Why Consider a Charitable Gift?2Giving Today to Guarantee Tomorrow: A Charitable Trust ReviewPeople give to charities for a variety of reasons. They give:According to the Giving USAFoundation, individual givingaccounted for 73% of allcontributions to charitableorganizations in 2011.*?Because they have compassion for the lessfortunate.From a belief that they owe something backto society.To support a favored institution or cause.For the recognition attained by makingsubstantial charitable donations.To benefit from the financial incentives ourtax system provides for charitable gifts.12345* Source: Giving USA FoundationTM - Giving USA 2012 Executive SummaryRegardless of your reasons forgiving, a careful review of thevarious ways to structure charitablegifts can help make your gifts moremeaningful, both to you and to thecharities you choose to support.
How Can Charitable Gifts Be Structured?3Giving Today to Guarantee Tomorrow: A Charitable Trust ReviewOutright GiftsTodaySome people prefer to make outright gifts of cash or other assets to their charities ofchoice. In many situations, an immediate charitable contribution makes sense… thecharity receives the cash or property at once, the donor receives immediate taxbenefits and the transaction is complete.RetirementPlan GiftsA charity can be named as beneficiary of the funds in an IRA or employer-sponsoredretirement plan, which provides a double tax benefit…the charitable gift will bedeductible for estate tax purposes and the charity will owe no income tax on the fundsit receives.Outright Giftsat DeathOther people wish to make sizeable charitable contributions, but are hesitant to do soduring their lifetime. They may depend on the income produced by their assets, wanta family member to receive some benefit from the property, or simply be concernedabout what the future will bring in terms of their financial needs. As a result, theydecide to wait and make charitable gifts at their death, through a will or trust.Split-InterestGiftsIf you want to make a charitable gift, especially a substantial one, there are charitablegiving techniques available that allow you to make the gift today, while retaining aninterest in the property and receiving both immediate and longer-term tax benefits.There is, however, another alternative…
Tax Benefits of Charitable Giving4Giving Today to Guarantee Tomorrow: A Charitable Trust ReviewFederal Income Tax DeductionType of Asset Deduction Based on: AGI LimitPublic Charity Private Charity1. Cash Amount Given 50% 30%2. Ordinary Income and Short-TermCapital Gains PropertyDonors Cost Basis 50% 30%3. Long-Term Capital Gains Property(general treatment)Fair Market Value 30% 20%4. Tangible Personal Property:-Use related to charitys function-Use unrelated to charitys functionFair Market ValueDonors Cost Basis30%30%20%20%Gifts to qualified charitable organizations are deductible up to amaximum of 50% of the donors adjusted gross income (AGI), depending on the charitable organizationand type of asset given. If the value of the property given exceeds the donors AGI limit, the excess canbe carried over and deducted for up to five years. The donor must itemize (a portion of itemizeddeductions are phased out for taxpayers with AGIs above certain limits).While generally not the primary motivation behind charitable giving, it is important to understand howthe tax savings generated by charitable gifts can fit into your overall financial and estate planning.continued on next slide
Tax Benefits of Charitable Giving5Giving Today to Guarantee Tomorrow: A Charitable Trust ReviewFederal Gift TaxIrrevocable gifts to charity are not subject to federal gift taxation.Federal Estate Tax DeductionA federal estate tax deduction is allowed for charitable gifts made at death, whether through a will, atrust or from a life insurance policy. There is no limit on the federal estate tax charitable deduction.
Split-Interest Charitable Giving Techniques6Giving Today to Guarantee Tomorrow: A Charitable Trust ReviewWith a split-interest charitable gift, the asset is split into two parts:Income Interest:Through the use of a charitable trust, the donor transfers the asset(s) to the trust and names abeneficiary for either the income interest or the remainder interest, with the charity receiving the otherinterest.Assuming the charitable trust is properly designed, a person making a split-interest gift may also realizesome or all of these tax benefits:12The stream of income produced by the asset.Remainder Interest: The principal remaining after the income interest is paid.A current federal income tax deduction;Avoidance or delay of capital gains taxation;and/orA reduction of the federal estate tax bill.Depending on your personal and charitablegiving objectives, there are several differenttypes of charitable trusts from which toselect.
