Archive for August, 2013


Decidedly not sexy but powerful planning techniques – the charitable remainder trust and the charitable lead trust.  Both of these are “split interest trusts” wherein a portion of value is transferred to a “charitable” beneficiary and a portion of value is retained by a “noncharitable” beneficiary.  (Keep it straight if you can – a “noncharitable” beneficiary is a beneficiary that is not a charity while a “charitable” beneficiary is… a charity!)  Both the CRT and the CLT come in different flavors – annuity trusts, unitrusts, terms of years, etc. but they both serve similar purposes – they enable some value to be retained in the hands of the donor or other “noncharity” while transferring some value into the hands of an appropriate charity.  The differences are many, but can be boiled down to when the charity receives its due – during the life of the trust or at its termination.

Charitable Remainder Trust (CRT)

The CRT is a tax exempt trust in which the donor or other noncharitable beneficiary retains the income interest from the trust for a period of years for the life or lives of one or more individuals.  The donor transfers cash or other property into the trust and in return, receives periodic payments over the term of the trust.  For income tax purposes, in the first year, the donor can deduct the actuarial present value of the remainder interest as a current charitable contribution.   Upon termination, any assets remaining in the trust pass to one or more charities.   Its best use is for a donor who wants to make a large charitable gift while retaining the income from the property for himself and/or his spouse or other heir.[1]  It can also be used to monetize and diversify an asset or asset pool at little or no tax cost to the donor.

Charitable Lead Trust (CLT)

The CLT, in many ways, is the mirror image of the CRT.  In a CLT, the CHARITY receives the income stream over the term of the trust with the remainder reverting to the donor or another noncharitable beneficiary at termination.  Donors who wish to provide an income stream to charity without actually relinquishing the underlying assets will find this technique appealing, especially as an estate freezing technique.  Contributions to “qualified” CLT’s (those in which the donor retains the income tax obligation) yield an income tax deduction while contributions to “non-qualified” CLT’s (those in which the income tax obligation is passed to the trust) do not.  Unlike CRT’s, CLT’s are NOT tax exempt.

Variations on a Theme

Because of the split interest nature of these trusts, there are many variations to CRT’s and CLT’s and the planning can become quite complex.  Determining if and when such a trust makes sense for you requires careful planning and the advice of experts.  Properly designed, however, these trusts make a terrific adjunct to a well-crafted estate and income tax plan.    Consult your tax or legal advisor for more details.


Charitable Remainder Trusts



The CRT is a tax exempt entity.  Therefore, it enables you to monetize highly appreciated assets with no tax cost to the trust and little or no tax cost to you.  If structured properly, CRT’s can also effectively act as an installment sale vehicle for the disposition of highly appreciated assets.


There is a minimum annual payout rate of 5% set at the time the trust is established and a maximum payout of 50%.  Variables include the government-specified §7520 rate and the age(s) of the donor(s)
Payments can be made over the life or lifetimes of the   beneficiary(ies) or for a fixed period of up to 20 years. There are legal costs to set up and administer these trusts, possible trustees’ commissions to consider, and the cost of preparing the annual tax return.


Variations on a theme – CRT’s can be:

  •   Annuity trusts wherein the periodic dollar payments are fixed at the inception of   the trust, or Unitrusts wherein the payout is set as a fixed percent of the fair market value of the trust,   determined annually.
  •   Inter vivos (during lifetime) or testamentary (at death)


Work best in a higher interest rate environment. The higher the interest rate, the greater the probability that both the income flow to the noncharitable beneficiary and the eventual remainder interest going to the charity will be meaningful.


Charitable Lead Trusts



Enables the donor to provide a charitable benefit of an income stream without giving away the underlying assets CLT’s are NOT tax exempt trusts:

  •   For a “grantor” lead trust (qualified) any   income generated is taxed to the donor.
  •   For a “non-grantor” lead trust (nonqualified),   the income is taxed to the trust


For the extremely generous donor, the nonqualified, non-grantor lead trust can circumvent the adjusted gross income (AGI) limitation on charitable contributions.  Even if you max out on these limits, you can still fund and operate a CLT. Contributions to non-qualified CLT’s are NOT tax deductible under any circumstances.
A contribution to a qualified CLT may generate a charitable contribution at inception. Contributions to a qualified CLT trust are considered gifts “for the use” of charity rather than gifts “to” charity and the deductibility is therefore limited to 30% of AGI (20% for appreciated property)


