Tag Archives: Donations

Tax Planning Tool: Charitable Lead Trusts


This article was co-authored by Richard Lee.

Many donors make multi-year commitments to a charity of their choosing. For example, an agreement to contribute $50,000 per year for 5 years to a new building campaign. Some donors are happy to make the pledge payment each year from their annual income, which makes them eligible to take an income tax charitable deduction annually. However, what about the donor that wants to fund their pledge payment out of existing wealth and garner a large upfront income tax deduction? There may be a way to accommodate this type of donor with a Charitable Lead Trust (CLT).

Conventional wisdom is that CLTs are actually estate-planning tools for the very wealthy. While this is true, there are estate and gift planners, such as Lani Starkey of Fifty Rock Consulting, who believe there are income tax planning uses for CLTs as well, particularly to generate an upfront income tax charitable deduction, in a year in which the donor has unusually high income.

A CLT involves making a charitable gift to an irrevocable trust. A CLT in some respects is the mirror-image of its trust cousin Charitable Remainder Trust (CRT). A CRT is tax-exempt and provides a regular income stream to the donor or named beneficiary for the donor’s lifetime(s) or term of years, with the remainder thereafter going to the charity. Conversely, a CLT is not tax-exempt, with periodic payments going to charity for a specified term, and the remainder either reverting to the donor or passing to some other person chosen by the donor.

Please note there are two different types of lead trusts: grantor trusts and non-grantor trusts. The income tax benefits discussed here stem from using a grantor charitable lead trust.

With a grantor trust, the trust will annually file a fiduciary income tax return for income tax purposes, the trust’s income, gain or loss, will flow through the trust and be reportable on the donor’s personal income tax return (Form 1040).

The upfront income tax charitable deduction is equal to the present value of the charitable income stream, which is determined by using an IRS-prescribed interest rate known as the “Section 7520” rate. The lower the Section 7520 rate, the higher the discounted present value of the charitable income stream, and the higher the upfront income tax charitable deduction. Currently the Section 7520 rate is very low, thus producing higher income tax charitable deductions for gifts to CLTs.

As an example, assume a donor makes a pledge to a charity for $25,000 per year for 10 years and has accumulated assets of $500,000. The donor could donate to a charitable lead annuity trust and they could use a large charitable deduction in the current year to offset a large bonus they received. If you assume a 5% payout rate and a 6% investment rate of return on trust assets over the 10 years, the transaction would yield the following:

  1. An immediate charitable deduction of approximately $229,000, which could offset other income by up to 20% of the donor’s adjusted gross income, or 30% if the contribution were made in cash (compared to a $25,000 deduction per year over 10 years). The deduction is so close to the $250,000 to be paid to the charity because of the low Section 7520 rate. This rate will presumably go up given other rate increases making the deduction less.
  2. $25,000 per year to go to the charity for 10 years, same as the pledge.
  3. Approximately $566,000 to revert back to the donor or their assignee at the end of the 10-year period.
  4. An amount greater than the $500,000 contributed as the rate of return on trust assets at 6% exceeded the 5% payout.

This might be a very attractive result for a prospective donor. The catch is that they would have to have sufficient wealth to completely fund the trust in the first year. A donor that pays their yearly contribution out of their annual income could not do that.

Additional benefits:

  1. The charity has more security that the pledge will be fulfilled as the trust is funded.
  2. If the trust is funded with securities, the donor gets an immediate income tax charitable deduction applied against ordinary income whereas subsequent sales of stock to fund the payments could trigger more favorable long-term capital gains.
  3. If the pledge is paid immediately, the donor gets the full $250,000 deduction but the money is gone. With this arrangement, unspent corpus is returned to the donor.

A CLT can be structured to fit a donor’s objectives and financial situation. The donor can select the trust’s start date, the trustee (e.g., a bank, individual, or the charity), the trust term, the lead interest charitable recipient, the payout percentage and formula (annuity or unitrust), the payout frequency (e.g., quarterly or annually), the contributed assets, and the remainder beneficiaries (e.g., the donor themself, or their children).

As mentioned before, a CLT is taxable, unlike its tax-exempt CRT cousin. Therefore, contributing low basis assets and selling them once inside the trust would result in the grantor having to recognize capital gain on the sale, thus offsetting the income tax benefit of the upfront charitable deduction. Thus, higher basis assets would generally be better assets to contribute to a CLT.

Note: Although the initial contribution of assets to the trust will generate an immediate income tax charitable deduction, over the trust’s term the initial income tax benefit is at least partially offset by the donor’s reporting of the trust’s income. And, if the donor dies during the trust term, the donor is required to report as income a portion of the up-front charitable deduction.

Keep in mind too that any income tax charitable deduction allowed is limited to 20% of a donor’s adjusted gross income, or 30% of adjusted gross income in the case of contributions of cash rather than capital gain assets, even if the lead interest goes to an otherwise 50% public charity.

