08 Apr

New Rules Facilitate Funding a CRT With Unmarketable Assets

In Charitable Trusts,Funding Trusts by admin / April 8, 2013 / 0 Comments

Estate Planner May-Jun 1999
A charitable remainder trust (CRT) is a popular estate planning tool for providing an income stream to you and paying the remainder to charity. In addition, a CRT provides you with an immediate charitable deduction and allows you to avoid or defer capital gains tax. CRTs may become even more widely used under final regulations issued by the Internal Revenue Service (IRS) that make it easier to fund CRTs with unmarketable assets, such as closely held stock, real estate and business interests.

Before these regulations, using unmarketable assets to fund a CRT was difficult because of annual payout requirements. CRTs have to pay annually either a set amount to the beneficiaries (referred to as charitable remainder annuity trusts or CRATs) or an amount based on a percentage of the value of the trust’s assets that year (referred to as charitable remainder unitrusts or CRUTs). CRUTs may also use an “income exception” method of payment. Under this method, the unitrust amount is the lesser of the fixed percentage of the trust’s value or the trust’s annual income. A variation of this method allows the trust to provide that any shortfall from years in which the income of the trust was less than the fixed percentage of assets can be made up in later years in which income exceeds the fixed percentage (referred to as net income makeup charitable remainder unitrusts or NIMCRUTs).

Flip CRUTs

As noted, in the past funding CRUTs with unmarketable assets was often not practical. If the donor chose an income exception method, payments might never be made to the donor if the assets did not produce income. If the donor chose the fixed percentage of assets payment method, the trust would have difficulty making annual distributions of a portion of assets that were unmarketable, both from a valuation and mechanical perspective.

Under the final regulations, it is now easier for the donor to have the best of both worlds. The final regulations provide rules for a trust to convert from an income exception method to the fixed percentage method. These trusts are known as “Flip CRUTs” and they allow the donor to contribute unmarketable assets to the trust and, in effect, defer the annual payments until a later time at which regular payments will be made.

The conversion under a Flip CRUT may be caused by specified triggering events that must not be within the control of the trustee or others. Allowable triggering events include the sale of unmarketable assets or an event such as marriage, divorce, death or the birth of a child. Impermissible triggering events include the sale of marketable assets and a request from the recipient that the trust convert to the fixed percentage method.

Other Concerns When Using Unmarketable Assets

Although the final regulations make it easier to create a CRT with unmarketable assets, some difficulties remain. For example, the value of unmarketable assets held by a CRT must be determined either by an independent trustee or through a qualified appraisal. Also, in connection with a NIMCRUT, any makeup amount from shortfalls in prior years is forfeited at the time of the conversion.

The final regulations also clarify some other issues relating to CRTs. For example, the annuity or the unitrust amount must be paid within a reasonable time after the end of the tax year in which the payment is due. Further, for CRUTs using the income exception method, special valuation rules as to transfers of interests in trusts apply to unitrust interests that are retained by the donor (or a member of his or her family). They are given a value of zero when a noncharitable beneficiary of the trust is someone other than the donor or the U.S. citizen spouse of the donor.

Easier Estate Planning

Charitably inclined donors who hold unmarketable assets should consider creating a Flip CRUT now that the final regulations have made using this method easier. We would be pleased to discuss with you whether a Flip CRUT is right for your estate plan.

08 Apr

Charitable Remainder Trusts Can Still Be a Win-Win Strategy

In Charitable Trusts by admin / April 8, 2013 / 0 Comments

Estate Planner Jul-Aug 1998

The new 20% capital gain tax rate may take the steam out of such planning vehicles as charitable remainder trusts (CRTs). Formerly, one of the primary benefits of a CRT was avoiding capital gains. But, with the new lower tax rate on capital gain, couldn’t you just sell the asset, reinvest the proceeds and come out the same or better? Let’s take a look.

Scenario 1: Sell and Reinvest

Assume you and your spouse are both 65 and have securities with a basis of $100,000 that are now worth $1 million. If you sell the securities, you have a gain of $900,000, a capital gains tax of $180,000 (ignoring any state tax) and $820,000 available to reinvest.
Investing at an 8% rate of return, you would receive annual pre-tax income of $65,600. If you and your spouse each live for another 21 1/2 years, you would receive a pre-tax income stream over your remaining years of about $1.4 million. Also, at the end of that time you would still have your $820,000 that can go to your children, but would be subject to estate tax.

Scenario 2: CRT

Now, suppose you instead transfer the securities to the CRT, and the trustee sells them for $1 million. Since the CRT, as an exempt entity, does not pay taxes, the trustee could invest the entire $1 million to earn an 8% return. You and your spouse could receive annual pre-tax income of $80,000 per year, about a 22% increase in your cash flow. This annuity would mean a pre-tax income stream over your life expectancy of $1.72 million. Although your annual cash flow is increased, at the end of that time your children would not have access to the funds in the CRT, and the $1 million would be earmarked for charity.

