Citibank Charitable Giving Survey – January 8, 2002

Citibank Charitable Giving Survey – January 8, 2002

CPB Charitable Giving Survey

Final Report

January 8, 2002

Citigroup Private Bank -US Marketing

Prepared by:

Peg Dwan, VP, (212-559-7612)



To better understand HNW charitable giving needs and interests, so that CPB Philanthropic Advisement Service may better serve clients.

Information to be gathered includes —

• Factors that impact charitable giving

• % of income contributed, form of donation, distribution by type of charity, # of causes supported

• Motivation for giving, selection criteria, evaluation of gift

• Involvement of family in giving

• Non-financial support

• Demographics


• A one-page questionnaire was included in the November issue of “citigroup PB”.  This issue focused on Philanthropy

• Approximately 5,800 magazines were mailed to HNW clients and wealthy partners on November 16, 2001.  Additional surveys were distributed at a HNW event in Charlottesville in October.

• A postage paid return envelope was provided with the questionnaire; the clients were also given the option of returning their questionnaires by fax.

• A preliminary report for Charlottesville responses was provided 11/19/01.  This final report aggregates all responses.  Differences at wealth level above and below $25MM are noted.

• A response rate of 1.9% (112 responses) was achieved on the mail portion of the study; 23 were received from Charlottesville, for a total of 135.  64 clients were <$25MM in net worth; 55 were above and 11 were unknown.



• Among the respondents ($3MM+ net worth), increase in wealth had most significant influence on giving; events of September 11 caused only 44% (31% of $25MM+) to increase or change focus of their giving; the economy has some influence, but is a determining factor for only 7%; and a change in tax law would not impact giving for more than half.

• More than 60% of respondents donate over 5% of their income and support 5+ charities; top two charities are education (27%) and religion (20%).  Cash and stock are the most mentioned type of donation.

• Many respondents are committed, focused donors driven by personal reward; personal values (76%) and personal interest/ passion (67%) are the determining factors in identifying causes.

• Personal involvement is key to choosing funding opportunities (78%); and the charity’s relationship to community (62%) and reputation (54%) are the main selection criteria; respondents do not evaluate the charity as a business/investment opportunity, but they do evaluate the impact of their gift.

• Almost two thirds of respondents involve family in giving; one third have a family foundation (74% of $25MM+); and three quarters prefer to disclose their name when donating.

• The majority of respondents volunteer time to charitable causes (77%); most devote 2+ hours a week; the most frequent activities noted were giving time (47%), serving on boards (38%) and consulting (33%).

• Three quarters of the respondents were male; the average age was 63; and 46% had total net worth of $25MM+.


An enormous amount of money is contributed to charity by individuals, a total of $152B in 2000.  According to the IRS, the 2% of tax returns with $200M+ adjusted gross income donated $42B to charity in 1999; and 1998 Federal Reserve information suggests that % of income represented by contributions increased with net worth.

Charity is a very personal matter, even among the very wealthy.  They are committed, focused donors; personal reward is the most important motivation for giving; personal values and personal interest the top two considerations in determining the cause and personal involvement the primary factor in choosing funding opportunities.

Wealth Most Significant Influence on Giving

• Over the last 10 years, 86% of respondents had increased their charitable giving; of those who provided a reason, 79% cited increase in wealth or earnings.

• The events of September 11 impacted giving for only 44% of respondents in total; 50% for those with net worth under $25MM and only 31% for those over $25MM.

• 68% noted that the economy had some influence; only 7% that it was a determining factor.

• Giving would not change due to the new estate tax laws for 59% of respondents; 32% were unsure.




Many HNW donate a significant portion of income and support many charities

• More than 60% of respondents (76% for $25MM+ net worth) typically donate over 5% of their income.

• Cash or a combination of cash and stocks are the most often mentioned type of donation.

• More than 60% support 10+ charities; 42% of the $25MM+ support 20+ charities.

• The top two types of charities supported are education (26%) and religion (19%); 33% of the $25MM+ contribution goes to education vs. 20% for the <$25MM.





Many clients are committed, focused donors driven by personal reward

• 54% describe themselves as “committed, focused” donors, 23% of these as “leaders”

• More than half are motivated by personal reward and a third each by life experience or obligation, which they explain to mean to “give back to society”.

• Personal values and personal interest are the determining factors in identifying charities

• A mix of local, national and international charities are selected for giving; $25MM+ are more likely to give to international charities (35% vs. 19% for <$25MM)





Personal involvement is key to choosing funding opportunities

• The top 2 factors in choosing funding opportunities were personal involvement and research.

• Specific charities are chosen for relationship to the community and reputation

• Most clients do not evaluate the charity as a business or investment opportunity, but most do evaluate the impact of their gift.




Most involve family in giving; one third have a family foundation

• Almost two thirds involve their family in giving; spouse and children are most often cited family members

• About half have a foundation; 35% have a family foundation.  For those with $25MM+, 80% have a private foundation; 74% family foundation.

• Most prefer to disclose their name when giving; there is no difference by wealth level.




The majority of respondents volunteer time to charitable causes

• More than three quarters of the respondents provide non-financial support to charitable organizations

• Most contribute two or more hours per week, with 18% giving over 10 hours

• Activities include volunteering time, board membership, consulting and mentoring.





The respondents were primarily male, somewhat older and just under half had $25MM.

• Three quarters were male; only 40% of the Charlottesville respondents were male.

• Two thirds of the respondents were over 55; mean age of 63; those with $25MM+ were slightly younger, 61 vs. 65 mean age; Charlottesville respondents were younger, mean age 53.

