Gift Planning Tips

Charitable Options for Revocable Living Trusts

Clients with revocable living trusts have several options for charitable giving:

  • Lifetime gifts — The trust can provide that a portion of the income be paid annually to the trust, or the trustee can simply be directed to make gifts as the donor wishes.

  • Distributions at death — Trust language can direct that, at the grantor’s death, the trustee will distribute certain assets or a percentage of the trust corpus to charity.  This generally results in a quicker payout to charity than a bequest in a will.

  • Revocable living trust/charitable remainder trust combination — Donors can create trusts that provide them with income for life and a remainder to charity.  There is no income tax benefit, but the donor is able to exercise unlimited control over the trust, which is not possible with a qualified charitable remainder trust.  If the donor’s estate is subject to tax, trust assets will be included in the gross estate, but charity’s interest will qualify for an estate tax charitable deduction [Code §2055].

  • Conversion to a qualified charitable remainder trust — A revocable living trust can be made irrevocable at the grantor’s death, securing a stream of payments for family members and a remainder to charity.  An estate tax charitable deduction is available.

  • Conversion to an irrevocable, nonqualified charitable remainder trust — A client whose estate will not be subject to estate tax might wish to have the living trust convert to an irrevocable, nonqualified trust for family members.  The trustee would have the flexibility to invade principal — an option not available with a qualified charitable remainder trust.

  • Conversion to a QTIP trust, remainder to charity — A client who wants to secure a marital deduction [Code §2056(b)] and subsequent charitable deduction at the death of the surviving spouse can have assets in the revocable living trust convert to a QTIP trust.

Take the Pledge

Because a charitable pledge or promissory note is merely a promise to make a gift at some future date, donors are not entitled to claim charitable deductions until payments are actually made to the charity [Rev. Rul. 68-174].  A donor who has an outstanding pledge to charity might think that the creation of a charitable remainder trust, with the remainder earmarked to satisfying the pledge, is the ideal solution.  However, the IRS has consistently taken the position that the use of the trust to satisfy the grantor’s legal obligations violates the private foundation rules and is an act of self-dealing [Reg. §53.4941(d)-2(f)(1)].  The same is true where income payments are used to satisfy the donor’s obligations (e.g., alimony, child support).

A pledge that is still outstanding at the donor’s death is generally not deductible as a charitable gift, but rather as a claim against the estate if (a) the pledge was a contractual obligation created in good faith for an adequate and full consideration in money or money’s worth, or (b) it would have constituted an allowable charitable deduction if it had been a bequest [Reg. §20.2053-5].  A client concerned that charity receive the full amount of the pledge should make it legally enforceable against the estate or include specific language in a will or trust directing that outstanding pledge amounts be satisfied from estate assets.

Gift Annuities and Capital Gains

A donor who contributes long-term appreciated assets to fund a charitable gift annuity can spread the recognition of gain over his or her life expectancy, provided the donor or the donor and a survivor are the only annuitants [Reg. §1.1011-2(a)(4)(ii)].  If a client uses appreciated securities to establish a charitable gift annuity for another person, the annuity portion is a gift, subject to gift tax, and the client must report all capital gain allocated to the annuity in the year of the gift.

A client who uses separate property to arrange a gift annuity for a spouse has made a gift that qualifies for the gift tax marital deduction [Reg. §25.2523(b)-1(b)(6)(iii)], but does not avoid the immediate recognition of capital gain.  It might be better, if the stock is highly appreciated, to have the client give the securities to the spouse (tax-free, thanks to the unlimited gift tax marital deduction) and let the spouse establish the charitable gift annuity.  The spouse takes the client’s basis and holding period but will be able to spread the gain ratably over his or her IRS life expectancy [Reg. §1.1011-2(a)(r)(ii)].

“Grandpa, Can I Borrow Some Money for College?”

One way for grandparents to help their grandchildren with college expenses while assisting charity is through a term-of-years charitable remainder trust 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)].  A term-of-years charitable remainder trust can last up to 20 years and is more likely to satisfy the 10% remainder requirement that might otherwise cause a problem for young beneficiaries of lifetime trusts, even at higher payout rates.  For instance, a 20-year 10% charitable remainder unitrust with quarterly payments and a 1.8% §7520 rate easily meets the 10% remainder test, providing more for grandchildren during their college years.  However, an independent trustee is required to avoid the grantor trust rules and disqualification of the remainder trust [Code §§671-678].


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