In addition, if your gift to the CRT would entitle you to an income tax charitable deduction of $173,000, you would save about $68,500 (assuming you are in the 39.6% tax bracket) in income taxes. If you put this tax savings into an investment fund that appreciated at 10% per year over your life, it would grow to about $530,000 that would be available to your children. If you also choose not to spend $5,000 of additional income you will receive from the CRT each year and put it annually into an investment fund growing at 10% after tax, in 21 1/2 years it would accumulate to approximately $330,000.

The Up Side of the CRT

Under the CRT arrangement:

  • The total investment fund available for your children would be about the same ($820,000 and $860,000) as without the CRT ($820,000),
  • Your annual cash flow would have increased during your lifetime, and
  • Charity would receive $1 million.

The Down Side of the CRT

Are there down sides to this CRT plan?

Naturally. First, without the CRT, you would have the after-tax sale proceeds of $820,000 available for emergencies. As noted above, the longer you and your spouse live, the more money builds up in the investment fund and the more assets are available for an emergency. But in the short term, there could be a problem and, if you do not have other financial resources available to you, the CRT may be too risky.

Second, if you and your spouse do not live as long as your life expectancy, the investment fund will not be there for your children. Also, if the investment fund grows at a rate substantially below 10%, a smaller fund would be available for your children. If this is a major concern, the easy option is to use part of the CRT plan savings to purchase wealth replacement life insurance to benefit your children. In fact, this insurance option is a major advantage of the CRT plan because the insurance can be held in trust and remain out of your estates for estate tax purposes.

Good for Many People

CRTs are complex planning vehicles and you will need the help of an experienced practitioner. It is important that projections be made, using various alternative assumptions. The reduction of the capital gains rate from 28% to 20% has tended to make the benefits of a CRT plan less dramatic, but under the right circumstances, a CRT can still be a win-win situation. Please check with us to see if this option is best for you.


Planning With and Without a CRT

CRT Sell and Reinvest
Value of Securities $1,000,000 $1,000,000
20% capital gains tax ——– (180,000)
Investable fund $1,000,000 $820,000
Cash flow at 8% $80,000 $65,600
Tax savings $68,500 ——-
Cash flow payments over lifetimes (21 1/2 years) $1,720,000 $1,410,400
Investment fund for children at life expectancy date $820,000 to $860,000 $820,000
Distribution to charity $1,000,000 ——-
08 Apr

Tips for Tax-wise Charitable Giving

In Charitable Gifts by admin / April 8, 2013 / 0 Comments

Estate Planner May-June 2006

For many people, estate planning isn’t just about reducing taxes and providing for their loved ones. You also may want to share your estate with one or more of your favorite charities. Charitable giving can satisfy several important goals, including leaving a legacy and instilling a sense of social responsibility in your heirs.

As you ponder your philanthropic strategies, saving taxes may not be your biggest priority. But it makes sense to consider the tax implications of various approaches to charitable giving.

Souping up lifetime charitable donations

Tax planning allows you to benefit the organizations you care about at a lower cost to you and your family. It also may enable you to leverage your charitable dollars by providing greater benefits to charity without increasing your cost.

Say, for example, you’re in the 35% tax bracket and plan to donate $100,000 to your favorite charity. If you donate cash, the “cost” of your gift is $65,000 – $100,000 less the tax-savings you would enjoy by taking a $100,000 deduction on your income tax return (assuming your write-off isn’t reduced by charitable deduction limitations).

Suppose, instead, you donate $100,000 worth of publicly traded stock you bought five years ago for $50,000. In this case, the cost of your gift is $57,500 because, in addition to getting the income tax deduction, you avoid the 15% capital gains tax on the stock’s $50,000 in appreciation. The charity still receives the full $100,000 value, but, by donating stock instead of cash, you save an additional $7,500.

Tax-smart charitable bequests

It’s not unusual for people to name charities in their wills, either by making outright bequests to charitable organizations or by contributing assets to a charitable trust. One of the benefits of making charitable gifts at death is that your estate can claim a charitable deduction for estate tax purposes.

But what if the value of your estate is within the federal estate tax exemption (currently, $2 million) so that you have no federal estate tax liability? In that case, you may be better off leaving the money to your kids and asking them to make the donation. These lifetime gifts may qualify for income and gift tax deductions.

Let’s suppose Allen wants to share $100,000 of his $2 million estate with a charity. If he names the charity in his will, he won’t generate any estate tax savings, because he has no estate tax liability (assuming the exemption is still $2 million or more when he dies). Now, suppose Allen leaves the $100,000 outright to his daughter, who’s in the 33% income tax bracket, and asks her to donate the money to the charity. By making the donation and taking a charitable deduction, Allen’s daughter enjoys $33,000 in income tax savings.

This strategy allows Allen to make the same gift to charity, but also provides a significant benefit to his daughter. Bear in mind that his daughter has no legal obligation to carry out his request, but a donor’s wishes typically are respected.