These arrangements might work very well in the right situation for the right donor. If you would like additional information, please contact our office at 301.231.6200. .


High Net Worth Philanthropy Giving Trends

A 2016 study of High Net Worth Philanthropy was issued in October as a collaboration by U.S. Trust and the Indiana University Lilly School of Philanthropy. A full copy of the report can be obtained here.

This is the sixth such study conducted since 2006 on a biennial basis. The study is based on a survey of more than 1,500 US households with a net worth of $1 million or more, which excludes the value of their primary residence, and/or an annual household income of $200,000 or more. The average net worth of the respondents was $16.8 million with a household income of approximately $330,000. Some respondents likely had extremely high net worths, which sent the averages higher.

Overall, the results are encouraging for charities cultivating wealthier donors; 91% of these households donated to charity and the average amount given to charities per household was approximately $25,500. Approximately 50% of the surveyed households also volunteer with charitable organizations. By comparison, 59% of the general population gave to charity and on average donated approximately $2,500. The causes most likely to receive donations were basic necessities, religious, and health categories with religious organizations receiving the most dollars. Also encouraging is the fact that 83% of those surveyed plan to continue giving at the same level or more in the next three years. Of the remaining 17% of respondents, 14% were undecided on future donations and only 3% planned to reduce future contributions.

“Wealthy donors continue to be incredibly generous with their time and money in support of social change in their communities and in the world,” said Claire Costello, national philanthropic practice executive for U.S. Trust. “And while their charitable activity is driven to a large extent by their personal values and convictions, donors are also listening closely to the needs of nonprofits as they make their giving and volunteering decisions.”

Interestingly, when asked why a household stopped supporting an organization the number one reason given was “they received too many requests from the organization or that the requests were too close together.” The report has a wealth of other information about high net worth philanthropy and should be recommended reading for development officers.

Transforming Planned Gifts into Current Gifts

ThumbnailAt the Planned Giving Days conference in Arlington, Virginia on May 26, Jeff Lydenberg, Esq., Vice President of Consulting for PG Calc   (jeff@pgcalc.com)  gave an excellent presentation on Transforming Planned Gifts into Current Gifts.

Some of the highlights of his presentation are included below:

Most planned gifts are “deferred gifts”  meaning that the arrangement is made now, but the charity’s use of the funds is delayed until a future date. Converting a future gift to a present gift can be both emotionally satisfying to the donor and obviously very financially satisfying to the charity.

Some of the options to achieve this are:

  • The donor making a current gift of all or a portion of the amount that would otherwise go to the charity via a bequest or dispository language in a living trust. A donor who believes they have enough income and other assets for contingencies may be willing to do this to be able to see their gift in action and to also get a current income tax deduction not available if given upon demise.
  • If the donor needs current cash flow might they consider contributing some or all of the amount they were planning to leave as a bequest into a charitable remainder trust or gift annuity funded currently.  While this does not result in the charity’s having immediately usable dollars today, it does convert a revocable arrangement into an irrevocable one and allows for the accounting recording of the arrangement.
  • Current gifts of IRA assets (as well as assets in a qualified retirement plan) that may achieve current giving goals of the donor. Obviously, if the donor is over 70½ an IRA charitable rollover of up to $100,000 would be possible to meet minimum distribution requirements.  There may also be ways to achieve comparable results for the donor aside from the charitable rollover option. Provided AGI limits were not an issue for the donor over age 59½ (so no early withdrawal penalty), the donor could simply withdraw an amount from the IRA and gift it to your charity. The donor could also donate appreciated stock and use the deduction from that contribution to offset the tax on withdrawal of cash from the IRA or qualified plan.
  • Outright Gift of all or part of the income interest in a charitable remainder trust – All or a portion of the assets reserved for the non-charitable beneficiary in the CRT instead become available for the immediate use of the charity. The tax rules can be a little tricky here but the assignment of the income interest is treated as the gift of a capital asset with no basis. Provided the beneficiary held the income interest exceeds one year, the deduction will be for the present value of the interest contributed, rather than cost basis, and the reportable deduction will be limited to 30% of the donor’s adjusted gross income.
  • Outright gift of all or part of the annuity interest in a charitable gift annuity to the issuing charity – In this scenario, the charity is relieved of its obligation to make future payments and is therefore free to use currently the amount being held in reserve to cover the obligation. The amount of the gift is the present value of the remaining annuity payments computed as of the date of the assignment. Although there are no revenue or private letter rulings specifically on point, it seems reasonable to conclude that the assignment will not result in taxable gain and that the income tax charitable deduction would be limited to the investment in the contract (the remaining capital that would have been returned tax-free over the remaining life expectancy if the annuity interest had not been assigned.)  This gift should be subject to a 50% AGI limitation.
  • Termination of a charitable remainder trust or a gift annuity resulting in cash distributions to the charitable and non-charitable beneficiaries –Upon the early termination of a CRT, the charity receives cash equal to the present value of the remainder interest and the income beneficiary receives cash equal to the present value of the income interest. Upon the termination of a CGA, the annuitant receives from the charity cash equal to the present value of the annuity interest and the charity is relieved of any further payment obligation. Even though part of the donor’s motivation in terminating a CRT or CGA may be to release money to the charity sooner than would be the case, no deduction is allowed, because the charity is only receiving its income interest.
  • Conversion of an income interest in a charitable remainder trust to a gift annuity – Provides additional money for the long-term use of the charity that would have gone to the non-charitable beneficiary.  The donor will be allowed an income tax deduction for the amount by which the date-of-gift present value of the income interest of the CRT exceeds the present value of the annuity interest.

