This document was last revised on July 1, 2002 and does not reflect changes in the law that have occurred since that date. The purpose of this outline is to provide an overview of concepts germane to the subject. None of the information contained herein should be relied upon without careful analysis of the changes to the applicable laws and regulations since the revision date.

I.          Federal Income Tax Charitable Deduction for Individuals.  Federal income tax deductions, while allowed for charitable contributions made during a taxable year, are limited to certain amounts, depending upon who makes the gift, who receives the gift, and what type of property is contributed.  Any deduction that exceeds the maximum amount allowed can be carried over to the next five (5) years.

 

A.        Type of Charity.  An individual’s charitable income tax deduction is limited based upon what type of charity is the recipient of the gift.

 

1.         “50%” Charity.  Charities known as 501(c)(3) Organizations such as churches, educational institutions, hospitals, governmental units, and certain organizations which receive substantial support from governmental units or the general public are classified as 50% charities.  When a donor donates property to a 50% Charity, the donor is allowed to deduct up to 50% of his or her adjusted gross income (“AGI”) in the year of the gift depending on the type of property donated. 

 

2.         “30%” Charity.  Includes all other charities (mostly private foundations) described in I.R.C. Section 170(c), but do not qualify as 50% charities.  An individual donor can deduct up to 30% of his or her AGI in the year of the gift to the 30% Charity depending on the type of property donated.

 

B.         Type of Property.  An individual’s charitable income tax deduction is limited based upon what type of property is donated.

 

1.         Cash.  An individual can deduct the entire amount of cash contributed to either a 50% Charity or a 30% Charity, subject to the annual limitations noted above.

 

2.         Ordinary Income Property.  An individual may deduct the fair market value of ordinary income property donated to charity (subject to the 50% of AGI and 30% of AGI limitations discussed above) only after deducting from said value the amount of ordinary income which would have been recognized had the property been sold.  Ordinary income property is property which, when sold at fair market value, would result in ordinary income rather than long-term capital gain, such as inventory and certain depreciable property.

 

3.         Long-Term Capital Gain Property (includes tangible personal property related to exempt purposes of the charity).  An individual may deduct the fair market value of long-term capital gain property, subject to the following restrictions:

 

(a)        50% Charity.  Deduction for gift of long-term capital gain property to a 50% Charity is limited to 30% of AGI.  Can be increased to 50% of AGI, if the deduction is limited to the value of the property contributed as reduced by the amount of long-term capital gain that would have been recognized had the property been sold.

 

(b)        30% Charity.  Deduction for gift of long-term capital gain property to a 30% charity is limited to 20% of AGI for gifts of publicly traded stocks for which a market quotation is readily available.  For all other gifts to a 30% Charity, deduction is limited to the value of the property contributed as reduced by the amount of long-term capital gain that would have been recognized had the property been sold.

 

4.         Tangible Personal Property Unrelated to the Charity’s Purpose. 

 

(a)        50% Charity.  The income tax charitable deduction equals the value of the property contributed, less the amount of gain that would have been recognized as long-term capital gain had the property been sold.  The deduction is subject to the 50% of AGI limitation.

 

(b)        30% Charity.  The income tax charitable deduction equals  the value of the property contributed, less the amount of gain that would have been recognized as long-term capital gain had the property been sold.  The deduction is subject to the 20% of AGI limitation.

 

II.         Charitable Gift Annuity.  A combination of a gift and an investment whereby a donor transfers cash or marketable securities to a charity who contractually guarantees to pay a specified amount each year, i.e. an annuity to the donor and/or one other beneficiary.

 

A.        Characteristics.

 

1.         Annuity rate depends upon age of beneficiary or beneficiaries.  Usually, the annuity rate is low when compared to an investment in equities.

 

2.         Maximum of two (2) annuitants permitted.

 

3.         A portion of each annuity payment is a tax-free return of principal.

 

4.         Donor’s charitable income tax deduction equals the amount transferred to charity less the present value of the retained annuity.

 

5.         Donation of appreciated long-term capital gain property allows for the capital gain to be spread out over the donor-annuitant’s life expectancy.

 

B.         Types of Charitable Gift Annuities.

 

1.         Immediate Annuity.  The annuity payments to the annuitant begin in the year of the gift.

 

2.         Deferred Payment Gift Annuity.  The annuity payment to the annuitant begins at a future date (often retirement).

 

III.       Pooled Income Fund.  A donor makes a gift to a charity which places the gifted assets in a “pool” with assets contributed by other donors.  The pool of assets is invested by the charity.  The donor receives his or her share of the fund’s earnings each year for life.  At the end of the term, the donor’s portion of the pool reverts to the charity.

 

A.        Donor receives income tax deduction for present value of remainder passing to charity.

 

B.         The annual payments received by donor are taxed as ordinary income.

 

C.        Donor has no control over where the assets of the fund are invested.

 

IV.       Charitable Remainder Trust (CRT).  A CRT is a trust where non-charitable beneficiaries receive income payments for a period of time, with the remainder being paid outright to a charity at the termination of the trust.

 

A.        The Mechanics.

 

1.         An individual, i.e. the grantor, transfers ownership of certain assets into an irrevocable trust.

 

(a)        A CRT is often funded with highly appreciated assets which can be sold by the trust without the imposition of a capital gains tax.