• Fewer than half of the respondents had total net worth of $25MM+; unlike Charlottesville respondents, 75% of which had $25MM+ and 35% had $100MM+




Appendix A:  Size, Source and Destination of Charitable Contributions

• In 2000, more than $200B was contributed to charity, 75% of it by individuals.  (Source:  Giving USA)

• About half the funds went to religion and education, similar to CPB survey, although reverse proportions.

• According to the IRS, itemized income tax deductions for charity totaled $120B in 1999 ($42B from individuals with $200M adjusted gross income).  Giving USA estimated an additional $24B from individuals not itemizing deductions.




Appendix B:  Charitable Donations by Wealth Level

The higher the level of wealth, the larger the contributions.  27% of HHs with $100MM net worth gave $500M or more in 1998;  almost 15% of their mean income.  The $50-100MM wealth level gave 10% of their mean income.



Source:  Federal Reserve 1998 Survey of Consumer Finances




Cutting Your Tax Bill

Cutting Your Tax Bill

Cutting Your Tax Bill?

A New Approach to Old Tools

Vaughn W. Henry


Looking for ways to:

  • provide more retirement income
  • generate tax deductions
  • minimize unnecessary estate taxes

Charitable Gift Annuities have been offered by nonprofit organizations for nearly 150 years and are considered safe, stable and about as “plain vanilla” a planned giving program as one could imagine. After the recent uproar and changes in tax laws, a number of planners have begun to take a new look at an old tool to accomplish a wide variety of estate and financial planning needs. Unlike the more heavily promoted Charitable Remainder Trust (CRT found in IRC §664), the gift annuity is capable of accepting assets that might “poison” a typical remainder trust. For example, client/donors with Sub-S stock or debt financed real estate may find a receptive place to park those problem assets inside their Gift Annuity. When the charity wants to sell the contributed asset, there’s no prohibition against family members of the donor purchasing the asset back. Normally, self-dealing restrictions prevent many owners from contributing family business assets, so the CGA is a viable option and with proper planning, there are powerful reasons to use this little known tool.

Not only does the CGA avoid the new CRT requirement of a 10% charitable remainder (§1089 in TRA ’97), it isn’t limited to 5% minimum payouts either. The gift annuity may also be used to provide income to retirees who want to remain in their farm residence and receive a retirement income stream before passing the real property to their favorite charity. Besides generating tax deductions much like the CRT, a well-designed and custom drafted gift annuity can be created to accomplish the following:

  • provide either immediate or deferred income to the donor/beneficiary and still allow the charity access to funds to meet its current charitable missions
  • improve risk management by smaller charities when using a commercial insurance product to provide adequate protection for the donor
  • if income is deferred, it may be delayed or accelerated, according to beneficiary needs
  • inflation protection may be incorporated to accommodate cost of living adjustments
  • capital gains recognition on donated appreciated assets may be spread over life expectancy
  • some income may be passed back to the beneficiary as a tax-free return of principal
  • an easily understood transaction benefiting the donor and the nonprofit organization

An example of how this might work for John and Gail O’Hara, aged 68 and 65, who decide to contribute $300,000 of appreciated stock ($130,000 cost basis) to a local charity. In return, the charity agrees to pay them a steady annuity income over both of their life expectancies. The transfer also generates the O’Haras a tax deduction of $94,445. This frees up cash that may be used in part to offset the wealth they’re giving away through a wealth replacement trust. In this way, their kids won’t be disinherited by the gift. John and Gail will receive a fixed income stream of $20,400 every year that will be taxed under three tiers. $5,416.67 is tax-exempt, $7,083.33 is taxed at lower capital gains rates and only $7,900 is taxed as ordinary income. Based on IRS averages, they will receive these funds over the 24 years of their life expectancy and this meets their living expenses comfortably without tapping into their other assets. If medical emergencies or long term care issues pop up later on, retirement income can be adjusted with income from their other assets. Should John or Gail outlive the statistical averages, they will still receive their annual annuity, but by then payments would be recognized as ordinary income, since the capital gains and tax-free portions would have been used by then. Their tax deduction, if not used in the first year to offset their other income tax liabilities, may be carried forward and used over an additional five years. Coupled with the increased income security from the gift annuity and the cash saved from their charitable deduction, the O’Hara family can easily offset the gift by funding a wealth replacement trust to pass more assets to their children and grandchildren free of both income and estate taxes.


Maybe it’s Me – More on Charitable Split Dollar Plans – brought to you by Vaughn W. Henry & Associates

Maybe it’s Me – More on Charitable Split Dollar Plans – brought to you by Vaughn W. Henry & Associates

Maybe it’s Me

by Stephan R. Leimberg, Esq.

My father always said (when he was sure he was right and the other person was wrong), “Maybe it’s me. Maybe I just don’t get it”.

Well, maybe it’s me.

But when people ask my opinion of Charitable Reverse Split Dollar, I have a hard time understanding why it’s so difficult for them to see what I see.

So let’s forget all the Code sections and legal jargon. Forget the technical terms like “quid pro quo”, “partial interest rule”, “step transaction” doctrine”, “private inurement”, and “private benefit”. Let’s forget – for a moment – the Uniform Management of Institutional Funds Act.

Let’s just take an honest – and common sense – look at what is really happening:

Picture in your mind that you are the president of a charity. The Attorney General of your state and the head of the local IRS office pay you a visit. During that brief chat, you happen to mention that last year, your charity was given a check for $100,000 by donor X.