Some very good ideas of potentially generating more current cash from deferred gift donors.

Nonprofits Sued for Return of $2.1 Million in Donations

questionMore than two dozen local, state and national nonprofit agencies are being sued for the return of $2.1 million in donations in a Waco, Texas based lawsuit. A trustee for Life Partners Holdings claims the donations were made by the CEO from funds he fraudulently received from the company before it filed for bankruptcy last year. The alleged scheme appears to have been going on for seven years according to the claim.

The suit claims that donations from the CEO were fraudulent because the funds were obtained through an excessive fee structure that bilked investors out of returns.

Life Partners Holdings was recently investigated by the U.S. Securities and Exchange Commission for their practices involving the sale of investment contracts. According to the suit, Life Partners hid the amount it charged in fees and that only about 20% of the proceeds from investors were actually used to acquire policies while the remaining 80% was divided between future premiums and commissions to licensees and Life Partners. The Texas financial firm is accused of defrauding investors out of $1.3 billion according to the bankruptcy trustee representing creditors.

The attorney that filed the suit notes that no one believes the defendants were involved in the fraud, however, the CEO stands accused of evading taxes and steering millions of dollars to his alleged mistress, the founder of one of the local animal welfare groups in the list of defendants.  A lawyer for the CEO said the suits filed by the bankruptcy trustee have “little, if any, validity” according to the Chronicle of Philanthropy. The suit is seeking to recover as much of the funds as possible.

Several of the recipients are animal welfare organizations but funds were also donated to renovate a building on a college campus in East Waco. The issue, of course, is that the majority of the funds received have been spent and many of the organizations are not in a position to be able to pay back the donation.

Read more about it here: http://www.wacotrib.com/news/business/dozens-of-waco-nonprofits-sued-in-life-partners-bankruptcy-action/article_5267c4e4-8144-5955-82c4-d688e6acdbf7.html

And here: https://philanthropy.com/article/Dog-Rescue-Charity-Linked-to/235704

Beating the Odds with a Long Term Development Director

please giveI have had the honor of being associated with Bread for the City (Bread) for more than 20 years, the last six or seven as a Board Member and Treasurer.

One key element of Bread’s success has been the longevity of Kristin Foti, their development director. For many clients, Development Directors turn over frequently in line with survey data showing most organizations have a Development Director for about 3.5 years. Although still only in her early thirties, Kristin has been at Bread for more than 10 years, the last six as Chief Development Officer. I spoke to her and George Jones (the CEO of Bread for the last 20 years) on the reasons for their success.

While many factors influence a person’s decision to stay at a job, Kristin noted the stability of the organization as the strongest reason: the programs are well run, the finances are well managed, the Board Members are enthusiastic givers, and the senior executive team have long tenures. She also thrives in her partnership with George, who puts leadership above micromanagement. And she also commented on how it’s fun to work with an organization that continues to innovate and grow, keeping her job interesting and offering opportunities for professional growth.

Bread for the City engages in a fairly wide swath of fundraising activities including private foundation proposals, direct mail annual fund and capital campaign solicitations, annual events and personal solicitation by Kristin and/or George to major donors. The fundraising environment is very strong as George the CEO is actively involved with cultivating and stewarding larger donors, and the Board Members are generous givers who also solicit additional contributions. Kristin also works with a dynamic team, who she considers to be the best in their fields.

Bread’s active donor file is about 11,000 donors. Online donations and gifts solicited by email are the fastest growing source of donations, which has been a strong positive for the organization. Bread also continues to work to grow its major gifts and planned giving programs. (They have several times over the years received substantial testamentary bequests from donors who were not active with the organization while alive.)

There are many social service organizations in the DC area doing great work. The differentiating factor for Bread is the diversity of services they provide, including medical and dental care, food, clothing, social services, and civil legal assistance. All of these programs are fully operational and most have been around for 20 years or more. Vision care is the newest offering, which was launched in December.

While I suppose this is a bit of an advertisement for Bread, an organization I really care about, I hope this blog entry highlights the types of factors that go into a development director having a lengthy stay and the position not being a revolving door.

Learn more about our nonprofit group here: http://www.aronsonllc.com/industries/nonprofit-accounting

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