Charitable Giving and Endowments Flashcards
What is a public charity?
It uses publicly collected funds to directly support its initiatives
Common types include churches, educational organizations, hospitals, organizations that benefit public colleges and universities, governmental units, and more
What is a private foundation?
A charitable organization generally established by an individual donor or a family who wishes to control, as much as possible, the use of their charitable contributions
What are the rules for directing investment decisions of donor advised funds?
Can direct cash or other assets into the DAF
Can make grant requests to the donor’s chosen charities at any time once the assets are in the DAF
The donor, or any person designated by the donor have advisory privileges with respect to the distribution or investment of amounts held in the fund by reason of the donor’s status as a donor
What are the tax treatments for contributions to donor advised funds?
The donor will receive a current tax deduction for contributions in the DAF
If cash, 60% AGI
If other securities, up to 30% of AGI can be deducted
What are the rules for Charitable Lead Trusts?
The charity receives the payment stream and the grantor retains a reversionary interest in the assets
A grantor CLT has a reversionary interest in the income or the principal of the trust that is greater than 5% or is otherwise considered the owner of the income or principal under the grantor trust rules
A non-grantor CLT does not have a deduction at the time of funding
What are the tax treatments of Charitable Lead Trusts?
- Under a grantor CLT, the donor is taxed on the income the trust earns each year and it’s based on the present value of the charity’s future rights to annuity or unitrust payments
- Grantor CLT may receive an income tax deduction at the time the trust is created. The net income the trust produces each year is taxed to the grantor, which can be itemized and deducted for the PV of the charity’s income interest for that year
- The transfer to a CLT can be made at death where there is no income tax deduction, but there is a step-up in the income tax basis of the assets going into the trust
- A nongrantor trust does not receive any income tax deductions, but may save the individual on gift taxes in the future. The trust will be able to take charitable deductions for the trust term. The remainder interest is sheltered from estate and gift tax
What are the rules for Charitable Remainder Trusts?
It’s an irrevocable trust that provides payment to non-charitable beneficiaries annually or on a more frequent basis and a remainder interest in the trust property to be paid to a charity at a specific or future time
The annuity percentage must not be less than 5% nor more than 50% of the initial FMV of all the property transferred in the trust
The value of the remainder must equal at least 10% of the initial FMV of all the assets transferred to trust and the entire remainder must go to charity
What are the tax treatments of Charitable Remainder Trusts?
- The donor receives a current tax deduction and can contribute appreciated property to the trust without realizing a gain and can provide a stream of favorably taxed income to themselves or another person
- For a CRAT, the present value of the annuity stream is subtracted from the amount donated to the trust to find tax deduction. For a CRUT, the present value of the remainder interest in a CRUT is determined by finding the present-value factor that corresponds to the trust’s adjusted payout rate
- Income tax deduction in the year the trust is funded: the present value of the charity’s remainder interest
- Unless the trust has UBTI, the investment income is not subject to tax
- Four-tier approach for annuity recipients: ordinary income, capital gain, other income, return of capital
What are the tax rates for donations to private foundations?
Deduct cash FMV up to 30% AGI
Ordinary income property deduct up to 30% the lesser of basis or FMV
LT capital gain property deduct up to 20% FMV
Tangible personal property that the charity can use can deduct up to 20% of FMV
Tangible personal property that has unrelated use can deduct up to 30% the lesser of basis or FMV
What are the tax rates for donations to public charities?
Deduct FMV of cash up to 60% of AGI
Ordinary income property can deduct up to 60% the lesser of basis or FMV
LT capital gain property can deduct up to 30% of FMV
Tangible personal property that the charity can use can deduct up to 30% of FMV
Tangible personal property that has unrelated use can deduct up to 60% the lesser of basis or FMV
What is unrelated business taxable income (UBTI)?
When a tax-exempt organization generates revenue from a business activity that is not substantially related to its charitable purpose, that revenue is known as unrelated business taxable income
What are the deduction amounts applicable to various donatable assets based on the type of organization receiving the donation?
- Cash - deductible amount is the FMV up to 60% for public charities and up to 30% for private foundations
- Ordinary income property - Lesser of basis or FMV up to 60% or 30% depending on charity
- Long-term capital gain property - FMV up to 30% or 20% depending on charity
- Tangible personal property charity uses - FMV up to 30% or 20% depending on charity
- Tangible personal property put to unrelated use - Lesser of basis or FMV up to 60% or 30% depending on charity
Calculate the potential deduction for a donation to a private foundation or public charity based on the type of asset donated and the type of organization receiving the donation.
- First determine what type of charity the asset is being donated to
- Then, determine the type of property that is being donated to the charity
- Then, find the FMV of the property; also, determine the basis of the property (helpful to always know, but important for ordinary income property and personal property put to unrelated use)
- Determine individual’s AGI and calculate the upper limit that’s deductible (20%, 30%, or 60%)
- After determining the value of the property, deduct the amount up to the AGI limitation in the previous step. Any charitable contributions remaining that can’t be used for this year’s deduction can be carried forward for future years
Describe a NIMCRUT
- Net income makeup unitrust is where the payout is income only, but the trust provides that to the extent income was less than the fixed percentage, deficiencies in past years are made up to if trust income exceeds fixed percentage
- If net income produced by the trust in any given year is inadequate to meet the unitrust payment amount, the trust can have a “make-up” provision. A beneficiary can receive the lesser of a percentage of trust assets or the actual trust income each year, plus any excess income if there’s deficiencies in previous years
- Funded with assets that produce less income in early years when income is greater, then trustee should convert to higher income investments in retirement years when beneficiary is in a lower tax bracket
