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Chapter 28: Charitable planning.

This chapter explores the various types of charitable giving strategies that exist for taxpayers. Although cash is one of the most commonly used gifts, it is not necessarily the most advantageous or convenient gift for a donor to make--and in fact, over the long run, it may not be the donor's best option. For this reason, many advisors have encouraged their clients to look at different gift techniques ranging from charitable gift annuities to split interest gifts. This chapter will provide a summary of each type of charitable technique. For an overview of the advantages and disadvantages of the various types of charitable gifts, see Figure 28.1. For an explanation of the basic rules applicable to charitable gifts, see Chapter 19.

WHAT ARE OUTRIGHT GIFTS?

Outright gifts are the type of charitable gifts with which people are most familiar. The simplest type of outright gift is a contribution of cash to charity. Determining the value of a cash gift is inherently easy, and proof of payment can be established without a large amount of documentation.

Outright gifts create the most immediate economic benefit to the charity because the gift is made either in cash or property in which the charity assumes an absolute interest. But while a donor retains absolutely no interest in an asset that is donated outright, he can still attach restrictions on the charity's use of the donated asset. For instance, a donor can designate that a cash gift be used for building a new facility for the charity or be placed in a university scholarship fund.

Aside from the satisfaction of making a charitable gift, the donor also can benefit by:

* taking an immediate income tax deduction, generally for the fair market value of the gift, and

* removing assets from his gross estate (and, thus, reducing the amount of estate tax due). (1)

However, the donor should be aware of the income tax rules that limit the donor's income tax charitable deduction to certain percentages of adjusted gross income (see Chapter 19). (2) When making gifts other than cash, the most significant tax benefit comes from a contribution of highly appreciated property; assuming that the gift is deductible at its fair market value, such a contribution generally does not result in a taxable gain (or loss) to the donor. (3)

WHAT ARE CHARITABLE BEQUESTS?

More charitable gifts are made by bequest than any other method of giving. A charitable bequest is a charitable gift that is made by will, revocable during the life of the donor, and operable only upon the donor's death. A bequest can be made of any of the following:

* a specific amount;

* a specific asset; or

* a percentage of the estate.

When a will is probated, the charity is provided with the assets or amount designated. (4) Charitable bequests can also be part of a donor's estate planning as the donor's estate will generally receive a deduction for the amount equal to the bequest. (5) The estate may deduct the entire value, since there is no income or estate tax limitation on the deductible amount of a charitable bequest. (6) Furthermore, reducing the assets in the estate through charitable bequests can result in "bracket slippage," thereby compounding the saving of estate taxes, as illustrated by the following example.

Example: Lisa died in 2009 with a gross estate of $4.7 million, but made a charitable bequest of $700,000. Without the charitable bequest, her estate would have owed federal estate taxes of $540,000. Because of her bequest of $700,000, the value of her estate was lowered for estate tax purposes from $4.7 million to $4 million, which lowers her federal estate tax bill to $225,000, a savings of $315,000 (45%). The savings are compounded for her estate, since it didn't have to pay federal estate taxes on the amount of the bequest and her taxable estate was reduced by the amount of the bequest.

WHAT ARE CHARITABLE GIFT ANNUITIES?

A charitable gift annuity agreement is a contract entered into between a charity and a donor in which the charity agrees to pay an annuity to the individual donor in return for an amount transferred by the individual to the charity. The result is that the charity receives a current gift and the donor/annuitant is provided with a predictable income stream for life.

A charitable gift annuity is basically the same as a commercial annuity since the person who receives the annual income is the annuitant and the income is paid to the annuitant for over a period of one or two lives. The main difference is that a commercial annuity will pay a higher income and the charitable annuity will pay a lower rate, which reflects the "gift" element of the arrangement. Many charities use the annuity rates recommended by the American Council on Gift Annuities in determining payment amounts to annuitants (see Appendix B). These rates are designed to provide a residual amount for the charity of 50% of the initial amount of the contribution, if the donor lives to life expectancy.

The charitable gift annuity is comprised of two components. The first component is the annuity part of the transaction and is very similar to a commercial annuity in concept and in income tax treatment. Each payment that the annuitant receives is made up of a taxable interest portion and a tax-free return of principal.