Your two visitors ask: “Did you send donor X a letter thanking her for that gift?”.

You reply: “Yes, of course I did”.

They then ask: “In your letter, did you state that she received nothing from your charity in return for that gift”?

You reply: “Yes, I stated that the donor, X, received nothing of value in return for her $100,000 check.”

They ask: “No quid pro quo whatsoever?”

You answer: “Nothing! I stated in the letter that she got nothing in return for her charitable contribution.”

A few minutes later your visitors ask: “How did your charity use the $100,000 outright gift of cash? Was the money used to buy new wheelchairs? Did you purchase exercise equipment for the children? Did you buy new orthopedic braces? Just how was the $100,000 used?”

You reply: “We are putting the money toward an insurance policy on the life of the donor of the $100,000 gift”.

Your visitors ask: “What portion of the $100,000 a year are you putting toward that policy?”

You reply: “Pretty much all of it.”

Your visitors remark: “Must be a very large policy,” “Was donor X a frequent contributor to your charity in prior years?”

You reply: “No. This was her first gift. But she plans to make a gift of about the same amount year after year for a number of future years.

Your visitors ask: “Are you under a legal obligation to use each year’s $100,000 gift to make the annual premium payments?”

You (honestly) reply: “No. Our charity is under no legal obligation to turn around and use that money each year to pay premiums. We could use the money to purchase wheelchairs.”

Your visitors ask: “But you’re not buying wheelchairs or exercise equipment or braces?”

You reply: “Well, no. We’re putting the money into this insurance policy”.

Your visitors ask: “Can we see the schedule of the build-up of cash values from the policy which your charity owns on X’s life?”

You reply: “Oh, We don’t own the cash values. We only have the right to some of the death benefit – if the insured dies while the policy is still in force”.

Your visitors ask: “So who owns the policy’s cash values?”

You reply: “Our understanding is that the cash values are owned by a trust on behalf of the children and grandchildren of the donor – insured. We’re just splitting the death benefit with that trust- but the trust actually purchased the policy. It owns the contract and it gets all the cash values.

Your visitors then ask: “So you are really just purchasing term insurance with the money you are paying toward the premiums?”

You reply: “Yes. We are essentially getting the equivalent of one year term insurance coverage every year. But if Ms. X dies, we’d get a lot of money”

Your visitors ask: “Are you are paying more, less, or the same as a competitive one year term policy you could have purchased on your own?”

You reply: “We never really checked.”

But when you do check – you find you could have purchased the term coverage on X’s life for significantly less than the money – the portion of the $100,000 a year your charity is actually paying toward the premium.

Your visitors ask: “What’s happening with the difference between what you could and should be paying for term insurance (assuming your charity had an insurable interest and the outlay was an appropriate expenditure of the charity’s money)? In other words, how large will the cash values – owned by the trust your client created for her children and grandchildren – grow to in Y years?

You reply: “It’s not really our business. The cash values don’t belong to our charity. But in Y years, the cash values will grow to about $6,000,000.”

Your visitors (particularly the state’s Attorney General) ask: “You said that your charity was receiving a check from Ms. X for $100,000 a year – no strings attached. Assuming a justifiable reason for insuring Ms. X’s life and assuming reasonable premiums for the type of one year term insurance your charity is receiving, what happened to the rest of your charity’s money? Why is the cash value growing in the hands of your contributor’s trust – for her children – rather than being invested or used for the crippled children and adults your charity is supposed to be caring for?

Come up with a good answer to any of these questions? I couldn’t.

Now picture yourself as the donor. Every year you file your tax return and claim a contribution to charity of $100,000. The charity has sent you a letter saying that you received no “quid pro quo” – you got (directly or indirectly) nothing in return for your contribution.

What do you say when the IRS auditor asks you: “Is that true? You received nothing back from the charity – directly or indirectly – in return for your $100,000 check?”

You say: “Oh, no” “Look, nothing up this sleeve. Nothing up that sleeve. I got nothing back from the charity in return for my $100,000 a year contribution.” “It even says in the promotional literature I consulted that “cash contributions are unconditional.”

What do you say when the IRS auditor asks you: “You know, don’t you, that the Code would not allow you any income tax deduction – if you personally purchased a policy on your life and split the premium dollars with the charity? And you know it’s a sin to tell a lie – that you gave a no-strings attached gift of $100,000 – and received nothing back in return – if in fact you got back something of great value?

You’d say, “Of course I do. I know no deduction is allowed for a contribution to charity of less than my entire interest.

What do you say when the IRS auditor asks: “Isn’t the charity’s split dollaring with the trust – and the circular path of the money from you to the charity – back through the split dollar policy to the trust you created – in reality a back door way for you to funnel money to your family’s trust? And doesn’t that constitute a gift of (a lot) less than a full interest in the $100,000?

Haven’t you – indirectly – retained a means of reacquiring (and then making a gift to your family of) a significant portion of every $100,000 check you write? Haven’t you really subverted the charity’s interest in the money or the policy which it could have purchased and totally owned with that $100,000?

What do you say when that same IRS auditor asks: “Why and how did the trust you set up for your children and grandchildren – get richer every year – even though you claim for gift tax purposes that you made little or no contributions to that irrevocable trust?” “Can we see your gift tax returns?”

Please correct me if I’m wrong. But it appears to me that the president of the charity has engaged in a tacit conspiracy with the “donor” to defraud the IRS (no, make that every U.S. citizen) as well as the charity. He’s told the IRS (and implicitly the Attorney General of the State in which the charity is located) that it’s received a no-strings (or stings) attached donation in the net amount of $100,000. Yet, clearly, there’s a string and a sting. If there were none, there would be a lot more wheelchairs and exercise equipment – and less wealth in the hands of the insured’s children’s trust.

