primer section iii: irrevocable planned gifts charitable gift annuities life insurance charitable...
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PRIMER SECTION I I I :
IRREVOCABLE PLANNED GIFTS
CHARITABLE GIFT ANNUITIES
LIFE INSURANCE
CHARITABLE TRUSTS
SUZANNE ZOLFO, CSPG
2013 Western RegionalPlanned Giving Conference
Party at 6:00 if you stay awake!
VERY COMMON IRREVOCABLE PLANNED GIFT
EASY FOR A DONOR TO UNDERSTAND AND FUND
ANY CHARITY CAN OFFER THEM, EITHER INDEPENDENTLY OR THROUGH A
COMMUNITY FOUNDATION
Charitable Gift Annuity
Charitable Gift Annuity
CHARITYMarch 19, 2013
Gift of property
Donor
CharitableGift
AnnuityCHARITY
Rem ainder toCHARITY
Incom e tax deductionFixed payments
How it works
You transfer cash, securities, or other property to CHARITY.
You receive an incom e tax deduction and may save capital gains tax.
CHARITY pays a fixed amount each year to you or to anyone you name for life. Typically, a portion of these paym ents is tax-free.
When the gift annuity ends, its rem aining principal passes to CHARITY.
Basic Elements of a CGA Contract
• Donor• Charity• Income beneficiary name, birthdate, age to nearest
birthday & address• Gift date• Fair market value of gift• Annuity amount• Date payments commence, frequency, method, any
prorated amount• Statement that gift is irrevocable and non-assignable• Termination• Gift designation• Power to revoke payments (2 life)• Governing law (state)• Signatures of donor and an authorized signer of charity
Deduction & the AFR
• 2 parts of deduction: immediate and tax-free income
• Amount is determined by IRS formula where a variable is the AFR
• 5-year carry forward to use up the immediate part of the deduction if they can’t use it all in one year
• If they don’t itemize and there are no special circumstances, probably will want more tax-free income
• Must discuss this with the donor before you draw up documents
• Only need signed election document if they choose other than the current month
What is the AFR?
• The Treasury Department issues the Applicable Federal Rate, or AFR, every month.
• The AFR, sometimes also called the Rate of the Month, represents 120% of the interest rates paid on medium term (3-9 years) government securities.
• Sec. 7520 of the Internal Revenue Code allows donors to elect either the AFR in effect for the month in which the gift is made or for either of the two preceding months.
• Generally, a higher AFR will produce a higher immediate income tax deduction for charitable gift annuities.
Additional Contract Documents
• Attachment to Schedule A, for donor’s tax return – so make it useful• These elements not set in stone, but should be spelled out in your gift
annuity policies & procedures • Donor name, address & SS#• Principal donated and asset (stock, cash, real estate, etc.)• AFR and month• Deduction being claimed
• AFR Election, if required• Statement explaining AFR – this protects YOU!• Month and AFR selected• Donor signature
From Donor/Income Beneficiary (good ideas, not required in CA)• Photo ID with date of birth and address• Bank account info for direct deposit payments (voided check)
Types of Annuities
Immediate• 1 or 2 income beneficiaries• If 2, concurrent or successive
Deferred• Fund now, must wait at least 1 year to start
payments• Choose a date in the future when payments
begin• Get a higher rate based on how long you defer• Deduction based on deferral period, use a
current AFR• Good way to set up income for retirement
Types of Annuities (cont.)
Tuition or Commuted Payment• A 1-life deferred annuity, usually funded by parent,
grandparent or guardian, for a young child• Donor defers payments until child is 18• Child has option before payments begin to either elect
lifetime payments or much larger “commuted value” payments over a period of 4-5 years, as spelled out in the contract, then the contract terminates
• If lifetime payments are elected, the rate would be very low because the income beneficiary is so young
• With a low AFR, may have to reduce the annuity rate to get the annuity to qualify for the deduction under the 10% rule: there must be at least a 10% residuum calculated for the charity
Types of Annuities (cont.)
Flexible Deferred• Like a deferred, but choose a “target date” with
earliest and latest dates selected• Deduction based on target date • If payments begin between earliest and target
dates, then lower rate than planned; later date, higher rate
• Inform charity prior to first payment date desired (put timing in your policies & procedures)
• Good option if donor has not decided when to retire, or just to give more flexibility in their planning
Gift Tax Implications
Gift tax implications depend on:• who owns the gifted property• whether or not it is appreciated, long-term property, and,• who the annuitants are
Be aware of gift tax when spouses fund with separate property, or when donor funds an annuity for anyone
other than themselves or spouse.
Scenario 1: donor funds with separate property and spouse receives annuity first, then donor• Gift tax is an issue when the marital deduction does not apply, but
for spouses, it usually does.• This circumstance is the exception: But this does qualify for the
annual gift tax exclusion, $14,000 in 2013, which can be applied to the annual payments.
Gift Tax Implications (cont.)
Scenario 2: Donor is first annuitant, then someone other than spouse. Annual gift tax exclusion does not apply as the gift is of a future
interest – so the current gift tax due However, the Donor can reserve the right to revoke annuity interest
by will in the contract, making the gift incomplete – then current gift tax is due on the income as it is paid out to the second annuitant, and it qualifies for the annual gift tax exclusion
Scenario 3: Donor funds for someone other than spouse Gift tax is due on present value of annuity But this does qualify for the annual gift tax exclusion of $14,000 In addition, the donor can reserve the right to revoke annuity
interest by will in the contract – then the gift that is reportable is only the present value for the donor’s life expectancy
Gift Tax – The Reality
The good news about gift tax:
The marital exclusion almost always applies for spouses and is unlimited
The lifetime exclusion in 2013 is $5,250,000 The annual exclusion in 2013 $14,000 You are probably not an accountant or tax advisor, so you
should NOT be calculating gift tax due for your donors Be aware of it and know to advise your multi-millionaire
donors who you think have exceeded their lifetime gift tax exclusion to get tax counsel
SO, IN REALITY…
You will probably never have to deal with this!
