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Advising Your Clients on Philanthropy: A Fresh Look at Charitable Remainder Trusts and Gift Annuities


Advising Your Clients on Philanthropy: A Fresh Look at Charitable Remainder Trusts and Gift Annuities

We’ve all heard about the somewhat less-than-positive impact that the Tax Cuts and Jobs Act of 2017 is expected to have on charitable giving. There appears to be little doubt that the significant increases in the standard deduction and the estate and gift tax exemptions will have some effect. Most charities remain optimistic because they believe their donors’ decisions to contribute aren’t based on tax considerations alone. Now that charities have had time to review the new law and consider the changes, it even seems possible that some of our old standbys will have new chances to shine. This column will review two of them in light of the new law.

Charities often refer to the charitable gift annuity and charitable remainder trust as life income plans. A life income plan is an arrangement whereby a donor contributes cash, appreciated securities, or other property in exchange for income for life, or in the case of a charitable remainder trust, life or a term of years. The amount of this payment is based on the age(s) of any income recipient(s) at the date of the gift, among other factors. After paying the established income for life, the remaining principal is a charitable gift. Your clients may create a charitable gift annuity or charitable remainder trust for themselves or another person. There may be gift tax implications if a person other than a spouse is included as a life income beneficiary, but the Tax Cuts and Jobs Act of 2017 has diminished them.

There are many similarities and some differences between the charitable gift annuity (CGA) and charitable remainder trust (CRT). CGAs are specifically regulated by the state of Florida and not all charities can offer them. See Fla. Stat. §627.481 (2017).

Charities tend to prefer CGAs for smaller gifts because they use a simple form-contract and are easier to administer; CRTs are typically for larger gifts because the charity’s liability to fund the income stream to the beneficiary is limited to the trust assets. CRTs require a formal trust instrument with a trustee (who can be the grantor) and trust administration. Either can be established with almost any asset and may be an effective tool for permitting diversification of assets that may not otherwise be sold advantageously because of a large built-in capital gain.

CGA payouts are always fixed, while CRT payouts may be fixed (annuity trust), but may also be variable (unitrust). The variable rate may make better sense for the younger donor. Charities often use the payout rates for CGAs published by the American Council on Gift Annuities or something close to them because the ACGA uses a very scientific process to establish its recommended rates and those rates comply with Florida law. The CRT payout rates are negotiated within certain broad parameters set by IRS regulations. Payout rates will almost certainly be greater than the fixed income rates available in today’s low interest rate environment. No additions can be made to a CGA after it is established, although the donor can simply establish another CGA. Additions to charitable remainder unitrusts are permitted and provide additional tax benefits and increase the payout to the donor.

The critical component of a CGA or CRT is the actuarial calculation that establishes the values of the life income interest and the charitable remainder interest. The life income interest represents the present value of the donor’s income stream and the remainder interest represents the present value of the remainder that will go to the charitable beneficiary or beneficiaries. The remainder interest is tax deductible to the donor in the year the CGA or CRT is established, and the five-year charitable deduction carryover is available. With a CGA, a portion of your annuity payment will also be tax-free income. If the initial gift consists of appreciated property, the capital gains tax on part of the appreciation of the asset may be avoided and the tax on the remaining portion postponed, prorated over the donor’s life expectancy.

The remainder of the charitable life income plan, the portion that goes to the charity or charities designated by your client, will establish an endowment fund in your client’s name or otherwise provide support, offering the personal satisfaction of knowing these gifts will help ensure the future vitality of their favored charities and our community.

It was true before the Tax Cuts and Jobs Act of 2017 and true now. In addition to providing a substantial charitable benefit, life income plans can increase your clients’ cash flow and quite possibly save on taxes, even with the increase in the standard deduction. If your clients’ goals include providing for their future financial security and reducing taxes, while still including charities in their estate plans, you may want to suggest they consider establishing a charitable life income plan.

The resources of The Foundation of the Greater Miami Jewish Federation are available to you and your clients, in complete confidence and without obligation, as you consider this and other issues related to charitable gift planning.

The new tax law tax will no doubt influence your clients as they seek to fulfill their charitable objectives in a tax-advantaged manner, inspire and engage the next generation of their families and create a lasting legacy. For more information, please contact Foundation Director Steve Lande at slande@gmjf.org, or at 786-866-8623, or consult JewishMiami.org.

Steve Lande is director of The Foundation of the Greater Miami Jewish Federation and serves as the Greater Miami Jewish Federation’s Authorized House Counsel. Before joining the Greater Miami Jewish Federation, he directed the Jewish Federation of Greater Pittsburgh’s endowment program for 18 years. A native of Iowa, Lande earned a law degree from Drake University and practiced law in Des Moines before joining the professional staff of the Jewish Federation of Greater Pittsburgh.

 

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