The second component consists of the gift amount, which is viewed as an outright gift to charity. The amount of the charitable contribution is equal to the amount by which the assets transferred to the charity exceed the value of the annuity. (7) To calculate the current income tax deduction, subtract the present value of the gift annuity from the fair market value of the property transferred. The present value of the gift annuity is determined by reference to the tables contained in the estate tax regulations. (8)

WHAT ARE "SPLIT INTEREST" GIFTS?

The term split interest refers to gifts where an interest in the property benefits a charitable and a noncharitable beneficiary. The donor can transfer an immediate benefit to the charitable beneficiary with the remainder interest going to a noncharitable beneficiary later, or employ the reverse strategy where a noncharitable beneficiary receives the immediate economic benefit with the remainder interest eventually going to charity. When the donor makes the charity the remainder beneficiary, the split interest gift is commonly referred to as a "deferred gift." A split interest gift may be made in trust or property; however, charitable split interest trusts include many of the more popular methods of charitable giving such as charitable remainder trusts and charitable lead trusts (both discussed below).

Charitable Remainder Trusts

A charitable remainder trust (CRT) is a trust instrument that provides for specified payments to one or more individuals, with an irrevocable remainder in the trust property to be paid to or held for a charity. (9) The trust has three associated entities:

(1) the donor, who contributes an asset to the trust;

(2) a lead annuity or unitrust beneficiary; and

(3) a charitable beneficiary of the remainder interest.

The donor and the lead beneficiary can be the same person.

CRTs have become very popular as a charitable giving technique because of the many tax advantages they offer to the charity and donor. The charity receives what frequently turns out to be a sizable gift while the donor receives an income tax deduction and reduces his future estate tax. CRTs are also popular because they give the donor the opportunity to donate highly appreciated property to the CRT and potentially avoid recognizing the capital gains.

Charitable remainder trusts are typically used in conjunction with wealth replacement trusts. The basic concept of a wealth replacement trust is to replace the assets given to charity for the benefit of the donor's heirs. Wealth replacement trusts generally take the form of an irrevocable trust and are generally funded with life insurance in an amount equal to, or greater than, the value of the property transferred to the CRT. The charitable planning design of a typical CRT can be summarized in four steps:

Step 1: The donor contributes assets to the CRT. The donor receives a charitable deduction equal to the present value of the remainder interest. (10)

Step 2: The donor sets up a "wealth replacement trust" (see below).

Step 3: The lead beneficiary, often the donor, receives annuity or unitrust payments from the CRT for a term of years (not in excess of 20 years) or for the life of the donor. (11)

Step 4: At death or the end of a term of years, the heirs receive the proceeds of the wealth replacement trust, and the charity receives the remaining assets in the CRT as the holder of the remainder interest in the trust.

Charitable remainder trusts are designed in one of two basic variations, as explained below:

* charitable remainder annuity trusts (CRATs); and

* charitable remainder unitrusts (CRUTs).

Charitable Remainder Annuity Trusts

A charitable remainder annuity trust (CRAT) provides to a noncharitable beneficiary a fixed payment at least annually of not less than 5% or more than 50% of the initial net fair market value of the trust, with an irrevocable remainder interest to be paid to or held for charity. (12) The value of the remainder interest must be at least 10% of the initial net fair market value of all property placed in the trust. (13) The assets in a CRAT are valued at the inception of the trust, and the donor can contribute to the CRAT only at the time the trust is created. Furthermore, the fixed payment amount cannot be limited to the net income of the trust.

Charitable Remainder Unitrusts

A charitable remainder unitrust (CRUT) is similar to a CRAT, but with a few important differences. The lead interest in a CRUT usually takes one of three basic forms:

(1) Standard CRUT: The payout of the trust is a fixed percentage of not less than 5% or more than 50% of the net fair market value of the trust assets calculated at least annually. (14)

(2) Net income unitrust: The payout is the lesser of (1) the fixed percentage or (2) the actual income for the trust in that year (this type is also known as an "income only" unitrust). (15)

(3) Net income with makeup unitrust: Commonly known as a "NIMCRUT," the trust is an income-only trust that provides for any income deficiencies in past years to be made up to the extent trust income exceeds the amount of the specified percentage in later years. (16)

[FIGURE 28.2 OMITTED]

In addition, with respect to each contribution to the trust, the value of the remainder interest generally must be at least 10% of the net fair market value of the property as of the date it was contributed. (17)

Charitable Lead Trusts

A charitable lead trust (CLT) is essentially the reverse of a charitable remainder trust. In a CLT, the donor gives the charity the current economic benefit or payment stream from the transferred assets and retains the right to receive the assets back at the end of the designated term of years or transfer that right to another person.

