This information is intended as an educational tool. The information presented is to provide general information only and should not be construed as legal or accounting advice. Because tax and financial consequences involved with any gifting program depend on personal financial circumstances, individuals should consult with their own financial, legal and accounting advisors to review any charitable estate planning options.

The people described in the illustrations are fictitious. Any resemblance to any individual, living or dead, is completely unintentional. The examples are presented to demonstrate many types of gifts donors can make, depending on their financial circumstances and philanthropic intentions.

Index:

Charitable Remainder Trusts

How Do They Work?

Charitable remainder trusts allow you to benefit an organization and yourself at the same time. Charitable remainder trusts are irrevocable gifts through which you receive income benefits, obtain charitable income tax deductions, or realize other tax benefits as well as supporting the work of an organization you admire.

In addition to providing you with lifetime income, you can actually choose the type of income you prefer – fixed or variable. You accomplish this by creating either a charitable remainder unitrust for variable income, or a charitable remainder annuity trust for fixed income.

The Charitable Remainder Annuity Trust (CRAT)

The CRAT pays a fixed income for the rest of your life. With the CRAT, you select your desired payout rate – it must be at least five percent of the initial fair market value of the trust – at the time the trust is created. Your income payments are calculated as a percentage of the value of the gift at the time the trust is funded.

The Charitable Remainder Unitrust (CRUT)

This type of charitable remainder trust is more flexible and offers potentially higher income than a charitable remainder annuity trust. Unlike the fixed income payment from an annuity trust, the annual income from a CRUT remains at a fixed percentage of the fair market value of the trust’s assets as revalued each year.

You may create either type of trust to provide income for your lifetime, or the additional lifetime of someone such as a spouse or other individual. You may also choose a trust term that covers a period of years. In return for your gift, you may claim a charitable income tax deduction for a portion of your gift. In addition, you will have the assurance that “YOUR ORGANIZATION” will receive a charitable gift in the future.

Why Should You Consider A Charitable Remainder Trust?

A charitable remainder trust is an excellent method with which to a make tax-wise gift. With a charitable remainder trust, you can:

  • Receive fixed or variable income for you and your family.
  • Select the payout rate when you create the trust.
  • Receive income over a lifetime(s), period of years, or both.
  • Claim a charitable income tax deduction for a portion of your gift.
  • Reduce potential estate tax exposure.
  • Use long-term appreciated assets to fund the trust and avoid potential capital gains taxes.
  • Convert non-income producing or low-yielding assets into a potentially greater income stream.
  • Enhance prudent estate and financial planning strategies.
  • Create a lasting legacy for the values in which you believe.

An Illustration

The Charitable Remainder Unitrust
In evaluating their stock portfolio, Jay and Sally Lewis, ages 70 and 68, noticed the outstanding growth of a stock they purchased a few years ago. The investment was a success, appreciating from its original cost of $150,000 to a current market value of $245,000. The company that issued the stock, unfortunately, pays a disappointingly small dividend each quarter.

The Lewises, who spend a great deal of time with their grandchildren, want to encourage other people their age to volunteer in child care centers. They see an opportunity to join forces with “YOUR ORGANIZATION” and help themselves at the same time.

Jay and Sally decide to use their appreciated stock to produce a higher return. However, if they sell the stock, they will suffer capital gains tax on the $95,000 the stock appreciated, and this tax will reduce the net proceeds available for reinvestment to $226,000.

If they decide to fund a charitable remainder unitrust with the stock, they will bypass capital gains tax and save $19,000. They select the unitrust because they want the income payments to reflect the trust’s market performance, particularly to hedge against inflation.

When the unitrust is funded, they select a seven percent payout. This will provide an annual income for their first year of $17,150. Should the value of the trust increase the following year to $265,000, for example, their income will increase to $18,550. Of course, the trust’s value could go down, and in that case so would their income.

