Revocable Gift Options

 

Charitable Bequests

A charitable bequest describes anything an individual gives or leaves to charity from their estate through a will or a revocable inter vivos ("living") trust.

Details: There are different ways to leave a bequest

• A specific bequest: leaves either a specific dollar amount or specific asset; i.e.; 100 shares of Google stock, automobile, or any other asset specifically defined.

• Undivided percentage of an asset as a specific bequest: transfer of a fractional amount or percent of an asset; i.e., real estate, to charity

• Percentage of residue of estate: the residue of an estate includes all assets in the estate not otherwise previously bequeathed through specific bequests. Donors will leave a percentage of the residue when they do not have a particular asset to bequeath but, instead, have philosophically determined that a certain amount of all they own will be given to charity.

Need: Many people may desire to benefit charity but are unable to donate property while they are alive (i.e.: property needed during life to cover living expenses or rising health care costs.).

Solution: Donor can retain ownership and use property during life and still benefit charity by leaving it to charity at death.

Benefits: Charity receives cash or property. Amount given to charity is not subject to federal estate tax. Donor is able to use and control property while alive.

Gifts of IRA assets or other retirement assets

Distributions from certain kinds of retirement assets — such as individual retirement accounts (IRAs), tax-sheltered annuities, and 401(k) and 403(b) plans — are subject to income tax and may be subject to generation-skipping taxes and estate taxes. However, gifts of these assets to charity upon a donor’s death will not be taxed if they are paid directly to a charity as beneficiary.

This gift is accomplished through the designation of a charity as beneficiary on a beneficiary designation form provided by IRA or retirement plan administrator.

 

Gifts of Insurance

Gifts of insurance to charity can be accomplished by several means:

Donation of a cash value paid-up policy a donor no longer needs.

Tax benefit: the charitable deduction is the lesser of the fair market value of the policy or the cost basis (the total of a donor’s net premium payments.)

Transfer ownership of a cash value existing policy, not yet paid up.

Tax benefit: the charitable deduction is the lesser of the total premiums paid or the “interpolated terminal reserve,” an amount designated by the insurer to fulfill its obligations under the contract. However, the value can be no greater than the policy’s cost basis.

Donation of a term policy a donor no longer needs.

Tax benefit: the charitable deduction is the amount of future premiums that would be paid to maintain the policy.

Donor takes out a new policy on his life, naming charity as the owner and beneficiary.

Tax benefit: Donor makes deductible annual gifts to charity in the amount of the premium payments; charity pays the premiums to the insurer.

Designate charity as a revocable beneficiary of a percentage or all of a life insurance policy. The donor remains the owner of the contract and simply names the charity a partial, sole or contingent beneficiary.

Tax benefit: No lifetime charitable deductions, but removes the gifted asset from the estate at death.

 

Irrevocable Gift Options

Charitable Gift Annuities

A charitable gift annuity consists of two elements: 1) an outright charitable gift, and 2) the purchase of a fixed income annuity contract. Payments can begin immediately or can be deferred for a period determined by the donor and set forth in the annuity contract. The payment period can be measured by one annuitant's life (who in most cases is the donor) or by the lives of two joint and survivor annuitants (who are usually husband and wife).

Details: A charitable gift annuity, unlike qualifying charitable trusts, is considered a general obligation of the issuing charity. Gift annuities, therefore, take on much of same characteristics as commercial annuities with the issuing charity acting as the insurer. Many states require issuing organizations to be licensed and to maintain investment reserves, though this is not the case in Texas.

Duration: The charity makes fixed payments for the lifetime(s) of one or two individuals.

Payout Rate: The vast majority of charities use suggested rates set by the American Council of Gift Annuities (ACGA). Under the ACGA’s rates, the older the person receiving gift annuity payments, the higher the rate. Most organizations offer annuity rates as suggested by The American Council on Gift Annuities -- a qualified 501(c)(3) organization formed in 1927 as the Committee on Gift Annuities for the purpose of providing educational and other services to American charities regarding gift annuities and other forms of planned gifts.

The Council deals with all matters pertaining to charitable gift annuities and meets periodically to establish suggested annuity rates that will result in issuing charities realizing a 50% actuarial residuum from the annuity agreements they issue. The rates are based on current mortality studies, prevailing and projected investment returns on invested reserves, and projected administrative costs.

Taxation of Payments: A portion of each annuity payment is considered a nontaxable return of principal and is tax-free. If a donor funds a gift annuity with appreciated long-term securities, he avoids a significant amount of capital-gain taxation and any remaining capital gain can be spread over the expected term of the contract. The remaining amount of each payment is taxable at ordinary tax rates.

Timing: A gift annuity contract can begin making payments immediately (a current gift annuity) or defer payments for at least one year or longer (a deferred gift annuity or flexible deferred gift annuity).

Need: A donor wants to make a gift to charity but needs regular payments to supplement income.

Benefits: Fixed payments for life of one or two individuals, portion of each gift annuity payment is tax-free, annuity payouts are based on donor’s age and donor receives a current federal income tax deduction for the present value of the gift to charity.

Charitable Remainder Trusts

A charitable remainder trust (CRT) receives cash or property from a donor, makes payments for life (lifetimes or terms of years), and then distributes the remainder to charity.

