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Charitable Gifting Part II

By: Brett Fingerhut

By: Investor Solutions

In the first part of our series, we addressed Charitable Remainder Trusts, Pooled Income Funds and Charitable Gift Annuities. Let’s continue our discussion of charitable gifting with an analysis of Charitable Lead Trusts and Private Foundations.

Charitable Lead Trusts (CLT) are the mirror image of Charitable Remainder Trusts (CRT). They have the following characteristics:

  • The charity receives the annuity or unitrust payments during the term of the trust.
  • Unlike CRTs, the CLT can be for a term greater than 20 years.
  • The designated individual beneficiaries receive the assets upon completion of the trust term.
  • An immediate charitable deduction is allowed equal to 100% of the value of the property transferred to the charitable organization.
  • The value of the remainder interest that passes to designated beneficiaries will be zero thereby resulting in no taxable gift to the beneficiary.
  • Additionally, these assets will either be excluded from the donor’s estate or the estate will be eligible to claim a charitable deduction.

A Private Foundation is a nonprofit legal entity created for charitable purposes. It can be set up as a trust or exempt organization, according to the laws of the state where the principal office is located. It may be created and controlled by a family and be in existence for an indefinite term of years. The individual who creates the private foundation has complete control over the amounts annually distributed (subject to a minimum) and who the recipient(s) of these gifts are. Other characteristics of private foundations include:

  • Private foundations are controlled by IRS Code Section 501(c)(3). As such, they must provide notice to the IRS that they are filing for exempt status under this code section.
  • An annual information return, Form 990-PF, must be filed in order to report gross income, disbursements, etc.
  • Investment income and endowments received are used to make grants to other organizations.
  • Annual distributions from the account must be at least equal to 5% of the average fair market value of its assets.
  • These distributions should come from income first and to the extent that income is insufficient, from principal.
  • Payments to both charitable organizations and private persons are allowed.
  • Private foundations are federal income tax exempt.
  • They are, however, subject to an excise tax equal to 2% of net investment income.
  • A 15% penalty on any undistributed income will be due if annual distributions are less than the required 5% mentioned earlier.
  • Individuals making donations to a private foundation may generally deduct contributions up to 30% of their adjusted gross income (AGI). Corporations may deduct all contributions up to an amount equal to 10% of their taxable income.

Private foundations are most suitable for individuals who want a structured gifting mechanism that will allow them flexibility as far as the amount and recipient of their charitable gift. It also works well for individuals who want their legacy carried on for an indefinite amount of time.

No matter what your charitable inclinations or how great or small your means to achieve them, there are numerous vehicles available to you to help you fulfill those desires. Talk to your trusted financial or legal advisor to help you determine which method is best for you.