Potential state tax savings

The examples above show just a few of the many ways that tax planning can help you achieve your charitable giving goals in a cost-efficient manner. It’s also important to consider the potential impact of state income and death tax savings on your planning, because lifetime gifts reduce the value of your estate.

08 Apr

A Charitable Gift Annuity Can Benefit You and Your Community

In Charitable Gifts by admin / April 8, 2013 / 0 Comments

Estate Planner Nov-Dec 2001

Today’s financial market may have you worried about the future. Although you can make fast money by investing in the unsteady stock market, you can lose it just as quickly. You may also wish to share a portion of your earnings with a favorite charity, museum, school or religious organization but are concerned about minimizing the tax impact. So how can you maintain a consistent income flow and still protect capital gains from the IRS? One of the most accessible and least complicated ways is through a charitable gift annuity.

A charitable gift annuity allows you to reinvest your appreciated property, avoid a current capital gains tax and do a good deed all at once. Here’s a closer look at how a charitable gift annuity can benefit your cash flow and your community.

Benefits of a Charitable Gift Annuity

Jon’s stock in has skyrocketed and he will face a large capital gains tax if he sells the stock. With dot-coms as unstable as they have been, he’s afraid to continue investing in the same company, yet doesn’t like the idea of selling his stock and handing over 20% of his gain to the IRS.

At the same time, Jon wants to prepare for his future. He has $500,000 worth of the stock that he wants to reinvest to provide additional cash flow. Jon’s advisor suggests creating a charitable gift annuity. Jon decides to support his local nature society. The
society and Jon agree on the terms and payout provisions of the charitable gift annuity agreement.

How a Charitable Gift Annuity Works

Jon’s charitable gift annuity agreement provides that, in exchange for the stock worth $500,000, the society will pay him an annuity of $33,000 a year for the remainder of his life. By purchasing an annuity, Jon is able to defer the capital gains when the society sells the stock and recognize a portion of the gain, but only as he receives annual payments. Jon reports his capital gain over his life expectancy. Also, a charitable gift annuity defines a portion of each payment Jon receives as a tax-free return of principal.
In addition, the tax law allows Jon to claim an income tax charitable deduction in the year he sets up the charitable gift annuity. Jon’s current tax deduction is based on the present value of the portion of the gift that will pass to the charity and is limited to 30% of his adjusted gross income. Jon can carry forward any excess deduction for five years.
Several factors determine the actual amount of the annuity Jon receives from the society:

  • Jon’s age at the time of the gift,
  • The rate of return the charity believes it will earn,
  • The gift amount, and
  • Whether the payments will begin immediately or be deferred to a later time. 

Jon may want to consider how the gift annuity may affect what he leaves to his wife after his death. But there is an easy way to handle this: Jon may name his wife – or a child or another person – as the successor beneficiary. The number and age of any additional beneficiaries will be taken into account when calculating the annuity payout and the gift’s value. Jon could also increase his life insurance or set up the annuity so that a portion of the payout pays his life insurance premiums, ensuring the welfare
of his beneficiaries.

A Win-Win Situation 

A charitable gift annuity carries many advantages. Financially, it spares you harsh taxation from immediate capital gains while ensuring retirement funds. Unlike many retirement savings plans – such as 401(k)s and IRAs – there are no limits on how much you can contribute to a gift annuity.

The plans are relatively easy to set up and allow for tremendous flexibility. And, philanthropically, a gift annuity benefits your community. Whether it is a charity or an educational or religious institution, charitable gift annuities protect the investor while ultimately giving to those in need.

08 Apr

Partial Gifts to Charity Make Giving Easy

In Charitable Gifts,Charitable Trusts by admin / April 8, 2013 / 0 Comments

Estate Planner Jan-Feb 2001

You can gain many income, estate and gift tax advantages when you give to charity by establishing and using a split-interest trust — such as a charitable lead trust or a charitable remainder trust. But establishing these trusts can be time consuming and costly. An alternative is to give a partial property interest directly to charity.

Three simpler-to-administer ways to do this are to give remainder interests, give fractional interests or grant a conservation easement on your property.

These allow you to receive many of the same benefits as you would by establishing trusts:

  • A charitable contribution income tax deduction for the interest passing to charity, valued as of the date of the gift,
  • A charitable gift tax deduction,
  • An exclusion of the property from your estate for estate tax purposes, and
  • Additional deductions if you substantially improve the property.

Let’s examine how each method works.

1. Giving a Remainder Interest 

A gift of a remainder interest involves dividing the ownership of an asset between a current ownership interest and a later ownership interest. You keep the current ownership interest and give away the later or remainder interest.

Your personal residence, vacation home or farm are examples of good candidates for giving a remainder interest to charity. You may split the remainder interest among multiple charities or a mix of charities and individuals. By giving a remainder interest, you can choose to have your property pass directly to the charity or first to someone else and then to the charity, either at your death or at a fixed time.