As in the case of a charitable remainder trust, a CLT can be either an annuity trust or a unitrust. A charitable lead annuity trust (CLAT) will pay the charity a fixed amount each year regardless of the income that the assets generate, whereas a charitable lead unitrust (CLUT) will pay the charity a fixed percentage of the value of the assets of the trust calculated annually. (18)

In general, the CLT gives the donor the opportunity to pass on assets to heirs in the future at a discount while also providing beneficial tax treatment to the donor and his estate. If the CLT is structured as a grantor trust (see Chapter 7) taxable to the grantor for income tax purposes, the grantor/ donor may be allowed an upfront income tax charitable deduction in the amount of the present value of the charity's annuity or unitrust interest. (19) If the CLT is not structured as a grantor trust, no upfront income tax charitable deduction is available, but the trust may be able to deduct amounts as they are distributed from the trust to charity.

Note that the income tax deduction for the charitable contribution determined upon the creation of the CLT is subject to a 30% of adjusted gross income limitation. Any unused excess charitable contribution may be carried forward for up to five years.

[FIGURE 28.3 OMITTED]

Another reason for using a CLT is the reduction of transfer costs to future heirs as it can be instrumental in maximizing the generation-skipping transfer tax exemption.

WHAT ARE PRIVATE FOUNDATIONS?

Standard private foundation. A private foundation (also referred to as a "family foundation") is a charitable organization generally established by an individual donor or a family who wishes to control, as much as possible, the use of their contributions for charitable purposes. Standard private foundations are the most common type of private foundation. This type of organization allows the donor to memorialize his name or the name of a family member in perpetuity. Another attractive aspect of a standard private foundation is the structure that it can give to the charitable activities of a family by formalizing the charitable causes of a family and passing on to future generations the charitable value system of its founders.

Standard private foundations generally don't engage in any type of charitable activity, don't apply for any grants, and generally don't get involved in any fundraising activities. They are designed simply to hold funds from which contributions are made to other charitable organizations. (This type of foundation is sometimes referred to as a "nonoperating" foundation to distinguish it from a private "operating" foundation--see below.)

A private foundation can assist a donor who has a high-income-year to fund several years' worth of donations in one year. The foundation can then give grants to the donor's charities over the next several years. A private foundation can also help a donor make a gift to several different charities with an asset that is difficult to divide and donate (e.g., real estate).

Note, however, that standard private foundations are the most restrictive with respect to current income tax charitable deductions; they are also subject to all of the excise tax rules. In general, cash given to a private foundation is currently deductible up to 30% of the donor's contribution base. Gifts of long-term capital gain property to a private foundation generally are deductible up to the donor's basis and limited to 20% of the donor's adjusted gross income. (20) In addition, private foundations are subject to a 2% excise tax on investment income (which may be lowered to 1% depending on the foundation's level of giving relative to its asset base), and may be subject to other excise taxes as well. (21)

Private operating foundations. A private "operating" foundation is a foundation that must participate in charitable activities, rather than just making contributions to other charitable organizations. (22) Traditionally, these types of private foundations operate institutions such as museums, libraries, and historic preservation sites.

A private operating foundation has a distinct benefit over the standard private foundation in that donors have a more liberal income tax deduction. A donor can contribute cash and deduct up to 50% of his adjusted gross income rather than 30%. However, the private operating foundation is still subject to most of the excise tax regulations that apply to standard private foundations.

Another benefit of private operating foundations is that donors may contribute highly appreciated property and use the full fair market value in determining the charitable income tax deduction. Alternatively, with a standard private foundation the deduction is generally limited to the donor's adjusted cost basis in the property and the contribution is deductible only up to 20% of the donor's adjusted gross income.

WHAT ARE SUPPORTING ORGANIZATIONS?

Supporting organizations and community foundations provide a great deal of flexibility for donors in structuring their charitable wishes. A supporting organization is a subcategory of public charity that, as its name implies, gives its founders and their descendants the opportunity to "support" favorite charitable causes by way of grants and distributions to public charities. One of the more common public charities supported are community foundations (see below). In general, these charitable giving vehicles allow the donor and his descendants to charitably participate in the community for generations. Supporting organizations and community foundations work well together since the supporting organization can benefit from the community foundation's staff and accounting systems for their distribution and financial reporting needs.

