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Things You Really Need to Know About Planned Gifts – Henry & Associates

Things You Really Need to Know About Planned Gifts – Henry & Associates

Things You Need to Know

Creating a planned gift is a great and noble act.  However, as more charities, commercial advisors, and prospective donors jump onto the planned giving wagon,imagethere are going to be dissatisfied clients and unhappy charities.  Why is that?  Simply said, too few advisors and planned giving officers do a good job disclosing all of the restrictions and the potential downside of these irrevocable gifts.  Then add in all of the client-donors who do their research on the web and think they can go down to the local super-store and get a ready to use trust off the shelf, there is bound to be disappointment.  One of the biggest problems with charitable remainder trusts is that invalid assumptions abound.

  1. A Charitable Remainder Trust (§664 CRUT or CRAT) is a charitable giving vehicle, not a tax avoidance scam  While there are tax advantages, it still requires that the trustmaker have some charitable intent.
  2. Generally, a CRT is transactionally driven.  Donors create them to minimize an immediate capital gains tax liability and keep more value at work.  Since some assets are unsuitable inside a CRT, double-check early in the research process with advisors on how to best fund the CRT.
  3. Treat the income tax deduction like icing on the cake.  Because it is a deduction, and not a credit, it offsets the adjusted gross income (AGI) on the taxpayer’s annual return.  The problem is that the deduction is only a present value of the future gift and if the remainder charity is a public 501(c)3, it is limited to 50% of the donor’s AGI for cash contributions and 30% for contributions of selected appreciated assets.  Other contributions either will not generate a tax deduction or may be limited to tax basis, so knowing what works and what does not is an important skill competent advisors bring to the planning table.
  4. The income tax deduction may be wasted unless the donor makes significant income, even over the six tax years it is available, as it may not be completely used up.  For example, a 75 year-old donor of appreciated farmland valued at $600,000, lives poor but may die “rich”.  Although “rich”, this donor has never made more than $45,000 in a year and is going to be hard- pressed to use the $360,000 deduction a 5% CRUT produces.
  5. Trustmakerswho act as trustees have to wear two hats.  They must prudently manage the trust assets for the benefit of the charitable remainder as well as to produce tax efficient income.  This is one reason charities acting as trustee may leave themselves open to hard feelings, dissatisfied donors and possible liability issues that show up years in the future if the trust does not perform as predicted.
  6. An annuity trust can run out of money and implode.  A CRT stands on its own merits, so investment performance can make or break a charitable trust.  If it falls apart, the charity is not going to make up the shortfall.
  7. A CRT created to pay lifetime income for one or two beneficiaries bases its projections on IRS actuarial tables.  Life expectancies are a median number, so 50% of people will live longer than expected and planners need to factor in the possibility that the trust will last long enough for a beneficiary who reaches age 100 to continue receiving an income stream.
  8. Donors who try to create a CRT with less than $150,000 of assets may have the equivalent of a jet engine on a jeep.  They have selected a vehicle that usually requires document drafting, appraisals, and ongoing administration expense; there is a minimum threshold for a CRT to stand on its own.
  9. A CRT can be set up to benefit more than one charity.  Properly drafted trusts will allow for changes or additions to the list of charitable beneficiaries.  A CRT can even allow for current distributions directly to a charity if the donor builds in that flexibility.
  10. If a CRT trustmaker has more than one income beneficiary (other than himself/herself), there may be an estate or gift tax liability for that gift of an income interest.  If there are more than two income beneficiaries or if there is a large spread in ages, there is a likelihood that the CRT will not pass the 10% remainder test
  11. Managing investments inside a CRT, or a CLT for that matter, is not the same as managing a 401(k) or IRA.  Retirement accounts always produce ordinary income; a well-managed CRT should do better than that.