You may restrict the charity’s use of the property. For example, you can require the charity to sell the property, or give the charity the right to keep it. You may require the charity to pass the title to another charity. You may provide that the charity will lose the property if it attempts to sell or place a mortgage on it, allow others to use it for reasons other than its intended use, or alter it. For example, you may use this type of restriction when your gift is a residence with historic or architectural significance.

2. Giving a Fractional Interest

A gift of a fractional interest involves dividing the ownership of an asset into fractions. For example, you keep 2/3 of an asset and give the other 1/3 to charity. A vacation home or items on tangible personal property that have a significant value are assets to consider for a fractional interest gift. (See “Donate Artwork Using Fractional Interests.”) If you and the charity later sell or replace the property with another type of property, the charity will be entitled to share in the proceeds of the new property.

Your gift must be a portion of your entire ownership in the property. For example, if you have a right to use a vacation residence during your lifetime, you could donate one-third of your interest in the use of the property for your life to charity. If you owned the property outright, you would not be able to donate just the use of the property to charity for your lifetime.

3. Granting a Conservation Easement 

A conservation easement is a permanent restriction on the use of your property that furthers the objectives of a tax-exempt organization whose goals generally relate to the environment or the presentation of history.

For example, you could place a restriction on the development of vacant land. You must grant the easement to a qualified organization that would be able to enforce it, such as a charity or government organization. The value of the easement for determining your charitable deduction is the difference between the value of the property before and after you grant it.

Which Method Is Best for You?

If you wish to benefit from the income, estate and gift tax advantages of making a gift to charity using a split interest but want to avoid the expense and complications of a charitable lead trust or a charitable remainder trust, consider making a partial gift. If you would like assistance in determining whether one of these charitable gifting methods is best for you, please give us a call.

Donate Artwork Using Fractional Interests

If you wish to give a work of art you own to a museum, you may use fractional interests. Suppose you give a one-third interest in a painting to charity. The charity will then have the unrestricted right to use the painting for four months of the year. The charity is not required to take possession of the painting; it simply must have the right to do so. The right of the charity to possess the painting must take place within one year of the date of the gift.

08 Apr

The Gift That Gives Back – Charitable Lead Trusts Can Help You Shelter Assets

In Charitable Gifts,Charitable Trusts by admin / April 8, 2013 / 0 Comments

Estate Planner Jan-Feb 1999
In the right situation, a charitable lead trust enables you to transfer significant wealth to later generations at reduced transfer tax costs, while helping you meet your charitable objectives.

The charitable lead trust (CLT) is the reverse of a charitable remainder trust. The CLT is an irrevocable trust established during life or at death that gives one or more charities the “annuity” or “lead” interest. The remainder interest passes to children or other noncharitable remainder beneficiaries, either outright or in trust. The remainder interest could also revert to the donor.

Generally, a CLT is appropriate if you are interested in supporting a charity and transferring assets to the next generation at substantially reduced transfer tax costs. The CLT is also suitable if you make substantial charitable contributions each year or your charitable gifts exceed the percentage of gross income ceiling on income tax deductibility.

How To Create a CLT

You establish a CLT by placing assets into a trust in which one or more charitable organizations receive an annuity interest for a period of time. (CLTs are not subject to the 20-year term limit that applies to charitable remainder trusts.) You can either stipulate the charities to receive the annual distributions in the trust agreement or leave the choice to the discretion of the trustee or a distribution committee. You should not serve as trustee.

To increase flexibility, you can designate a philanthropic or donor-directed fund or a private foundation as the charitable recipient. But take care that this increased flexibility and control do not cause the trust to be included in your estate for estate tax purposes if you die during the trust’s term. All assets remaining in the CLT at the end of the term (the remainder interest) are distributed to your children or to other designated beneficiaries.

Gift Tax Considerations

When you establish a CLT during your lifetime, the present value of the remainder interest is a current taxable gift. To calculate this value, you first determine the present value of the lead or annuity interest to the charity by using the applicable federal interest rate prescribed by U.S. Treasury regulations.

You then subtract this value from the total value of the assets placed into the CLT. The lower the applicable federal interest rate, the lower the taxable gift and the greater the potential benefit to the remainder beneficiaries if the trust can grow in value at a rate greater than the required payout.

For example, let’s say you transfer $3 million of appreciated securities to a CLT that distributes an 8% annuity each year for 20 years to your favorite charity. Table 1, below, shows how the results change depending on the applicable federal rate.
Increasing the term of the trust or the amount of the annual distribution may reduce or possibly eliminate the amount of the taxable gift.

Since the remainder interest in a CLT is a future interest, the taxable gift portion does not qualify for the gift tax annual exclusion. If the remainder interest passes to your spouse who is a US citizen, it should qualify for the gift tax marital deduction.

Estate Tax Considerations

You may establish a CLT at death through a will or revocable trust. Your estate is entitled to an estate tax charitable deduction for the present value of the charitable interest. This value is calculated in the same way as the charitable gift tax deduction.

