below) of equivalent, cost, a charitable gift annuity provides a smaller income tax deduction. Offsetting this is the annuity's freedom from administrative fees and the fact that a portion of each payment (the return of capital) is not taxable.
Charitable Remainder Trusts
A charitable remainder trust is an income trust created by transferring property irrevocably to a trustee (often the charitable institution receiving the gift) under a trust agreement that provides the donor and/or designated beneficiary with income for life. After the income beneficiaries die, the institution may use the remaining trust principal for its charitable purposes. Two types of charitable remainder trusts are the annuity trust and the unitrust.
Charitable Annuity Trust
The charitable remainder annuity trust may be either an inter-vivos (while the donor is alive) or a testamentary annuity trust. In the former, the donor or his beneficiary receives a guaranteed annuity at a fixed percentage of the initial fair market value of the trust (not to be less than 5%) and an income tax deduction for the remainder (the sum the charity receives upon the donor's death). If during any year the trust earns less than it agreed to pay out, the shortfall will be made up by tapping the corpus (principal). A testamentary annuity trust, which is funded at the time of the donor's death, provides income for the donor's beneficiaries and an income tax deduction for the estate.
Comparison: An appropriate donor of an annuity trust has the primary need to provide continuing income for himself or his beneficiary through the trust but has no desire to retain the asset or pass it to a relative. He may have highly appreciated securities and other assets that are producing a low yield in income and anticipates a relatively stable economy when a predictable income would be desirable. He may wish to fund the trust with municipal bonds so that the income to the income beneficiary will be tax exempt. He has no intention of increasing the size of the trust by added contributions in later years.
Charitable Remainder Unitrust
The charitable remainder unitrust, like the annuity trust, may be intervivos or testamentary. It provides a donor or beneficiary with a flexible annual income rather than the annuity trust's fixed amount. The unitrust fixes a specific income percentage (at 5% or more) of the trust's fair market value. However, the unitrust's value is recomputed each year; the annuity trust's valuation remains the initial one. Therefore the income payments of a unitrust vary from year to year as the trust's value varies. When the unitrust's annual earnings drop below its promised payout, the corpus (principal) need not be invaded to bring up the payout. Instead the payments may equal the trust's earnings for that year and the shortfall can be made up during years when the yield is high.
Comparison: The donor who opts for a unitrust has a similar profile to that of an annuity trust donor but anticipates an inflationary economy, sets the trust's income above six percent, or expects to add to the trust. However, if the trust's assets are very difficult to value, the unitrust compounds the problem by having to be revalued every year, thus adding to the trust's administrative costs. In-addition, the unitrust is flexible and allows the donor to make added investment-donations to the trust if such a provision is specified at the time of the trust's creation; the annuity trust is a closed system.
Pooled Income Fund
The pooled income fund is a form of charitable remainder trust maintained by a charitable organization. Similar to a mutual fund, it is divided into units and a donor is assigned a number of them proportionate to the fair market value of the gift when it is irrevocably transferred. Fluctuations in the market value of a Fund's assets may be reflected in earnings and benefits. Gifts may be made in cash or readily marketable securities; tax-exempt bonds and restricted stock are unacceptable. Upon the death of the last beneficiary, the principal will be severed from the fund and transferred to the charitable institution in question.
Comparison: An appropriate donor to a pooled income fund has limited wealth or does not wish to commit at one time the large sums that unitrusts and annuity trusts require. He may also wish to add to the fund frequently, which he can do with ease (relative to other trusts). Although a pooled income fund cannot receive tax-exempt securities or pay tax-exempt dividends, it diversifies an investment portfolio and allows access to professional investment management. The donor can be assured that the charity will receive the remainder intact because there never is any invasion of the corpus to meet a shortfall in payments to the income beneficiaries. (This also means that the charity has greater protection than the income beneficiary, versus a gift annuity's guaranteed return.)
Charitable Lead Trust (Front-End or Charitable Income Trust)
The lead trust stands the remainder trust on its head. A charitable remainder trust, as we have seen, pays the donor or his designated beneficiary "interest" and gives "principal" (remainder interest) to a charity; the charitable lead trust pays income to the charity and returns the remainder, after a designated period, to the donor or his beneficiaries. The income generated for the charity must be annuity or unitrust interest and may be paid out during the lifetime of the donor or as a charitable bequest.
Comparison: Besides corporations, the appropriate donor for using a lead trust is a very wealthy individual whose relatives and intended beneficiaries are already financially secure. He or she is interested in seeing periodic contributions made to certain charities and can even use the lead trust to exceed normal limits on how much of an individual's income can be deducted for charitable contributions. The donor should have a very high income, be willing to speculate, and be in the highest tax bracket to profit from a large current tax deduction.
The charitable lead trust places the interests of the charity before those of the beneficiary and allows for the possibility that after the term of the trust is over, the remainder destined for the non-charitable beneficiaries may be seriously depleted. However, it does provide bequests or gifts to relatives or others with a minimum of gift or estate tax.
QTIPQualified Terminable Interest Property
If a donor wishes to make a charitable donation while bequeathing or giving to his or her spouse a very flexible source of income. Qualified Terminable Interest Property may be the answer. The beneficiary spouse can draw freely upon the trust's income and, if needed, even draw upon the principal. Another attraction is that the whole trust qualifies for the marital deduction.
Of all of the foregoing charitable trust instruments, the QTIP may be the most flexible and reliable source of income for a surviving spouse. However, it does have a prominent wart: it does not qualify for a charitable income tax deduction, although it does avoid transfer, estate, and gift taxes.
Partial Interests
Normally, income, gift, and estate tax deductions are not allowed for donations of partial interests. The exceptions are certain types of residences, an undivided portion of a donor's complete interest in a property (such as ten acres out of twenty owned by the donor or a half interest in a painting in which the institution retains the whole painting for half a year), gifts of land for conservation purposes, and copyrighted works of art.
For example, until recently, the rapid appreciation of permanent residences and summer homes has made partial interests especially attractive as philanthropy. A donor can donate a partial interest in his principal home, vacation home, or farm to a charitable institution, receive substantial income tax, estate tax, and gift tax deductions on it, and continue to live in the personal residence or run the farm for life. A yacht may also qualify if it is a residence. The institution will only take full possession of the property after the donor dies.
Life Insurance
Charitable gifts of new or existing insurance policies are often overlooked by donors as meaningful avenues of philanthropy. A new policy may be taken out naming an appropriate charitable institution as the owner and irrevocable beneficiary. The annual premium payments qualify as deductible contributions for income tax purposes.
An existing policy is an appropriate charitable gift if the original coverage is no longer needed. Policies covering businesses that no longer exist or mortgages that have been paid up should be considered along with policies covering individuals he replacement value of a paid-up policy transferred to an appropriate charitable organization is deductible for federal income tax purposes. If premium 'main to be paid on the donated policy, the approximate cash value is deductible ' the donor wishes to continue paying those premiums, they are also deductible as charitable contributions.
Changes in the laws pertaining to charitable giving and in the tax-deductible status of specific charities make the counsel of legal and financial advisers essential to a donor. In addition, consultation with a planned giving professional employed by a reputable charitable institution is without cost or obligation and may be indispensable to a donor and his adviser.