Charitable Giving

• CASH OR SECURITIES Cash gifts are fully deductible up to 50% of the donor's adjusted gross income in any one year. Appreciated securities which are donated yield a savings of capital gains taxation on their appreciated value and an income tax deduction of up to 30% of the donor's adjusted gross income. Any unused portion of the income tax deduction may be carried over for up to five consecutive years.
• PERSONAL PROPERTY Such gifts might be jewelry, antiques, artwork, or other tangible personal property.
• REAL ESTATE It is possible to donate your primary residence, vacation home, or other real estate to Anti-Defamation League (“ADL”) while still maintaining residency on the property during your lifetime.

A Planned Contribution could be:

• WILL OR CODICIL BEQUEST A bequest in your will can be used to leave any of the above outright gifts to the ADL or to establish a planned contribution.
• CHARITABLE GIFT ANNUITY It is possible to make a donation of cash or securites to establish a Charitable Gift Annuity to provide you or another individual with guaranteed, partially tax-free income for life.
• CHARITABLE REMAINDER TRUST A Charitable Remainder Trust provides an individual with income for either life or a term up to 20 years from the date the gift is made. When the trust terminates, the ADL receives the trust's principal.
• CHARITABLE LEAD TRUST A Charitable Lead Trust provides the ADL with a steady income for a term of years or the life of an individual. When the trust terminates, the donor's designated heirs will receive the trust's appreciated principal.
• LIFE INSURANCE There are several ways to use life insurance to make a donation to the ADL. The ADL can be named as owner and beneficiary to an existing policy or a new policy can be established.
• RETIREMENT ASSETS The combination of federal income, estate and excise taxes can seriously erode the value of retirement savings. Naming the ADL as a beneficiary of these assets can save your estate and heirs both income tax and federal estate taxes.

WILL OR CODICIL BEQUEST

The simple, revocable bequest provides vital future funding for ADL programs and services.

The bequests are appealing for the following reasons:

• It is revocable, allowing the donor flexibility for future changes.
• The future nature of the bequest means the current lifestyle of the donor is not affected.
• Donors can provide for both individual heirs and favorite charities.
• Estate taxes are avoided when assets are passed to charities.
• Bequests provide donors the opportunity to make larger gifts than otherwise thought possible.

The Charitable Gift Annuity is an estate planning vehicle that has been used by charitably minded people for more than a century to support favored nonprofit institutions without sacrificing current income. The charitable gift annuity with the ADL is a contractual arrangement governed by the laws of the State of California whereby you make an irrevocable charitable contribution of cash or marketable securities to the ADL in exchange for a promise that you (and one successor beneficiary if you wish) will receive a specific amount of partially tax-free income each year for life. The contributor may enjoy federal and state tax benefits. At the completion of the terms of the Charitable Gift Annuity agreement, the remainder of the original principal of your contribution will benefit the ADL’s endowment.

How a Charitable Gift Annuity works:

• It may be set up for one or two lives.
• It may be funded with appreciated property or cash.
• The fixed annuity amount a donor may receive is determined taking into account the annuitants age at the time the annuity is established as well as the Internal Revenue Service discount rate. The ADL follows guidelines set by the American Committee on Gift Annuities, a voluntary association of charities. Generally, the older the annuitant, the higher the annuity rate paid. Depending on prevailing market conditions and terms of the annuity, rates may be as high as 12% per year.
• Since the annuitant receives back some of the original principal as income, part of the income is tax-free. To many, the tax-free income is one of the most appealing features of the charitable gift annuity

Individuals who wish to support the future of the ADL and its programs may wish to consider establishing a Charitable Remainder Trust.

How a Charitable Remainder Trust Works:

• You create a charitable remainder trust and transfer assets to it.
• The trustee invests the assets in order to pay the benificiary an annual income. The income may continue for one or more lifetimes, or for a term of 20 or fewer years.
• When the trust term ends, whatever remains in the CRT passes to one or more qualified nonprofit organizations.