Types of Charitable Trusts7Giving Today to Guarantee Tomorrow: A Charitable Trust ReviewCharitableRemainder TrustsA beneficiary named by the donor receives the income interest for life or for astated number of years, after which the remainder interest is donated to thecharity.Charitable Lead(or Income) TrustsThe opposite… the charity receives the income interest for a stated period oftime, with the remainder interest then going to a beneficiary named by thedonor.There are two types of charitable trusts,each of which treats the income interestand remainder interest differently:While each type of charitable trust satisfies different objectives, they share certain common features:During Life In order to realize maximum tax benefits, most people create charitable trusts duringtheir lifetime, especially during their highest income-producing years.Tax-ExemptCharitiesThe gift must be made to a tax-exempt charity approved by the IRS in order to providethe desired tax benefits.Irrevocable Once a charitable trust is created and becomes operational, it is irrevocable… youcannot regain ownership of property given to the trust.Income TaxDeductionA split-interest gift to a charitable trust results in a current income tax deduction,assuming the taxpayer itemizes.
The Charitable Remainder Trust8Giving Today to Guarantee Tomorrow: A Charitable Trust ReviewA charitable remainder trust may be the solution for someone who wants to donate property to acharity during lifetime and receive an immediate income tax deduction, while reserving an incomefrom the property for themselves, their spouses or even for other family members.Using a charitable remainder trust, the donor receives an immediate charitable income taxdeduction based on the present value of the charitys remainder interest. The income beneficiary(donor, spouse, other family member) receives an income from the trust for life or a statednumber of years, and the trust principal (the remainder) is distributed to the charity at the end ofthe income period.A charitable remainder trust is especially advantageous for donors with highly-appreciated assets,such as growth stocks and mutual funds or raw land, that need to be sold and converted toincome-producing assets.continued on next slide
The Charitable Remainder Trust9Giving Today to Guarantee Tomorrow: A Charitable Trust ReviewAdvantages Disadvantages+ -The donor can give highly-appreciatedproperty to the trust and eliminate capitalgains tax on the appreciation when the giftedasset is sold by the charity.Non-income-producing property can becomeincome producing, since the charity can sellthe asset and use the proceeds to purchaseincome-producing assets.The income beneficiary (donor, spouse, otherfamily member) may realize an increase incurrent income.A current income tax deduction is available totaxpayers who itemize.The size of the donors estate is reduced forfederal estate tax purposes.Donation of property to the trust isirrevocable.Income paid to someone otherthan the donor or donors spousemay incur gift tax and/orgeneration skipping transfer tax.
How Does a Charitable Remainder Trust Work?10Giving Today to Guarantee Tomorrow: A Charitable Trust ReviewDonorDonatedAsset(s)The donor transfers the donatedasset(s) to an irrevocable charitableremainder trust and receives acurrent income tax deduction basedon the value of the charitysremainder interest.Charitable Remainder TrustNon-CharitableIncome BeneficiaryCharity (RemainderBeneficiary)RemainingTrust AssetsIncomePaymentsAt the end of theincome period, thecharity receives theremaining trustassets.The non-charitable incomebeneficiary (e.g., donor, spouse,other family member) receives astream of income for life or aterm not to exceed 20 years.CharitableRemainderTrustVariations:Gifts of remainder interests aredeductible for federal income taxpurposes only if made to one ofthe following:12charitable remainder annuity trust (CRAT);charitable remainder unitrust (CRUT); orpooled income fund.3
Charitable Remainder Trust Variations11Giving Today to Guarantee Tomorrow: A Charitable Trust ReviewHow Are a Charitable Remainder Annuity Trust (CRAT) anda Charitable Remainder Unitrust (CRUT) Different?There are two primary differences between these variations of the charitable remainder trust:CRAT CRUTIncomePaymentsThe yearly income stream is a fixedamount determined at inception of thetrust and expressed as either a fixedpercentage of the initial value of trustassets or as a fixed dollar amount; mustbe equal to at least 5% and not morethan 50% of the initial value of trustassets and must remain constant.The yearly income stream is based on apercentage of the current value of trustassets; expressed as a fixed percentageof trust assets (not less than 5% or morethan 50%) at inception of the trust.Since trust assets must be revalued eachyear, income payments may increase ordecrease if trust assets increase ordecrease in value.AdditionalContributionsNot allowed. Trust document may provide foradditional contributions.
