Gift Plan Details

What has Congress done?  (Or how could they just sit by and do nothing?)  I hear different versions of this question from a wide variety of people.  One article on a planned giving website starts with, "It's an extraordinarily uncertain time –".  One boilerplate publication sent by nonprofits ends with, ". . . the estate tax litigation over 2010 law may last for the next decade."  Some people in our profession may be trying to fan the flames of hysteria.  Do you want to be one of them?  Does hysteria encourage anybody to put together a good estate plan?

Here's the short version of what happened, in plain English:

A law was passed in 2001 that gradually decreased the federal estate tax through 2009.  That law stipulated that if no future laws were passed – and professionals in the field all expected that Congress would pass a new law in those intervening 9 years – the federal estate tax would go away in 2010, and return to much higher levels in 2011.

This fall I attended several meetings with local planned giving committees and a national conference where we discussed what we would do when new estate tax legislation was passed.  Very few people thought that there would be such gridlock that nothing would be passed.  But that gridlock prevailed, and on January 1, no new law had been passed, and the federal estate tax was "accidentally" repealed.

Because of this, at the moment there is no federal estate tax.  Therefore people with large estates who die between January 1, 2010 and the date of any new estate tax law might (or might not) be able to leave estates that are not subject to federal estate tax.  Congress might pass a new law to tax people who die during the rest of the year, might try to make the law retroactive on people who died earlier in the year, might not pass any estate tax law this year, or might not pass any estate tax law next year.  Anybody’s guess is just that – a guess. 

So . . . what should you be telling your donors? 

1. Our charity has an important mission.  You have supported us during your lifetime with generous gifts.  Please consider supporting us through your gifts from your will and/or trust. 
2. The federal estate tax did not change for anyone with an estate of less than $3.5 million, or for couples with good planning and total estates worth less than $7 million.  So if your estate is smaller than that, there’s no excuse to wait until Congress fixes the wild gyrations in tax rates.  (If Congress does nothing, the estate tax will apply to any estate of more than $1,000,000 starting January 1, 2011.) 
3. The repeal of the federal estate tax only impacts large estates left by people who die while it is repealed.  If Congress passes a law that is retroactive, the repeal may not help any estates.  But whether or not you die in that window, you need a good will.

(VirtualGiving websites have been updated with 8 points that encourage donors to consider a gift to the specific charity.)

This is not a time for charities to give donors a new excuse to sit on their hands by declaring that things are "extraordinarily uncertain." Wise leaders and responsible charities will let their donors know that it is vitally important to have an up-to-date will and estate plan this year, just like it has always been important. Let’s motivate our donors to do the right thing. Let’s refrain from trying to scare them, which might only cause them to wait for Congress to act.

People choose to support your charity because they love what you do or because they are grateful for the services you provide.

There is a simple answer to your question, and a complicated answer.    

Simple Answer:  Yes.  She can do either.   

Basically, if she has lost money on the commercial annuity (CA), and wants to switch from that CA to a CGA with your charity, she should sell the CA and use the proceeds to fund a CGA.  However, if she has made money of the CA she should "trade it in" on the CGA by donating the CA to you in exchange for a CGA.   

Now for the complicated part, also known as "the Devil's in the details":   

There are dozens of types of CAs on the market, and each accumulates and counts gains and losses differently.  Also, each company has different regulations about who/when/how to cash in the annuity.  In some cases the owner may not be able to donate the annuity to you.  In some cases it may be allowed, but the hassle related to getting the company to give your charity the money might not be worth it.   

A qualified professional needs to look at the actual contract and the most recent statement.  If she has an advisor or accountant who usually prepares her taxes, that person is probably the best-qualified individual to give the most informed and balanced opinion about whether she should sell the CA or donate it to you.  Since there are probably more CAs that show losses than gains right now, it would probably make more sense for her to sell the CA, take the losses, and donate cash to fund a CGA.  However, she may face stiff penalties, which also vary widely between types of CAs and companies that sell them.  There are other tax issues which her tax advisor will be better qualified to address than either you or me.   

Also, it's important to realize that if she paid $50,000 for a CA and it's now worth $40,000, she may not have any "losses," since she may have received a cash stream for several years that is calculated (at least partially) as a return of her principal.   

So, I'd suggest a variation on the planned giving professional's standard approach of asking her to seek professional advice before acting.  In this case, I would advise her to show both the CGA quote you prepare and the CA contract and statement to her tax advisor and strongly suggest that she ask his advice about her next step.  I would add strong language that states that you are not able to make any specific recommendation about her commercial annuity (CA). 

