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Planned Giving offers donors a variety of gift vehicles to support their favorite charitable organizations in the long run; moreover, it offers donors the chance to obtain significant financial benefit for themselves in the short run. The most popular planned giving vehicles, after bequest-type gifts, are life income gift arrangements: Charitable Gift Annuities (CGAs), Charitable Remainder Trusts (CRTs), and Pooled Income Funds (PIFs). These vehicles are widely used by philanthropic individuals to achieve their charitable objectives while establishing a stream of income for life and / or a period of years. But are all planned gifts – and more specifically, are all life income gifts – truly beneficial for the nonprofit organization? Are some of these gifts better than others? And how does a charity attempt to measure the relative merit of a prospective life income gift arrangement?

For most organizations, the contractual payout rate on a charitable gift annuity is the rate suggested by the American Council on Gift Annuities (ACGA). These rates are based on ages of the annuitants – the older the persons, the higher the rates. They are also based on an assumption that the charitable organization should receive a remainder equaling at least 50% of the initial funding amount. An investment return assumption (based on an assumed asset allocation) also underlies the rates, and so the gift annuity payout rates tend to increase as investment returns in general rise, and they tend to decrease when returns in general fall. 

Through a regulation issued in December 1998, the Internal Revenue Service (IRS) officially gave its blessing to a type of charitable remainder trust (CRT) known as the “flip trust.” As anticipated, this now well-accepted planned giving vehicle has proven to be quite versatile. 

There can be all sorts of reasons a younger person should not make a planned gift. On the other hand, because age is a relative concept, a very elderly donor can establish or modify a planned gift without a problem. Still, a handful of issues become increasingly worthy of close attention for older donors considering a planned gift.

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What should your organization do with a life insurance policy on which premiums are still owed? This is a dilemma encountered by many non-profits from time to time. It arises in two instances: 1) When the non-profit is first offered a gift of a life insurance policy, and 2) When the non-profit is already the owner of a life insurance policy and for some reason finds itself paying the premiums.

These days, the struggling Pooled Income Fund is like the Rodney Dangerfield of life income gifts – it just can’t get any respect!  Prospective donors interested in establishing split-interest charitable gift arrangements that provide income for life typically consider either the Charitable Gift Annuity or the Charitable Remainder Trust.  The former offers low entry points, consistent payment amounts, and simple tax reporting, while the latter offers considerably more options to donors who are prepared to make significantly larger gift amounts.  Pooled Income Funds, on the other hand, pay very little current income to the beneficiaries and involve complicated and lengthy tax reporting.  As a result, they attract few if any new participants.  As the size of the PIFs decrease, the work and expenses associated with these funds push many organizations to question if they should even continue to maintain their PIFs.  But what options do they have?  The gift arrangements mandate income to the beneficiaries for the rest of their lives.  Is closing out a Pooled Income Fund the only logical solution?  Is it the best choice of action for every organization?  Are there other considerations?

How many of us “Baby Boomers” actually know when we’re going to retire? At this point, in our 50s and 60s, we’re likely reaching high points in our careers, in terms of earnings and fulfillment; or we have started completely new careers at midlife and have no intention of slowing down anytime soon. We’re healthier and more active than our parents were at this age, and, with ever-increasing life expectancies, it’s reasonable to envision not only living into our 70s and 80s, but also, living well and remaining vibrant. Sure, we’ll have Social Security (it won’t run out that soon, right?), but it won’t be enough to sustain our lifestyles, and we’ve watched the values of our retirement funds gyrate like roller-coaster rides over the past 10 years. Besides, we are the Boomers, the generation that kept refusing to grow up – we’ve finally learned to trust people over 30, but we’re nowhere near being “old enough to retire!”

What do you do when you run calculations for a charitable remainder annuity trust (CRAT) for one of your loyal donors, only to find that the trust fails the 10% minimum charitable remainder test or 5% probability of exhaustion test? One alternative would be to run similar calculations for a charitable remainder unitrust (CRUT) – because of the self-adjusting payment feature in a CRUT, it rarely fails the 10% minimum remainder test, and you don’t have to worry about the likelihood of exhaustion at all.

It may seem too good to be true, but the beneficiary of the life interest in a planned gift – if he or she is inclined to do so – is typically free to end the arrangement ahead of schedule by letting the charity become the new owner of the interest in question. Recognizing that there are potentially a number of details to be addressed (as covered in our June 2012 eRate featured article), what follows is a quick review of the possibilities. To view and/or print a copy of this article, click this link:: http://www.pgcalc.com/about/featured-article-july-2014.htm

When preparing illustrations for prospects interested in establishing life income charitable gift arrangements, projections of future benefits can complicate modeling income projections. From a tax perspective, categorization of income from gift annuities and charitable remainder trusts depends on a number of factors. Some of the income may be reported as ordinary income, to be taxed at the donor’s highest marginal income tax bracket, while some of the income may be reported as realized capital gains and taxed at a much lower rate. A portion of the income may even be considered to be return of principal, which is by definition tax-free. The gift-planning professional may find it helpful to illustrate the consequences of the gift arrangement from both the before-tax and after-tax perspectives. Doing so may help the donor understand the potential benefits of a complex charitable gift arrangement.