Benefits Charitable Remainder Trusts provide include:

• Lifetime or period of years income for the beneficiary
• Income to a parent, child, or some person other than the donor without transferring a large sum of money at one time
• A possible way of supplementing retirement income
• Immediate income tax charitable deductions for the donor
• A way of avoiding capital gains taxes on appreciated property
• Removing assets from the donor's taxable estate
• A way of converting non-income producing assets, such as non dividend stock, to a stream of income with favorable tax consequences
• The personal satisfaction of making a major gift during lifetime, that otherwise might have to be made via one's will.

Assets That Can be Used To Fund A Charitable Remainder Trusts:

The Charitable Remainder Trust can be very accommodating as regards the type of asset you might use to make the gift. You could consider funding a CRT with:

• Cash
• Appreciated securities sold on a major stock exchange
• Real Estate (as long as it isn't mortgaged)
• A residence
• Commercial real estate
• Undeveloped land
• Stock in a closely held corporation
• Tangible personal property:
• Works of art
• Musical instruments
• Antiques
• Valuable collections

Types of Charitable Remainder Trust:

There are two types of charitable remainder trusts, the Unitrust and the Annuity Trust.

Charitable Remainder Unitrust

This version of the CRT pays the income beneficiaries income equal to a percentage of the value of the assets in the trust. When the donor establishes the Unitrust he/she decides what that percentage will be. The rate must be at least 5%.

Each year the trustee values the assets in the Unitrust to determine how much will be paid out in the coming year. For example; an individual might fund a Unitrust with $100,000 and decide that it is to pay a parent 5% per year for life. In year #1, the parent would receive $5,000 from the Unitrust. At the beginning of year #2 the assets in the trust are valued at $103,000. The income in year #2 would be 5% of $103,000, or $5,150.00.

A gift to the parent of $42,000 is reported to the Internal Revenue Service in the calendar year the trust is funded. The donor may take a tax deduction of $58,000 in the calendar year the trust is funded.

This version of the CRT pays out a fixed dollar amount each year which will not vary. The donor selects a percentage for the payout when the Annuity Trust is created. When the assets are put into the trust and valued the dollar amount of the payout is determined and will remain the same for the life of the Annuity Trust. For example; a donor creates a 6% Annuity Trust (it, too, must be at least 5%) and funds it with $100,000 cash. The payout will be $6,000 per year regardless of the value of the assets in the Annuity Trust from this point on.

$50,000 is reported to the Internal Revenue Service as an allowable deduction in the calendar year the trust is funded.

CRAT or CRUT?
Selecting the Right Trust for Your Needs

One would think a simple “either – or” decision would be the easiest to make, but as it turns out it is not always so straightforward. Take the choice of charitable remainder trust. Which works better for the client – the annuity or one of the unitrust variations? Well, many prospective trust makers throw the choice back to their advisors, assuming that because there is a legal, financial planning, or accounting professional designation or degree that their advisors know what is best. As it turns out, that’s not necessarily so since so many professionals now specialize and can’t be expected to know all the problems associated with every tax planning situation, and few know anything about §664 split interest trusts. It is not reasonable to expect litigators and general practitioners to know about obscure tax rules any more than a psychiatrist would be competent to perform a kidney transplant. The possession of an MD, CFP, CPA, or JD designation only provides a framework for future knowledge and experience. What is most important is the practical application of that knowledge, and with charitable remainder trusts, there are precious few professionals who have ever seen one, much less understand them. As an example of the compartmentalization found among professionals, examine the planning that went into former President and Mrs. Clinton’s 1997 tax returns. Arguably, while the Clintons have access to lots of qualified counsel and even possess law degrees themselves, they still made serious blunders in their charitable and estate planning. If the first family cannot get it right, it should come as no shock that the majority of clients will not get it right either.

The Clintons paid $291,755 in federal income taxes over the two years. But they could have paid $167,532 less by having royalties from “It Takes a Village,” Mrs. Clinton's book about child rearing, sent directly from the publisher to a charitable fund instead of taking the money as income, paying taxes and giving away the difference. The charities would have come out ahead, too, collecting 22 percent more than the $840,000 they received.
“It Takes a President to Overpay the IRS”, New York Times, April 19, 1998 .