What Is a Pooled Income Fund?12Giving Today to Guarantee Tomorrow: A Charitable Trust ReviewDonorDonatedAsset(s)The donor transfers the donated asset(s) to acharitys pooled income fund, where thedonation is commingled with other donatedassets and managed by the charity in a trust.The donor receives a current income taxdeduction based on the age(s) of thebeneficiary(ies) and the funds rate of return.Pooled IncomeFundNon-Charitable IncomeBeneficiaryCharity (Remainder Beneficiary)RemainingAssetsIncomePaymentsWhen the income beneficiaries are alldeceased, the remaining propertyreverts to the charity for its use.The non-charitable income beneficiary (e.g., donor, spouse, otherfamily member) receives a pro rata share of the income earned by thetrust for life.The CharitableGift Annuity…AnotherAlternativeA charitable gift annuity allows a donor to irrevocably transfer property to acharity in return for a lifetime income and an immediate income tax deduction.There is no trust involved. Instead, through a contractual agreement, the charitypays a fixed amount to one or two annuitants (e.g., the donor alone or the donorand spouse) for life. In addition, the annuity payments from the charity may beginimmediately or be deferred until a future point in time.A pooled income fund is a trustmaintained by a public charity.Donors contribute assets to this trustmaintained by the charity and thoseassets are commingled and managedtogether with assets donated byother individuals, all of whom haveretained an income interest.
The Charitable Lead (or Income) Trust13Giving Today to Guarantee Tomorrow: A Charitable Trust ReviewDonorDonatedAsset(s)The donor transfers the donatedasset(s) to an irrevocable charitablelead trust and receives a currentincome tax deduction for thepresent value of the charitysincome interest.CharitableLead TrustCharity (IncomeBeneficiary)Non-Charitable RemainderBeneficiaryRemainingAssetsIncomePaymentsAt the end of the income period, the remainingtrust assets go to the final beneficiary(ies)named by the donor. The final beneficiaries canbe the donor, if the term of the trust is for a setnumber of years, or, for example, the donorssurviving spouse, children or grandchildren.The charity receives a fixed annual income fromthe trust for a specified number of years or for thelifetimes of specified individuals (e.g., the donor orthe donor and spouse).The charitable lead trust works in reversefashion from the charitable remainder trust…the named charity receives a fixed amount ofincome from the trust for a specified numberof years or for the lifetimes of specifiedindividuals, such as the donor or the donorand spouse.At the end of that time, the donor, donorsestate or individuals named by the donorreceive the remaining trust assets.
A Comparison of Charitable Trusts14Giving Today to Guarantee Tomorrow: A Charitable Trust ReviewCharitableRemainder AnnuityTrust (CRAT)CharitableRemainder Unitrust(CRUT)Pooled Income Fund Charitable LeadTrustPrimaryobjectivesIncome and estatetax savings; fixedincome streamIncome and estatetax savings; incomehedged againstinflationIncome and estatetax savings; incomereflecting pooledinvestment resultsIncome and estatetax savings;preservation of trustassets for finalbeneficiariesTrust property Money or tangibleassetsMoney or tangibleassetsMoney or equities Money or tangibleassetsTrust valuation At inception only Annually Not applicable At inception onlyAdditionalcontributionsNot allowed Yes, if permitted bytrust documentYes Yes, if permitted bytrust documentCurrent incometax deductionYes (generally largerthan with unitrust)Yes (generallysmaller than withannuity trust)Yes Yescontinued on next slide
A Comparison of Charitable Trusts15Giving Today to Guarantee Tomorrow: A Charitable Trust ReviewCharitableRemainder AnnuityTrust (CRAT)CharitableRemainder Unitrust(CRUT)Pooled Income Fund Charitable LeadTrustIncomebeneficiaryDonor or anyoneelse named bydonorDonor or anyoneelse named bydonorDonor or anyoneelse named bydonorNamed charityIncome paid toincomebeneficiaryFixed dollar amounteach yearFixed percentage oftrust assets eachyearDonors pro ratashare of incomeearned by the trustFixed dollar amountor percentage oftrust assetsFinal beneficiary Named charity Named charity Named charity Donor or otherbeneficiaries namedby donorTrustee Selected by donor(can include donoror the charity)Selected by donor(can include donoror the charity)The charity Selected by donor(can include donoror the charity)
