Ch 8 - Sophisticated Methods Of Charitable Giving Flashcards Preview

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Flashcards in Ch 8 - Sophisticated Methods Of Charitable Giving Deck (26):
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•No charitable deductions are allowed unless the transaction falls into one of the following special categories:

  • •undivided portion of a donor’s entire interest
  • •remainder interest in personal residence or farm
  • •charitable remainder trust
  • •pooled-income fund
  • •charitable lead trust
  • •qualified conservation easement

What is the impact of Donating Less Than Entire Interest?

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•undivided portion of a donor’s entire interest

•remainder interest in personal residence or farm

•charitable remainder trust

•pooled-income fund

•charitable lead trust

•qualified conservation easement

What are the special categories for Donating Less Than Entire Interest?

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•if the transfer consists of anything less than this “undivided portion of the donor’s entire interest” there will be no deduction allowed

•includes undivided interest as joint tenants

What is the Undivided Portion of Entire Interest

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•includes primary and secondary homes

•deductible portion does not include tangible personal property

•works well if donor will not need property after retained interest expires

•valuation is determined under Section 7520, except that charitable remainder is required by IRS to be reduced by depreciation factor

•Retained life estate is in Donor’s gross estate, but the estate gets the estate tax charitable deduction

What is the Remainder Interest in Personal Residence/Farm

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•gifts of a remainder interest in trust are deductible only if the trust is a

  • •Charitable Remainder Annuity Trust (CRAT)
  • •Charitable Remainder Unitrust (CRUT)
  • •Pooled Income Fund (PIF)

•Valuation rules are mandated by Secs. 664 and 7520

What are Split Interest Charitable Arrangements

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•Annuity or unitrust interest for life or lifetimes of the individual beneficiaries

•Annuity or unitrust interest for individual beneficiaries for a period not to exceed 20 years

What is the Duration of CRTs

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•CRTs must make annual distributions to one or more individual beneficiaries

•CRATs distribute a fixed amount, not less than 5% and not more than 50% of the initial trust principal

•CRUTs distribute a fixed percentage of the assets of the trust, valued annually

What are the CRT rules regarding Individual Interests Are Not Deductible

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Look up

Charitable Remainder Annuity Trust (CRAT)

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•Fixed annuity or percentage (at least 5%, but not more than 50%) of the initial amount of donated principal

•Term (not to exceed 20 years) or measuring lives

•No additional contributions

•Inflexible, but advantageous if interest rates are high

•Deduction will be denied if charitable remainder less than 10%

What are the characteristics of a Charitable Remainder Annuity Trusts (CRATs)

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Look up

Charitable Remainder Unitrust (CRUT)

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•Stated percentage (at least 5%, but not more than 50%) of annual value of principal

•Term (not to exceed 20 years) or measuring lives

•Additional contributions are permitted

•Flexible, but difficulty with hard-to-value assets

•Tax deduction will be denied if charitable remainder is less than 10%

What are the characteristics of a Charitable Remainder Unitrusts (CRUTs)

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•if there are multiple beneficiaries, CRT can provide for noncharitable benefits to be reduced if one of those beneficiaries dies

•a proportionate amount of the principal must be accelerated to the charitable remainder beneficiary

•the reduction must be pro rata with respect to the remaining noncharitable beneficiaries

•the trust must continue to meet the 10% test

What are the benefits of Payout Flexibility in a CRT?

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•a CRUT with a net income makeup provision

•payout limited to the lesser of stated unitrust payout percentage or net income earned by the trust

•protects the remainder beneficiary against invasion of principal

•noncharitable beneficiaries have less valuable interest

What is a NIMCRUTs

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•CRT is tax exempt entity

•distributions to beneficiaries reflect the tax character of the CRT’s investments, using the tier system of Sec. 664(d)

•ordinary income

•capital gains

•amounts excluded from gross income

•principal

How are Annuity & Unitrust Payments taxed?

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•Tax Exempt Investments

  • •limits taxable income distributed to beneficiaries

•Deferred Annuities

•Closely Held Stock

•Life Insurance

  • •provides significant leverage for the charity

How is the Principal of a CRT Invested?

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•CRTs and Wealth Replacement Trusts

•CRTs as supplement to a Retirement Plan

•Transferring a Closely Held Corporation through a CRT

How are CRTs used in Estate Planning Applications?

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•usually structured as an ILIT

•replaces the trust principal ultimately distributed to charity

•funding comes from the tax benefits provided by charitable deductions, and the increase income the donor receives from the CRT

What is a Wealth Replacement Trusts (WRTs)

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•donor retains benefit from CRT for life

•donor receives estate, gift and income tax deductions

•charity gets substantial contribution

•donor and heirs do not forgo value of the donation

•donor avoids capital gains tax on contribution of appreciated property to the CRT

What are the Benefits of Using CRTs with WRTs

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•operated or controlled by a charitable organization

•composed of assets of many donors commingled to form one investment pool

•payments to income beneficiary are based on units of participation

•PIFs are prohibited from investing in tax-exempts

What is a Pooled Income Fund

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•Irrevocable trust is funded

•Annuity or unitrust (of any size) is provided to charitable organization(s) for any term of years or measuring lifetime of immediate family member

•Trust terminates and property passes to remainder beneficiaries (probably family of the donor)

What is a Charitable Lead Trust

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•current income tax deduction is available

•must be designed as grantor trust

•all income is taxed to grantor after creation of trust

•if property reverts to donor, no estate tax benefit results

•remainder interest passing to noncharitable beneficiary is a taxable gift

What is a Inter Vivos Charitable Lead Trusts

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•used to reduce estate tax burden

•Jacquelyn Kennedy Onassis

•estate tax charitable deduction totaled 96.8% of the residuary estate

What is a Testamentary Charitable Lead Trust

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•donor obtains significant conservation objective

•donor retains important property right

•donor receives a deduction

What are Qualified Conservation Donations

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•entire interest in property except for retained mineral rights

•gift of remainder interest in real estate

•agree to perpetually restrict use of property for conservation purposes

What are the Types of Conservation Donations

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•must be made to an eligible charitable organization

•governmental units

•publicly funded charities

•subtraction method of valuation is generally used (i.e., the donation deduction is equal to the FMV less the value of the property as restricted)

•IRS will not give advance ruling on value and it may be very difficult to value in any given fact pattern

What are the Tax Deduction Requirements

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