For most planners who don’t specialize in charitable planning, their assumption that a CRAT is best for old folks and a CRUT is best for younger donors isn’t necessarily the best way to make a decision about a trust that’s irrevocable. This is especially true when the timeline of the CRT, something with which a donor must deal for years, is considered. Disagreements among advisors often pop up over investments inside a CRT since few financial advisors really understand the fiduciary accounting peculiarities of investing for a tax-exempt CRT. Because a charitable trust invests over a long time horizon, and the trust does not usually pay income tax on its growth or income, chasing returns and reacting day to day is not the style of investing that works best for the CRT. Add to the long term view the very real concern about avoiding unrelated business income that may be unintentionally created when a broker uses a margin account, acquires partnerships or other working interests that expose the trust to “toxic income” that loses the CRT its tax-exempt status.

A well drafted CRUT allows, even encourages, additional contributions; however, it is not an option in the annuity trust. Trustees need to properly fund the CRAT and be extra cautious to ensure that it is just one straightforward transaction and not in bits and pieces over a period of days. With a charitable remainder annuity trust (CRAT), the payout is irrevocably set in a fixed dollar amount at the inception of the trust, and this rigidity creates several potential problems for trustees managing the trust and its investments.

Which trusts work best? Sometimes knowing which trust will not work is a good place to start. For example, if a donor contributes cash or publicly traded stock, that is a workable solution, but if undeveloped land goes into to a CRAT, the downside risks are numerous.

1. Will the asset produce enough income to meet the required income distributions? A CRAT may not defer required distributions and being illiquid is not an excuse.
2. If the asset is not an income-producing asset, is it readily marketable to make the required distributions?
3. If the CRAT does not have enough liquidity to meet the obligations of the trust, is the asset easily partitioned in order that the income beneficiary can receive an in-kind distribution? As an added insult, those in-kind distributions typically trigger capital gains tax liabilities, so the beneficiary receives his or her land back and has a tax bill to boot. That is a recipe for an unhappy client – advisor relationship.
4. Was the contribution of the asset matched with enough additional cash to pay insurance, property taxes, maintenance, marketing, and operating expenses? Remember, there can only be one contribution in a CRAT, so any cash transfer has to occur simultaneously with the transfer of the real estate deed.
5. Generally speaking, a CRAT is a better tool for a donor unconcerned with eroding purchasing power, and it is typically used for clients with little tolerance for volatility and short term needs, i.e., less than ten years, otherwise inflationary pressures diminish the value of the income distributions.
6. The minimum annuity paid at least annually must be at 5%, but cannot exceed 50% of the initial fair market value of the assets contributed to the trust. In most cases to prevent trust exhaustion, a CRAT paying out more than 6.5% is a concern.
7. After the Taxpayer Relief Act of 1997 passed, the charity's calculated remainder interest must be worth at least 10% of the value initially transferred to the trust. This severely restricts young individuals from having a life income interest in any CRT, and restricts payouts to lower levels for many trusts, especially if there are more than two income beneficiaries.
8. Because there is a very real possibility of a CRAT collapse in a poor investment environment, these trusts must also meet a 5% probability test [Rev Rul 77-374]. If the trust fund has a greater than 5% chance that it will exhaust before the trust terminates and passes to the charity, then the trust will not produce an income tax deduction or qualify as a CRT.

CHARITABLE LEAD TRUST

Individuals who wish to make substantial current contributions to support the ALD while controlling the eventual distribution of their assets will want to consider the Charitable Lead Trust.

The Charitable Lead Trust comes in two versions, Unitrust and Annuity Trust, and has been used by philanthropists for years as a way of passing along large portions of their estates to heirs without significant erosion of assets due to gift and estate taxes.

How a Charitable Lead Trust Works:

• You create a charitable lead unitrust or annuity trust and transfer assets to it.
• The trustee invests the assets to provide a payout to the ADL for a period of years. You decide how large the payout will be and for how long when you create the trust.
• When the trust term ends, whatever remains in the lead trust passes to your heirs or, in rare cases, back to you.

Benefits Charitable Lead Trusts provide include:

• A large gift/estate tax deduction for you, which may enable you to pass along far more to your heirs than would otherwise be possible.
• Income taxes saved because the income diverted to ADL is removed from your taxable income.
• If you are having the trust assets come back to you when the trust ends, you are entitled to an income tax charitable deduction when the trust is established. However, you also have to report any taxable income the trust earns during the term of the trust, even the amount which goes to the ADL. Most people have the future distribution go to heirs rather than back to themselves.
• The trustee is responsible for the management of the assets used to fund the trust. If you like managing investments yourself, you may wish to be the trustee of the charitable lead trust.
• A possible solution to the problem of passing a family business, or an income producing building, along to the next generation.