Details: Donor transfers cash or appreciated property to the CRT. The CRT is a tax-exempt trust that can sell the appreciated property without paying capital gains tax.

Duration: CRT can last for the lifetime of one or more beneficiaries or for a specific term of years.

Annuity vs. Unitrust Payout: A charitable remainder annuity trust (CRAT) pays a fixed dollar amount each year. By contrast, a charitable remainder unitrust (CRUT) pays an amount equal to percentage of the trust value at the beginning of each year.

Taxation of Payouts: Most CRT payouts are taxed to the beneficiary as ordinary income and /or capital gain.

Payout Flexibility: A unitrust offers four flexible payout options. A standard CRUT pays a fixed percentage of the trust value. A net income trust (NICRUT) pays the lesser of the trust’s net income or the standard amount. A net income with makeup trust (NIMCRUT) is like a NICRUT but can make additional distributions to make up for income shortages in prior years. Finally, a FLIP trust pays like a NIMCRUT until a certain date or event and then “flips” to payout like a standard CRUT.

Need: A donor wants to turn appreciated property that produces little or no income into a productive asset without paying capital gains tax on the sale of the property.

Solution: Donor contributes the appreciated property to a charitable remainder trust that will sell the property tax-free and then make payments for life or a term of years.

Benefits: Bypass gain on sale of property, trust pays a percentage of its value to the trust beneficiary, and donor receives a current federal income tax deduction.

Charitable Lead Trusts

A charitable lead trust (CLT) receives cash or property from a donor, makes payments for life (lifetimes or terms of years) to charity, and then distributes the remainder to a specified beneficiary, usually family.

Details: Donor transfers cash or property to the CLT. Unlike a CRT, a CLT is a taxable trust. Each year the CLT will report its income and then take a deduction for the amount that it distributes to charity, any excess is subject to tax. (This handling depends on whether it is a grantor or non-grantor trust.)

Duration: CLT can last for the lifetime of one or more beneficiaries or for a specific term of years.

Annuity vs. Unitrust Payout: Each year, a CLT pays either a fixed annuity amount or available unitrust amount to charity.

Lead Trust Types: A non-grantor CLT receives property and usually distributes it to a family member at the end of the term. A gift tax deduction is available to a donor who creates a non-grantor CLT. However, if a gift deduction is taken, the annual payment to charity is non-deductible on the annual trust income tax return. A Grantor CLT receives property that ultimately returns to the donor. The donor gets an income tax deduction when the trust is created. The tax deduction is equivalent to the present value of the stream of gifts going to the charity. However, the donor has to report trust income on personal income tax return each year.

Need: Donor wants to give a gift to charity for a period and with a non-grantor CLT, pay as little gift or estate tax as possible.

Solution: Donor contributes property to a trust that will make distributions to charity for a specified term and ultimately distribute the property to the donor’s family (non-grantor trust) or be returned to the donor (grantor trust)

Benefits: Donor gives property to a lead trust and that property plus growth passes to family with no additional tax. Donor receives a current federal gift or estate tax deduction for the present value of the payments that goes to charity. (for non-grantor trust only)

Life Estate Reserved

Charity accepts a gift of property, either a personal residence or a farm, and the donor retains the right to use the property for life.

Benefits: Donor receives a current federal income tax deduction for the remainder value of the home or farm and preserves the lifetime use of the property.

Details: Donor executes a deed transferring a house or farm to charity. In the deed, donor retains a “life estate” that grants the donor the right to live on the property for life and continues all responsibilities of home ownership during lifetime; i.e., payment of ad valorem taxes, etc.

Duration: typically, life of the donor.

Deed Restrictions: Deed of the remainder interest to charity must not be restricted.

Mortgage: It is possible for a donor to make a gift of a remainder interest even though there is a mortgage on the residence, though many charities will not accept this gift arrangement if there is a mortgage not taken care of by the donor.

MIT Agreement: Donor agrees to be responsible for the maintenance, insurance and taxes on the property.

Need: a person may desire to leave a house or farm to charity at death, but wants to continue to live in her home till her death.

Solution: Donor can deed house or farm to charity but keep the right to use the house or farm for the remaining lifetime.

Benefits: Donor receives a current federal income tax deduction for the remainder value of the home or farm. Donor is able to use and control the home or farm while alive.

Pooled Income Funds

Charity accepts a gift of cash or stock, invests it with similar gifts from other donors and then distributes a proportionate share of earnings to the donor.

Details: Donor transfers cash or appreciated property to the pooled income fund (PIF) and receives an income tax deduction for the present value of the remainder interest at the donor’s death.

Tax-Free Sale: The PIF sells the appreciated property without having to pay capital gains tax.

Reimbursement: The cash or property sale proceeds are invested as part of the pooled fund.

Annual Income: Donor receives a percentage of the PIF earnings each year. These earnings are usually taxed to the donor as ordinary income.

Need: Person desires to leave property to charity at death but needs to Supplement income.

Solution: Donor gives cash or stock to the charity. Charity issues shares of its PIF to the donor. Donor receives earnings from the PIF for life with the remainder going to charity.

Benefits: Donor bypasses gain when appreciated property is sold by the PIF. Donor receives a current federal income tax deduction. Donor receives a percentage of the PIF earnings every year.

 

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