Charitable Giving and Endowment (III.A) (8%,10 questions) Flashcards
2023 Percentage Deduction Limitation Rules
Picture
Donor Advised Fund
- Contributions are irrevocable, and donor receives immediate income tax deduction subject to AGI LImitation.
- Reduction in donor’s potential capital gains plus no capital gains tax paid on donated appreciated securities.
- Unlike private foundations, DAFs are not required to distribute at least 5% of their average net assets to acceptable charitable organizations yearly.
Charitable Lead Trust (CLT)
- Income to charity for life or a term of year and remainder to individual beneficiaries.
-More effective as interest rates decline. - Assets plus potential appreciation could pass to decesndants or bene’s at a fraction of their value for gift tax purposes.
Charitable Remainder Trust (CRT)
- Income to individual beneficiaries for life or a term of year and the remainder to charity.
Two Types of CLTs
- Grantor and non-grantor
-Grantor - May receive an income tax deduction for gift. Pays tax on income and pays cap gains when charity sells trust assets. - Non-Grantor (More common) - Grantor does not receive tax deduction for gift. Trust is taxed on income. Typically offers more benefits for gift and estate planning purposes.
CRAT & CRUT
- The annual pyaout must be minimum of 5%
- The annual payout may not exceed a max of 50%
- The duration of the non-charitable interest in the trust may not exceed either the life of the non-charitable beneficiary or 20 years.
- There must be a remainder interest in the trust for the benefit of charity equal to at least 10% of the initial trust value.
CRT
- Must be irrevocable
- The donor is entitled to a charitable deductions for income, gift and estate tax purposes for the present value of the remainder interest given to charity.
- No capital gain is realize by the trust on the sale of the contributed assets.
- There is one exception: a 100% excise tax is imposed if the CRT has UBTI.
CRT Term
May last for a term of years (not to exceed 20 years) or for the life of one or more bene’s who are alive at the creation of the trust.
CRT Tax Advantages
- An income tax charitable deduction is available in the year of the gift
- No capital gain is realized by the trust on the sale of the contributed assets
- Tax exempt, with the possible exception of the UBTI.
CRT - Income Bene’s and Taxation
- There is a four-tier system for determining the income tax character of the distributions made from a CRT, which is based on the following order:
- Ordinary income generated by the CRT in the current tax year, plus any ordinary income which was not ditributed in prior years.
- Capital gain income generated by the CRT in the current tax year, plus any cap gains income which was not distributed in prior years.
- Other income generated by the CRT in the current tax year or prior year.
- Distribution of principal (not income)
CRAT Requirements
- The annual pmt to the non-charity bene must be 5% and not more than 50% of the initial fair market value of the property transferred to the trust.
- The pmts must stay fixed from year to year.
- The pmts must be made for a term of year (not exceeding 20) or the life of the non-charity bene.
- Must be paid annually
- The remainder on termination must be paid to or for use of the charity.
CRUT Requirements
- The annual payments to the non-charitable bene must be at least 5% of the fair mrkt value of the assets in the trust
- Pays fixed percentage to at least one non-charity bene who must be living at the time trust is created of no less than 5% nor more than 50%.
-Pays a variable amount, depending on the annual value of the CRUT. - the % unitrust cannot be changed.
- Cannot pay any others outside of the non-charity bene and the charity.
Types of CRUT’s
- “standard” CRUT
* Provided the fied % annual payout of the unitrust amt. - Net Income Unitrust (NICRUT).
* The non-charity bene is paid the lesser of the trust’s net accounting income or a fixed % of the value of the trust without a make-up provision.
NIMCRUT
- Net Income with Make-up
-The trust provides that if there is a short-fall of annual income based on the fixed percentage expectation, that is acceptable, and the shortfall is to be made up in the future.
-Pays the lower fo the unitrust amt or the trust accounting income.
Flip Unitrust
- Begins as a NICRUT or NIMCRUT but converts to a standard CRUT upon a triggering event.
- Examples: Marriage, Divorce, Birth or Death.
Planning Opps with a CRT
- Best when a donor owns an appreciated asset they would like to sell, and also has a desire to benefit charity.
- Also makes sense for a donor who intends to leave a substantial asset to charity at death, and would like to generate income tax deduction during lifetime.
- When combined with a wealth replacement trust (holding life insurance), it may be possible for a donor to provide for charity while taking little or nothing away from the family.
The Charitable Toolbox
Direct gifts:
- Cash - Property of various classifications - Life Insurance - Real Estate:
Philanthropic Structures:
- DAF, Community foundation - supporting organizations
Split-interest Vehicles:
- CRT - CLT
Private Foundations:
- Private Family Foundation - Private Operating Foundations.
Key features of select Charitable Structures
Private Foundations
- Annual income distribution requirements
-Limits on holdings in private businesses
-Other taxes levied on net investment income.
UBTI
- Occurs when income is generated from an unrelated trade of business activity (example: gains from the use of leveraged investments)
- Associated with activites within retirement plans or charitable orgs or structures.
- It may result in double taxation.
Tax Ramifications of Gain, Loss & leveraged Prop Gifted to Charity
Gifted assets with unrealized gains:
- Gains are not taxed to donor if conditions are met.
Gifted assets with unrealized losses:
-If worth less than donors basis, the deductions is limited to fair mrkt value.
* It is usually more advantageous to sell property with unrealized losses before gifting.
Gifted assets that are leveraged:
- Donor deducts fair mrkt value of the appreciated asset at the date of gift minus debt.