In addition to their income benefit, the couple can claim an attractive charitable income tax deduction of $71,812. At their income tax bracket of 36 percent, this saves them $25,852 in taxes, which they have the opportunity to reinvest.

In Brief

Charitable remainder trusts are gifts that provide income to the donor while ensuring future support for “YOUR ORGANIZATION”. They can:

  • Provide fixed or variable income for you and other people you designate.
  • Create a tax deduction.
  • Help to avoid estate taxes and capital gains taxes.

Charitable Gift Annuity

How Does It Work?

Charitable gift annuities offer you a simple way to support “YOUR ORGANIZATION” in the long run, while enjoying income and tax benefits for you and your family in the short run. These fixed-rate, fixed-income gift plans come in two options: the immediate payment gift annuity, which allows you to receive income payments without delay, and the deferred payment gift annuity, which allows you to delay receipt of income until a date in the future that you select.

The charitable gift annuity represents a legal contract under which “YOUR ORGANIZATION” agrees to pay a donor, usually an individual or married couple, lifetime income payments in return for an irrevocable gift of cash, property or securities. After the death of the last income beneficiary, the remainder of the original gift is transferred to “YOUR ORGANIZATION”, thereby expanding its pool of unrestricted funds.

Immediate Payment Gift Annuity

This gift annuity is a popular gift plan due to its ease and attractive rates of return, particularly for donors over age 65.

Gift annuities offer a rate of return which is determined by the age(s) and number of income beneficiary(ies) at the time of the gift. The rate of return and the amount of your gift determines the amount of your income payments. You may be the sole income recipient, you and your spouse may be income recipients or you may even fund a gift annuity to provide income to a favorite relative or friend. This choice, however, presents additional considerations.

An added benefit of the gift annuity income payment is that a portion is a tax-free return of principal, which reduces your taxable income.

Deferred Payment Gift Annuity

This type of gift annuity allows you to defer the income payment until a date in the future, which you select. The benefit of doing this is a higher rate of income when the payments begin. An attractive charitable income tax deduction is available to claim in the year you set up your gift annuity even though receipt of the actual income isn’t until some date in the future. The longer you defer receipt of your income payments, the larger the tax deduction you can claim.

The deferred gift annuity provides an excellent means to plan for family needs and circumstances. For example, a deferred gift annuity can provide retirement or supplemental retirement income, or perhaps provide for a child or grandchild’s education.

The full faith and credit of “YOUR ORGANIZATION” backs your gift annuity. Since charitable gift annuities do involve charity, they cannot be compared fairly with the benefits and rates of commercial annuities and other products. The key word in gift annuity is “gift.” Charitable gift annuities benefit “YOUR ORGANIZATION” and you.

Why Should You Consider A Charitable Gift Annuity?

Funding a gift annuity is smart philanthropy. With a gift annuity in place, you will:

  • Receive lifetime income payments at an attractive rate of return.
  • Receive, in most cases, tax-free income as a portion of your income payment.
  • Claim an immediate charitable income tax deduction and perhaps, with a deferred gift annuity, significantly offset the higher tax rates of your income-earning years.
  • Reduce other tax exposures such as estate and capital gains tax.
  • Increase the income from a low-performing investment, such as a certificate of deposit, and make a significant charitable contribution.
  • Plan for supplemental retirement income.
  • Defer income into later years when you expect your tax rate will be lower.
  • Ensure an important legacy for your family and “YOUR ORGANIZATION”.

Illustrations

Immediate Payment Gift Annuity
Carol Harris is 80 years old and very much values her independent life. She has kept substantial funds in certificates of deposit (CDs). Recently, however, she learned about charitable gift annuities and the extremely attractive rate of return available for someone of her age. With a $25,000 CD coming due next month, she decides to fund a gift annuity that will help AGENCY X support independent living programs for older adults.

At age 80, Carol’s 9.2 percent rate of return allows her $25,000 gift to generate lifetime income payments of $2,300 per year, far more than her CD ever could. Of that amount, a little more than half is tax-free return of principal. In addition, her gift produces a charitable income tax deduction of almost half the amount of her gift.

