The Bailey Law Firm - Practice Areas

Estate Planning: Charitable Giving

The Bailey Law Firm provides guidance in the area of charitable giving to individual donors, charitable organizations, and professional advisors.

What is a Charitable Remainder Trust?

A charitable remainder trust is established when a donor creates an irrevocable trust and transfers property to the irrevocable trust. The terms of the trust provide for the payment of an income stream to the donor or to other non-charitable beneficiaries for life or for a term of years, and for the payment of the remainder interest to one or more qualified charitable organizations upon the death of the donor or upon the expiration of the term of years.

Annuity vs Unitrust. A charitable remainder trust may be either an annuity trust or a unitrust. The charitable remainder annuity trust (CRAT) pays to the non-charitable beneficiary a fixed dollar amount, based on a fixed percentage of the initial value of the trust property. A charitable remainder unitrust (CRUT) pays to the non-charitable beneficiary a fixed percentage of the value of the trust property as revalued each year.

The CRAT has one basic form - the fixed percentage. The CRUT has four configurations: (i) standard fixed percentage; (ii) net income (without make-up); (iii) net income with makeup (NIMCRUT); and (iv) "flip" CRUT.

The standard fixed percentage CRUT pays a fixed percentage of the value of the trust assets, revalued annually.

The net income or income only CRUT pays the fixed percentage, or all of the income earned, whichever is less.

The NIMCRUT pays the fixed percentage, or all of the income earned, whichever is less, with a make-up provision if the trust earns more than the fixed percentage in future years.

The flip CRUT first pays the fixed percentage, or all of the income earned, whichever is less, and then upon the occurrence of a specified event, flips or changes to a standard fixed percentage CRUT.

Income Tax Deduction. The donor receives a charitable income tax deduction in an amount equal to the remainder interest.

Capital Gain. A charitable remainder trust is exempt from federal and state income taxes. Therefore, a donor can transfer highly appreciated property with a low capital gains tax basis to the charitable remainder trust, the charitable remainder trust can then sell the property with no realization of any capital gains, and the charitable remainder trust can invest the entire proceeds of the sale for the benefit of the donor income beneficiary and the charitable remainderman.

What is a Charitable Lead Trust?

A charitable lead trust is established when a donor creates an irrevocable trust and transfers property to the irrevocable trust. The terms of the trust provide for the payment of an income stream to one or more qualified charitable organizations for the life of the donor or for a term of years, and for the payment of the remainder interest to the donor or other non-charitable beneficiaries upon the death of the donor or upon the expiration of the term of years.

Grantor Lead vs Non-Grantor Lead. In a grantor charitable lead trust, the remainder is distributed back to the grantor (or the grantor's spouse) at the end of the term. In a non-grantor charitable lead trust, the remainder is distributed to a person other than the donor, usually the children or grandchildren of the donor.

Annuity vs Unitrust. A charitable lead trust may be either an annuity trust or a unitrust. The charitable lead annuity trust (CLAT) pays to the charity a fixed dollar amount, based on a fixed percentage of the initial value of the trust property. A charitable lead unitrust (CLUT) pays to the charity a fixed percentage of the value of the trust property as revalued each year. The donor may make additional contributions to a CLUT, but cannot make additional contributions to a CLAT.

What is a Charitable Gift Annuity?

Definition. The donor transfers cash or securities to a qualified charity. In exchange for the transfer, the charity promises to pay the donor a fixed, guaranteed payment for life on a monthly or quarterly basis.

Payout Rate. The charity establishes the payout rate. The American Council on Gift Annuities recommends payout rates that range from 5.7% (age 20 and under) to 12% (age 90 and over).

IRS Interest Rates or Section 7520 Rates. IRS interest rates determine the amount of the charitable deduction and the amount of the tax free payout. The higher the interest rate, the larger the deduction and the smaller the tax-free payout. The lower the interest rate, the smaller the deduction and the larger the tax-free payout.

Immediate vs Deferred. A gift annuity can be immediate or deferred. The payout rate for a deferred gift annuity will be higher than an immediate gift annuity due to the deferral period. A deferred gift annuity is an excellent addition to any retirement plan. The donor receives an immediate income tax deduction, plus no taxable income until the payout commences, plus no income tax on the "growth" during the deferral period, plus an income stream at retirement age.

Income Tax Deduction. The donor receives a charitable income tax deduction in an amount equal to the difference between the fair market value of the asset transferred and the actuarial value of the annuity or the "investment in the contract." The actuarial value is calculated based on the Treasury Tables in IRS Publication 1457 or Section 7520 rates. The tables are pegged to a floating interest rate that changes every month. Each month the Treasury Department announces an Applicable Federal Rate (AFR). The interest rate for computing charitable gifts - the Charitable Midterm Federal Rate (CMFR) - is 120% of the AFR. This rate has ranged from a high of 11.6% in 1989 to a low of 6.0% in 1993.

How can Life Insurance be used to make a Charitable Gift?

A donor may make a charitable gift of life insurance by one of three methods: (a) The donor may give an existing policy to a charitable organization, by assigning or transferring ownership of the policy to the charity and by designating the charity as the beneficiary of the policy; (b) The donor may apply for and purchase a new policy with the donor as insured and with the charity as owner and beneficiary, and then either the charity can pay the premiums on the policy or the donor can make annual gifts to the charity for the purpose of the charity paying the premiums; or (c) The donor may retain ownership of the policy and designate a charitable organization as the beneficiary of the policy.