And it’s pretty clear to me that each year, Donor X is lying on her tax return – claiming a deduction for far more than the net value of what she’s really contributing to the charity. Money is merely circulating from the client to the charity to the client’s children’s trust via the guise of the charity split dollaring a life insurance policy.

And maybe it’s me – but shouldn’t Ms. X be filing gift (and perhaps generation-skipping) tax returns – for the real (albeit indirect) gifts she’s making to the irrevocable trust she set up for her children and grandchildren? After all, the money didn’t appear in the trust from thin air. And certainly it would be an act beyond – and in violation of – the charity’s charter to use money that should have used to purchase wheelchairs – to enrich Ms. X’s children and grandchildren. So if it wasn’t the charity’s money, how did the $6,000,000 get there?

The charity’s contribution toward the policy is not an amount equal to the insurer’s one year term costs. According to the promoter’s sales literature, the charity’s contribution will normally be P.S. 58 term rates – which we all know is substantially higher (maybe five or six times) than the real cost of the coverage the charity is getting. And who gets the benefit of that annual overcharge the charity is paying? And if the charity lays out a “prepayment”, will it be paid a reasonable rate of return for the use of its money – or does that too magically find its way to the donor’s children’s trust?

We’re not talking about aggressive planning here, gang.

In my opinion , it’s likely the IRS would view this as nothing less than (“Read my lips”) T A X F R A U D. This is exactly the type of tactic that brought about the stiff charitable rules in THE TAX REFORM ACT OF 1969: Congress was fed up with charitable contribution deductions that didn’t truly reflect the value of the ultimate benefit flowing to charity.

Tell me if I’m wrong:

The donor and the charity know from the get-go that next year’s donation from Ms. X will never occur – if the charity didn’t “split” the death benefit dollars (and shift all of the policy’s cash values and the earnings the charity should have enjoyed on any “unearned premium account” to the irrevocable trust the insured donor set up for her children and grandchildren).

Ms. X, the donor, never intended that the charity could keep – and use for its charitable purposes – anywhere near the entire amount she claimed as a “no-strings-attached “I get nothing from it” $100,000 donation.

Ms. X, the donor, knew from the promotional literature that the whole scheme was a ploy to get a largely undeserved income tax deduction and shift significant wealth to her children and grandchildren’s trust at what was touted to be no gift or generation-skipping tax cost.

And if that’s what the donor and president of the charity are, what’s that make the promoters of this shell game?

Yes, I know there are infinite variations on this theme and each promises that its version is “different from all the others” and “our plan rests on solid legal ground”. I also know that some of these promoters are very sharp characters who throw so much paper and so many code sections at you – and tell you how much you can make doing it – and how much others are already making – that you want to believe it will work. (Especially if you’ve paid them a lot of money for the idea).

But take a really honest look at the quality of the cloth garbing the emperor:. The bottom line of every one of these schemes I’ve seen (and I admit even I haven’t seen it all) is the old “something for nothing” trick.

“Everyone – the agent – the charity – the insured – the children – you all get a free lunch – and the IRS will buy and pay for it”.

Well guys and gals – it ain’t gonna work. The IRS ain’t gonna buy it. And it ain’t worth your home.

Worse yet, when this scheme hits the Wall Street Journal, every split-dollar arrangement – even the very conservative and legitimate arrangements by very honest and ethical agents and attorneys – will become suspect.

Or maybe it’s me? Clearly, the concept is no secret. So why are its promoters so reticent to obtain a private ruling with respect to each of the issues I have raised? Clearly, a PLR is the least assurance competent counsel would insist upon. (And I’ll be happy to eat crow – medium rare – if a donor can obtain such a ruling).

P.S. If you are promoting this time bomb, when the IRS and the Attorney General of your state starts asking you these questions, call one of the attorneys who has issued a “favorable opinion letter” on this. I’m sure he’ll be willing to defend you – right down to your very last dollar!

P. S. P. S. The Executive Committee of the National Committee on Planned Giving (NCPG) has reviewed a number of these plans and has concluded, “Life Insurance “Quid Pro Quo” Poses Risks to Donors, Charities” and stated, “Notwithstanding the promoters’ claims to the contrary, NCPG strongly suggests that donors and charities not proceed with the kind of gift arrangement described above without first obtaining a private letter ruling from the IRS on the “quid pro quo” and partial interest issues.

Neither I nor they are alone in our position: See S. Horowitz, A. Scope, and S. Goldis, “The Myths of Charitable Split Dollar and Charitable Pension”, Journal of the American Society of CLU & ChFC, September 1995, Pg. 98 where the authors state: “This is not merely aggressive tax planning, it is egregious and borders on tax fraud…” Planners should carefully read two excellent and well reasoned discussions on the subject. The first is the objective, balanced, and scholarly “CHARITABLE REVERSE SPLIT-DOLLAR: BONANZA OR BOOBY TRAP?” by well known and highly respected Los Angeles attorney Douglas K. Freeman in the Journal of Gift Planing, 2nd quarter, 1998 (317 269 6274). Freeman further states in a recent ALI-ABA Course of Study on Charitable Giving Techniques given May 7th and 8th in San Francisco, “The reverse split-dollar technique is aggressive planning without substantial reliable authority”, “charitable reverse split-dollar is an attempt to stretch an aggressive program further”, and charities should never use their influence and reputation to promote a risky program that could influence donors to engage in an arrangement that could result in adverse economic or tax consequences to such donors”. Attorneys John J. Scrogin and Kara Flemming of Roswell, Georgia recently published articles in the May 1998, Pg. 2 and June issues of Financial Planning Magazine entitled, “A Gift With Strings Attached?” and “One Gift, Many Unhappy Returns” in which the authors state that charitable reverse split dollar plans may suffer the same fate that befell tax shelters in the 1980’s and that donors, charities, tax preparers, and plan promoters are all vulnerable if the IRS cracks down on charitable reverse split dollar plans.


