Charitable Planning

For high net-worth individuals and couples, there are a variety of transfer techniques in order to minimize exposure to death taxes. These include, but are not limited to Disclaimer Trusts, Credit Shelter Trusts, Applicable Exemption Trusts (a/k/a Credit Shelter Trusts), and Q-TIP Trusts. These Trusts, effective for use with married couples, can be utilized in Wills and Revocable Living Trusts. To further minimize potential payment of estate and inheritance taxes, a variety of other techniques may be employed. These techniques focus on major lifetime gifting. They include, but are not limited to:

A. Annual exclusion gifts. Each year, an individual may currently give $13,000.00 per donee and, with the consent of a spouse, $26,000.00 per donee;
B. Lifetime exemption gifts. Substantial gifts, over the annual exclusion amount, may be made if a donor pays gift taxes and survives three years although an exclusion of $1,000,000 for aggregate lifetime gifts may be used;
C. Gifts to Remove Appreciation. Gifts may made to remove appreciation from a donor’s estate;
D. Education. Unlimited payments of qualified tuition expenses may be made if paid directly to the educational institution;
E. Medical. Unlimited payments of medical expenses may be made so long as said payments are made directly to the provider and to the extent they are not covered by insurance;
F. Spousal. Inter-spousal gifts using the unlimited marital deduction;
G. Leveraged Gifts. Gifts may be made through Trusts which include, but are not limited to, a Qualified Personal Residence in Trust (QPRT) and Grantor Retained Annuity Trusts (GRAT);
H. Life Insurance to Others. Gifts of existing life insurance outright to owners other than the insured;
I. Life Insurance to Trust. Gifts of life insurance premiums through the use of an Irrevocable Life Insurance Trust; and
J.Charitable gifts.
The focus of this article will be the utilization of charitable giving in estate planning. Charitable planning has a variety of benefits including personal satisfaction, lifetime income tax minimization and post-death estate and inheritance tax minimization. Charitable planning takes a variety of forms ranging from simple lifetime checks to charitable organizations through the utilization of more complex Charitable Lead Trusts or Charitable Remainder Trusts.

Various sections of the Internal Revenue Code apply to transfers to charitable organizations. Unless otherwise indicated, all citations within this article will be to the Internal Revenue Code of 1986 and the regulations issued thereunder. The most notable sections, in understanding and implementing charitable planning, include:

A. Section 170 – Income Tax Deductions for Charitable Transfers;
B. Section 2055 – Charitable Transfers Deductible for Estate Tax Purposes;
C. Section 2522 – Charitable Transfers Deductible for Gift Tax Purposes;
D. Section 501 – Defining Tax Exempt Organizations;

E. Section 509 – Defining and Describing Private Foundations; and
F. Section 664 – Describing CharitableSplit Interest Transfers.


Transfers that qualify for a charitable deduction can be utilized for income, estate and/or gift tax purposes. Generally, transfers, that qualify for the charitable deduction, are made to a tax exempt organization. These organizations are described in detail in Section 501. The most relevant provision is Section 501(c)(3), which describes what is commonly thought of as a charitable organization: a corporation, community chest, fund or foundation organized and operated for religious, charitable, scientific, testing for public safety, literary or educational purposes or to foster a national or international sports competition or for the prevention of cruelty to animals or children, no part of the net earnings of which inure to the benefit of any private shareholder or individual, or substantial part of which is carried on propaganda or attempting to influence legislation and which does not intervene in or participate in any political campaign. In addition to public charities, the charitable deduction can be employed by entities commonly known as private foundations. These entities, defined in Section 509(a) are those which are not included in the definitions covering public charities. See Section 509(a)(1)-(4).

RevRul59-310, 1959-2 CB 146 sets forth the prevailing definition for charity in determining whether a private or public organization qualifies as an appropriate recipient by which a donor can request or assets a charitable deduction. This ruling states, in relevant part “charity in the legal sense of the term includes benefits which are for an indefinite number of persons and are for the relief of the poor, the advancement of religion, the advancement of education, for erecting or maintaining public buildings or works or otherwise lessening the burdens of government.”

