Charitable Gift Types

We frequently receive calls from our clients asking how to determine the date-of-death value for a charitable gift annuity (CGA). The value of a gift annuity upon the death of an annuitant seems to be an area of particular confusion.

We have responded to many more client inquiries about charitable lead trusts over the past two years than any other two year period in our 25-year history.  We have also noticed a flurry of articles on lead trusts during this same period.

A particular lead trust variation that has received considerable attention lately is what some practitioners are calling the "Shark Fin" lead trust. You may have also seen the term "Balloon" lead trust mentioned.  Two names, same trust.

So, you have a pooled income fund (PIF). How’s your fund doing? We hear a variety of stories from our clients. Some clients have PIFs that are doing well, but many others are looking for ways to close their PIF. Once upon a time, when PIFs were in favor, their attraction was in their relative simplicity compared to charitable remainder trusts. No trust document was needed because it was already in place; the documentation was a simple one or two page Instrument of Transfer. A second advantage of the PIF was the relatively low cost of administration. Charitable remainder trusts require the creation the filing of tax and informational returns for each individual trust. In contrast, the charity was required to file only one set of returns for a PIF, regardless of the number of participants. The reporting requirements to the participants involved a relatively simple Schedule K-1. A third advantage of PIFs was that they could accept smaller contributions than charitable remainder trusts. These features made the PIF arguably the most popular form of life income gift in the 1980s and early 1990s. Oh, how times have changed!

In furtherance of its mission, ACGA presents this white paper and recommendations as a resource for sponsoring organizations, allied professionals, and the broader philanthropic community. The paper is intended to provide a basis for the discussion of best practices in managing the financial liability of charitable gift annuity programs for development and finance staff, as well as board members.

On April 17, 2013 Governor Scott Walker signed into Wisconsin law new and much less stringent regulations regarding gift annuities (2013 Wisconsin Act 271). The new regulations became effective the next day. Prior to the change in law, Wisconsin was a highly regulated state when it came to gift annuities. Requirements included:

Why Size Matters

A primary objective in establishing and operating any CRT is to ensure the CRT will have enough money to make the required payments to its life income beneficiary(ies) each year throughout the trust term.  Even with a low payout rate, in any given year trust income may fall short of the amount that needs to be paid.  Unless the CRT is a charitable remainder unitrust (CRUT) with a net-income limitation, the CRT will have to make up the difference by drawing on principal.

The modern forms of planned gifts were defined in tax legislation passed in 1969. This legislation created the charitable remainder trust, the charitable lead trust, and the pooled income fund forms that we know today. Prior to this legislation, the tax law governing charitable gifts was generally less restrictive.

A super grantor charitable lead trust is a charitable lead trust that has both grantor trust and non-grantor trust characteristics. Sometimes called a “defective” lead trust, the trust distributes its remaining principal to the donor’s heirs when it terminates.

A balloon charitable lead annuity trust is a type of charitable lead annuity trust. Sometimes called a “shark fin” trust, it shares all characteristics of a standard charitable lead annuity trust except that its payments to charity are not the same fixed amount every year. Instead, the payments are a relatively small amount during all but the final year or final few years of the trust, then increase dramatically to a large “balloon” amount to be paid in the final year or final few years of the trust.

The deduction for a gift to most pooled income funds must be computed using the fund's highest yearly rate of return of the past three years. The fund must have three or more taxable years of experience for this rule to apply. Deduction calculations for gifts to young funds that have less than three taxable years of experience use a rate mandated by the IRS.