Charitable Family Limited Partnerships by Stephan Leimberg – Vaughn Henry & Associates

Charitable Family Limited Partnerships by Stephan Leimberg – Vaughn Henry & Associates

Charitable Family Limited Partnerships

Prudent Planning or Evil Twin?

by Stephan R. Leimberg

“We all seek the Holy Grail-like chalice from which all who drink will be given large and lasting income tax deductions at little or no cost. But that chalice will be hard to find within the Charitable Family Limited Partnership concept!”

Charitable Family Limited Partnerships: The Promises

Imagine a concept that enables you to obtain a large income tax deduction, generate a largely tax-sheltered capital gain on the sale of business and investment assets, create and retain a strong and steady stream of income, and pass on substantial wealth to your family members at little, if any, gift or estate tax cost.

Its promoters tout that it does all these things and is even better than a CRT since the deduction is higher, the stream of income is potentially greater, the gift you make, unlike an outright gift which once made is gone forever, comes back to your family (and is worth more than when you gave it) forever, and within a few short years (unlike the case where a CRT is used) the charity is out of the picture, and it’s the client’s family who receives the wealth rather than the charity, and all that family wealth is shifted, at little if any gift or estate tax cost.

The Mechanics

Step 1: You create a FLP comprised of a general partner’s interest and one or more levels of limited partnership interest(s).

Step 2: You put business and other appreciated assets and cash into the FLP.

Step 3: You, as general partner, retain a management fee for operating the partnership. The fee ranges from 3 to 10% of asset value. This enables you to keep all or most of the firm’s cash flow, or trickle out a token amount to limited partners at your whim.

You also retain, as General Partner, the right to borrow partnership assets for personal needs at competitive interest rates.

Step 4: You make a gift of (say) 97% of the limited partnership interests to one or more qualified charities. This generates a large current income tax deduction (however, the charitable income tax deduction valuation process considers the fact that even at 97% of all the limited interests in the FLP, the interests conveyed carry limited control and almost no marketability, and must therefore be discounted considerably).

The charitable gifts carry a “put” enabling the charity to force a buy-back of the limited partnership interest, but at a very significant discount from its value when it was received by the charity. For instance, the charity may be given an option to “put” its interest back to the partnership or to the other partners in five to eight years, but at a small fraction of its value.

Step 5: You make a simultaneous gift of the remaining 3% of the FLP’s limited partnership interest to your children and/or grandchildren. The gift tax valuation of these interests also takes into account the lack of control and marketability and so a relatively large gift tax valuation discount may be taken.

Step 5A: To fund the deferred buy-out, life insurance on the donor’s life is purchased. The partnership itself splits the premium dollars with an irrevocable trust that represents the interests of its beneficiaries, the 3% limited partners. Indirectly, since the charity holds 97% of the partnership’s limited interests, the charity is helping to pay insurance premiums. In other words the charity is funding the bulk of the premiums that will be used to buy itself out.

In one variation on the theme, the charity’s “put” enables it to sell its interest to the irrevocable life insurance trust (yes, the same ILIT its dollars have been helping to fund the life insurance that will be used to buy out its interest at a discount). The trust would then receive the partnership interest with a stepped-up basis.

Step 5B: If there is a sale of partnership assets during the donor’s life and before the charity exercises its right to demand a purchase of its interest, approximately 97% of the gain is attributable to the charitable partner, so the client’s family pays tax on only a small fraction of any gain.

Step 6: At the specified “put” date, the charity exercises its option to force a purchase (at pennies on the dollar) of the limited interests the charity was holding. It receives cash in return for the interest, which has been sold back, either (a) to the partnership itself or (b) to the 3% owners. This brings the family business and other holdings of the FLP (together with any appreciation on relatively untaxed capital gains sheltered by the charity’s tax free status) back into the control of the family.

What’s Wrong With This Picture?

Here we go – again! All the parties to this scheme know from inception that this is not a charitable gift, an action of detached disinterested generosity.

Everyone knows, and intends, that this is yet another re-run of the “Let’s Make a Deal” show. Charity, you’ll get a “play-along” fee in return for allowing Mr. and Mrs. “Angry Affluent” to receive a large charitable deduction for their “gift” (even though they have relatively little charitable intent here). We all know this arrangement is designed to disproportionately benefit Mr. and Mrs. A and their family and facilitate their personal estate planning objectives.

This is yet another classic example of using a charity to serve a private rather than public purpose. If personal economic goals were not a substantial element, why not merely give the charity an outright gift of the FLP limited partnership interest?

