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Charitable Gifting Part I

By: Investor Solutions

By: Investor Solutions

Whatever your reasons for gifting to charitable organizations, it is better to give and receive the most in charitable deductions. This is the first of a two part series where we will discuss various methods of gifting, their requirements and the best use for them. In this analysis, we will concentrate on Charitable Remainder Trusts, Pooled Income Funds and Charitable Gift Annuities.

There are two different types of Charitable Remainder Trusts (CRT), Charitable Remainder Annuity Trusts (CRAT) and Charitable Remainder Unitrusts (CRUT). These trusts are similar in the following ways:

  • Initial stream of income to donor for a term of years (not to exceed 20) or until death.
  • Income distribution must be at least 5% but cannot exceed 50% of the trust’s initial value.
  • At the end of the term or death of the donor, the remaining trust property passes to any qualified charitable organization.
  • An income tax deduction when the trust is funded is allowed for the present value of the remainder interest that passes to any charity.

Characteristics that distinguish these trusts from each other include:

Charitable Remainder Annuity Trust (CRAT)

  • Stream of income is fixed based on a specific dollar amount or a percentage of the fair market value of the trust at inception.
  • Because payments are fixed, no additional contributions to the trust are allowed.

Charitable Remainder Unitrust (CRUT)

  • Variable stream of income based on a percentage of trust principal at the beginning of the year.
  • Additions to trust corpus are allowed.

Charitable remainder trusts are best utilized by individuals who want or need a steady stream of income for a period of time and either have no individuals to bequeath their assets to or have strong charitable inclinations.

Let’s continue our discussion of charitable gifting by discussing pooled income funds.

Whereas charitable remainder trusts require the drafting of trust documents, no trust is needed for pooled income funds. Instead, a donor places property into a common trust fund which is commingled with those of other donors. A public charity controls and manages this fund’s assets. Pooled income funds are not allowed to invest in tax-exempt securities and typically do not accept non-marketable securities or other assets difficult to value.

The amount of the annual returns will vary from year to year depending on the pool’s investment performance. The fund’s annual returns are distributed to the donors or their beneficiaries based on their proportionate share of the fund. Like CRUTs, additions to the pooled income fund are allowed. However, unlike charitable remainder trusts, the remainder interest is payable to a specific charity.

The transfer of these assets to the pooled income fund by the donor is irrevocable as is the beneficiary designation. Like CRTs, the donor receives an income tax deduction for the present value of the remainder interest.

Pooled income funds are typically best when individuals want to make smaller gifts yet retain an income interest.

Lastly, let’s talk about charitable gift annuities. Charitable gift annuities are transfers of cash or property to a specific qualified charitable organization in exchange for a promise from the charity to pay the donor a specified amount each year for the remainder of the donor’s life. Like pooled income funds, this arrangement does not require the establishment of a trust. Similarly to CRATs, no additions to the annuity are allowed because lifetime income to the donor is a fixed amount.

The charitable deduction allowed to the donor is the difference between the value of the property transferred and the annuity guaranteed by the charity.

In part II of the series, we will discuss Charitable Lead Trusts and Private Foundations.