Charitable deductions are allowed for transfers to qualified and identifiable recipient organizations. In general, there are four types of these organizations:

1. Charitable Corporations and Associations – if they are to or for the use of corporations/associations “organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes,” See Section 2055(a)(2).
2. Government – if said transfers are to or for the use of the United States, any of its states, the District of Columbia, counties, cities, towns and other political subdivisions so long as the transfers are solely and exclusively for public purposes. See Sections 2055(a)(1), 2522(a)(1) and 178(c)(1).
3. Trusts/Fraternal Organizations – if the transfers are used “exclusively for religious, charitable, scientific, literary, or educational purposes or for the prevention of cruelty to children or animals…” See Section 2055(a)(3). It is important to note that these organizations are disqualified for purposes of charitable deductions if they participate in propaganda, lobbying, or participation in political campaigns. It should also be noted that said organizations may undertake activities above and beyond that for charitable purposes. However, deductible transfers must be exclusively used for charitable purposes.
4.United States Veterans Organizations – if there is no use of the net earnings for the benefit of a private shareholder individual. See Sections 2055(a)(4) and 2522(a)(4).

In order to qualify for a charitable deduction, a charitable interest must meet certain criteria:

1. It must be or an ascertainable interest;
2. It must comply with proper reporting requirements; and
3. There must be substantiation of the transfer.
An interest is certainly ascertainable and simple to recognize of an outright gift or a donor’s or decedent’s interest in property. However, when property is transferred in Trust or for both a private and charitable purpose Reg Sections 20.2055-2(a) and 25.2522(c)-3(a) state that the deduction will only be allowable if the charitable interest is ascertainable at the time of the contribution and can be severed from the private interest. Examples of deductible and ascertainable interests include: undivided portions of a donor or decedent’s entire interest in a type of property, remainder interest in residence and farms, qualified conservation contributions and a remainder interest in a Trust, a charitable lead interest or a charitable gift annuity.

As to reporting, charitable transfers during lifetime must be reported for income tax purposes on an individual’s personal income tax return provided that the individual taxpayer itemizes his or her deductions. Charitable transfers for decedents are reported on Schedule O of the federal estate tax return, known as the Form 706.

Proper reporting entails proper substantiation. Proper substantiation follows the following set of rules:

A. As to charitable contributions of money, a taxpayer is required to maintain a canceled check, receipt or letter acknowledging the contribution from the donee.
B. For contributions of property other than money, a taxpayer must keep a receipt or letter from the donee noting the date of the donation, the location of the donation and a description of the contribution. In the event the donor wishes to claim a deduction greater than $500.00, he or she must also keep written records regarding the acquisition of the property including the date and manner of its acquisition as well as the cost or other basis of property held for less than twelve months before the contribution. If the claim deduction exceeds $5,0000.00, a donor must also obtain a qualified appraisal as well.


One of the most popular techniques, for mid-level to high ne-worth clients, is the utilization of Charitable Trusts. There are two general forms for Charitable Trust:

A. Charitable Lead Trusts; and
B. Charitable Remainder Trusts.
Since the Tax Reform Act of 1969, only certain kinds of bequests in Trusts qualify for the estate tax charitable deduction where there is one or more non-charitable beneficiaries in addition to the charitable beneficiary. Both Charitable Lead Trusts and Charitable Remainder Trusts are vehicles by which there are benefits both to donor and/or his or her family as well as charitable organizations.

A Charitable Lead Trust is a Trust, which is established by a donor, with the contribution in trust of investment property in which the income from the Trust is to be paid to one or more qualified charitable organizations at least annually for the term of the Trust. Typically, assets, which are used to fund this Trust, are those which are expected to appreciate over the life of the Trust. Upon the expiration of the term of the Trust, the remainder interest passes to a non-charitable remainderman, specifically the donor’s intended beneficiary.

