Charity options allow donors to keep property interests

Healthcare Financial Management, June, 1990 by William G. Kistner

Most people are familiar with the idea of giving cash or other property to charitable organizations and receiving an income tax deduction for their donations. What many overlook are giving options available for those who wish to contribute to a charity, but who do not want nor are ready to give up their entire interest in the property.

Charitable remainder trusts. A charitable remainder trust is designed to distribute income earned on property given in trust to one or more persons usually an individual), with the property eventually passing to charity. Because income earned on the property is distributed to a beneficiary chosen by the donor, the donor may incur gift tax consequences.

The gift is the current value of the income interest at the time of the gift.

The trust itself is generally exempt from tax. The donor may claim a charitable income tax deduction at the time the trust is funded, equal to the current value of the future contribution to charity and provided that certain conditions are met.

A donor's charitable income tax deduction is calculated from Internal Revenue Service (IRS) tables. The trust document also must follow IRS regulatory guidelines.

Estate planners may choose from two types of charitable remainder trusts: an annuity trust and a unitrust. With a charitable remainder annuity trust, at least 5 percent of the initial fair market value of property contributed must be paid annually to the beneficiary. Income is paid for a term not to exceed the lesser of 20 years or the life of the beneficiary.

No additional contributions can be made to an annuity trust after the initial transfer.

A charitable remainder unitrust requires that a fixed amount of at least 5 percent of the fair market value of trust assets, determined at year end, be paid annually to the beneficiary. Like an annuity trust, a unitrust's term cannot exceed the lesser of 20 years or the life of the beneficiary. But additional contributions are permitted.

Current earnings of the trust may exceed or fall short of the amount required to be distributed in any year. To avoid problems, trust documents may include an "income exception-provision. The provision usually states that if trust income is less than the amount required for payment in any year, the payment is limited to trust income.

The shortfall may be made up in future years, when trust income exceeds the required payment for the year. Failure to provide for corrective payments may disqualify the trust.

Pooled income funds. Instead of creating a charitable remainder trust, a donor may wish to make a charitable transfer to an existing entity, such as a pooled income fund. The fund is maintained by a qualifying charitable organization (such as a medical institution or university), and the donor's contribution is pooled with gifts from others.

To obtain a charitable income tax deduction for gifts to a pooled income fund, the fund must meet these requirements: * Remainder interest must be given

to a qualifying charity, with life

income interest paid to an individual

beneficiary; * Property received by the fund

must be pooled with all other donated

property; is The fund cannot accept or contain any exempt income property, such as Federal tax-exempt securities; * The fund must be maintained by the charitable organization; and * The life income interest beneficiary must receive a proportionate share of trust income each year, based on the rate of return earned by the fund on all assets. The charitable income tax deduction allowed a donor for a gift is the current value of the remainder interest at the time of transfer. A gift's current value is computed using IRS life expectancy tables.

Charitable lead trusts. In this arrangement, a charitable organization benefits from income generated by donated property, and remainder interest is paid to noncharitable beneficiaries selected by the donor. Income is paid annually to the charitable organization for a fixed term or for the life of an individual, based on either a guaranteed annuity or unitrust method.

Under the guaranteed annuity method, the charity receives an amount determined when the property is transferred to the trust.

The unitrust interest method, however, requires that the trust assets be valued each year. The annual payout to charity is equal to a fixed percentage of the fair market value of trust assets. Any income not required for payout each year is taxable to the trust.

Charitable gifts also may be made by will, a procedure that also reduces the taxable estate. However, lifetime gifts usually are more advantageous because a donor can receive a current income tax deduction for qualifying gifts.