Variations on a theme – CLT’s can be:

  •   Annuity trusts wherein the periodic dollar payments are fixed at the inception of the trust, or Unitrusts wherein the payout is set as a fixed percent of the fair market value of the trust,   determined annually.
  • Qualified (grantor) or non-qualified (non-grantor)
  • Inter vivos (during lifetime) or testamentary        (at death)
  • Any length term is permissible.
Complex compliance:  Must comply with many of the private foundation rules (such as the rules against self-dealing, excess business holdings, jeopardy investments, and taxable expenditures)


[1] There are enough similarities between the CRT and the charitable gift annuity (CGA) to refer to the CGA as the “poor man’s CRT”.  The CRT, however, is far more flexible.

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We have reached it.  The pinnacle of the Philanthropic Continuum.  The stuff of upscale cocktail party chatter.  The Cadillac, no, the Rolls Royce of philanthropic giving vehicles.  Drum roll, please… introducing the PRIVATE FOUNDATION.

Now, for such a sexy vehicle you would think there would be a sexy name.  Could it get any more boring?  The term “private foundation” evokes yawns even from me as I write about it!  But, like a good, solid (boring) CPA who is worth his/her weight in gold, the PF is a powerful construct and great addition to the philanthropic toolkit.  Unfortunately, it is also an often overused vehicle, as we shall see.

My take is that private foundations work well for donors and families who want to be in the business of philanthropy.  If, instead, you are merely looking for a charitable pocketbook, try a donor advised fund (DAF) – it works much better.


What is it?

A private foundation (PF) is essentially a private charity that is created, funded and (generally) controlled by a single donor or members of the donor’s family.  PF’s can be either “operating” foundations (involved, say, in the running of a museum) or “non-operating” (grant making.)  There are many more non-operating foundations that operating foundations in existence today and, for the most part, when we speak of PF’s we are speaking of non-operating entities.  PF’s are far more robust that DAF’s because they can be used to more extensively fund charitable projects while exerting greater control over their outcome.  The best use is for philanthropically inclined high net worth donors who want to maintain control of the charitable assets prior to disposition, establish the direction of charitable giving for their families and establish a family reputation as philanthropists for generations to come.  As stated above, they are for donors who want to be in the business of philanthropy.  In practice, however, I have too often seen those who are not that interested in charity talked into using a PF because it was a good income and transfer tax planning tool.  But that is only half the equation with the other, perhaps more important half, being the donor’s charitable inclinations.  It is always a shame when a PF, once funded, ends up languishing and being used as a mere charitable pocketbook.  This is definitely not the best use of a PF.

Another bias on my part – if PF’s are best used for the business of philanthropy rather than as a charitable pocketbook, they ought to be a decent size.  There is no legal minimum size for PF’s but in my mind, a practical minimum is seven figures or more.  I know of, at least, one vendor who offers prepackaged PF’s for a minimum investment of $100,000… but really, how much “philanthropic business” can you conduct with such a small base?

PF’s are terrific, but like certain exotic, high performance sports cars, they are really high-maintenance vehicles.   Like everything else, you have to weigh the pros and cons to see if such a vehicle is right for you.




From a planning perspective, the establishment of a PF works well for the philanthropically minded taxpayer   faced with a major liquidity event, like the realization of a large bonus or equity compensation package, or the lucrative sale of the family business.  This enables the taxpayer to shift the contribution to the year of the   liquidity event, reduce taxes accordingly, and defer the ultimate gift to the final charity to a later date.


Although lower cost options are available, the cost of administration is high including legal, tax, accounting, and management costs.


Once established and funded, the donor or, more appropriately, the board of the PF which may include the donor and family members, can exercise significant but not total control over the timing and manner of   charitable expenditure. 


There is constant legal exposure to the PF, its board members and managers for excise taxes levied for not   following the rules to the letter of the law.


There is also considerable flexibility in the choice of recipients.  This is probably the most desirable feature   for those who wish to be in the “business of philanthropy.”  For example, PF’s are not limited to making only public charity contributions.  Under certain circumstances, they can make grants to individuals or   other private foundations.  However, grants to individuals are permissible only by using an IRS-approved selection method and grants to other private foundations involve the donor-PF’s acceptance of expenditure responsibility.  Such permissible uses of PF’s increase flexibility and often enable donors to use their PF’s to advance or support causes that are underserved or of little interest to public charities.