CGA Prospects
AGE
• Average age of annuitants for immediate gift annuities: 79• Average age of annuitants for deferred gift annuities: 64
78% of charities report having a minimum age for annuitants
• 57% require a minimum age of 60 or older for an immediate annuity
• 28% require annuitants be 65 or older to begin receiving payments on a deferred annuity, and 26% stated age 60 for the same
Source: ACGA Survey of Charitable Gift Annuities, 2009
Minimum Funding Amount
55.1% of charities require a minimum contribution of $10,000-$25,000, 29.6% require $5,000-$9,999
For subsequent contributions from the same donor for an immediate annuity, 39.3% of charities require a minimum of $10,000-$25,000, and 38.5% require a minimum of $5,000-$9,999
Results were about the same for deferred annuitiesAverage size of gift annuities among charities
nationwide is $43,371
Source: ACGA Survey of Charitable Gift Annuities, 2009
EASY GIFT TO GIVE, IF CERTAIN CRITERIA ARE MET
MAY REQUIRE ADMINISTRATIVE WORK FOR THE CHARITY
NEED TO HAVE GOOD POLICIES AND PROCEDURES IN PLACE
Life Insurance
Donor Retains Ownership of Policy
Revocable giftDonor makes charity beneficiary of the policyNo administration for charityNo current tax advantage for the donorPolicy payout is excluded from the estate at
deathCharity determines how to recognize gift from
donor as a revocable giftInsurer can provide the value of the policy at
any time
Donor Transfers Ownership of Policy
If Donor gives ownership of policy to charity, it is an irrevocable gift
Paid-up policy donated to charity: 1. Wait until insured passes to receive payment,
OR,2. Cash out the policy when donated
Gift value is as of the date it is transferred to the charity, donor gets tax deduction for that amount
Charity Owns Policy
2 Scenarios if premiums are still payable:
1. Donor does not want to pay premiums (if any due) so charity must decide whether to continue to pay premiums out of reserves or cash it out – gift value is what policy is worth when it transfers to charity
2. Donor continues to pay premiums and charity holds policy – donor gets deduction for each payment made since it goes to the charity, so gift value is what the policy is worth when transferred to charity PLUS the premium payments as they are made
Life Insurance Administration
If donor is paying the premiums and charity is the owner, Development and Finance must have tight procedures in place to administer
Premium bills will go to the charity to pay, have them come into Development
Charity pays premiums (via Finance dept)Send a reminder to the donor to make the donation to
offset the premium (include proof of payment)When donation is received, send acknowledgement to
donor – full amount is tax deductibleMake sure at least 2 people in Development are aware of
the donor, the premium amounts and the timing of payments so premiums do not get overlooked
COMPLEX GIFTS
REQUIRE DONOR TO HAVE COMPETENT ESTATE, FINANCIAL AND TAX COUNSEL
REQUIRE CHARITY TO HAVE COMPETENT COUNSEL AND ASSET MANAGEMENT
REMAINDER AND LEAD TRUSTS
Charitable Trusts
Acronyms from Hell
CRUT CRAT
CLUT
CLAT NICRUT
NIMCRUT FLIP NIMCRUT
Charitable Remainder Trusts
Charitable Remainder Unitrusts (CRUTs)
Pay non-charitable beneficiaries for lifetime or term of years and remainder goes to charitable beneficiaries
Donor receives deduction at time of donation, taxation of payments depends on investments
Can add to the principalPay a set percentage of the trust balance as
of January 1 each yearMust meet IRS test to qualify for deduction
Charitable Remainder Trusts (cont.)
Charitable Remainder Annuity Trusts (CRATs)Similar to CRUTs, but:
Pay a set dollar amount each year, regardless of portfolio performance of the trust
Cannot add assets to a CRATThese trusts are the ones that run out when
paying more than they are earning for a long timeUsually not a good idea unless the non-charitable
beneficiaries are elderly and want a set income stream – in this case, consider a CGA instead
Charity as Trustee
Policies & Procedures need to address whether the charity will act as trustee or co-trustee, or not at all – different schools of thought on this
If trustee, must manage the assets, prepare annual tax returns and make payments to beneficiaries
If going to do this, good policy to require that your charity is XX% irrevocable in the trust
Individual employees of charities should NOT act as trustee, conflict of interest
Charity Considerations
Ask questions when donors tell you they already have a “charitable trust” and your charity is in it – don’t assume it is a qualified trust OR that your charity is irrevocable. This is important because:
When charity is irrevocable, can book present value of the remainder as a gift and any subsequent additions
Must also carry liability on your books
Remember, donors don’t always use the right language to describe their estate plans, and they don’t always recall the exact terms of their documents
Charitable Lead Trusts
Charitable Lead Unitrusts (CLUTs)Charitable Lead Annuity Trusts (CLATs)
Asset is put into trust and income generated goes to charities
At end of the term, the asset reverts to the donor
Good vehicle in a low-AFR environment
Charitable Trust Summary
Get a good estate planning attorney who has experience drafting these trusts to advise you
You should NEVER draft documents if you are not an attorney
If you are an attorney, your organization needs to decide if you are allowed to draft documents
Also need to decide if your organization will pay to draft trusts or if the donor must pay – if charity pays, must 1099 the donor for the cost
Get help!
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