Lifetime Giving

Jewish Rehabilitation Center of the North Shore
February 11, 2005
By Bryan S. MacCormack, Estate Planning Attorney

Charitable transfers can provide significant income and estate tax savings, while at the same time benefiting charities. There are a number of ways to structure your gifts to charity. This article will discuss charitable remainder annuity trusts, charitable remainder unitrusts, pooled income funds, donor advised funds, and private foundations. A charitable remainder annuity trust pays a fixed sum each year (not less than 5%) of the net fair market value of the trust assets (valued at original contribution) to one or more persons until the trust terminates. The remaining trust assets are paid to a qualified charity. After initial funding, no additional sums may be added to the trust. The annuity amount does not change, it is set when the trust is established. The individual receiving the annuity is guaranteed to receive that amount regardless of the value of the trust's assets. The payment period must be for the life or lives of the individual beneficiaries or for a term not in excess of twenty years. An annuity trust's primary benefits are a predictable income stream, bypass of any capital gains tax, if funded with appreciated stock, and an income tax charitable deduction.

Generally, the annuity trust provides fewer planning opportunities than a unitrust, discussed below, but does provide a greater level of security because of the guaranteed income flow. A charitable remainder unitrust specifies that a fixed percentage (not less than 5%) of the fair market value of the trust assets, valued annually, is to be distributed to one or more persons for the term of the trust until the remainder is paid over to charity. A unitrust can receive additional contributions if allowed by the trust instrument. Contributions may be added during the lifetime of the trust creator or by will. A unitrust may be structured as a "net income only" trust, providing for the payment of the lesser of either the fixed percentage or the net income of the trust. This approach is typical when the trust is funded with non-income-producing assets such as undeveloped real estate or growth stocks. A unitrust may also have a "makeup provision" specifying that any amount by which the trust income falls short of the specified percentage is to be distributed in later to the extent the trust's income exceeds the fixed percentage in subsequent years. A unitrust's primary years benefits are a charitable deduction, the ability to increase your cash flow, provide for college education for children and grandchildren, and have the trust serve as a private retirement plan. In addition, a unitrust can be structured to allow an independent trustee to allocate the unitrust amount to members of a family where income needs may vary each year.

A charitable deduction is also allowed for the value of a charitable interest in property transferred to a pooled income fund. The deduction is determined by taking into account the yield of the fund and the age(s) of the income recipient(s). With a pooled income fund, a donor contributes an irrevocable remainder interest in property to a public charity and retains for himself (or others such as a spouse) an income interest for life. Investment options are limited to the investment purposes of the fund and cannot include tax-exempt securities. Donor-advised funds provide the tax benefit of an irrevocable gift while at the same time enabling you to decide which public charities you would like to receive grants. With a donor-advised fund you would assume the role of the account advisor even though once the account is set up you no longer own the assets. A charitable private foundation permits a donor to make a charitable contribution to a foundation, without determining the ultimate recipient of the funds, or how the funds will be ultimately devoted for charitable purposes. Private foundations offer their sponsors control and allow you to build a legacy of giving that may last for generations. Foundations are subject to regulation by the Internal Revenue Service and also the Attorney General's office.

Private foundations are required to distribute a certain minimum amount for each taxable year. The rules governing charitable giving are technical in nature and change frequently. Each situation involving a charitable transfer must be carefully analyzed.