The tax rules for PF’s restrict them to a greater extent that public charities.  PF’s are subject to an ongoing, annual excise tax equal to 1% or 2% of net investment income.  Public charities are not. 
There are tax advantages to the donor such as avoiding the recognition of capital gains on highly appreciated assets donated to the foundation, and   shifting income producing taxable assets from his/her own pocket to the tax exempt world of the PF.


There are lower annual charitable contribution limitations for PF’s than for public charities (30% vs. 50% for cash; 20% vs. 30% for capital gain property).  This may be meaningful for significant donors who periodically face these limitations when filing their   income tax returns. 


PF’s provide significant visibility in the philanthropic community, and can also be used to pull the family together in the pursuit of common philanthropic goals.   


The big one – the required annual minimum distribution of 5% of the PF’s asset value to other charities

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Often, when people speak of making noncash gifts to charity, they are referring to intangible property such as stocks and bonds.  Although they have their own set of rules and limitations, such gifts are fairly easy to value and complete.  Today, however, we are going to focus instead on the gifting of tangible personal property to charity, an area that can be quite profitable for both sides but also fraught with misunderstanding and planning landmines.

Years ago, I used to get a kick out of the radio commercials run by certain charities urging listeners to donate used cars to their organizations.  They would often claim that you would save more in taxes than you could make if you sold the car (wrong) and that they would give you a “tax deductible receipt” for the value of your car.  I was never quite sure what a “tax deductible receipt” was because, silly me, I thought the contribution itself was tax deductible, not the scrap of paper evidencing the gift.  Anyway, those days are thankfully long gone, as the government has tightened up on the rules to limit such bogus deductions.

Such gifting can still be a good strategy, particularly with appreciated property, but you have to be cognizant of several issues.  Most importantly, perhaps, is to know the use to which the charity will put the property once it receives it.  Will the property actually be used in the furtherance of the charity’s exempt purpose?  It is not always clear.  Take, for example, the case of fictional client Phil Lanthropist, who owns an original “Kramer” painted by the noted avant-garde artist Nina West[1].  Phil purchased his beloved painting in 2002 for $6,000; today it is worth $80,000.  Phil iskramer now considering donating the painting to his alma mater.  The value of his contribution will ultimately depend upon how the University uses the painting.  If the University displays it for educational purposes in the permanent collection of its art gallery, then Phil should be able to deduct its full fair market value.  If, however, the University sells the painting (and even if it turns right around and uses the proceeds to fund other educational programs), the painting will no longer be considered employed in a related use and Phil will only be able to deduct his cost basis.  THIS CAN BE A HUGE, HUGE DIFFERENCE!  In this case, if the painting is used for exempt purposes, Phil ends up with an $80,000 contribution; at a 39.6% tax rate, he saves $31,680.  If, however, it is not used for exempt purposes, Phil will only be able to deduct $6,000, with a corresponding tax savings of only $2,376.  The message is clear:  Make sure there are no misunderstandings with the charity as to the intent of the donation!

(As an aside, whether Phil gets to deduct his cost or FMV, he will have to spring for a qualified written appraisal of the value of the painting.  Appraisals are required for the valuation of any single item or group of items that exceeds $5,000 and in the case of artwork, if the claimed value is $20,000 or more, the appraisal must be submitted with the return.)

There is also a final piece of paperwork, specifically, written certification from the charity confirming to the IRS and the donor that the property use was indeed related to the charity’s exempt purpose and that such use was substantial or, alternatively, that such use, although intended at the time of the contribution for one reason or another has become impossible or infeasible to implement (form 8282).  Without this certification, if the property is disposed of during the year of the gift, the taxpayer’s contribution will be limited to his basis.  Similarly, if the charity disposes of the property within three years of the donation, the donor will be required to recapture the excess of the FMV over cost basis as ordinary income.

The IRS is not messing around with this one!  While such contributions can be quite worthwhile for both the donor and the donee, you have to follow the “use” and “documentation” rules.  Remember the old adage – No job is done until the paperwork is finished.  Never so true as in the tax world.

[1] With apologies to Seinfeld, Season 3, Episode 21

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