Contributions to a supporting organization are generally treated just like contributions to any other public charity and, thus, qualify for the 50% contribution base limits. (23) Gifts of appreciated property to a supporting organization are generally deductible up to 30% of the donor's contribution base. (24)

WHAT ARE COMMUNITY FOUNDATIONS?

A community foundation is a 501(c)(3) grant-making organization that is treated as a public charity for federal tax purposes. In order to attain this status, the foundation must qualify as a "publicly supported" organization and satisfy one of two public support tests.

The community foundation has a board of directors or trustees whose main duty is to distribute funds for the use of charities in the community. A community foundation maintains separate trusts or funds for the contributions that it receives, but these funds must be under the ultimate control of the governing body and must be treated as a single entity. Donors who contribute to a community foundation generally have two basic options for their funds. The first is to make a contribution to an unrestricted fund, which will be used for community needs as determined by the board members. The second option for contributions is for a donor to contribute through one of several types of restricted accounts. These types of restricted accounts may include several different categories of funds, such as a designated fund, a field of interest fund, a scholarship fund, an agency endowment fund, or a donor advised fund (see below).

Gifts of cash to a community foundation qualify for a current income tax charitable deduction up to 50% of the donor's contribution base. (25) Furthermore, capital gain property is deductible up to 30% of the donor's contribution base. (26)

WHAT ARE DONOR ADVISED FUNDS?

A donor advised fund provides a means by which a donor can make a deductible charitable contribution to a pool of assets, offer recommendations about the direction of his contribution, and yet avoid the expense of starting a private foundation or supporting organization himself. As long as the donor does not have final say or legal control over the distributions, the contributions will be complete and qualify for a charitable deduction. (27) The basic types of donor funds are:

Donor Advised Funds: This type of fund is one of the fastest growing charitable tools. In brief, a donor enters into a written agreement with a sponsoring charity to establish an account to benefit the donor's causes. He then transfers cash or other assets to the account, receives an immediate charitable deduction, and over the next days, months, or years, requests that the sponsoring charity make grants to the donor's chosen charities. (Donor advised funds differ from pooled income funds in that they do not provide for a lifetime income stream to the donor or other beneficiary.) The donor receives regular statements from the sponsoring charity and, in some cases, may nominate an investment advisor or choose between a small number of investment funds.

The sponsoring charity usually receives a small annual fee for managing the account and may provide services, ranging from performing due diligence on the donor's selected grants, to providing a list of worthy grant recipients which match the donor's goals and criteria.

Component Funds: With this type of fund, a foundation establishes separate funds or trusts to receive and manage donors' contributions. If a donor's fund can qualify as a component fund, there are significant advantages. Even though the community foundation does not generally hold title to these component funds or trusts, a completed gift by the donor to such a trust is considered a donation to the community foundation; therefore, it is subject to the 50% deduction limits for cash gifts.

Gifts of cash to a donor advised fund qualify for a current income tax charitable deduction up to 50% of the donor's adjusted gross income. (28) Furthermore, capital gain property is deductible up to 30% of the donor's adjusted gross income.

As a result of the Pension Protection Act of 2006, donor advised funds are now specifically defined as a fund:

1. Which is separately identified by reference to contributions of a donor or donors;

2. Which is owned and controlled by a sponsoring organization; and

3. Which allows the donor, or any person designated by the donor, 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. (29)

A donor advised fund will not be treated as such if it makes distributions to only a single identified organization or governmental entity. (30) In addition, a donor advised fund may not make grants to individuals for travel, study, or similar purposes if certain conditions exist. (31)

WHAT ARE POOLED INCOME FUNDS?

A pooled income fund is a trust maintained by a charity into which each donor transfers property and from which each named beneficiary receives an income interest from the charity in the form of shares. The simplest analogy for a pooled income fund is that of a mutual fund, since contributions to the fund from the different donors must be commingled. Each time a donor transfers property to the pooled income fund, he will receive shares or units of participation in the fund equal to the value of the property. The fair market value of the shares or units at the time of the transfer is determined by dividing the fair market value of all the property in the fund at such time by the number of shares or units in the fund.