 

(b)        By transferring low income producing assets to a CRT, the trustee can sell the assets and purchase other income producing securities to provide additional income to the grantor (or other recipient), usually during retirement.

 

2.         The grantor names a non-charitable beneficiary to receive payments of income for a period of time (the “Term”) as defined in the CRT.

 

(a)        The income beneficiary may be any non-charitable beneficiary, but it is usually the grantor.

 

(b)        The Term may be for the grantor’s life, another non-charitable beneficiary’s life, or a certain number of years not to exceed 20.  If the grantor is married, income is typically paid over the life of the grantor and the life of the surviving spouse.

 

(c)        The payments are usually made in monthly, quarterly or annual installments.

 

(d)        The amount paid each year is calculated based upon the terms of the trust, and depends upon the type of CRT, i.e. Charitable Remainder Annuity Trust (CRAT) or Charitable Remainder Unitrust (CRUT).

 

B.         Tax Consequences.

 

1.         Income Taxes.  An individual can deduct the present value of the charities’ remainder interest in the taxable year of contribution of the property into the trust (subject to the limitations discussed in Section I above).  Also, grantor avoids capital gains on the sale of assets transferred into trust.

 

2.         Estate Taxes.  Since trust is irrevocable, the assets are removed from the grantor’s estate.

 

C.        Charitable Remainder Annuity Trust (CRAT).

 

1.         Payments each year are a fixed percentage (annuity amount) of the initial valuation of assets in the trust.  The annuity amount is stated in the trust document.

 

2.         The annuity amount cannot be less than 5%.

 

3.         The present value of the charitable remainder interest must be at least 10% of the initial value of the trust.

 

4.         The Grantor cannot add additional assets to the trust after initial funding.

 

5.         Higher income tax deduction and higher contribution to charity at termination of trust, when compared to a CRUT.

 

D.        Charitable Remainder Unitrust (CRUT). 

 

1.         Payments each year are similar to a variable annuity, i.e. a fixed percentage (unitrust amount) of the annual re-valuation of assets in the trust.  As the value of the corpus changes from year to year, the amount distributed will also change.  In addition, the grantor may elect to have the trust document require the trustee to pay the lesser of the unitrust amount or the actual trust income (known as a net income unitrust).

 

2.         The unitrust amount cannot be less than 5% or greater than 50%.

 

3.         The present value of the charitable remainder interest must be at least 10% of the initial value of the trust.

 

4.         The grantor can add additional assets to trust after initial funding.

 

5.         Lower income tax deduction and lower contribution to charity at termination of trust, when compared to a CRAT, but offers the ability to have unitrust payments increase each year if investments outperform the rate of pay-out.

 

V.        Charitable Lead Trust (CLT).  A CLT is a trust which pays income to a charity for a period of time, with the remainder payable to a beneficiary at the termination of the trust (basically the reverse of a CRT).

 

A.        The Mechanics.

 

1.         An individual, i.e. the grantor, transfers ownership of certain assets into an irrevocable trust.

 

2.         The grantor names a charitable beneficiary to receive payments for a period of time (the “Term”) as defined in the CLT.

 

(a)        The Term may be for the grantor’s life or a certain number of years, without limitation.

 

(b)        The payments are usually made in monthly, quarterly or annual installments.

 

(c)        The amount paid each year is calculated based upon the terms of the trust, and can be either an annuity amount or a unitrust amount, similar to the CLT’s discussed above.

 

(d)        Tax consequences depend on the type of CLT created, i.e. Grantor Charitable Lead Trust or Non-Grantor Charitable Lead Trust.

 

3.         Upon the termination of the Term of the trust, the trust assets are distributed to the noncharitable remainder beneficiaries, usually the grantor’s children or grandchildren.

 

B.         Grantor Charitable Lead Trust.

 

1.         Income Tax Consequences.  The grantor retains certain powers over assets of the trust.  Therefore the grantor is considered the owner of the trust for income tax purposes.  Grantor receives up-front income tax charitable deduction, but also must include trust income as personal income in future years.

 

2.         Estate Tax Consequences.  If the grantor retains the right to recover the trust principal at the termination of the trust, the value of that right will be included in the grantor’s estate at death.  If the trust principal is paid to someone other than the grantor at the termination of the trust, the property is excluded from the grantor’s estate.

 

3.         Gift Tax Consequences.  If the grantor retains the right to recover the trust principal at the termination of the trust, there is no gift tax on the remainder of the trust.  If the trust principal is paid to someone other than the grantor at the termination of the trust, the gift of the remainder will generate gift taxes on the date of the transfer of property into the trust.

 

C.        Non-Grantor Charitable Lead Trust.

 

1.         Income Tax Consequences.  The grantor does not retain certain powers over assets of the trust.  Therefore, the grantor is not considered owner of the trust for income tax purposes.  Grantor does not receive up-front income tax deduction, but receives annual deductions for the annual payments to charity.

 

2.         Estate Tax Consequences.  Since the remainder is paid to someone other than the grantor, the assets are not included in the grantor’s estate.

 

3.         Gift Tax Consequences.  Since the remainder is paid to someone other than the grantor, the gift of the remainder will generate gift taxes on the date of the transfer of property into the trust.