If you transfer highly appreciated assets to a CLT, a testamentary lead trust may be preferable to a trust established during your lifetime. This is because assets transferred to a CLT created at the time of your death receive a step-up in basis. This will reduce the capital gains tax owed by the trust or by the remainder beneficiaries when the assets are sold. Unlike a charitable remainder trust, a CLT is a fully taxable trust. Income will be taxed either to the grantor or the trust (and the trust will be entitled to receive an offsetting charitable income tax deduction).

A CLT must be either an annuity trust or a unitrust. In the case of an annuity trust, the annuity is expressed as a percentage of the initial fair market value of the assets contributed to the trust. With a unitrust the annual distribution is redetermined each year based on the current value of the trust’s corpus. If the remainder interest in the CLT passes to your grandchildren or other “skip persons,” the generation-skipping transfer (GST) tax rules will apply differently depending on whether the trust is an annuity trust or a unitrust. How you can allocate your GST tax exemption depends on the type of trust established.

You may use a CLT to shelter future growth in the value of assets transferred to or acquired by the trust or as part of a business succession plan. You may be able to fund a CLT with discounted interests, such as in a family limited partnership, thus increasing the potential benefit to the remaindermen. A CLT may produce better results than a direct gift to grandchildren, depending on your assumptions of growth. Just be sure to run the numbers using different examples.

Timing Is Everything

Estate planning is often a matter of timing. The current low applicable federal discount rates provide a significant opportunity to use a CLT to leverage the transfer of wealth to the next generation. If you think a CLT may help you achieve your objectives, please call us. We would be glad to answer questions you may have about CLTs and show you how to use them to your best advantage.

Table 1: Calculation of Current Taxable Gift

Value of transferred securities $3,000,000 $3,000,000
Annual distribution to charity (8%) $240,000 $240,000
Applicable federal rate (120%) 5.4% 7%
Present value of charitable gift $2,892,000 $2,543,000
Taxable gift $108,000 $457,000 
08 Apr

Conservation Easements Provide Estate Tax Benefits

In Charitable Gifts,Conservation Easements by admin / April 8, 2013 / 0 Comments

Estate Planner May-Jun 1999
A conservation easement is one of the qualified conservation contributions treated as a charitable deduction for income tax purposes. These contributions give an interest in real property to a qualified organization exclusively for conservation purposes. Under recent legislation, conservation easements can also qualify for a new estate tax exclusion.

Conservation easements can take many forms, including:

  • A limitation on the property’s use,
  • A limitation on the number of building sites on an undeveloped real estate parcel,
  • A prohibition against depleting the land’s natural resources, such as timber, and
  • A prohibition against fishing or hunting.

Conservation easements must be entered into between the owner of the real estate and a “qualified organization.” A qualified organization is one committed to conservation purposes with the resources to enforce the easement. The Internal Revenue Code (IRC) permits many conservation purposes including:

  • Preservation of land for outdoor recreation or education of the general public,
  • Protection of a natural habitat, preservation of open space for scenic enjoyment, and
  • Historical preservation.

Conservation easements have been made significantly more attractive for estate planning purposes because of the newly available 40% exclusion of up to $200,000 in 1999. This maximum exclusion amount increases $100,000 per year until it reaches $500,000 in 2002.

Qualifying for the Exclusion 

To be eligible for the new exclusion, the land must be subject to a qualified conservation easement. Historical easements are not excludable. In addition, the qualified conservation easement must prohibit more than just a de minimis use for commercial recreation. The land owner, or a family member, must also meet a three-year holding period requirement.

To qualify for the estate tax exclusion, the land subject to the conservation easement must be located within:

  • 25 miles of a metropolitan area,
  • 25 miles of a national park or wilderness area, or
  • 10 miles of an urban national forest.

It is important to note that the conservation easement may even be placed on the property after the donor’s death by the executor or estate. For the exclusion to be available in this case, the executor must make an irrevocable election for the conservation easement on or before the due date of the federal estate tax return.

Calculating the Exclusion Amount

The amount of the exclusion is computed on the property’s reduced value rather than its value before the easement. Be careful when obtaining an appraisal of the easement’s value. Have the property professionally valued both before and after granting the easement. And note that special rules apply if the land is subject to debt or if you retain development rights. (See “Retained Development Rights,” below.)

The 40% exclusion amount is reduced by 2% for each 1% by which the easement’s value is less than 30% of the land’s value. Thus, the estate tax exclusion is reduced if the easement’s value is between 30% and 10% of the land’s value. No exclusion is available if the easement’s value is less than 10% of the land’s value. This ensures that the easement will benefit the public. Note that the land will not receive a stepped-up basis to the extent of the exclusion on the donor’s death. For example, if a conservation easement donated during life reduced the value of land from $1 million to $600,000 and the donor died in the year 2000, then the donor’s executor could exclude $240,000, which is 40% of the $600,000 value. If the donor died in 1999, the exclusion would be capped at $200,000.