Deferred Payment Gift Annuity

George and Eileen Perry, both college administrators in their mid-50s, do not expect to retire for some years. They do, however, want to employ some of the long-term, appreciated stocks they hold today to provide extra income for their retirement years. They discovered that by establishing a deferred gift annuity they could accomplish their income goals. As former public school teachers, they want to help AGENCY X fund education programs.

They choose to fund a deferred gift annuity with $50,000 of their appreciated stock. By starting the payments in 10 years, when they reach their middle 60s, they gain an immediate tax deduction of almost half the amount of the gift. By using long-term appreciated stock, they also benefit from reduced capital gains tax exposure and gain extra tax savings. When George and Eileen reach their retirement years, the deferred gift annuity rate of 10.9 percent will provide over $5,000 in annual income for the rest of their lifetimes.

In Brief

A charitable gift annuity:

  • Pays you and perhaps another person income for the rest of your lives.
  • Reduces your taxable income.
  • Offers a potential tax deduction.
  • Can lower your estate and capital gains taxes.
  • Can convert a low-performing asset into a higher income stream.

Retained Life Estate

How Does It Work?

If you are a homeowner and want to make a substantial charitable gift, a retained life estate enables you and/or your spouse to take advantage of one of your larger assets: your dwelling. The property can be a principal residence, vacation home, condominium, cooperative or farm. With a retained life estate gift to “YOUR ORGANIZATION”, you and your spouse can live in your home for the rest of your lives. After that time, the property will belong to “YOUR ORGANIZATION”.

One of the advantages of a retained life estate is that you continue to use and enjoy your property as you choose. You maintain the real estate to keep it in good condition, keep appropriate insurance coverage, pay the required taxes, and come and go as you please. You also have options if you want to rent your home or move. In general, retained life estate gifts work best if you own your home and plan to remain there.

You can make a generous, irrevocable gift during your lifetime, and therefore you may claim a charitable income tax deduction based on your age, life expectancy and value of the property.

Why Should You Consider a Retained Life Estate Gift?

If a retained life estate gift is appropriate for you, you will be able to:

  • Make a significant gift without tapping your liquid assets.
  • Live in your home as you always have.
  • Claim an immediate charitable income tax deduction.
  • Remove the asset from your estate and eliminate estate taxes on the asset.
  • Avoid capital gains tax on the appreciation of a second home.
  • Perhaps make a bigger gift than you thought possible.

An Illustration

To provide a generous gift to “YOUR ORGANIZATION”, Rudy and Sarah Branch, ages 68 and 67, have decided to make a retained life estate gift of their second home in Vail. They admire the work done by “YOUR ORGANIZATION” in funding mental health programs and want to support those efforts.

The fair market value of the Vail home is approximately $500,000, a significant appreciation from its $100,000 purchase price many years ago. When the Branch’s gift is completed, their immediate charitable income tax deduction will equal $128,579.

Because they are giving a second home, the exclusion-of-gain rules on a principal residence do not come into play. Nevertheless, by making this retained life estate gift, they avoid capital gains tax on the $400,000 appreciation, thus providing them with $80,000 in tax savings. Additionally, the asset is removed from their estate, thereby reducing potential estate tax exposure.

The couple chose this option because they:

  • Can continue to use their home as they have always planned.
  • Created a gift using an illiquid asset while maintaining the liquidity of their cash and investment portfolios.
  • Incorporate income, capital gains and estate tax strategies in their giving.
  • Make a larger gift to “YOUR ORGANIZATION” than they might have otherwise.

In Brief

A retained life estate enables you to make a gift of your primary residence or vacation home while living in it or using it for the rest of your life. In addition, you can:

Make a generous gift to support the work of “YOUR ORGANIZATION”.
Avoid using liquid assets to make a philanthropic gift.
Claim a tax deduction.
Remove the property from your estate and thus avoid estate taxes.
Avoid capital gains taxes on a second home.

