Ch 8 - Sophisticated Methods Of Charitable Giving Flashcards
- undivided portion of a donor’s entire interest
- remainder interest in personal residence or farm
- charitable remainder trust
- pooled-income fund
- charitable lead trust
- qualified conservation easement
What are the special categories for Donating Less Than Entire Interest?
•No charitable deductions are allowed unless the transaction falls into one of the following special categories:
- •undivided portion of a donor’s entire interest
- •remainder interest in personal residence or farm
- •charitable remainder trust
- •pooled-income fund
- •charitable lead trust
- •qualified conservation easement
What is the impact of Donating Less Than Entire Interest?
- if the transfer consists of anything less than this “undivided portion of the donor’s entire interest” there will be no deduction allowed
- includes undivided interest as joint tenants
What is the Undivided Portion of Entire Interest
- includes primary and secondary homes
- deductible portion does not include tangible personal property
- works well if donor will not need property after retained interest expires
- valuation is determined under Section 7520, except that charitable remainder is required by IRS to be reduced by depreciation factor
- Retained life estate is in Donor’s gross estate, but the estate gets the estate tax charitable deduction
What is the Remainder Interest in Personal Residence/Farm
•gifts of a remainder interest in trust are deductible only if the trust is a
- •Charitable Remainder Annuity Trust (CRAT)
- •Charitable Remainder Unitrust (CRUT)
- •Pooled Income Fund (PIF)
•Valuation rules are mandated by Secs. 664 and 7520
What are Split Interest Charitable Arrangements
- Annuity or unitrust interest for life or lifetimes of the individual beneficiaries
- Annuity or unitrust interest for individual beneficiaries for a period not to exceed 20 years
What is the Duration of CRTs
- CRTs must make annual distributions to one or more individual beneficiaries
- CRATs distribute a fixed amount, not less than 5% and not more than 50% of the initial trust principal
- CRUTs distribute a fixed percentage of the assets of the trust, valued annually
What are the CRT rules regarding Individual Interests Are Not Deductible
Look up
Charitable Remainder Annuity Trust (CRAT)
- Fixed annuity or percentage (at least 5%, but not more than 50%) of the initial amount of donated principal
- Term (not to exceed 20 years) or measuring lives
- No additional contributions
- Inflexible, but advantageous if interest rates are high
- Deduction will be denied if charitable remainder less than 10%
What are the characteristics of a Charitable Remainder Annuity Trusts (CRATs)
Look up
Charitable Remainder Unitrust (CRUT)
- Stated percentage (at least 5%, but not more than 50%) of annual value of principal
- Term (not to exceed 20 years) or measuring lives
- Additional contributions are permitted
- Flexible, but difficulty with hard-to-value assets
- Tax deduction will be denied if charitable remainder is less than 10%
What are the characteristics of a Charitable Remainder Unitrusts (CRUTs)
- if there are multiple beneficiaries, CRT can provide for noncharitable benefits to be reduced if one of those beneficiaries dies
- a proportionate amount of the principal must be accelerated to the charitable remainder beneficiary
- the reduction must be pro rata with respect to the remaining noncharitable beneficiaries
- the trust must continue to meet the 10% test
What are the benefits of Payout Flexibility in a CRT?
- a CRUT with a net income makeup provision
- payout limited to the lesser of stated unitrust payout percentage or net income earned by the trust
- protects the remainder beneficiary against invasion of principal
- noncharitable beneficiaries have less valuable interest
What is a NIMCRUTs
- CRT is tax exempt entity
- distributions to beneficiaries reflect the tax character of the CRT’s investments, using the tier system of Sec. 664(d)
- ordinary income
- capital gains
- amounts excluded from gross income
- principal
How are Annuity & Unitrust Payments taxed?
•Tax Exempt Investments
- •limits taxable income distributed to beneficiaries
- Deferred Annuities
- Closely Held Stock
- Life Insurance
- •provides significant leverage for the charity
How is the Principal of a CRT Invested?
- CRTs and Wealth Replacement Trusts
- CRTs as supplement to a Retirement Plan
- Transferring a Closely Held Corporation through a CRT
How are CRTs used in Estate Planning Applications?
- usually structured as an ILIT
- replaces the trust principal ultimately distributed to charity
- funding comes from the tax benefits provided by charitable deductions, and the increase income the donor receives from the CRT
What is a Wealth Replacement Trusts (WRTs)
- donor retains benefit from CRT for life
- donor receives estate, gift and income tax deductions
- charity gets substantial contribution
- donor and heirs do not forgo value of the donation
- donor avoids capital gains tax on contribution of appreciated property to the CRT
What are the Benefits of Using CRTs with WRTs
- operated or controlled by a charitable organization
- composed of assets of many donors commingled to form one investment pool
- payments to income beneficiary are based on units of participation
- PIFs are prohibited from investing in tax-exempts
What is a Pooled Income Fund
- Irrevocable trust is funded
- Annuity or unitrust (of any size) is provided to charitable organization(s) for any term of years or measuring lifetime of immediate family member
- Trust terminates and property passes to remainder beneficiaries (probably family of the donor)
What is a Charitable Lead Trust
- current income tax deduction is available
- must be designed as grantor trust
- all income is taxed to grantor after creation of trust
- if property reverts to donor, no estate tax benefit results
- remainder interest passing to noncharitable beneficiary is a taxable gift
What is a Inter Vivos Charitable Lead Trusts
- used to reduce estate tax burden
- Jacquelyn Kennedy Onassis
- estate tax charitable deduction totaled 96.8% of the residuary estate
What is a Testamentary Charitable Lead Trust
- donor obtains significant conservation objective
- donor retains important property right
- donor receives a deduction
What are Qualified Conservation Donations
- entire interest in property except for retained mineral rights
- gift of remainder interest in real estate
- agree to perpetually restrict use of property for conservation purposes
What are the Types of Conservation Donations
- must be made to an eligible charitable organization
- governmental units
- publicly funded charities
- subtraction method of valuation is generally used (i.e., the donation deduction is equal to the FMV less the value of the property as restricted)
- IRS will not give advance ruling on value and it may be very difficult to value in any given fact pattern
What are the Tax Deduction Requirements