We define it as any major gift, made in lifetime or at death as part of a donor's overall financial and/or estate planning.  By contrast, gifts to the annual fund or for membership dues are made from a donor's discretionary income, and while they may be budgeted for, they are not planned.

(Our handy Planned Giving Pocket Guide describes all planned gifts.)

Donors can also direct a charitable distribution from the balance remaining in their retirement plan (IRA, 401(k), Keough, etc.) at death. They can also make your organization the owner and beneficiary of a new life insurance policy. 

Note: Some gift assets can prove challenging for a non-profit to administer and/or liquidate, and your organization should review offers of non-traditional assets carefully before accepting them.

It depends on the asset used to fund the gift, whether the gift was made during the donor's lifetime or at death, and whether the donor retained an income interest from the gift.  Here are the guidelines:

• Outright, lifetime gifts of cash, or of assets like securities held by donors for more than 1 year ("long-term capital gain property"), are deductible at fair market value.
• The charitable deduction for a gift that returns income to donors and/or other beneficiaries, such as a charitable gift annuity or a charitable remainder trust, is the fair market value of the gift asset minus the present value of the income interest retained.
• Revocable gifts that will be paid to your organization upon the death of the donor do not generate an income tax deduction. Therefore, donors do not receive a deduction for including a charitable bequest when they write their will, for naming you the beneficiary of a life insurance policy, or for designating your organization to receive the remaining balance of their retirement plan.

If your organization can use the property to further your tax-exempt functions (also known as putting it to a "related use"), the deduction is the fair market value of the asset.  However, if you cannot use the property, or if the donor instructs you to liquidate it and use the cash proceeds, the deduction will be limited to the donor's cost basis in the asset.

Note:  The broader your organization's charitable functions, the more "related uses" can be found for gifts of personal property.  A college, a library, a museum and a hospital, for instance, could all put a painting to good use, even if it wasn't the same use.  Non-profits with more narrowly focused missions, on the other hand, may be hard-pressed to find a use for a proposed gift of personal property.]   

Except for publicly traded securities, gifts of property worth $5,000 or more ($10,000 for shares of closely held stock) held by donors longer than 1 year must be appraised in order to establish their fair market value (and thus the charitable deduction donors may claim for the donation).  Appraisals must be obtained by the donors and not the recipient charity, and must also be obtained for the purpose of valuing the gift (in other words, insurance appraisals are not acceptable).  Donors are required to get their appraisal not earlier than 60 days before they make their gift, and not later than the due date for the tax return on which they are claiming their deduction.

Donors include a provision in their will directing that a gift be paid to your organization after their death or the death of one of their survivors.

Donors face two sets of choices when they write a charitable bequest:

• First, they can give your organization either a specific amount of money or item of property (a "specific" bequest), or they can give a percentage of the balance remaining in their estate after taxes, expenses, and specific bequests have been paid (a "residual" bequest).

• Second, they can direct you to use their bequest for a particular program or activity at your organization (a "restricted" bequest), or allow you to use it at your discretion (an "unrestricted" bequest).

Donors can also direct that a bequest be paid to you if one of their heirs does not survive (a "contingent" bequest).   

Charitable gift annuities make fixed payments, starting either when the gift is made (an immediate-payment gift annuity) or at a later date (a deferred or flexible gift annuity).   Some organizations maintain pooled income funds, which commingle donations, pay beneficiaries varying income depending on the earnings of the fund, and generally operate like a charitable mutual fund.  Charitable remainder unitrusts and annuity trusts are individually managed trusts that pay the beneficiaries either a fixed percentage of trust income or a fixed dollar amount.

(Our handy Planned Giving Pocket Guide describes all planned gifts.)

Donors make a gift to your organization and in return, you agree to make fixed payments to them for life.  Payments may be made to a maximum of two beneficiaries.  At the death of the last beneficiary, the remaining balance of the annuity is used by your organization for the purpose that the donor specified when the gift was made.

Gift annuities operate under a simple contract between you and the donor.  They are not trusts, but rather income obligations backed by your organization's assets.

(Our handy Planned Giving Pocket Guide describes all planned gifts.)

Yes, if they use the version called a flexible gift annuity.  The annuity contract will set out a range of possible starting dates for payments.  Each date will offer progressively higher income rates.  The donor's charitable deduction will be that corresponding to the earliest possible starting date.

