14 Charitable Transfers

Question 1

Charitable Transfers - Direct Outright Gifts

Answer 1

1. Income tax deduction is permitted
2. Amount eligible for income tax deduction = FMV
3. Unlimited charitable deduction allowed for transfer tax purposes.

Question 2

Charitable Gift Annuity

Answer 2

A donor makes an irrevocable transfer of assets to a charity, and receives an annuity from the charity in return.

Donor is eligible for an income tax charitable deduction based on the difference between the value of the donated property and the present value of the annuity payments that will be received

Question 3

Pooled Income Fund (PIF)

Answer 3

• Irrevocable transfer of assets to a charity for an income stream from the charity’s commingled asset management.
• Charitable deduction available

Question 4

PIF mechanics

Answer 4

1. Created and maintained by the charity
2. Donated property commingled with property of other donors
3. Grantor retains income interest for one or more beneficiaries for life (no term trusts)
4. Payment to donor is determined by earnings of trust annually
5. Investments cannot include tax-free municipal bonds

Question 5

Charitable Remainder Trusts

Answer 5

Irrevocable trust in which the remainder beneficiary is a qualified charity

Question 6

CRT Term

Answer 6

Trust can last for

• life of grantor, or
• up to 20 years

Question 7

CRT: Does charity have to know?

Answer 7

No!

Question 8

CRT Remainder interest requirement

Answer 8

PV(remainder interest at inception) >= 10% FMV

Question 9

CRTs Payout Rate

Answer 9

>= 5%, <= 50%

Question 10

Unique Features of a CRAT

Answer 10

1. Very inflexible!
2. No additional contributions permitted after inception
3. Grantor receives either a fixed dollar amount or fixed percentage of the initial FMV
4. Annuity must be paid regardless of necessity to invade principal

Question 11

Unique Features of a CRUT

Answer 11

1. Very flexible
2. Additional contributions after inception permitted
3. Grantor receives fixed percentage, assets valued annually
4. Unitrust amount may be limited to income earned
5. Trust may provide for catch-up provisions when income does not meet the percentage requirement and then later exceeds the current percentage payout
6. Annual valuation may be expensive if property in trust is not easily valued (e.g., closely held businesses, real estate)

Question 12

Charitable Lead Trusts (CLTs)

Answer 12

• Income from property transferred to a trust is distributed to charity
• Remainder reverts to the noncharitable beneficiary (often a family member).
• Set up by wealthy with no need for current income

Question 13

CLT Grantor Trust

Answer 13

• charitable income tax deduction for PV(income interest) available at the inception
• Annual trust income is taxable to the grantor

Question 14

CLT Nongrantor Trust

Answer 14

• No charitable income tax deduction is available
• Gift is valued at FMV less the PV(charitable income interest)
• Trust receives an unlimited annual charitable deduction for the gift made to the recipient charity each year

Question 15

Private Foundations

Answer 15

• Tax exempt charitable entities created to direct contibutions effectively
• Created by person, family, or corporation
• Do not receive contributions from a wide range of supporters
• Can be operating (do stuff) or nonoperating (donate elsewhere)
• Net investment income of the private foundation is subject to special income tax

Question 16

Private Foundations: Tax Ramifications of Cash contribution

Answer 16

min(30% of donor’s AGI)

Question 17

Private Foundations: Tax Deduction for LTCG Property Contribution

Answer 17

For contribution to private nonoperating foundations: min(basis, 20% taxpayer’s AGI)

Question 18

Advantages of Private Foundations

Answer 18

1. Donor is eligible for a charitable deduction in the year the contribution is made, subject to the income tax rules for charitable donations
2. Donor can control the investment and distribution of assets
3. Allows the donor to address specific charitable objectives that may not be addressed by other organizations
4. Provides ability to train heirs to manage wealth
5. Accumulation of assets allows for larger charitable gifts

Question 19

Disadvantages of Private Foundations

Answer 19

1. Subject to strict reporting requirements
2. Can be administratively expensive
3. Donations to private foundations are subject to deductibility limitations
4. Foundation must generally distribute at least 5% of its net investment assets each yea

Question 20

Donor Advised Funds

Answer 20

1. The charity establishes a fund in the donor’s name.
2. The donor or its representative makes future recommendations of grants to charitable beneficiaries.
3. It is usually established by a public charity or community foundation

Question 21

Tax Ramifications of Donor Advised Funds

Answer 21

1. Donor is eligible for an immediate income tax deduction when initial donation is made, subject to income tax rules for charitable donations
2. Income tax deduction for contributions of cash is limited to 60% of donor’s AGI for the tax year
3. Income tax deduction for contributions of appreciated property is limited to 30% of donor’s AGI for the tax year
4. Donor-advised funds fall under the tax-exempt classification of the charity offering the fund

Question 22

Advantages of Donor Advised Funds

Answer 22

1. Donor is eligible for immediate income tax deduction, even though grants to charities may be spread over several years
2. Costs to establish the fund are low
3. Donor has ability to name several charitable recipients
4. Fund is generally very simple to understand and use
5. Minimum required contribution is usually relatively low
6. Can be established relatively quickly
7. Charity performs any necessary annual filings

Question 23

Disadvantages of Donor-Advised Funds

Answer 23

1. Once donor makes a donation to the fund, it is irrevocable
2. Charity may place restrictions on the grant
3. Occasionally, annual fees charged by the fund are substantial
4. Donor only has a limited right to control management of fund assets