An IRS Blueprint

There are at least three specific roadblocks the IRS will place in the way of a current deduction:

  1. The intent of the parties from inception is based on the unwritten, but very real, understanding between the parties that after a relatively short period of time, the charity will sell its interest back to the partnership or the other partners, and receive nothing more than pennies on the dollar.
  2. Here’s a (simplified) “best case” (from the taxpayer’s viewpoint) IRS position:
  1. The IRS could easily argue that what the charity received at the time of the contribution was the sum of —

No matter what reasonable discount rate is assumed, when you crunch the numbers, the sum of the two real rights the charity is being given fall far below the $700,000 deduction actually taken. Clearly, at best, the difference would be disallowed and appropriate interest and penalties would be imposed.

A more likely IRS approach is that there is no allowable income or gift tax deduction. The IRS will argue that what the “donor” gave here is in reality a possible, but certainly uncertain, stream of dollars over a period of years followed by a “balloon” (remainder) payment.

Since this “partial interest” gift is not in the form allowed by the Code (e.g. not a CRT or remainder interest in a home or farm), there is no Code-based sanction for a deduction. The result of a disallowance of the income tax deduction is obvious. But consider the implications of the disallowance of the gift tax deduction; the entire value of the transfer to the charity, less any allowable annual exclusion, would be taxable!

Although promoters may argue that the “put” is merely an option and that there was never a legal obligation for the charity to sell (and therefore the contribution of the 97% interest in the FLP must be respected), consider the probability that parties, particularly the donor, would never have entered into the transaction had it not been contemplated from inception that the charity would have no practical choice but to exercise its put.

This is just like the CSD concept in that promoters are hoping to obscure the substance of the overall plan with a focus on each step of the form. Yet the IRS and the courts will put the pieces of the puzzle together and view it as a whole, since the taxpayer here would not enter into any portion of the transaction unless it was contemplated that the whole would work. (Again, if the transaction was intended merely to benefit charity, why not a Palmer-like outright “no strings attached gift?”)

If the transaction is viewed in its entirety, the intent of the promoters and the client becomes obvious. The combination of the —

  • generous management fee reserved by the “donor,” when added to
  • the overvalued deduction valuation, on top of
  • the underpayment for the partnership interest that was, just five years previous to its intended resale to the “donor’s” partnership, valued much higher (and the fact that the “put” in no way is grounded on an objective or reality-based formula) must lead a court (as well as any other intelligent and honest observer) to the conclusion that the transaction was something very different than a contribution solely for the benefit of a public charity.

Certainly, the spirit, if not the letter, of the private inurement and private benefit rules have been violated. This is clearly not a gift for the exclusive benefit of the charity or its intended beneficiaries.

Certainly, under “intermediate sanctions” regulations, if the donor has been a substantial contributor to the charity or he/she or their family is/are for some other reason considered “disqualified persons,” that is, persons who by their relationship with the charity, have a direct or indirect power over the decisions of the charity or a position of trust vis a vis its actions, they will be severely penalized for any “excess benefit” transaction. Here, both an unjustifiable management fee and the underpayment to the charity at the time of the put could easily result in harsh excise taxes, in addition to the normal interest and penalties.

The Bottom Line

When promoters use form to obfuscate substance and when the exemptions of a charity are exploited to achieve private objectives, expect problems. I have never known a client who was happy to have his name on a well-known case.

The “I’m Different” Defense

You’ll hear, of course, many promoters claiming, just as they did in Charitable Split Dollar, “I’m different.” “My variation will work even if other “more greedy” versions will not.”

You’ll hear about an “I’m different” version where —

  • the management fee is lower,
  • the FLP’s payout to the charity is higher,
  • the charity gets a better deal on the sell-back, or
  • the charity’s money isn’t used to finance the buyout of its own interest.

One Last Time

The central issues to focus on are:

  • Is the arrangement you are examining a transfer representing “detached disinterested generosity” or an incredibly great deal for the charity and a relatively negligible benefit for the donor (deductible), or is it a take-it-or-leave-it deal in which the major beneficiary is the “donor” (nondeductible)?
  • Is the gift of the right to uncertain income for a period of years followed by a balloon payment (the “put”) a partial interest gift (nondeductible)?
  • Are both the original transfer to charity and the buy-back from the charity REALLY valued at arms’ length (O.K.) or are (or can) valuation games being (be) played? The deduction, if any, will be limited to the real and measurable value of what the charity gets at the date of the original transfer.

The less in it for the donor and the more for the charity, the better the odds.

At the very least, —

  • it has to be a true charitable gift,
  • it must be a gift of the donor’s entire interest, and
  • there must be the total absence of the ability to play games with valuation.

If any one of these elements is missing, you have an invitation to litigation.

And giving the charity “something,” a “go along with the deal” fee, is not good enough. It’s not enough that the charity ends up with something other than an empty bag. Throwing the charity a bone, in return for a lopsided benefit, was not what Congress had in mind when it created the income tax deduction for gifts to charity.


Henry & Associates

Henry & Associates

Malpractice Coverage – IV,

Don’t Leave Home Without It

(fourth in a series on design and implementation issues)


imageThe CRT isn’t a suitable tool for all property.  While it’s true that most appreciated assets can be contributed to a §664 charitable remainder trust and sold without incurring an immediate capital gains liability, there are a few problems that will crop up if an advisor isn’t careful about what goes in there. 


