Charitable Transfers Flashcards
Charitable transfers
(amount in () min amount corpus must pay each year)
Income to donor until donors death
- tax deduction based on PV of remainder
- no gift tax
- at death paid to charity
1. CRAT (5%)
- trust needed
- no additions
- payments fixed
- payable to any charities
- 10% ending value
2. CRUT (5%)
- additions allowed
- payments variable
- payable to any charities
- 10% ending value
3. Pooled income
- no trust needed
- additions allowed
- payments variable
- payable to specific charity
4. Charitable gift annuity
- no trust needed
- no additions
- fixed lifetime income
- payable to specific charity
- charitable deduction based on gift less annuity
Income to charity
1. CLAT/CLUT (0%)
- income or estate tax deduction
- after period paid to non-charitable beneficiary
2. Private foundation (5%)
- 30% income tax deduction
- payable to charity or private individual
- can continue for an indefinite time period
Charitable remainder annuity trust (CRAT)
- for when donor wants to provide a noncharitable beneficiary with stream of income usually for life or stated years (cannot exceed 20)
- donor gets income tax deduction for present value of the remainder interest
- at termination, remainder interest passes to one or more charities (or remain in trust for charity)
- remainder interest must be at least 10% of initial amount
- donor can transfer property only once (no additions)
- must pay out fixed amount of corpus income each year (at least 5%)
Charitable remainder unitrust (CRUT)
- similaries to CRAT
1. max 20 yr term life
2. 5% income rule - differences from CRAT
1. provides level of inflation protection
2. donor can make more than one transfer
3. corpus must pay fixed income each year of reappraised value, amount of income may vary
Net income with make up unitrust (NIMCRUT)
- alternative form of CRUT
- noncharitable beneficiary will receive lesser percentage of trusts value or net income earned by trust during that year
- if the amount is less than the stated percentage, any excess is forfeited
- account accrues in those years when the net income is less than the fixed percentage of the trusts value
Charitable lead trust
- income tax deduction for present value of the payment stream distributed to charities
- future income and gains will be taxable to grantor without deductions
- if trust is established at death, estate can take present value of payment stream as estate tax deduction
- income earned in excess of income payable goes to remaindermen
- remaindermen get any principal remaining
Charitable gift annuity
- donor transfers cash or property to a qualified charity in exchange for a commitment by organization to pay donor a specified amount each year during reminder of their life
- differences between charitable gift annuity and CRAT
1. property transferred to charity not to trust
2. charity receives money now
3. value of property transferred to the charity exceeds the value of the annuity guaranteed, excess is deduction
4. no 5% rule
Measuring the charitable deduction
- amount required to acquire annuity from charity is greater than amount required to purchase comparable annuity
- its the excess cost that creates charitable deduction
Pooled income fund (PIF)
- donor transfers property into a common trust fund
- donors property is comingled with the property of others
- one common fund all deposits placed
- once placed in trust, single public charity controls and manages trust assets
- when income distributions terminate (donor death) the public charity receives remainder interest (donor cannot change who gets remainder)
- difference between pooled fund and CRUT
1. property is commingled and managed by charity
2. cannot be invested in tax exempt securities
3. each beneficiary receives prorated share of income (distributed annually)
4. at death of donor remainder stays with charity
5. income tax deduction for present value of remainder interest, gift tax deduction of present value of remainder interest going to charity
6. donor cannot be trustee of funds
7. no term of years used, paid out over life
8. no trust, no 5% rule
Wealth replacement trust
- alleviate concerns regarding leaving a lot to CRT
- ILIT
- face amount of policy can be less than or equal to the value of the property that is transferred to the charity
Private foundation/ family foundation
- nonprofit organization created and controlled by wealthy individual for family charitable purposes
- separate legal entity that holds and invests and distributes minimum of 5% each year to charity
- follow state and federal laws
Advantages of private foundations
- donor controls amount and recipients of annual gifts
- only requirement is 5%
- control can remain for generations
- can distribute tax deductible gifts to noncharitable beneficiaries for following
1. made for study, travel
2. scholarship, fellowship, prize, award
3. intended to improve or enhance literacy, art, music, teaching, science, etc
Disadvantages of private foundations
- subject to number of excise tax (exempt federal)
- pay excise tax equal to 2% of net investment income
- 15% penalty if not distributing annually (5%)
Supporting organizations
- created to benefit one public charity
- good if you know which charity you want to support and want to do it over time
- or program through a few charities
- not controlled by donor, controlled by charity
- complex rules, establish BOD with charity holding 50% more holding power
- family can serve on board but cant have veto power
Advantages of supporting organizations
- larger amounts will be available to fund grants because no 2% excise tax is imposed nor any minimum distribution requirements
Disadvantages of supporting organizations
- donor nor family can control the foundation