Charitable Lead Trusts can be established during one's lifetime, or can take effect at one's death as part of the testamentary estate plan.

Asset Protection and Multi-Generational Estate Planning Tools

Allen (72) and Elizabeth (64) Becker have a successful chain of franchise food restaurants. Starting with just one restaurant 40 years ago, they both worked the grill and cash register, even mopping floors at night to save payroll expenses to get their fledging business off the ground. Now, after years of hard work, the businesses are valued at $6.25 million and Allen is reluctantly selling the stock in his corporation after experiencing some health problems. With no chance to continue operating the business, there was only a choice between selling the stock and paying the capital gains tax, or using a §664 Charitable Remainder Trust to control 100% of the principal. After Allen's accountant attended a seminar on using a CRT to more efficiently sell closely-held businesses, he met with the Becker family and suggested bypassing the capital gains tax "hit". However, Allen was initially unwilling to give up all the stock and principal to charity, so a strategy was developed to only transfer 80% of his company stock to the charitable remainder unitrust, and sell the remaining 20% in a routine taxable sale. The new buyer acquired 100% of the stock from two separate sellers (i.e., The Becker CRT and Allen Becker individually). This technique allowed Allen and Elizabeth to use the tax deduction of $1,583,350 created by the transfer of $5 million in corporate stock to their CRT and offset most of the tax liability on the $1.25 million taxable sale. The Beckers then took $1.2 million from the taxable sale proceeds and created an Irrevocable Life Insurance Trust (ILIT) to hold a survivor life insurance policy funded with one payment.

To further protect family assets from the heirs' mismanagement, their attorney drafted the ILIT to make use of the Becker's Unified Credit and Generation Skipping Tax Exemptions. This protects all of the proceeds from estate taxes for the duration of the trust, probably 100+ years or so. The advantage of designing this "dynasty trust" is that it controls and protects family assets from taxation, litigation, divorce and spendthrifts while still providing the heirs with an opportunity to distribute and spend family wealth. By using the ILIT to purchase an insurance asset, this special trust now holds capital that creates no current income tax liabilities. At the surviving spouse's death, the family trust will receive $5 million in insurance proceeds, free of both income and estate taxation. With no other assets in the Becker's ownership, the family escapes all estate taxation and has $5 million in personal financial capital to use inside the family trust. Besides this tax leveraged asset, there will be an additional $8.8 million in social capital inside their charitable trust. This illustration compared the two options of (a) selling stock and paying the income tax, reinvesting the balance at 9% or (b) gifting the stock to an IRC §664 Trust and reinvesting all of the sale proceeds in a similar 9% balanced portfolio. At the termination of the CRT, when the surviving spouse (most likely Elizabeth) passes away, the capital inside the trust will pass to a community foundation with Becker heirs sitting on an advisory board to make recommendations about funding charitable programs of interest to their family. Since diabetes and cancer have affected the Becker family over the years, much of the annual support of about $500,000/year, will be used to fund research and education on these two diseases. This family has regained control of their social capital and now has an effective asset protection strategy that will serve the Becker family for many years.

NIMCRUT

For those considering an IRC § 664 - Charitable Remainder Trust as an estate or retirement planning tool, take a look at the Net Income with Make-up provisions of a CRT (NIMCRUT). While the standard Charitable Remainder Uni-Trust (CRUT) requires 5% as a minimum annual distribution, based on annually revalued assets, it is rigid in its distribution rules. Add a net income feature and you receive the lesser of all the trust income or the original pay-out percentage, whichever is less. If you make income, you have to take it, with no ability to defer it until later. However, if the trust makes no income, the beneficiary receives nothing. Thus, income potential is forever lost in poor performing years. The problem with trusts that may effectively last for several lifetimes is that IRS prototype (pre-approved and standardized) trust documents do not allow for much flexibility in managing complicated distributions. Instead, use a customized NIMCRUT, and it becomes a "spigot trust". Called spigot, like a water valve, the special trustee directs the trust administrator to turn the income streams on and off as needed by the beneficiary.

