Gift Planning Tips

Raining on the Grandchildren

One way for grandparents to help their grandchildren with college expenses while also assisting charity is through a term-of-years charitable remainder trust (maximum 20 years) with sprinkle powers.  The trustee can be given the power to pay income in varying amounts to different beneficiaries within the stated class, according to their changing needs [Code §674(c)].  An independent trustee is required, however, to avoid the grantor trust rules and disqualification of the remainder trust [Code §§671-678].

For example, Irene has six grandchildren, ages seven to 18.  She could transfer $100,000 to a 7% charitable remainder unitrust that will initially pay out $7,000.  The trustee can direct the funds to the oldest grandchild for college expenses.  The amount paid annually will fluctuate according to the value of the assets.  Irene will be entitled to a charitable deduction of about $23,900 (assuming quarterly payments and a 2.2% §7520 rate).  The trust, which will continue until the youngest grandchild is age 27, can pay while the grandchildren attend graduate school or even to allow them to get established in their careers.  At the end of 20 years, trust assets will pass to Irene’s favorite charity.

Deferred Charitable Gift Annuities without the Worry

One perceived drawback to deferred payment charitable gifts annuities is the potential that the annuitants may die before payments begin.  A possible solution is to include language permitting payments to begin early if one of the beneficiaries dies prior to the starting date.  The agreement can provide for reduced payments at earlier dates that maintain the original actuarial values (Letter Ruling 9017071).

For example, Larry and Karen, both age 65, establish a $100,000 deferred payment charitable gift annuity that is to begin payments of $5,400 annually when they reach age 70.  The charitable deduction is $30,522 (assuming quarterly payments and a 2.2% §7520 rate).  The gift annuity agreement can provide that if either dies before annuity payments begin, slightly lower payments will immediately start for the survivor.

Real Opportunities in Real Estate Gifts

Real estate presents opportunities for planning satisfying and tax-smart charitable gifts, including techniques that allow the donor to continue using the property.

  • An outright gift of real estate held more than one year offers the same advantages as a gift of stock or mutual fund shares: avoidance of capital gains tax and a charitable deduction for the full value of the property, subject to the deduction limits of Code §170(b)(1)(C)(i).

  • Owners of vacation homes who wish to sell sometimes hesitate because of the capital gains tax that will be due.  A charitable alternative to selling is to use the home to fund a charitable remainder unitrust that pays income to the donor for life.  Sale proceeds are not reduced by capital gains tax when the home is sold within the trust.  This alternative is also available to homeowners planning to sell their principal residence and move into a smaller home or retirement community.

  • A bargain sale of real estate to charity saves capital gains taxes and earns the donor a charitable deduction.  The owner of land worth $100,000, with a basis of $25,000, could sell the land to charity for $50,000, for example, and claim a charitable deduction for the $50,000 difference between the sale price and fair market value.  The owner would recognize capital gains only on the sale portion of the property [Reg. §1.1011-2(b)].  If the arrangement is structured as an installment bargain sale, the capital gains are spread over the term of the installment period.

  • A donor can make a gift to charity of a residence or farm while retaining the use of the property for life [Code §170(f)(3)(B)(i)].   The residence can be the owner’s principal residence or vacation property.  A donor who retains a life estate in a farm is entitled to work the land or receive income from renting the property to another farmer.

Charitable Remainder Trusts to Encourage Good Behavior?

Charitable remainder trusts generally pay income for life to named individuals, but is it possible to use a trust as a carrot for good behavior?  Take the case of a father who is planning a charitable remainder trust for a son with an addiction problem.  The father does not want to enable the son’s destructive behavior by providing money.  But is it possible to make the payments only when the son can pass random drug tests?

One option is to name a second income beneficiary, which might be the charitable remainderman.  An independent trustee could be given the power to sprinkle trust income among the beneficiaries at the trustee’s discretion.  Such a clause would not disqualify the trust [Code §674(c), Rev. Rul. 77-73, Letter Ruling 9052038], although naming charity as an income beneficiary would not increase the donor’s income tax charitable deduction [Reg. §1.664-3(d)].

A charitable remainder trust could name the son and the charitable remainderman as co-income beneficiaries, with an independent trustee holding the power to sprinkle the trust’s annual payment.  The trust might provide that the son is to receive at least 5% or 10% annually — more, at the trustee’s discretion, if he can pass an annual drug test.

A less flexible approach would be to structure the trust as a contingency charitable remainder trust that pays income to the son for life or until the occurrence of a qualified contingency [Code §664(f)].  The contingency could be failure to pass a random drug test, which would cause the trust to terminate and the assets to pass to the charitable remainderman.


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