Since my web site offers an on-line CRT income tax deduction calculator, I periodically receive calls from advisors who need to confirm the results of their data entries.  One such call was from a broker’s assistant needing an answer for her employer who was driving over to present a “solution” to a prospective client.  The “donor” had a highly appreciated asset and was considering the use of a charitable trust.  I was told the asset’s fair market value was $3 million and that the client was 66 years old and the broker had proposed a one life CRUT.  He wanted to know what the highest payout allowed would be for that type of gift.  I responded that it depended on the asset, the charity, the date of the gift and the appraisal.  The broker’s assistant had calculated a $1 million dollar deduction, but she wanted to make sure she hadn’t overlooked anything.  She further indicated that the asset had a $100,000 basis with significant unrealized gain so the broker was attempting to earn the prospect’s business by displaying his tax-planning prowess.  I asked exactly which asset was to fund the trust and was told it was art.  The broker’s putative plan was to have the artwork contributed to the CRT and have the charity pay the client 10% of the value annually while the “donor” continued to display the contributed asset in her home. 


imageWhere to start dissecting the problems in this case? 

There were so many mistakes and assumptions that had to be corrected that the assistant actually put me on hold in order to intercept the broker before he arrived at the prospect’s home.  The first problem was the contribution of art to a CRT.  While tangible property is an allowable contribution [Sec. 170(e)(1)(B)(i)], it won’t produce the tax deduction this donor expected.  Deductions hinge on “related use”.  For example, art given to a museum or an educational institution with an art history program can be contributed and generate a fair market value (FMV) income tax deduction if it is related to the purpose for which the organization was granted exempt status.  A CRT has no “related use”; contributed assets are there to be sold, not exhibited or used.  As a result, this prospect’s income tax deduction is reduced from fair market value to basis, and any tax deduction remains unavailable to the donor until after the asset is actually sold by the charitable remainder trust.  This news further upset the broker, and then when I informed him that there wasn’t any way a CRT would have any funds with which to pay out the overgenerous income distribution until the artwork was actually sold, it completely blew his deal out of the water.  He had assumed that the donor would be allowed to keep the artwork displayed in her home and that the charitable remainderman would provide the liquidity for the needed income.  The donor had little philanthropic motivation and the broker only hoped to manage funds he thought the charity would advance to his client’s trust.  Clearly, this isn’t a CRT headed towards successful implementation.


This remarkably inept CRT proposal was further distinguished by having the dealer who sold the client her artwork serve as the appraiser.  Generally, a “qualified appraiser” is a term that specifically excludes the seller of the donated asset, the donor, the donee, and any related individuals or employees of these disqualified parties.  Additionally, there is a requirement for independent authorities to hold themselves out to the public as appraisers in order to complete the IRS form 8283 and substantiate the values claimed for the contributed asset if the value is greater $5,000.[Treas Reg §1.170A-13(c)1]


What assets generally work best inside a charitable remainder trust?

  • Unrestricted appreciated public stock
  • Appreciated mutual funds
  • Cash
  • Marketable and unencumbered real estate

With special handling, these assets may be manipulated so they can be made to eventually work inside a CRT.

  • Encumbered real estate
  • Closely held “C” corporation stock
  • Tangible personal property, including art
  • Restricted (Rule 144) stock
  • Stock with a tender offer in place
  • Sole proprietorships – ongoing businesses
  • “S” corporation stock

Some gifts are just doomed as possible contributed assets for CRT use, and generally should be avoided.

  • Property with an existing sales agreement
  • Installment notes
  • Stock Options (ISO and NQSO)
  • Inter-vivos transfers of IRA/Qualified Plan
  • Inter-vivos transfers of deferred annuities
  • Inter-vivos transfers savings bonds


Henry & Associates

22 Hyde Park Place, Springfield, IL  62703-5314

217.529.1958   217.529.1959 telefax

800.879.2098 toll-free —

© 2001



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Vaughn W. Henry

Henry & Associates

Gift and Estate Planning Services

22 Hyde Park Place

Springfield, IL 62703 USA

Phone: (217) 529-1958 Fax: (217)529-1959

Toll-free: (800) 879-2098


PhilanthroCalc for the WebCONTACT US FOR A FREE PRELIMINARY CASE STUDY FOR YOUR OWN CRT SCENARIO or try your own at Donor Direct. Please note — there’s much more to estate and charitable planning than simply running software calculations, but it does give you a chance to see how the calculations affect some of the design considerations. This is not “do it yourself brain surgery”. When is a CRUT superior to a CRAT? Which type of CRT is best used with which assets? Although it may be counter-intuitive, sometimes a lower payout CRUT makes more sense and pays more total income to beneficiaries. Why? When to use a CLUT vs. CLAT and the traps in each lead trust. Which tools work best in which planning scenarios? Check with our office for solutions to this alphabet soup of planned giving tools.




Books and Planned Giving Publications


Planned Giving Simplified : The Gift, the Giver and the Gift Planner

(NSFRE/Wiley Fund Development Series) by Robert F. Sharpe


Beyond Death and Taxes – Gregory Englund JD

Tools and Techniques of Charitable Planning by Stephan Leimberg et al

The Complete Guide to Planned Giving 3rd Edition 2004, by Debra Ashton

Giving – Philanthropy for Everyone

by Robert A. Esperti and Renno L. Peterson

with Drake Zimmerman, JD, CFA, CFP


Bigger Pie Publishing, P.O. Box 326, Normal, IL 61761 — (309-454-7040)

Planned Giving Management, Marketing, and the Law (Wiley Nonprofit Law, Finance, and Management Series)

by Ronald R. Jordan, Katelyn L. Quynn


Art of Planned Giving : Understanding Donors and the Culture of Giving

(Nonprofit Law, Finance & Management) by Douglas E. White


Getting Going in Planned Giving (How-To, Book 1) by G. Roger Schoenhals (Editor)


First Steps in Planned Giving by G. Roger Schoenhals


Start at Square One : Starting and Managing the Planned Gift Program by Lynda S. Moerschbaecher