Increasing Popularity

The popularity of conservation easements as an estate planning tool is increasing because of the additional estate tax benefits provided by recent tax legislation. Significant tax savings may be available. We would be glad to discuss whether a conservation easement is right for your estate planning objectives.

Retained Development Rights

Special rules apply if the land is subject to debt or if you retain development rights. Retained development rights are defined as the right “to use the land for a commercial purpose not directly related to and supportive of the use of the land as a farm for farming purposes.” Maintaining your residence on the property and normal farming practices are not considered retained development rights. But retaining the right to sell the land for future development or build houses would be considered retained development rights. Retained development rights are an asset of your estate and subject to estate tax, but your beneficiaries or heirs can agree to extinguish retained development rights within nine months of your death and avoid the tax.

08 Apr

Supporting Organizations as an Alternative to Private Foundations

Estate Planner May-Jun 1999

The complexity of the rules governing private foundations and the restrictions placed on them under the Internal Revenue Code (IRC) have spurred a search for alternatives by the charitably inclined who wish to maintain some control over property gifted to charity.

Establishing a supporting organization is one alternative to consider. Supporting organizations are often overlooked because the rules for establishing them may on the surface seem more complex than for private foundations. Nevertheless, supporting organizations are gaining in popularity and offer significant advantages over private foundations.

Supporting organizations are just what their name suggests — organizations that support or benefit one or more existing public charities. You and your family, as donors, can provide grants and distributions to your favorite charities by establishing a supporting organization that allies itself with those charities.

Private Foundations vs. Supporting Organizations

Private foundations allow you and your family to maintain a great deal of direct control over the investment of foundation funds. However, this ability to control has brought private foundations under Internal Revenue Service (IRS) scrutiny. In addition, private foundations are subject to numerous rules designed to prevent perceived abuses that are thought to benefit the donor. For example, engaging in self-dealing, failing to distribute 5% of the foundation’s assets annually, or making investments that are deemed too risky or that hold too great a share of one business can subject private foundations to excise taxes.

Supporting organizations are not subject to these excise taxes and also provide greater tax advantages for the donor. The income tax deduction for charitable contributions to supporting organizations is limited to a higher percentage of your adjusted gross income than that for contributions to private foundations — 50% rather than 30%. Also, contributions of real estate and nonmarketable appreciated property to supporting organizations may be deducted based on fair market value, and not on tax basis as in the case of private foundations.

One of the primary reasons for the increasing popularity of supporting organizations is the growing awareness of the donor’s ability to exert some influence over the assets’ use after transferring ownership. This influence or indirect control, which, under the IRC, must necessarily fall short of direct control, is a significant objective because supporting organizations have no percentage limits on the amount of a business interest that the supporting organization may hold. In contrast, a private foundation, which allows a donor to retain much more direct control, may not hold more than 20% (including attribution) of an operating business for an extended period of time.

Establishing a Supporting Organization

A donor may establish a supporting organization as either a corporation or a trust. There is some question as to which format provides greater flexibility. For example, some people feel it is easier to keep the indirect control in the family through corporate bylaws or to change charitable beneficiaries through corporate charter amendments.

Once you have chosen the type of entity that is right for you, determine which of the three types of supporting organizations authorized by the IRC is appropriate:

1. A designated charity or charities actually operates, supervises or controls the supporting organization.

2. The supporting organization is “supervised or controlled in connection with” the designated charity or charities.

3. The supporting organization operates “in connection with” the charity or charities.

This third type is the most attractive from a control standpoint because it allows the supporting organization to be controlled by independent parties who may be selected by you and your family. Even if you can’t control the supporting organization, you can still exercise considerable influence if you and your family comprise a substantial minority of a supporting organization’s board of directors and you also select the independent directors.

Is a Supporting Organization Right for You?

A supporting organization offers a viable alternative to a private foundation for many donors when the subject of a charitable gift is property other than cash and marketable securities. You can retain control over the property, and you can receive a greater income tax charitable deduction. If you have questions regarding supporting organizations, or any other questions regarding your estate plan, don’t hesitate to call. We would welcome the opportunity to help you achieve your estate planning goals.

Qualifying as a Supporting Organization

For an organization to qualify as a supporting organization, it must meet four tests:

1. Independent parties must have control — you and your family, as donors, cannot control the organization.

2. The supported charity or charities must have either a “significant voice” in the supporting organization or the supporting organization must qualify as a “charitable trust” in which the supported charity has the power to enforce the trust terms. In addition, the supporting organization must apply substantially all of its income for the charity’s use or perform services that the charity would normally perform itself.

3. The supporting organization must be limited to the specified charities’ approved charitable purposes.

4. The supporting organization must actually benefit the charity through its operations.

08 Apr

Donating Your Home to Charity

In Charitable Gifts,Home by admin / April 8, 2013 / 0 Comments

Estate Planner May-Jun 1998

Case Study of a Tax-Smart Strategy

Sam is a widower, age 68, in good health and has an estate of $2 million consisting of a $900,000 Individual Retirement Account (IRA), $800,000 securities and cash portfolio, and a $300,000 home. Sam wants to leave his estate primarily to his children but also wants to make a substantial gift or bequest to his favorite charity. Sam is looking for a way to do this simply while being tax smart.