The Wealth Replacement Trust16Giving Today to Guarantee Tomorrow: A Charitable Trust ReviewThe Problem:Through a charitable remainder trust (or charitable gift annuity), a charitably-minded person canrealize certain income and estate tax objectives, while ultimately providing assets to a favoritecharity. In doing so, however, the donors family will be deprived of those assets that they mightotherwise have received.A Potential Life Insurance Solution:In order to replace the value of the assets transferred to a charitable remainder trust (orcharitable gift annuity), the donor establishes a second trust - an irrevocable life insurance trust -and the trustee acquires life insurance on the donors life in an amount equal to the valuetransferred to the charitable remainder trust or charitable gift annuity.Using the charitable deduction income tax savings and the annual cash flow from the remaindertrust or gift annuity, the donor makes gifts to the irrevocable life insurance trust that are thenused to pay the life insurance policy premiums. At the donors death, the life insurance proceedsgenerally pass to the donors heirs free of income tax and estate tax, replacing the assets thatthen belong to the charity.
The Wealth Replacement Trust in Action17Giving Today to Guarantee Tomorrow: A Charitable Trust ReviewDonorDonated Asset(s)The donor receives an incomestream for life or a term not toexceed 20 years.Charitable Remainder Trust or Gift AnnuityCharity (Remainder Beneficiary) Donor‘s HeirsRemaining Trust AssetsIncomeStreamWealth ReplacementTrust (Irrevocable LifeInsurance Trust)The donors heirs receivethe life insurance proceeds,free of estate tax.At the donors death, theremaining trust assets revert to thecharity for its use.The donor establishesan irrevocable lifeinsurance trust, whichpurchases insurance onthe donors life.The donor uses the incomestream, together with thecharitable deduction incometax savings, to make annualgifts to the irrevocable lifeinsurance trust, which thenpays the life insurancepremiums.The donor transfers the donated asset(s) to an irrevocablecharitable remainder trust or gift annuity and receives acurrent income tax deduction based on the value of thecharitys remainder interest.Annual GiftsInsurancePolicyLife InsuranceProceeds
Charitable Trust Action Checklist18Giving Today to Guarantee Tomorrow: A Charitable Trust ReviewDo you have assets (particularly highly-appreciated assets) you want to remove from yourestate to avoid federal estate tax?Do you have highly-appreciated and/or non-income-producing assets you want to turn intoincome-producing assets without paying capital gains tax?Would you benefit from a significant current income tax deduction?In consultation with your professional advisor:Analysis...Do you need current income or do you want to defer income for the future?Do you want a fixed income or an income that varies each year depending on the value ofthe assets in the trust?Do you want to maximize the benefit to yourself or to the charity?Will you want to make additional contributions to the trust in the future?If a charitable trust is right for you, decide which type of trust to use:continued on next slide
Charitable Trust Action Checklist19Giving Today to Guarantee Tomorrow: A Charitable Trust ReviewUse a qualified attorney to draft the trust document, which names both the charitable andnon-charitable trust beneficiaries and defines the amount of yearly income to be paid andfor how long.Decide whether you will serve as trustee or appoint the charity as trustee.Donate the appreciated asset(s) to the trust. The trustee then arranges for the sale of theasset(s) and decides how the money will be reinvested in order to generate the requiredincome.Determine if life insurance should be purchased on your life to replace trust assets that yourfamily might otherwise have received.Implementation…
A Note About The Federal Estate Tax20Giving Today to Guarantee Tomorrow: A Charitable Trust ReviewWhether your estate is actually subject to the federal estate tax will depend on the size of yourestate, the year you die and whether future Congressional action modifies the estate tax rules.