The shares generate income that is payable to the donor or someone the donor designates to receive the income. The amount of income attributed to each share of a pooled income fund is calculated by dividing the income of the fund by the outstanding number of units in the fund at the end of the year. (32) The income received by a noncharitable beneficiary will be taxed similar to that of income received from any other complex trust. In the case of a pooled income fund this will generally result in all of the distributions being taxed as ordinary income in the year received. (33)
Figure 28.4

CHARITABLE INCOME TAX DEDUCTION LIMITS FOR GIFTS OF LIFE INSURANCE

* Recently Issued Policy: The deduction is equal to the lesser of

** the cost basis, or

** the fair market value of the contract. This is defined as the
first premium paid.

* Existing Life Policy in Premium Paying Mode: The deduction is
equal to the lesser of

** the cost basis, or

** the fair market value of the contract. This is defined as the
interpolated terminal reserve plus unearned premium. This latter
number is roughly equal to the cash surrender value but that is an
approximation only.

* Paid Up Life Insurance Policy: The deduction is equal to the
lesser of

** the cost basis, or

** the fair market value of the contract. This is defined as the
replacement value of the contract. This latter number is equal to
what the donor would have to pay for a new single premium policy
with the same death benefit at his or her current age.

Definition of Cost Basis: In general, the cost basis is the sum of
all premiums paid to date less 1) amounts surrendered or 2)
dividends received in cash.

Policy Valuation: If requested, the insurance company will provide
free of charge either 1) the interpolated terminal reserve plus
unearned premium, or 2) the replacement cost for the policy on Form
712.

Source: The Tools & Techniques of Charitable Planning (2nd
Edition), p. 110 (National Underwriter Company, 2007).


The donor receives a current charitable deduction for the value of the remainder interest. (34) The charity benefits from this arrangement by receiving an irrevocable remainder interest in the donated property. (35)

WHAT ARE CHARITABLE GIFTS OF LIFE INSURANCE?

Making a charitable gift of life insurance is one of the easiest ways to make a significant gift to charity, and it can be done in one of several different ways. A donor can simply make a charity the beneficiary of a policy owned by the donor, donate a current policy to a charity, or finally, have a charity purchase a new policy on the donor's life. The tax advantages of a charitable gift of life insurance will depend upon how the life insurance gift is structured. For instance, a donor may be able to receive a deduction for the value of premiums paid to maintain an existing or newly purchased policy, or for the value of a fully paid policy equal to the amount an insurance company would charge for a single premium policy on a person the same age as the donor Regardless, charitable gifts of life insurance typically allow a donor to make a large gift in the future for a relatively small contribution.

WHERE CAN I FIND OUT MORE ABOUT IT?

Tools & Techniques of Charitable Planning (2nd Edition) (National Underwriter Company, 2007).

QUESTIONS AND ANSWERS

Question--What factors should be considered when deciding between a charitable remainder annuity trust (CRAT) and a charitable remainder unitrust (CRUT)?

Answer--A CRAT offers the primary benefits of simplicity and certainty. With a CRAT, the retained interest is a fixed dollar amount. Therefore, since the amount is fixed, there is no need for an annual revaluation as with a CRUT. For that reason (i.e., no annual revaluation requirement), a CRAT will be considerably easier, and less expensive to administer than a CRUT, especially when there are hard-to-value assets being contributed to the trust.

A second consideration is the need (or desire) for a fixed return. With a CRAT, the annual payout is fixed. The annuity payment will not be reduced if the value of the trust decreases, unless the trust is completed liquidated by distributions.

A third consideration is the need for a hedge against inflation. While a CRAT offers the promise of a fixed annual return, this fixed annual payout can be a significant detriment in the event of inflation. For this reason, younger donors often prefer the flexible unitrust payment that is available with a CRUT, as opposed to the fixed payment guaranteed by a CRAT.

With a CRAT or a CRUT, in many instances the cash flow created from the trustee's investment of 100% of the sales proceeds on a tax-free basis will be significantly more than the cash flow that would have been earned by the donor from the contributed asset. Furthermore, selling the contributed asset inside the CRAT or the CRUT and allowing the trustee to invest the proceeds in a diversified portfolio can diversify the donor's source of income.

A fourth consideration is whether additional contributions to the trust are contemplated. A donor can make multiple contributions to a single CRUT, but the initial contribution is the only contribution that can be made to a CRAT. (36)

Question--How is a charitable lead trust different from a charitable remainder trust?