The use of Charitable Lead Trusts, in general, meet two goals. First, it allows the donor to make significant lifetime donations to charitable organizations. Second, it also ensures that the family members, who will be the ultimate heirs of said Trust, will enjoy the ultimate prosperity of the asset. In establishing these Trusts, the donor, as well as his or her family, forego income for the tradeoff of realizing long-term capital appreciation and at a low gift or estate tax cost.

In order for a Charitable Lead Trust to qualify for the charitable deduction, the income interest, to be received by the qualified charitable organization, must be either in the form of a guaranteed annuity or a unitrust interest. The term of the Trust may be either for finite period of years or can be based upon the life or lives of individuals who are alive at the creation of the Trust.
A Charitable Lead Annuity Trust is one in which a charitable organization receives a fixed amount in the form of a guaranteed annuity for a certain number of years, with the remainder passing to a private individual or individuals. A Charitable Lead Unitrust is one in which a fixed percentage of trust corpus, determined annually, is paid to a charitable beneficiary or beneficiaries, with the remainder passing to one or more non-charitable beneficiaries at its termination.

To properly understand Charitable Lead Trusts, one must recognize that they are split interests where the charitable organization holds the first or lead interest and the non-charitable entity or individual receives the remainder interest. A guaranteed annuity interest is deductible regardless of whether or not it is in Trust. It must consist of the right of a charitable organization to receive a guaranteed annuity. If a Charitable Lead Trust is used, the Trust must be irrevocable. If the interest is not in a Trust, it must be paid by an insurance company or other company that issues annuity contracts.

See Sections 170(f)(2)(B), 2055(e)(2)(B) and 2522(c)(2)(B).

The Unitrust interest is deductible, whether utilized in a Trust or not, if it consists of the right of the charitable organization to receive payment of a fixed percentage of the fair market value of the property if funding the interest so long as the payment is made at least annually. Like the annuity interest, it must be paid by an insurance company or other company in the business of issuing such interests if the Unitrust interest is not in Trust. If it is in Trust, the Trust must be irrevocable. See Sections 170(f)(2)(B), 2055(e)(2)(B) and 2522(c)(2)(B).

Both forms of Lead Trusts can be established as Grantor Lead Trusts, Non-Grantor Lead Trusts and Testamentary Lead Trusts. A Grantor Lead Trust is one which is established by a donor and provides the donor a current income tax charitable deduction for the present value of the charitable distribution over the term of the Trust, but the Trust income is imputed as taxable income to the donor each year. In a Non-Grantor Lead Trust, a gift or estate tax deduction is allowed for the value of the charitable interest, established as the present value of the payments to charity over the term of the Trust. Unlike the Grantor Lead Trust, there is no income tax deduction for the Non-Grantor Lead Trust for the donor. Testamentary Lead Trusts are commonly used when there is no deferral through the use of the marital deduction and the estate can thereby obtain an estate tax charitable deduction for the present value of the charitable lead interest.


Charitable Remainder Trusts are practically the opposite of Charitable Lead Trusts. Both are split interest vehicles. However, the initial beneficiary of the Trust is the donor and/or his or her family in the Remainder Trust, whereas in the Lead Trust, it is the charity itself. As a result, in the Lead Trust, the family is the remainder beneficiary. In a Remainder Trust, one or more charitable organizations is the remainder beneficiary.

A remainder interest in a Trust is deductible if the Trust takes one of three forms:

Charitable Remainder Annuity Trust, Charitable Remainder Unitrust or a Pooled Income Fund. A Charitable Remainder Annuity Trust is authorized under Section 664(d)(1). It is an Irrevocable Trust in which a fixed amount is paid at least annually to one or more persons for a term of years or for life. The fixed amount must be a sum certain not less than 5% or more than 50% of the initial net fair market value of the Trust. The lead beneficiary (or if there is more than one, at least one of said beneficiaries) must not be a permissible donee of a charitable contribution listed in Section 170(c). If a term of years is utilized, it must not exceed 20.
Individuals, who will receive payments from a Charitable Remainder Annuity Trust must be living at the creation of said Trust. No other payments may be made other than to or for the use of an organization qualified under Section 170(c).