Since Sam is counting on his IRA and securities for income and flexibility, and wishes to continue to live in his home, an outright gift to charity is not an appealing option at this time. The solution Sam is considering is gifting a remainder interest in his home to his favorite charity.

How It Works

Income tax rules contain a specific exception that will allow Sam to both make a gift to charity of his home that won’t take effect until his death and receive a current income tax deduction for the present value of the remainder interest.

The Benefits

The present gift of a remainder interest in Sam’s home will result in three tax benefits:

1. Based on the current value of the residence and Sam’s age, Sam will be able to receive a charitable income tax deduction of $126,897, using the Internal Revenue Service (IRS) discount rate for the month of the transaction (7520 rate). Sam will need to get a qualified appraisal of his home since the charitable deduction will exceed $5,000. Also, in making the calculation of the present value of the remainder interest, Sam may choose the 7520 rate for the month in which he makes the gift, or for either of the two preceding months. The remainder interest will be valued higher and the charitable deduction will be larger if a lower 7520 rate is used.

2. Sam’s gift of the remainder interest in his home will also qualify for a gift tax charitable deduction, so he will not have to pay a gift tax on the transfer.

3. Title to Sam’s home will pass to charity upon his death, and his heirs will not owe estate tax on it.

A Flexible Option

This planning technique can be flexible to meet Sam’s specific needs. For example, if Sam determined that the gift of the entire value of the home was too large, he could leave the charity a fractional portion of the remainder interest.

Another alternative is for Sam to give the right to use the personal residence after his death to someone else before the charity receives it. However, this would significantly decrease the value of the remainder interest, and could cause gift tax. The person receiving the right to live in the house (a second life estate) after Sam’s death would be receiving a gift of a future interest and the gift would not qualify for the $10,000 annual exclusion. If Sam remarried and made the gift to his wife, it would not qualify for the gift tax marital deduction because her interest would not start until Sam’s death.
Generally this gift trap can be avoided if Sam retains the right to revoke the second life estate during his lifetime. This would remove the gift tax issue and would put the property in Sam’s estate for estate tax purposes. Accordingly, the second life estate would then qualify Sam’s wife for the estate tax marital deduction.

A mortgage on the residence at the time of the gift may make the well-intentioned gift more complicated. The contribution of the mortgaged property would be considered a bargain sale, with the donor “receiving” an amount equal to the outstanding debt on the property. The result is gain to the donor.

Additionally, the value of the income tax deduction is affected by the outstanding mortgage. If the existing term of the mortgage extends beyond Sam’s life expectancy, then the gift to charity is in theory subject to a liability. When Sam dies at his expected age, the remainder interest will pass to charity subject to the unpaid mortgage balance.

Accordingly, Sam’s income tax deduction probably should be reduced by the amount of the present value of that liability. On the other hand, if the remaining term of the mortgage is less than Sam’s life expectancy, Sam can agree to hold the charity harmless from the mortgage liability so the value of the remainder interest will not be affected.

Smart Choices

Making gifts to charity during your lifetime almost always offers more tax benefits than transfers occurring after death. However, many people do not want to jeopardize their present financial security by donating liquid assets to charity. Giving a remainder interest in a personal residence could be the answer for people who wish to accomplish both charitable and income tax objectives.

Home Improvement

Presumably, Sam will take care of all expenses related to the residence including repairs, maintenance, improvements, taxes, special assessments and utilities during his lifetime. If a successor life estate is being given to someone, then Sam’s estate plan should make arrangements for the payment of these costs.

Anything Goes

The special income tax exception that applies to Sam’s situation only requires that the remainder interest be in a personal residence. It does not have to be Sam’s primary residence and accordingly, if Sam had a vacation home, the remainder interest in that property could be used for the gift to charity. Of course, the definition of home also includes a condominium as well as a cooperative apartment. In fact, under the right circumstances, a house boat or a yacht would qualify as a personal residence.


08 Apr


In Charitable Gifts,Charitable Trusts by admin / April 8, 2013 / 0 Comments

Estate Planner Mar-Apr 1998

Choose the Charitable Remainder Unitrust Option To Meet Your Needs

Charitable remainder unitrusts (CRUTs) can provide an income stream to an individual, a contribution to a charity and an income tax deduction for the donor. Certain limitations, however, make traditional CRUTs less attractive in some situations. Two other types of CRUTs — the net income with make-up CRUT (NIMCRUT) and the Flip CRUT — can be useful alternatives. The type of assets you are contributing and your charitable goals will help you determine which type of CRUT is right for you.

