Charitable Giving and Endowments Flashcards
Donor Advised Fund
- Donors gift assets to Fund; take charitable deduction for value of gift
- Donors “suggest” how assets will be invested
- Donors “recommend” amount and timing of grants to non-profit; beneficiaries can be named to assume advisory role after donor’s death
- Contributions are irrevocable and donor receives immediate income tax deduction subject to AGI limitation
- Reduction in donor’s potential capital gains liability 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 – although most DAF’s employ some minimum distribution rule themselves
Charitable Lead Trusts
TWO TYPES:
- If a grantor CLT, the donor:
- - may receive an income tax deduction for gift
- - pays tax on income generated in the trust
- - pays capital gain tax when charity sells trust assets - Generally, the CLT is non-grantor trust:
- - grantor does not receive tax deduction for gift
- - trust is taxed on income
- - typically offers more benefits for gift and estate planning purposes
- From a tax perspective, CLTs become more effective as interest rates decline.
- Assets plus potential appreciation could pass to descendants or beneficiaries at a fraction of their value for gift tax purposes.
Charitable Remainder Trusts
Generally:
- Deny charitable deductions for gifts to remainder interests in split interest trusts unless the gift of the remainder interest was made through a trust which qualified under §664
- A CRT is an IRREVOCABLE trust that pays a fixed dollar amount or percentage of its initial value — a charitable remainder annuity trust (CRAT) or a uni-trust percentage of its annually determined value a charitable remainder uni-trust (CRUT) to a non-charitable beneficiary for life or for a term of up to 20
years
- The donor is entitled to a charitable deduction for income, gift and estate tax purposes for the present value of the remainder interest given to charity
- An entity exempt from federal income taxes - an exception: a 100% excise tax is imposed if the CRT has (UBTI)
- 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
- Transfer to a CRT qualifies for the unlimited gift tax charitable deduction to the extent of the present value of the remainder interest
- No gift tax consequence if the donor or the donor’s U.S. citizen spouse are the only non-charitable beneficiaries of the trust
- There may be a taxable gift consequence if there is a non-spouse beneficiary
CRT Estate Tax Consequences
▪ The decedent’s estate receives an estate tax charitable deduction for the present value of remainder interest
▪ If an interest in the trust is given to a spouse, the marital deduction applies
▪ The CRT is not permitted to be responsible for any share of the federal estate tax
CRT - Income Beneficiaries 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 of treatment
– Ordinary income generated by the CRT in the current tax year, plus any ordinary income which was not distributed in prior years
– Capital gain income generated by the CRT in the current tax year, plus any capital gain income which was not distributed in prior years
– Other income (including tax-exempt income) generated by the CRT in the current tax year or a prior year
– Distribution of principal (not income)
CRAT
- Once funded, additional contributions to a CRAT are not allowed
- Fixed Dollar (not less that 5% or more than 50%)
CRUT
- Fixed percentage (not less that 5% or more than 50%)
- Intended to provide a hedge against inflation
- If additional contributions are made (the CRUT can accept additional contributions), the 10% rule applies as of the date of the additional contribution
Common Elements of a CRAT and CRUT
▪ The annual payout must be a minimum of 5%
▪ Annual payout may not exceed a maximum 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
Net Income Uni-trust
NICRUT the non-charitable beneficiary is paid the LESSER of the trust’s net accounting income or a fixed percentage of the value of the trust without a make-up provision
Net Income with Make-Up
NIMCRUT 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 of the uni-trust amount or the trust accounting income
- When the trust accounting income exceeds the uni-trust amount, the deficiency is made up
- Used to defer income into future years
- Trustee controls the trust accounting income by the selection of investments
“Flip Uni-trust”
- Begins as a NICRUT or a NIMCRUT but converts to a standard CRUT upon a triggering event
- Uni-trust % is the same before and after the flip
- Triggering event is a “specific date or single event whose occurrence is not discretionary with, or within the control of, the trustees or any other person” (ie marriage, divorce, birth or death)
- Commonly used when a trust has unmarketable assets that produce little or no income
Planning Opportunities with a CRT
- 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
- With the proper precautions, it is also possible to use a CRT as an effective means of transferring ownership in a business from one generation to next
- Grantor can retain the right to change the charitable beneficiary of a CRT, and this change can be made at any time prior to the Grantor’s death
- NIMCRUT can sometimes be used as a replacement for a retirement plan, without all the normal limitations and restrictions associated with a typical qualified retirement plan
- Gift to a CRT of a remainder interest in a residence is tax advantageous in the present low interest rate environment
Private Foundations
- All tax-exempt organizations under 501(c)(3) are considered “private foundations” unless they are specifically excluded
- Restrictions on “self-dealings”
- Annual income distribution requirements
- Limits on holdings in private businesses
- Other restrictions and limitations regarding income and expenses
- Excise taxes levied on net investment income
- Under certain circumstances, the donor may retain control over assets that he contributed
Unrelated Business Taxable Income (UBTI) Basics
- Occurs when income is generated from an unrelated trade or business activity (e.g., gains from the use of leveraged investments)
- Most commonly associated with activities within retirement funds/plans or charitable organizations or structures
- UBTI may result in double taxation (i.e., UBTI may be taxed to the plan or charitable organization and also to the plan participants or beneficiaries)
- UBTI could be subject to both state and federal taxation
Tax Ramifications of Gain, Loss & Leveraged Property Gifted to Charity
- Gifted assets with unrealized gains: Gains are not taxed to donor if conditions are met
- Gifted assets with unrealized losses: For gift property (assets) worth less than the donor’s basis, the deduction is limited to fair market value
- Gifted assets that are leveraged: Gain scenario: donor deducts fair market value of the appreciated asset at the date of gift minus debt (transferred to/assumed by the donee)
