Charitable Transfers (Lesson 6) Flashcards
How does a Charitable Gift Annuity differ from a CRAT?
□ Property is transferred to the Charity, not to a Trust.
□ Charity gets the money now.
□ There’s no specified amount of income and therefore no 5% distribution rule.
□ The Donor does not need to establish a Trust.
□ The value of the property transferred to the charitable organization EXCEEDS the value of the annuity guaranteed by the charity. The Donor intends to make a charitable contribution in the amount of the EXCESS, and the amount so contributed is an allowable deduction. Thus, the transaction is BOTH an acquisition of an annuity AND a charitable contribution.
How does a Pooled Income Fund (PIF) work?
1) Does the Donor get Income from a PIF?
2) What deduction does the Donor get?
3) What marks the end of the income period?
A PIF is an arrangement in which the donor transfers property into a common trust fund operated by the charity. The property is commingled w/ the property of other donors. There is ONE common fund (no municipals). Charity controls/manages the assets. Afte i
1) Donor gets income for life.
2) An INCOME tax deduction for the PV of remainder interest, AND a GIFT tax deduction of PV of remainder interest going to the charity.
3) A term of years certain CANNOT be used (must be paid out over life expectancy).
After income stream terminates, charity receives remainder.
- Donor can’t change which charity gets the remainder.
- There is no specified amount of income and therefore no 5% rule.
- Advantage: donor does not need to establish a trust.
Wealth Replacement Trust
Is an ILIT. Think replaces wealth for family.
Private Foundation/Family Foundation
- Not held to the requirements that govern public charities.
- It’s a separate legal entity that holds and invests funds and distributes a minimum of 5% of its investment assets each year.
- Advantages: donor has complete control over amounts and recipients of annual gifts. CAN make a grant to an INDIVIDUAL. Only a Private Foundation may make a “charitable” distribution to a gifted individual.
- Disadvantages: exempt from regular federal income tax BUT they are subject to a number of excise taxes: 2% of net investment income. Lower annual charitable deduction percentage limitations apply for INCOME tax purposes.
Supporting Organizations
- Similar to a Private Foundation but generally created to benefit only 1 public charity.
- Advantages: no 2% excise tax like there is with a Private Foundation/
Donor Advised Funds, pg. 6-9
- A Donor Advised Fund (DAF) is a fund held by a community foundation or other public charity where Donor or a committee appointed by a Donor may RECOMMEND eligible charitable recipients for grants from the fund. Think of it as a “poor man’s Private Foundation.”
- The public charity sets up a sub-account or fund in the Donor’s name.
- A DAF does NOT provide an income stream to the Donor or other non-charitable beneficiaries at ANY time.
- The governing body MUST be FREE to accept/reject the recommendations.
- Can be opened with VERY LOW MINIMUM DEPOSITS.
Charitable stock bailout, pg. 6-9.
- Donor gifts stock to a charity.
- Saves income tax, “BAILS OUT” corporate earnings and profits without incurring dividend income, helps younger (family) shareholders concentrate their ownership, and enables charity to receive cash.
- To qualify for charitable contribution deduction, the stockholder and charity CANNOT agree to the time or certainty of the redemption.
- Need to gift the stock to the charity first and then have the charity redeem the stock back through the corporation. If corporation redeems stock directly to the stockholders, it would result in unwanted dividend treatment of the redeemed stock.
Charitable-Bargain Sales, pg. 6-10.
- Property is sold to charity for less than FMV. Sales must be allocated between portion “sold” and portion “gifted” based on FMV of each portion.
- So, have to reduce basis! Proportion of sale amount over total FMV times basis. Then use that to calculate the taxable gain. See pg. 6-10 Example #1, if need.
What is a CRAT?
Charitable Remainder Annuity Trust
- Enables the donor to provide a non-charitable beneficiary (either the donor, the donor’s spouse, or a 3rd party) with a stream of income to last for the life of the income recipient or for a term of up to 20-years.
- At the end of the period, the remainder interest passes to a qualified charity.
- Donor receives an INCOME tax deduction from the present value of the presumed remainder interest.
- Only one (initial) transfer of property to the trust; no additions or increases to the corpus in later years.
- Once trust established, corpus must pay out a specific amount of income ( a sum certain) each year (at least 5%). This remains fixed once the initial payments are calculated.
What is a CRUT?
Charitable Remainder Unitrust (CRUT)
-Similar to the CRAT (CRAT info copied below) with the following differences:
–Donor can make MULTIPLE transfers of property into the trust.
–Once the trust is established, the corpus must pay out a specified amount of income – a fixed percentage – each year (at least 5%) of the REAPPRAISED VALUE of the corpus.
CRAT info:
- Enables the donor to provide a non-charitable beneficiary (either the donor, the donor’s spouse, or a 3rd party) with a stream of income to last for the life of the income recipient or for a term of up to 20-years.
- At the end of the period, the remainder interest passes to a qualified charity.
What is a CLAT and CLUT?
Charitable Lead Annuity Trust (CLAT) and Charitable Lead UniTrust
- Provides income to the charity for a period of time with remaining assets eventually going to family members or other beneficiaries. Considered the reverse of a charitable remainder trust.
- Under current tax law, neither are effective WHILE LIVING. When established AT DEATH, they are effective: the estate can take the then-present value of the PAYMENT STREAM as an ESTATE tax deduction.
- Presumably, CLUT is just that charity receives a specified percentage of the trust assets each year, and the precise amount can vary (verified with Fidelitycharitable.org).