Planned Giving Essentials by Barrett, Ware

19 More Articles You Can Use to Inspire Planned Gifts (19 Article, Book 2) by G. Roger Schoenhals


19 Other Articles You Can Use to Inspire Planned Gifts (19 Article, Book 3) by G. Roger Schoenhals


Practical Guide to Planned Giving 1998 by Leonard G. Clough, David G. Clough, Ednalou C. Ballard, A. B. Tueller


Planned Giving Essentials : A Step by Step Guide to Success

(Aspen’s Fund Raising Series for the 21st Century) by Richard D. Barrett, Molly E. Ware

19 Articles You Can Use to Inspire Planned Gifts (19 Article, Book 1) by G. Roger Schoenhals


Doing Planned Giving Better (How-To, Book 2) by G. Roger Schoenhals


The Art of Planned Giving : Understanding Donors and the Culture of Giving

(Nonprofit Law, Finance, and Management Series) by Douglas E. White


Gaining More Planned Gifts (How-To, Book 3) by G. Roger Schoenhals


On My Way in Planned Giving :

Inspiring Anecdotes and Advice for Gift-Planning Professionals by G. Roger Schoenhals


Retirement Assets and Charitable Gifts :

A Guide for Planned Giving Professionals, Financial Planners, and Donors

(Wiley Nonprofit Law, Finance and Management) by Christopher R. Hoyt, Bruce R. Hopkins

Portable Planned Giving Manual by Conrad Teitell

Practical Guide to Planned Giving

by Len C. Clough, Ellen G. Estes, Ednalou C. Ballard, Taghrid Barron

Practical Guide to Planned Giving 2000

Practical Guide to Planned Giving 2000 by Paul H. Schneiter (Editor)

Planned Giving: Management, Marketing, and Law

by Ronald R. Jordan, Katelyn L. Quynn, Carolyn M. Osteen


The Planned Giving Deskbook :

A Continuing Guide to Tax Law and Charitable Giving by Alden B. Tueller

Complete Guide to Planned Giving :

Everything You Need to Know to Compete Successfully for Major Gifts by Debra Ashton

Nonprofit Organization Management: Forms, Checklists, & Guidelines

by Jamie Whaley (Editor), Jeff Stratton (Editor), Aspen Nonprofit Fundraising

Development Office Management: Forms, Checklists and Guidelines

by Aspen Publishers and Jeff Stratton

Inspired Philanthropy by Tracy Gary, Melissa Kohner, Nancy Adess


Don’t Just Give It Away: How to Make the Most of Your Charitable Giving

by Renata J. Rafferty, Paul Newman


The Seven Faces of Philanthropy: A New Approach to Cultivating Major Donors

(The Jossey-Bass Nonprofit Sector Series) by Russ Alan Prince, Karen Maru File (Contributor)


The Artful Journey: Cultivating and Soliciting the Major Gift by William T. Sturtevant


Democracy in America

by Alexis De Tocqueville, Richard D. Heffner (Editor)

The Gospel of Wealth

by Andrew Carnegie

Reinventing Fundraising

by Sondra Shaw and Martha Taylor

Cultures of Giving II: How Heritage, Gender, Wealth, and Values Influence Philanthropy

edited by Charles Hamilton and Warren Ilchman

Silver Spoon Kids : How Successful Parents Raise Responsible Children

by Eileen Gallo, Jon Gallo, Kevin Gallo

The Golden Ghetto: The Psychology of Affluence

by Jessie H. O’Neill

The Seven Faces of Philanthropy: A New Approach to Cultivating Major Donors

by Russ Alan Prince and Karen Maru File

Children of Paradise: Successful Parenting for Prosperous Families

by Lee Hausner


by Bob Buford, Peter F. Drucker, Terry Whalin

Beyond fundraising

by Kay Sprinkel Grace


by L. Peter Edles

The Nonprofit Handbook: Fund Raising

edited by James Greenfield

The Nonprofit Handbook: Fund Raising Third Edition 2003 Cumulative Supplement

Designs for Fund Raising

by Harold “Si” Seymour

Achieving Excellence in Fund Raising

by Henry Rosso & Associates

Wealthy & Wise

by Claude Rosenberg

Taking Fund Raising Seriously: The Spirit of Faith and Philanthropy

by Dwight Burlingame

Mega Gifts and Born to Raise and Finders Keepers

by Jerry Panas

The Answer to How is “Yes:” Acting on What Matters

by Peter Block

The Natural History of the Rich: A Field Guide

by Richard Conniff

Why the Wealthy Give

by Francis Ostrower

Seven Faces of Philanthropy

(with Karen File) by Russell Prince et al

Boards From Hell

by Susan Scribner (3rd Edition 1996, Scribner and Associates, 1991)

Fund Raising Realities Every Board Member Must Face:

A 1-Hour Crash Course on Raising Major Gifts for Nonprofit Organizations

by David Lansdowne

How to Write an Investment Policy Statement (Paperback)

by Jack L. Gardener

The Handbook for Investment Committee Members

by Russell L. Olson

Asking: A 59-Minute Guide to Everything Board Members, Volunteers, and Staff Must Know to Secure the Gift

by Jerold Panas

The Ultimate Board Member’s Book:

A 1-Hour Guide to Understanding and Fulfilling Your Role and Responsibilities

by Kay Sprinkel Grace

High Impact Philanthropy:

How Donors, Boards, and Nonprofit Organizations Can Transform Communities

by Alan L. Wendroff and Kay Sprinkel Grace