Answer--While both are split-interest charitable trusts, there are significant differences between charitable lead trusts and charitable remainder trusts. The most obvious difference is that the lead and remainder beneficiary roles are reversed. In a lead trust, a charity is entitled to the annuity or unitrust interest and a noncharitable beneficiary is entitled to the remainder. Conversely, in a charitable remainder trust, the noncharitable beneficiary is entitled to the annuity or unitrust interest with a charitable beneficiary receiving the remainder interest.

Aside from the reversed trust interest roles, there are other differences. For example, charitable remainder trusts are tax-exempt entities, whereas charitable lead trusts are not. Additionally, charitable remainder trusts have minimum and maximum payout rates, as well as maximum term limits. Charitable lead trusts do not have these same requirements. (37)

Question--A taxpayer owns an asset that has appreciated rapidly since its acquisition. What are the implications if the asset has not been held for at least one year?

Answer--Donors of appreciated property are permitted to receive a charitable deduction equal to the fair market value of the asset provided that it has been held for at least one year (i.e. it qualifies for a long-term holding period). Consideration should be given to delaying the contribution of an asset that has significantly appreciated, but not met the long-term holding period requirement. If an asset is donated that has not been held for at least one year, the charitable contribution is limited to the taxpayer's basis in the asset.

CHAPTER ENDNOTES

(1.) Treas. Reg. [section]1.170A-1(c).

(2.) See IRC Sec. 170(b).

(3.) Rev. Rul. 55-410, 1955-1 CB 297.

(4.) In some cases, the charity may be the first in line to receive assets before any of the heirs. This can sometimes cause problems from the standpoint of the estate having to liquidate assets to meet the charitable obligation, which can result in "shrinkage" of the estate greater than the amount of the charitable gift.

(5.) IRC Sec. 2055.

(6.) IRC Secs. 642(c), 2055(d).

(7.) Treas. Reg. [section]1.170A-1(d).

(8.) Treas. Reg. [section]1.170A-1(d)(2). For gift annuities, the Section 7520 interest rate and the most current mortality tables are used to determine the value of the gift annuity. IRC Sec. 7520(a). The use of the Section 7520 rate for the month in which the gift was completed, or in either of the previous two months, is required. It is important to calculate the present values using the highest of these three Section 7520 rates. Generally speaking, the higher the Section 7520 rate, the lower is the value of the annuity and, consequently, the higher is the charitable deduction.

(9.) Treas. Reg. [section]1.664-1(a)(1)(i).

(10.) Treas. Regs. [section][section]1.664-2(c), 1.664-4(a).

(11.) See IRC Sec. 664(d).

(12.) IRC Sec. 664(d)(1)(A).

(13.) IRC Sec. 664(d)(1)(D).

(14.) IRC Sec. 664(d)(2)(A).

(15.) IRC Sec. 664(d)(3)(A).

(16.) IRC Sec. 664(d)(3)(B).

(17.) IRC Sec. 664(d)(2)(D).

(18.) IRC Sec. 170(f)(2)(b).

(19.) IRC Sec. 2522(c)(2). See also Treas. Regs. [section][section]1.170A-6(c)(3), 20.2055-2(f)(2)(iv), 20.2055-2(f)(2)(v).

(20.) IRC Secs. 170(b)(1)(B), 170(b)(1)(D), 170(e)(5).

(21.) IRC Sec. 4940.

(22.) See IRC Sec. 4942(j)(3).

(23.) IRC Sec. 170(b)(1)(A).

(24.) IRC Sec. 170(b)(1)(C).

(25.) IRC Sec. 170(b)(1)(A).

(26.) IRC Sec. 170(b)(1)(C).

(27.) See Treas. Reg. [section]1.507-2(a)(8).

(28.) IRC Sec. 170(b)(1)(A).

(29.) IRC Sec. 4966(d)(2).

(30.) IRC Sec. 4966(d)(2)(B)(i).

(31.) IRC Sec. 4966(d)(2)(B)(ii).

(32.) Treas. Reg. [section]1.642(c)-5(c)(2)(i).

(33.) Treas. Reg. [section]1.642(c)-5(a)(4).

