August 2016 – The Heart of a Philanthropist

We often hear the above statement from a generous donor who has just made a significant gift that will make it possible for us to continue our outreach to those we serve. “I wish could do more!

But they can’t – and perhaps they shouldn’t. Even the most generous donors have limited resources and other obligations. What we need is to find a better way – perhaps a magic wand? – of doing the same thing, only better.

Charitable Solutions
How often do we read or hear about an individual leaving a sizable six or seven figure gift to his/her favorite charity as a distribution through their estate, usually their Will?  We rejoice at their thoughtfulness and concern for others. We marvel at all that will be accomplished through this gift.

But we are often left to wonder how much more could have been given and how many more lives could have been touched if that person has consulted with a qualified gift counselor and followed that advice. Savvy donors utilize current U.S. tax laws to increase the impact of their charitable giving.
There is no other country on earth that is as generous in the charitable deductions it allows its citizens as the United States.

While it is no magic wand, the charitable deduction on the tax payer’s annual returns (state and federal) is an immediate benefit to the donor. If the gift is funded with long-term capital gains property, the avoidance of that tax is another bonus. If the donor’s overall estate is such that it would be subject to taxation, that’s another tax avoidance that can be considered as lowering the overall cost of the gift. Money not paid to the taxman is money left to the donor’s discretion. The donor can then afford to increase his/her gift, give to more charities or leave more to family members.

Charitable Trusts
Essentially, there are three types of charitable trusts, each with their own characteristics, that are available for American taxpayers/donors. What they have in common is that they are irrevocable, i.e. once they are created, there is no turning back or changing your mind about making a gift.

The Charitable Remainder Annuity Trust (CRAT): As the name implies, there is a remainder interest which passes to the named charities and an annuity, (a fixed amount) paid to the named income beneficiary(ies). The annual income must be at least 5% of the principal funding the trust and cannot be increased by adding to the initial funding amount.

The trust ends when the last of the income beneficiaries die or the term of years for which the trust was created ends. The amount remaining in the trust is then distributed to the named charity(ies). The law requires that at least 10% of the initial fair market value of the trust assets be paid to the named charitable remainderman.

There are significant benefits.  1) The annuity remains the same each year, even if the trustee must invade the principle funding the trust.  2) The same assets contributed to a CRAT have a higher value for income tax purposes than if contributed to a Charitable Remainder Unitrust.  3) The value of the remaining assets, calculated according to IRS rules, can be taken as an income tax deduction in the year the gift is made and, if necessary, for the next five years until the deduction is used up.  4) The initial value of the funding assets is not subject to federal estate tax.  5) The trust can be funded with appreciated assets. Because the trust is acting on behalf of a charity, it pays no long-term capital gains tax on the sale of the assets.

Charitable Remainder Unitrust(CRUT): This popular split-interest trust is a favorite among knowledgeable donors. The benefits three, four and five of the CRAT are also applicable for the CRUT. What’s different and certainly favorable for the donor is the allowance to add more assets to the trust without having to create a new trust. This means more income for the retirement years plus more income tax deductions, more avoidance of long-term capital gains tax if funded with appreciated securities, and more estate tax savings.

The secret ingredient that makes this trust a five-star performer among sophisticated donors is the provision inserted in the original drafting of the Unitrust that turns this trust into a NIMCRUT. This means that the trustee can invest in low-to-no income producing assets until the donor/beneficiary wants and needs the income for retirement. Then all that income which was not paid to the beneficiary is made up – Net Income Make-up CRUT.

This double bonus provision means the donor receives the higher income when he/she wants and needs it, and the named charities receive a larger gift than they would have without that provision. Plus that donor, if healthy, could have used the tax savings generated by the gift to buy life insurance, which is not subject to estate tax, to replace the value of the donated assets in his/her estate.

The Charitable Lead Trust (CLT):  This trust can be described as the mirror image of either the CRAT or the CRUT. The trustee receives a particular asset – he may decide to sell it for an income producing asset – and pays the charity a set amount or variable annuity for a set number of years. If the earnings do not equal the agreed upon amount, the trustee can invade the principal to pay the amount. At the end of the stated period, the trust assets are returned to the named remaindermen, usually the donor’s spouse or the children.

The CLT does not have all the tax benefits of the CRAT and the CRUT , but they do offer some. For example, if the trustee must sell the assets initially funding the trust to pay the charity what it is due, there are no long-term capital gains tax paid out of the proceeds. Also, the donor receives an immediate charitable tax deduction based upon the value of the payments that will be given to the charity as computed by IRS tables that consider his/her life expectancy and interest rate.

What many consider a serious shortfall to the CLT is that all the income paid to the charity is taxed to the donor if the donor is still alive. This tax liability must be weighed against the remainder interest of the trust that will be passed to his/her heirs at a reduced value for estate tax purposes. If the trust only becomes operational upon the donor’s death – thus avoiding the problem of being taxed to the donor as income – this shortfall is avoided. At any rate, the donor does achieve lifetime goals: support of his/her favorite charity beyond his/her lifetime and passing a significant inheritance to his/her loved ones.

Conclusion
So, considering all of the above, do you think that there is a charitable trust in your future? Did any of the above benefits of estate planning that includes charitable gift planning strike a responsive chord? Have you ever really sat down with a professional planner and discussed the many options you have and the benefits/advantages of each?  Have you really decided upon what are your life and estate objectives?
Life planning and estate planning were never meant to be easy. Doing nothing is the easy route to take – but in the end proves to be the most expensive and costly.

“To those who have been given much,
                                        much will be expected.”