Life Insurance

How Does It Work?

A gift of a life insurance policy allows you to make a substantial gift with a relatively modest outlay of cash. There are various methods by which you can contribute a life insurance policy. You may:

  • Establish a new life insurance policy with “YOUR ORGANIZATION” as the applicant, owner and beneficiary.
  • Irrevocably assign ownership and beneficiary status of a paid-up policy to “YOUR ORGANIZATION”.
  • Irrevocably assign ownership and beneficiary status of a policy on which premiums remain to be paid.
  • Designate “YOUR ORGANIZATION” as a beneficiary of the proceeds.

Upon the death of the insured, “YOUR ORGANIZATION” will receive the policy value – the death benefit amount – in cash.

The benefits to the donor depend on whether the gift is revocable or irrevocable. If you clearly release control of the policy by naming “YOUR ORGANIZATION” owner and beneficiary, you become eligible right away for a charitable income tax deduction, the amount of which depends on whether the policy is fully or partially paid-up.

If you choose to name “YOUR ORGANIZATION” a beneficiary of a policy while retaining ownership of the policy, your gift is considered revocable. This means that you remain in control of the policy and can change the beneficiary at any time. However, if you retain control of the gift, you lose the potential for an immediate, charitable income tax deduction.

Why Should You Consider A Gift of Life Insurance?

Life insurance is a good way to make a large gift to “YOUR ORGANIZATION” with a minimum outlay of resources. Many families, when their children were young, took out life insurance policies to make sure that the family would be covered if something happened to one or both of the parents. When the children are grown and living on their own, the life insurance is no longer needed for its original purpose. By changing the beneficiary to “YOUR ORGANIZATION”, an individual or couple can make a sizeable gift – if the policy is paid up – at no cost to the donor.

If you give a fully paid-up policy and designate “YOUR ORGANIZATION” owner and beneficiary, your charitable income tax deduction will generally equal the policy’s replacement value.

Irrevocably giving a partially paid-up policy can provide you with a tax deduction based on a figure that reflects the current value of the policy at the time of the gift, generally its cash surrender value. If you continue making premium payments through annual contributions to “YOUR ORGANIZATION”, the amount of those gifts can be deductible as well.

An Illustration

Sandy Arnold, age 52, wants to contribute $100,000 to “YOUR ORGANIZATION” to support counseling services for low-income children. Unfortunately, she does not have the luxury of making an outright gift of that size in cash nor does she want to deplete her investment portfolio by that amount.

Sandy discovers she can make that gift by purchasing a life insurance policy with a death benefit of $100,000. The cost to her is only a fraction of that amount as a result of several factors. To begin with, her age – a youthful 52 – keeps the cost down. Second, Sandy can obtain the policy with a single premium payment of $18,000, which also lowers the cost. If she buys the policy with cash, she will receive a charitable income tax deduction of slightly less than $18,000 and a resultant tax savings, if she were in the 36 percent tax bracket, of $6,480.

The bottom line – Sandy can make a $100,000 gift for only a small fraction of this amount, enabling her to make a far larger gift than she might have thought possible. While her gift will not take effect until her death, she is secure in knowing that her charitable intentions will be carried out, and there will always be a need for the services she wishes to support.

In Brief

A gift of life insurance:

  • Allow you to make the maximum gift at the minimum cost.
  • Allows you to donate an asset that you may no longer need.

Charitable Lead Trusts

How Do They Work?

Charitable lead trusts are gifts that pay income to “YOUR ORGANIZATION” for a specified amount of time. At the end of the trust period, the income payments to “YOUR ORGANIZATION” stop and the trust principal is returned to the donor, or to designated individuals. The time period of the trust may be for a number of years or it may be for one or more lifetimes. The charitable lead trust presents an attractive way to return assets to your control in later years or pass assets to family members with minimal or no gift or estate tax consequences. It also offers attractive tax incentives.

