106-7 Charitable Deduction Planning Flashcards
Split interest gifting
Involves the separation of property into an income portion and a corpus or principal portion
Gifts of a remainder interest in trust to charity generally are deductible only if the non-charitable beneficiary receives an income interest in 1 of 3 ways:
- A fixed annuity trust
- A unitrust
- a pooled income fund
2 types of private charitable remainder trusts (CRTs)
- Charitable remainder annuity trusts (CRATs)
- Charitable remainder unitrusts (CRUTs)
- both are irrevocable trusts
Pooled Income Fund
3rd type of charitable remainder gift that does not involve a privately drafted trust
Is established primarily by educational institutions and hospitals
Charitable Remainder Annuity Trust (CRAT)
In this type of trust, the grantor-donor transfers property to an irrevocable trust
During the term of the trust, 1 or more noncharitable beneficiaries (often the grantor or his family members) receive either a fixed % of the initial FMV of the property transferred to the trust or a fixed dollar amount annually
At the end of the trust term, the assets remaining in the trust pass to 1 or more qualified charities
The annuity payout rate must be at least 5% annually for the grantor’s lifetime or for a term of up to 20 years
In a CRAT, the present value of the charitable remainder interest at the trust’s inception must equal at least 10% of the initial fair market value of the trust property.
Charitable Remainder Unitrust (CRUT)
Similar to a charitable remainder annuity trust (CRAT) in that it permits payment of a periodic sum to 1 or more noncharitable beneficiaries w/ the remainder passing to charity
In a CRUT, the noncharitable beneficiaries receive a fixed % of the trust assets, as revalued annually, thus providing for a possible inflation hedge if the trust assets appreciate in value
Unlike the CRAT, additional contributions of property are permitted once a CRUT is established
Pooled Income Fund
Generally created and maintained by a public charity, such as a private or public educational institution or a not-for-profit hospital
As long as certain basic provisions are met by the institution establishing the fund, a charitable income and estate tax deduction is accorded the donor
Charitable Lead Trust
The reverse of the charitable remainder trust (CRT) because it provides for an annuity or unitrust payment to a charity during the term of the trust, w/ the remainder passing to 1 or more noncharitable beneficiaries, such as the donor or the donor’s family, at the end of the trust term
Charitable Gift Annuity (CGA)
A contract between a donor and qualified charity in which the donor transfers cash or appreciated property to the charity in return for the charity’s unsecured promise to pay an annuity to the donor or other designated annuitant
CGAs are unsecured contracts and the donor assumes default risk
The donor is eligible for an income tax deduction equal to the difference between the FMV of the donated property and the present value of the annuity
Private Foundation
A tax-exempt charitable organization usually created by an individual or family to effectively direct charitable contributions for a specific purpose
Such a foundation can make gifts to noncharitable beneficiaries as long as this gift is intended to enhance a literary, artistic, or scientific skill of the beneficiary
One advantage of establishing a private foundation is the donor’s ability to control the investment and distribution of any contributed money
The only restriction on this control is that at least 5% of the foundation’s assets must be distributed annually for charitable purposes
Supporting Organization
Usually formed to support the activities of another qualified public charity
Major disadvantage of establishing a supporting organization is that its activities must be controlled by the selected public charity and cannot be controlled by the donor or the donor’s family
Donor-advised fund
An arrangement in which a donor makes a gift to charity and then makes future recommendations regarding who should receive grants (or future monies) from the charity
The major advantage to the donor is the ability to name several charitable recipients
In addition, the donor is eligible for an immediate income tax deduction when the initial donation is made, although the grants to beneficiary charities may be spread out over several years
Major disadvantage is that the donor usually only has a limited right to control the management of the plan assets, and the donee charity may place restrictions on future grants