(34.) In determining the amount of a charitable contribution to a pooled income fund for purpose of determining the allowable deduction, the value of the remainder interest is generally determined on the basis of the highest rate of return by the fund for any of the three taxable years immediately preceding the taxable year of the fund in which the transfer is made. If the fund has been in existence less than three years, the rate of return is deemed to be equal to the interest rate that is 1% less than the highest annual average of the monthly Section 7520 interest rates for the three years preceding the transfer. Generally, the higher the rate of return for the fund, the lower the present value of the charity's remainder interest, and the lower the current charitable deduction.

(35.) IRC Sec. 642(c)(5).

(36.) Tools & Techniques of Charitable Planning (2nd Edition), p. 155 (National Underwriter Company, 2007).

(37.) Tools & Techniques of Charitable Planning (2nd Edition), p. 135 (National Underwriter Company, 2007).
Figure 28.1

TYPES OF CHARITABLE GIFTS

  TYPE OF GIFT             ADVANTAGES               DISADVANTAGES

Outright gifts      Donor receives a current   Amount of income tax
                    income tax deduction.      deduction is limited to
                                               certain percentages of
                    Assets are removed from    the donor's contribution
                    gross estate.              base. (1)

                    Gift may be given to       Gift must be of an
                    charity immediately.       absolute interest in
                                               most cases. (2)

                                               Funds or assets are no
                                               longer available for use
                                               by donor during
                                               lifetime.

Charitable          Charitable gift is         No current tax benefits.
bequests            revocable during
                    lifetime.                  A bequest may become a
                                               liability of the estate.
                    A bequest is relatively
                    inexpensive to set up.     Assets may need to be
                                               liquidated at less than
                    A bequest provides a       fair market value to
                    charitable gift            meet the charitable
                    painlessly.                obligation.

                    Gift can be made with      The estate may
                    anonymity during           experience "shrinkage"
                    lifetime.                  due to the charitable
                                               obligation.

                    Unlimited charitable       Charitable bequests must
                    deduction for the          be probated, adding cost
                    estate.                    and time.

                    Creates the potential
                    for a smaller estate
                    and, thus, a possibly
                    lower estate tax.

Charitable gift     Charitable gift            The charitable gift is
annuities           annuities are relatively   irrevocable.
                    simple and easy to
                    understand.                The annuity income will
                                               remain fixed and will
                    The charity receives a     not be adjusted for
                    current gift.              inflation.

                    The annuitant will         Charity needs to be
                    receive a predictable      financially sound, or
                    income for life.           reinsure the payout.

                    Capital gain is
                    distributed over the
                    life of the annuity.

                    The donor will receive a
                    tax-free return of
                    principal.

                    The donor will receive a
                    current income tax
                    charitable deduction.

                    Charitable gift annuity
                    can be funded with
                    relatively small amounts
                    of money.

Charitable          Donor receives a current   Complex creation and
remainder           income tax deduction.      administration.
trusts:             (1)
                                               Assets are irrevocably
* Charitable        Donor can contribute       donated to the trust.
  remainder         highly appreciated
  annuity trusts    property and not have to   Accounting and trustee
  (CRATs)           recognize the gain.        fees are required.

* Charitable        Donor can reduce future    A qualified appraisal of
  remainder         estate taxes.              the assets will
  unitrusts                                    generally have to be
  (CRUTs)           Assets placed in the       made. (2)
                    trust can be sold or
                    converted to increase
                    income.

                    The trust can invest in
                    tax-exempt vehicles.

Charitable lead
trusts:

* Charitable lead   Allows the donor to pass   If the donor receives a
  annuity trusts    on assets to heirs in      current income tax
  (CLATs)           the future at a            deduction, all the
                    discount.                  future income from the
* Charitable lead                              trust will be considered
  unitrusts         The donor gives a          taxable income to him.
  (CLUTs)           current gift to charity.   (3)

                    A current income tax       Charitable lead trusts
                    deduction can be           are somewhat complex and
                    utilized by the donor.     difficult to draft and
                                               administer.
                    The donor can transfer
                    highly appreciated         The donor and heirs give
                    property without           up use of the income for
                    recognizing the gain.      the life of the trust.

                    The donor can maximize     The transfer of assets
                    the effectiveness of the   to a charitable lead
                    generation-skipping tax    trust is irrevocable.
                    exemption.

Supporting          Gives the donor greater    Donor has very little
organizations,      flexibility in             control over investments
community           structuring their          and distributions.
foundations         charitable wishes.