Charitable lead trusts make it possible for donors to generously support the community with a portion of their assets without giving up ultimate control of them. Charitable lead trusts take two forms depending on your plans for the trust principal at the end of the time period. The first is a grantor lead trust, which returns the trust principal to you. The second is a non-grantor lead trust, which returns the trust principal to someone else.

Grantor Lead Trusts

With this trust, the principal comes back to you. It entitles you to claim an immediate charitable income tax deduction equal to the value of the future income payments to “YOUR ORGANIZATION”. However, grantor trusts also carry the possibility of annual income tax consequences.

Non-Grantor Lead Trusts

This trust returns the principal to your family members or friends. While this kind of trust does not generally provide you with an income tax deduction, it can minimize gift or estate tax repercussions by transferring assets out of your estate and conveying those assets to others at the end of the trust period.

Charitable lead trusts are usually sizable and complex gifts. We encourage you to talk with your qualified professional advisors to thoroughly examine and advise you on how a charitable lead trust can be included in your overall estate plan.

Why Should You Consider A Charitable Lead Trust?

Perhaps the biggest reason individuals set up charitable lead trusts is to reduce the amount of their taxable estate. These trusts enable donors to keep money in their family while benefiting a charity such as “YOUR ORGANIZATION”. Doing so will:

  • Help you take advantage of a prudent and generous method to transfer your assets back to you or to other generations with minimal or no gift or estate tax consequences.
  • Give you the satisfaction of making a multi-year gift to “YOUR ORGANIZATION”.

Illustrations

Grantor Trust
Mike Borenstein, age 59, is in the highest income tax bracket this year, and looks forward to retiring next year and enjoying a much lower tax bracket. Over the years, he has spent an increasing amount of his time in religious studies, and would like to join “YOUR ORGANIZATION” in funding efforts to promote similar study opportunities for young people.

To this end, he decides to make a gift to “YOUR ORGANIZATION” through a grantor annuity lead trust. He funds the trust with a property worth $100,000 with which he does not want to part. He arranges for a 10-year trust period that will pay “YOUR ORGANIZATION” $5,000 a year. At the end of the trust’s time period, the property reverts to Mike.

In setting up the trust, he can claim a charitable income tax deduction of $36,801 in the year of his gift. This will offset his high income tax bracket. It is important to note that the income from the trust will be taxable income to him. Since he will be retired, however, the income will be taxed at a relatively low rate.

Mike thus achieves his goal of making a gift to “YOUR ORGANIZATION”, holding on to a property he wants to retain, and obtaining a large income tax deduction in a year when he needed it.

Non-Grantor Trust
Gene and Ruth Roberts, ages 78 and 82, are evaluating plans they want to put in place as they review their family and philanthropic interests. Ruth, an ex-nurse, wants to help “YOUR ORGANIZATION” provide health education. Because they have income well beyond their own needs, they decide to fund a non-grantor charitable lead annuity trust with $1,000,000 of long-term appreciated stock, a payout rate of five percent and a trust period lasting the rest of their lives, with the income payment coming to “YOUR ORGANIZATION”. At the end of their lifetimes, the trust’s assets will go to their daughter. For as long as either Ruth or Gene lives, “YOUR ORGANIZATION” will receive $50,000 a year that will be dedicated to supporting health education programs.

Using the example above, should the couple elect to fund a non-grantor charitable lead unitrust, which pays a variable income, by applying the payout rate to an annual valuation of the trust assets, “YOUR ORGANIZATION” would receive $50,000 per year as long as the asset value of the trust remained at exactly $1,000,000. However, should the trust’s annual valuation increase to $1,500,000, AGENCY X’s annual income would increase to $75,000 (five percent of $1,500,000) that year as well.

In Brief

Charitable lead trusts are complex giving vehicles typically involving six- or seven-figure amounts of money. They allow donors to:

  • Pass assets to family members with minimal to no estate tax consequences.
  • Create a significant tax deduction, depending on the type of trust.

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