How CRUTs Work

You (the donor) contribute assets to a trust and take a current income tax deduction equal to the present value of the gift that will eventually be distributed to charity. The CRUT pays the noncharity beneficiary (the annuitant, who can be you or someone else) a percentage of the trust assets, valued each year either for the annuitant’s life or for a term of years (not more than 20). At the end of the trust term, the remaining assets go to the charity (or charities) you have named as the beneficiary.

For example, Beth creates a CRUT and funds it with $1 million. The CRUT terms require the trust to pay Beth 7% of the value of the trust assets each year for 20 years. Beth will receive a distribution of $70,000 in the first year. If the trust assets grow to $1.1 million in the second year, Beth will receive $77,000. At the end of the trust term, Beth’s favorite charity will receive the balance of the trust assets.

Use a CRUT To Defer Taxes on Appreciated Assets

CRUTs can be ideal vehicles to defer tax liabilities on appreciated assets. Why? Because the trustee of a CRUT can sell the appreciated assets transferred to the trust without incurring capital gains tax, though the annuitant is responsible for income tax on the payment he or she receives each year.

For example, if Beth sells $1 million of stock, for which she had paid $100,000, she will pay $180,000 in tax, leaving her $820,000. To receive the $70,000 annual income stream she needs, she will have to earn a 9% return. If instead she funds a CRUT with the stock, and the CRUT sells it, the full $1 million will be available to invest because the CRUT will pay no immediate capital gains tax.

CRUTs don’ t work as well when funded with assets that produce no income, such as real estate. If the assets held by a CRUT do not produce enough income to meet the annual payment obligation, the trustee will be forced to use the trust corpus to transfer a portion of the assets back to the annuitant as a part of the payment. This will reduce the trust’s ability to produce income in the future and leave less for the charity at the end of the trust term.

Use a NIMCRUT To Hold Currently Unproductive Assets

If you are interested in funding a CRUT with assets that are currently unproductive but are likely to be productive at some point over the trust term, consider using a NIMCRUT instead. Under the NIMCRUT, the annuitant receives the lesser of either the net income earned by the trust during the year or a fixed-percentage amount. A make-up account is established for years when the trust pays less than the percentage amount, and any shortfall is made up in years the trust earns more income than the percentage amount.

Using our previous example, if the NIMCRUT earns $60,000 in the first year, Beth will receive a payment in that year of $60,000, because this is less than the 7% required amount. If the trust earns $90,000 in the following year, and assuming the value of the trust is still $1 million, Beth will receive a payment of $80,000 — the $70,000 percentage amount, plus an additional $10,000 to make up for the prior year’s $10,000 shortfall.

By using a NIMCRUT, the trustee avoids having to distribute a portion of the trust corpus to an annuitant as part of the annual payment in years in which the trust does not produce enough income. Thus, a NIMCRUT preserves trust corpus while still, over time, paying the annuitant the percentage he or she is entitled to under the trust.

But the trustee may face another dilemma if the unproductive asset is sold. Generally, the terms of a NIMCRUT agreement forbid the trustee to pay the fixed-percentage amount from capital gains or trust principal. Therefore, the trustee may feel pressured to invest for current yield, and produce additional income to make up prior shortfalls to the annuitant, rather than to invest for total return, which may better serve the long-term interest of the charitable beneficiary.

Use a Flip CRUT To Benefit Annuity and Charity More Equally

If you want to benefit the annuitant and the charitable beneficiary more equally, consider a Flip CRUT, a technique approved in last year’s tax legislation. The Flip CRUT begins as a NIMCRUT and can be funded with an unproductive asset. This allows the trustee to make smaller or no payments to the annuitant in years the trust is earning little or no income.

Once the asset is sold, the trust flips to a traditional CRUT, which then pays the annuitant the fixed-percentage amount, allowing the trustee to invest for total return.
For instance, using our prior example, if Beth funds a Flip CRUT with an unproductive asset valued at $1 million, the trust will earn no income and Beth will receive no annual payments. When the trust assets are sold and invested in income-producing assets, Beth will begin to receive fixed percentage payments of 7% of the trust assets as valued each year but will receive no make-up for payments not received in prior years.

To qualify as a Flip CRUT, though, at least 90% of the fair market value of the trust assets must be unmarketable at the time of trust funding, and the trust’ s governing instrument must provide that it will be a NIMCRUT until the unmarketable assets are sold. At that point, it will flip to a standard CRUT and the annuitant will forfeit any make-up payments.

Which Vehicle Is Right for You?

CRUTs, NIMCRUTs and Flip CRUTs can all be effective estate planning techniques if you want to make a charitable donation while retaining an income stream that can continue for the benefit of your spouse or children. If you have questions about these trust options, please contact us. We would like to help you determine which is appropriate for your situation.


Flip CRUT as a Retirement Planning Tool

If you have no current need for income, you can fund a Flip CRUT with an unproductive asset, retaining an income interest and receiving a current income tax deduction. You can time the sale of the asset to coincide with your retirement, when you will need additional income. The trust will flip on the sale of the assets and begin paying you income during your retirement years.