                    Relatively easy to set     Gifts are irrevocable.
                    up and administer for
                    the donor.                 Donor may disagree with
                                               the policies of the
                    Relatively inexpensive     community foundation.
                    to use.
                                               Most grants from the
                    Higher deductibility       community foundation go
                    limits than private        to the surrounding
                    foundations.               community and not to
                                               national charities.
                    Enables the donor and
                    his descendants to
                    participate in
                    charitable giving in the
                    community for
                    generations.

Pooled income       Donor receives current     Fund cannot receive or
funds               income tax deduction.      invest in tax-exempt
                                               securities. (1)
                    Non-income producing
                    assets can be converted    Income is unpredictable
                    into income-producing      from year to year.
                    assets.
                                               All income received is
                    Donating highly            taxed as ordinary
                    appreciated assets does    income.
                    not cause recognition of
                    gain.                      Remainder interest will
                                               generally go to only one
                    Income will be paid to     charity. (2)
                    income beneficiaries for
                    life.                      Pooled income fund
                                               cannot easily accept
                    Pooled income fund will    hard to value or
                    pay out the actual         illiquid assets.
                    income earned.

Donor advised       Donor receives an          Gift is irrevocable.
funds (3)           immediate charitable
                    deduction, even if         Annual fees and charges
                    grants are spread out      are usually imposed by
                    for years.                 the sponsoring charity.

                    Compared to private        Some charities put
                    foundations, donations     restriction on grants
                    made to a donor advised    immediately after the
                    fund receive favorable     fund is established
                    tax treatment. If cash     (e.g., disallowing
                    is donated, the donor's    grants exceeding a fixed
                    deduction can be applied   percentage of the fund,
                    to 50% of his AGI. If      or requiring that a high
                    highly appreciated         minimum amount be paid
                    assets are donated, the    out).
                    deduction is limited to
                    30% of AGI.                Donor's rights to
                                               control the management
                    Donor has ability to       and distribution of the
                    recommend a number of      fund assets are limited.
                    charitable grantees. As
                    long as the sponsoring
                    charity approves the
                    distribution and ensures
                    that no private benefit
                    is inuring to the donor,
                    the fund can benefit
                    numerous charitable
                    causes.

                    Generally, very simple
                    to understand and easy
                    to use.

                    Can be established
                    relatively quickly,
                    which can be very useful
                    in year-end tax
                    planning.

Private             Provides donor with a      Smaller percentage
foundations         current income tax         limits on a donor's
                    charitable deduction.      adjusted gross income
                    (4)                        reduce the amount the
                                               donor can potentially
                    Donor has more control     deduct.
                    over distributions.
                                               Income tax deduction for
                    Donor can memorialize      some gifts of
                    his name or the family     appreciated property may
                    name.                      be limited to basis. (5)

                    Allows the donor to        Complex to establish and
                    create a lasting           maintain.
                    charitable vehicle.
                                               Must apply to
                                               IRS for recognition of
                                               tax exempt status. (6)
                    Donor can prefund future
                    gifts to charity.          Minimum payout required
                                               annually. (7)
                    Creates an entity where
                    the donor and his family   Tax returns open to the
                    can work together for a    public. (8)
                    common charitable goal.
                                               Subject to excise taxes.
                                               (9)

(1.) IRC Sec. 170(b).

(2.) See IRC Sec. 170(f).

(1.) IRC Sec. 170(f)(2)(A).

(2.) Treas. Reg. 1.170A[section]-13(c)(1).

(3.) IRC Sec. 170(f)(2)(B).

(1.) IRC Sec. 642(c)(5)(C).

(2.) IRC Sec. 642(c )(5)(E); Treas. Reg. [section]1.642(c)-5(b)(5).

(3.) Tools & Techniques of Charitable Planning (2nd Edition),
pp. 176-177 (National Underwriter Company, 2007).

(4.) IRC Secs. 170(b)(1)(B), 170(b)(1)(D).

(5.) IRC Sec. 170(e)(1).

(6.) See IRC Sec. 508(a)(1).

(7.) See IRC Sec. 508(e).

(8.) IRC Sec. 6104.

(9.) See IRC Secs. 4940-4945.
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Publication:Tools & Techniques of Income Tax Planning, 3rd ed.
Date:Jan 1, 2009
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