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What Sophisticated Charitable Giving Options Are Available To Donors?

Donation and charity

Introduction

There are many charitable giving opportunities available to charitable donors.  Gifts of assets to public charities or private foundations are simple options that donors often undertake.  However, gifts to charitable remainder trusts (“CRTs”), charitable lead trusts (“CLTs”), gifts of remainder interests in residential real estate, or investments in donor advised funds are more sophisticated charitable giving options that may provide benefits in the right situations.  Those more sophisticated options are discussed below.  In addition, because the United States has historically low interest rates, the impact of low interest rates on each of these options is also discussed.

Gifts to Charitable Remainder Trusts

There are two kinds of CRTs that a donor can make a gift to:  charitable remainder annuity trusts (“CRATs”) and charitable remainder annuity trusts (“CRUTs”).

  • Gifts to CRATs: A CRAT involves a gift of property to a trust where the grantor retains the right to a payment of an annuity (not less than 5% per year) from the trust either for life or a term of years (not to exceed 20 years if it is a term of years), with the remainder in the CRAT at the end of the term to pass to charity (either a public charity or private foundation – and typically is a gift to the grantor’s own private foundation).  The grantor is entitled to an income tax deduction for the actuarial value of the remainder interest that will pass to charity.  In order to qualify as a CRAT, two tests must be met:  (a) the “10% test” – when the CRAT is established, the actuarial value of what will pass to charity at the end of the CRAT term must be 10% or more; and (b) the “exhaustion test” – when the CRAT is established, calculations must demonstrate that there is no more than a 5% probability that the trust will be exhausted before the charitable remainder vests.  In a low interest rate environment, gifts to CRATs the following concerns:
    (i)        The value of the deduction is reduced for gift tax purposes, because the value of the lead annuity interest is increased so that the value of the remainder interest passing to charity is worth less.

Example 1:

Gift is made to a CRAT of $1,000,000.  The 7520 rate is 7% and the 60 year old donor keeps a 6% annuity for life.  The value of the remainder interest passing to charity is $460,000.


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