As retirement, health and family needs become more clear over time, the donor picks the appropriate starting date in the annuity contract, and requests that you start payments then.  

A commercial annuity, typically sold by banks and life insurance companies, provides the owner fixed or variable income based on commercial rates of return. These plans establish their annuity rates on the assumption that all of the assets in the plan will be used up by the end of the income beneficiaries' lives.

A unitrust is an individually managed charitable trust paying its beneficiaries income as a fixed percentage of the trust's value - which is revalued annually.  Income and appreciation in excess of the required payments to the beneficiaries is held in the trust to allow growth.  A unitrust pays income to its beneficiaries for their lifetimes, for a term of up to 20 years, or for a combination of both.  A unitrust can have multiple beneficiaries. 

The donor can make additional contributions to a unitrust.  When the unitrust terminates - at the death of the last beneficiary or at the end of the trust term - the remaining balance is available to your organization to be used for the purpose that the donor specified when the gift was made.

(Our handy Planned Giving Pocket Guide describes all planned gifts.)

An annuity trust is an individually managed charitable trust that pays its beneficiaries a fixed dollar amount or a fixed percentage of the initial value of the assets that funded the trust.  Unlike income from a unitrust, payments from an annuity trust do not fluctuate during the term of the trust.  Income from an annuity trust can be paid to beneficiaries for their lifetimes, for a term of up to 20 years, or for a combination of both.  An annuity trust can have multiple beneficiaries. 

The donor cannot make additional contributions to an annuity trust.  When the annuity trust terminates - at the death of the last beneficiary or at the end of the trust term - the remaining balance is available to your organization to be used for the purpose that the donor specified when the gift was made.

Unlike a flip unitrust, an annuity trust cannot defer making its stated income payments.  Accordingly, it should not be funded with assets like real estate, closely held stock or artwork unless that asset is very likely to sell in the near term. 

(Our handy Planned Giving Pocket Guide describes all planned gifts.)

A charitable lead trust is an individually managed trust that holds gift assets, pays income to your organization for a period, and then returns its remaining balance to the donor or to the donor's heirs. 

A lead trust delivers a steady stream of income to your organization.  For donors, a lead trust offers the choice of two different benefits:

• If the lead trust is structured to return its remaining balance to the donor after it has paid income to your organization, it is called a grantor lead trust. The donor receives an upfront deduction based on the present value of your total income payments. The trust's annual earnings (minus the distributions to you) will be taxable to the donor, but by adjusting the amount and duration of the charitable payments, the upfront deduction can offset this subsequent tax. A grantor lead trust can be an attractive strategy for donors who maximize their current tax deduction but don't want to part permanently with a valuable asset.
• If the lead trust pays its remainder to the donor's children or other heirs, it is called a non-grantor lead trust, and it can be a very effective way to reduce the tax cost of passing assets within a family. First, the estate- and gift-tax value of assets placed in the non-grantor lead trust will be reduced by the present value of your total income payments. Second, the taxable value of the assets in the lead trust is fixed as of the time the trust was established - any subsequent appreciation will pass to your heirs free of estate and gift tax. A non-grantor lead trust is particularly effective in sheltering the cost of passing ownership of a growing family business on to the next generation.

(Our handy Planned Giving Pocket Guide describes all planned gifts.)

Donors can irrevocably transfer title to real estate (a primary home, a vacation condo, etc.) to your organization while keeping the right to live in and/or use the property for the balance of their lives, or for a term of years.  Even though they haven't moved out, they receive an upfront charitable deduction based on the fair market value of the property, minus the present value of their future tenancy there.

A retained life estate allows donors to make a significant gift to you using what may be the most valuable asset they own, yet not disturb their living arrangements or cash flow.

The donors in a retained life estate transaction pay no rent for their use of the property.  However, they are responsible for the property's ongoing taxes, structural maintenance and upkeep.  You and the donors reach agreement about what you will both do if the donors no longer wish to keep using the property after it has been donated, or if they become unable to continue using it.  The terms of this agreement should be very clearly stated in writing before the transfer of the property takes place.

Your organization will perform standard due diligence before agreeing to accept the property.  Be especially vigilant if the property is located such a distance away that your personnel cannot easily keep it under routine observation; if the property is already in poor condition; or if the donors appear unlikely to be able to keep maintaining the property.

(Our handy Planned Giving Pocket Guide describes all planned gifts.)