The traditional NIMCRUT funding approach uses growth mutual funds to prevent unwanted income from spilling out of the trust. When income is needed, the assets inside the trust are generally repositioned into income funds capable of generating the required pay-out. Unfortunately, this does not effectively control ordinary income that forces unwanted distributions out of the trust. This happens when net income is produced from the occasional capital gains or dividends generated by any investment in the CRT. While funds producing 2% ordinary income and 8% growth are not shabby, it becomes more efficient when all 10% of the gain can be deferred and retained inside the trust to compound tax-deferred for future use. The down side occurs when the equity market has a bad year and there is no "distributable net income" (DNI) produced, so the beneficiary cannot access any funds during that year.

During the accumulation phase, this is not a problem; but, during the distribution phase it creates a serious management problem when using mutual funds. Briefly, a solution may lie in a proper trust drafting and a series of deferred annuity contracts that have "earned income", but as long as an independent trustee refuses to accept it, the money can remain undistributed. Unfortunately, few annuity providers offer the administrative support to work within these specially constructed NIMCRUTs. Those that do, have learned how to flex according to the needs of their clients. When the trustee holds several annuity contracts and specifies that one be completely invested in a fixed portfolio, the income beneficiary can be assured that at least some income will always be available for distribution. This is much different from the mutual fund approach, over which the trustee has no discretionary control in distribution. Properly structured, a NIMCRUT can provide a vehicle for managing tax-deferred growth. Regarded as the eighth wonder of the world, tax-deferred compounding investments can fund both college educations and retirement needs from the same CRT account. Best of all, this can be done without the usual age restrictions and penalties on pre 59½ distributions from tax sheltered savings.

For example, the trustee may direct the "spigot" be opened to pay for children's tuition and then closed until income is needed for retirement, when it is again reopened. By aggregating the undistributed income in a make-up account, the accumulated deficiencies may be made up by paying out excess funds in years that produced extra income. Generally, NIMCRUTs work best for younger trust beneficiaries with hard to value assets that may be difficult to immediately market (e.g. farm land, development property, etc.) and reposition within the trust. Given the capacity to accumulate a little cushion when income is not needed, the NIMCRUT is ideal as a retirement supplement. This ability to store income and grow it efficiently provides for future substantial distributions from the make-up account.

LIFE INSURANCE

When you bought your life insurance policies, you obviously felt a need for them. But perhaps you do not need all that coverage today. Yet you still have those policies.

If you are thinking about a contribution to the Kennedy Center and National Symphony Orchestra, a gift of life insurance could be a sensible and generous course of action. You can also use life insurance to replace the value of an outright donation. For example, you could donate stock to the Center and benefit by avoiding capital gains taxes. You may then purchase life insurance to benefit you heirs in the amount they would have received had you left them the stock.

Setting up a Life Insurance plan :

• If you have an already existing life insurance policy, you may contact the insurance company to name the Kennedy Center and National Symphony Orchestra ultimate beneficiary.
• If you would like a current income tax deduction, you may also transfer ownership to the Kennedy Center and National Symphony Orchestra on existing policies.
• If you would like to establish a new life insurance policy naming the Kennedy Center and National Symphony Orchestra irrevocable owner and beneficiaries, please contact your preferred insurance company. The most efficient way to make premium payment sis to make a contribution equal to the premium payment directly to the Kennedy Center and National Symphony Orchestra requesting they pay the premium. The IRS will provide a charitable income tax deduction.

The benefits of a Life Insurance plan :

• Charitable deduction when you name us beneficiary and assign us ownership
• Flexibility through naming us beneficiary but keeping ownership
• Security for you family by naming us contingent beneficiary
• Reduction in estate taxes because proceeds are removed from your estate

Retirement plan assets can be heavily taxed if left to heirs. Most inherited assets are subject to estate tax, yet free from income tax. However, an heir will pay income tax on amounts received from a decedent's retirement plan (profit sharing plan, 401(k), 403(b), IRA, etc.). Estate and income taxes can exceed 75% or more of the total amount in the retirement plan. A charitable bequest avoids these heavy taxes.

