Planned Giving Strategies

In this post, I discuss three popular planned giving strategies — charitable remainder trusts (CRATs and CRUTs), pooled income funds, and charitable gift annuities — and explain how each helps donors reduce estate tax exposure while supporting causes they care about.

If the estate tax is a concern for you, determining how to mitigate your tax bill is a significant issue. One great way to do this is through charitable donations. With these gifts you have the opportunity to make a positive difference, to share your success with others less fortunate, and to lower your tax bill.

For larger estates, careful planning of charitable gifts beyond simply writing a check may be quite helpful in mitigating tax liability. In this post, I will discuss some planned giving strategies, particularly the charitable remainder trust, the pooled income fund, and charitable gift annuities.

Charitable Remainder Trusts

Charitable remainder trusts are one of the most valuable of the planned giving strategies. This technique allows you to set up a trust to benefit you or someone else—such as a spouse or children—with the remainder of the trust going to the charity of your choosing at the expiration of the trust’s term. The trust’s term is often set to expire at the death of the beneficiary.

There are two types of charitable remainder trusts: the charitable remainder annuity trust, or CRAT as it is sometimes called, and the charitable remainder unitrust, or CRUT. The only significant difference between the two is the way in which distributions are calculated. CRATs require an annuity payment to be made to the beneficiary, which is a payment of a fixed amount per year—for example, $10,000 per year.

A CRUT on the other hand requires a distribution of a percentage of the trust’s value. So, for example, a CRUT could be set up to distribute 10% of its value annually. Consequently, the size of the distributions will vary every year based on the performance of the trust’s investments and a variety of other factors.

Both types of trusts must meet the following requirements to qualify as charitable remainder trusts:

1. The amount paid to the noncharitable beneficiaries cannot be less than 5% of the trust property but also not more than 50%.
2. If the trust will be paid out for a period of time—that is, for a fixed term of years rather than “for life”—it must be for less than 20 years.
3. The remainder of the trust has to be transferred to or held in remainder for charity.
4. The remainder of the trust must be equal to or greater than 10% of the initial value of the assets transferred to the trust.

Charitable remainder trusts offer some great advantages, including the ability to remove property from your estate without incurring gift tax liabilities while also gaining an income tax deduction. Like many planned giving strategies, however, forming and implementing a charitable remainder trust can be quite complex and should be done with the assistance of a competent attorney or tax advisor.

Pooled Income Funds

Pooled income funds are trusts that are established by a charity that allow several donors to pool their funds together. (See an example here.) The charity manages the trust using whatever investments it wants. The income beneficiaries then receive income from the pooled income trust for life or another predetermined term.

After the beneficiaries’ term ends, the remainder goes to charity. Actuarial value of the remainder value determines the amount of the tax deduction allowed. The actuarial value can be difficult to calculate and can be affected by interest rates, term of years of the trust, and the amount transferred into the trust.

Charitable Lead Trusts

The final of the planned giving strategies I will discuss in this post is the charitable lead trust (CLT). A CLT is, in effect, the opposite of a charitable remainder trust: the charity receives the income (or annuity) from the trust for a term of years or for the life of a designated individual, and the remainder goes to a noncharitable beneficiary (typically children or grandchildren) at the expiration of the trust. This makes the CLT an excellent vehicle for transferring appreciating assets to the next generation at a reduced transfer-tax cost.

A CLT can be structured as either an annuity trust (CLAT, fixed payment to charity) or a unitrust (CLUT, percentage of trust value paid to charity annually). When the CLT is structured as a grantor trust, the donor receives an immediate income tax deduction equal to the actuarial value of the charity’s interest; the donor then pays tax on the trust’s income during its term. Non-grantor CLTs do not generate an income tax deduction, but they still produce the gift- and estate-tax benefits and can be powerful wealth-transfer tools — particularly in low-interest-rate environments, where IRS §7520 discounting depresses the calculated value of the remainder gift to the family.

A separate vehicle worth mentioning briefly is the charitable gift annuity (CGA) — a simple contract under which the donor transfers cash or property to a charity in exchange for the charity’s promise to pay the donor (or another designated beneficiary) a fixed annuity for life. At the donor’s death, the charity keeps the remainder. CGAs are simpler than CRTs but offer less flexibility on payout structure and term.

Disclaimer: This post is general legal and tax information about planned giving strategies, not legal or tax advice. The federal tax code provisions that govern CRTs, pooled income funds, and charitable gift annuities are complex; consult a qualified estate-planning attorney or CPA before structuring any of these vehicles.

---