At the termination of the fixed amount payments, the remainder must be distributed to or for the use of a charitable organization or held for the benefit of such an organization. The Trust may have one or more remainder beneficiaries that are charities. All remainder beneficiaries must be charities.

In order to qualify for a charitable deduction, the present value of the remainder interest must be at least 10% of the initial fair market value of the property contributed to the Trust. This requirement applies to all Charitable Remainder Trusts established after July 28, 1997.

A Charitable Remainder Unitrust is an irrevocable Trust from which a fixed percentage is paid at least annually to one or more persons for a term of years or for life. The requirements as to percentage, lead beneficiaries and term are the same as with a Charitable Remainder Annuity Trust. As with a Charitable Remainder Annuity Trust, individuals receiving payments, from a Charitable Remainder Unitrust, must be living at the creation of the Trust. The 10% rule also applies.

The difference of a Charitable Remainder Unitrust is that this type of Trust may pay annually to the income beneficiary income if it is less than the fixed percentage amount rather than the fixed percentage mandated by the Charitable Remainder Annuity Trust. In addition, if income is greater than the fixed percentage amount, that income may also be paid to the income beneficiary to the extent that the aggregate Charitable Remainder Unitrust income in prior years was less than the aggregate fixed percentage amounts (A Charitable Remainder Unitrust with these net income and “makeup” provisions is often referred to as a NIMCRUT.)

An alternative to the Charitable Remainder Trust is a Pooled Income Fund. It is also referred to as a “Poor Man’s Trust” or a “No Trust Trust”. It is an irrevocable Trust in which multiple donors transfers property, retaining an income interest an contributing an irrevocable remainder interest to a charitable organization listed in Section 170(b)(1)(A). Private foundations and public charities, which support other public charities or which receive more than one-third of their support from memberships, admissions fees, grants and gifts and less than one-third from investment income are excepted. The income interest retained by the donors is for the life of one or more income beneficiaries living at the time of the transfer. The income interest is also paid at the rate of return actually earned by the Trust itself. Whereas the aforementioned Charitable Lead Trusts and Charitable Remainder Trusts may be maintained by an individual or financial institution as Trustee, a Pooled Income Fund is maintained by the charitable organization that will receive the remainder interest. See section 642(c)(5).

One interesting facet of a Charitable Remainder Trust is that a Grantor can also serve as Trustee. Typically, any Trust, in which a Grantor can also serve as Trustee will be referred to as a Grantor Trust and have no significant estate or gift tax benefit.

However, an important exception is made for the Charitable Remainder Trust. In doing so, a Trust can make investments consistent with the Grantor’s plans. However, in doing so, the Grantor, in his or her capacity as Trustee, must balance the goal of investment control with the fiduciary duty owed to the charitable remainderman. Morever, a Grantor, who serves as Trustee, must be certain that no powers are retained which would cause the Trust to be subject to the Grantor Trust rules of Sections 671-678. Otherwise, the Trust will be considered a Grantor Trust and will not qualify as a Charitable Remainder Trust. Typically, the type of assets, which can be contributed to Charitable Remainder Trusts, is unlimited. However, in the aforementioned event when the Grantor is also the Trustee, the Trust interest must hold clearly identifiable assets. Real estate, stock in closely held companies, and personal effects are often difficult to value, and could disqualify a Trust for the Grantor’s charitable deduction.

Upon the death of a Grantor, the estate tax deduction for the Charitable Remainder Annuity Trust will equal the actual or fair market value of the remainder interest of the Trust. It is determined by taking the fair market value of the property placed in the Trust and reducing it by the present value of the non-charitable annuity interest. These values are to be determined as of the Decedent’s date of death or by the alternate valuation date.


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