When we do our estate planning we are confronted with the question, "what am I going to do with any assets remaining in my retirement plan at death?" Possible answers include:

• The income is to continue to my spouse or someone else for their lifetime
• Remaining assets are to go to my estate and be distributed via my will
• Whatever remains is a bequest to certain individuals
• Whatever remains, or a portion of it, passes to one or more nonprofit organizations

Why give retirement plan assets to the Kennedy Center ?

To fulfill a desire to make a major contribution to the Kennedy Center . It may be that your retirement plans contain a large portion of your net worth and that it would be the only way you could make a donation of the amount you have in mind.

To reduce your taxable estate . Assets passing from retirement plans to qualified nonprofit organizations like The John F. Kennedy Center for the Performing Arts are entirely removed from your taxable estate. This can potentially save your estate thousands of dollars in taxes.

To avoid an income tax that would otherwise be due . When retirement plan assets pass to heirs they are subject to federal income tax as well as the federal estate tax. While there is some credit allowed to partially avoid double taxation, the cumulative effect of both taxes can reduce the amount that eventually ends up with your heirs by as much as 75%!

If you are considering making gifts to nonprofit organizations as well as to your heirs, you would be wise to give retirement plan assets to charity and other investments to your heirs.

How to give retirement plan assets to the Kennedy Center :

There is more than one way to make such a gift. Which is best for you depends on your individual circumstances. You are well advised to discuss it with your accountant or other advisor before making a decision on this matter.

Outright Gift

If you want whatever remains in your retirement account to pass to the Kennedy Center at your death, simply ask the plan administrator for the appropriate form needed to do this. You then indicate how you wish the remainder to be distributed. If you do name The John F. Kennedy Center for the Performing Arts as a beneficiary, please send us a copy of the form, which we will retain for our records.

Gift in Trust

You may wish your surviving heirs to enjoy the income from your retirement plan before anything passes to the Kennedy Center . In that case, you could establish a charitable remainder trust and have the retirement plan assets transferred at your death to the trust. The Trust will make regular payments to the person(s) you designate. These payments will continue either for their lifetimes or for a term of years after your death. That is your decision. Then, whatever remains in the trust passes to the Kennedy Center . This strategy avoids the income tax that would otherwise be due, and partially avoids the federal estate tax.

A Lifetime Alternative

Another option is to remove assets from the retirement plan while you are living and transfer them to a charitable life-income plan. You name yourself as the income recipient and the Kennedy Center eventually gets the remainder. While you must pay income tax when you withdraw the money from the plan, you also are entitled to an income tax charitable deduction for establishing the life-income arrangement. It may be that the life-income arrangement can provide you with more income than the retirement plan, and you remove the asset from your taxable estate.

ILLUSTRATIONS:

Real Estate Income Property Converted for Retirement

  Sarah Sullivan, a widow age 72, has a modest estate with some cash savings and an apartment complex that has become increasingly burdensome to manage. As a former high school biology teacher, she is comfortable with her pension, but she would like to travel with her grandchildren while her health remains good. The rental property generates a decent source of income, but the responsibilities of day to day management keep her tied closely to the units. As the property ages, recurring repairs and dealing with renters has taken most of the enjoyment out of the property since her husband passed away some 5 years earlier. She would like to move to Florida to spend more time with her adult daughter and grandchildren. However, she is unwilling to sell the apartments and pay 30% of her proceeds as a capital gains tax. Besides the income tax issue, she was especially incensed to learn that she would also have the remaining balance taxed again at death when she passes that value on to her family. With a tentative offer of $680,000 for her property, she views this as an opportunity to sell and retire more comfortably. Her attorney suggested a charitable remainder uni-trust (CRUT) as a possible planning tool to minimize tax liabilities and retain some control over 100% of the family capital. The attorney requested that our firm to run a sample scenario*, and compare what would happen if (a) she kept the apartment complex and continued to operate it, or (b) sold it and paid the tax, reinvesting the balance, or (c) gifted it to an IRC § 664 Trust. The following presentation was reviewed and accepted by Mrs. Sullivan, her family and advisors. The major attraction was that the CRT would revert to a family type foundation after Mrs. Sullivan passed away. In this way, the family keeps a presence in the community and commits annual funds to the school district's high school science program.

* Hypothetical evaluations are provided as a professional courtesy to members of the estate planning community. Call for suggestions.

Normally, a wealth replacement trust would be established to offset the loss of value in the charitable gift. As once the asset is irrevocably transferred to the CRT it is unavailable to the heirs, and many families opt for insurance protection to replace the value of the gift. However, she and her husband had already purchased a $500,000 "second to die" insurance policy to provide liquidity for estate taxes, so this policy was simply converted to a different use and shifted out of her estate via gifts to her family while the early policy value was low. Now, since there won't be estate taxes to pay; the existing policy will be used instead to offset much of the value lost in the gift.

Things You Need to Know
 

Creating a planned gift is a great and noble act. However, as more charities, commercial advisors, and prospective donors jump onto the planned giving wagon, there are going to be dissatisfied clients and unhappy charities. Why is that? Simply said, too few advisors and planned giving officers do a good job disclosing all of the restrictions and the potential downside of these irrevocable gifts. Then add in all of the client-donors who do their research on the web and think they can go down to the local super-store and get a ready to use trust off the shelf, there is bound to be disappointment. One of the biggest problems with charitable remainder trusts is that invalid assumptions abound.

1. A Charitable Remainder Trust (§664 CRUT or CRAT) is a charitable giving vehicle, not a tax avoidance scam. While there are tax advantages, it still requires that the trustmaker have some charitable intent.
2. Generally, a CRT is transactionally driven. Donors create them to minimize an immediate capital gains tax liability and keep more value at work. Since some assets are unsuitable inside a CRT, double-check early in the research process with advisors on how to best fund the CRT.
3. Treat the income tax deduction like icing on the cake. Because it is a deduction, and not a credit, it offsets the adjusted gross income (AGI) on the taxpayer’s annual return. The problem is that the deduction is only a present value of the future gift and if the remainder charity is a public 501(c)3, it is limited to 50% of the donor’s AGI for cash contributions and 30% for contributions of selected appreciated assets. Other contributions either will not generate a tax deduction or may be limited to tax basis, so knowing what works and what does not is an important skill competent advisors bring to the planning table.
4. The income tax deduction may be wasted unless the donor makes significant income, even over the six tax years it is available, as it may not be completely used up. For example, a 75 year-old donor of appreciated farmland valued at $600,000, lives poor but may die “rich”. Although “rich”, this donor has never made more than $45,000 in a year and is going to be hard- pressed to use the $360,000 deduction a 5% CRUT produces.
5. Trustmakers who act as trustees have to wear two hats. They must prudently manage the trust assets for the benefit of the charitable remainder as well as to produce tax efficient income. This is one reason charities acting as trustee may leave themselves open to hard feelings, dissatisfied donors and possible liability issues that show up years in the future if the trust does not perform as predicted.
6. An annuity trust can run out of money and implode. A CRT stands on its own merits, so investment performance can make or break a charitable trust. If it falls apart, the charity is not going to make up the shortfall.
7. A CRT created to pay lifetime income for one or two beneficiaries bases its projections on IRS actuarial tables. Life expectancies are a median number, so 50% of people will live longer than expected and planners need to factor in the possibility that the trust will last long enough for a beneficiary who reaches age 100 to continue receiving an income stream.
8. Donors who try to create a CRT with less than $150,000 of assets may have the equivalent of a jet engine on a jeep. They have selected a vehicle that usually requires document drafting, appraisals, and ongoing administration expense; there is a minimum threshold for a CRT to stand on its own.
9. A CRT can be set up to benefit more than one charity. Properly drafted trusts will allow for changes or additions to the list of charitable beneficiaries. A CRT can even allow for current distributions directly to a charity if the donor builds in that flexibility.
10. If a CRT trustmaker has more than one income beneficiary (other than himself/herself), there may be an estate or gift tax liability for that gift of an income interest. If there are more than two income beneficiaries or if there is a large spread in ages, there is a likelihood that the CRT will not pass the 10% remainder test
11. Managing investments inside a CRT, or a CLT for that matter, is not the same as managing a 401(k) or IRA. Retirement accounts always produce ordinary income; a well-managed CRT should do better than that.