Deferred and Life Income Gifts

Estate Planning Allows Alumnus to 'Pay Back' Previous Support One of Al Knott’s earliest experiences in engineering came when he was only a child: His sister gave him her alarm clock. He fixed it, and then she wanted it back.      Despite the apparent lack of reward, Knott (ArchEngr’55) went onto find great enjoyment and satisfaction working in the field.      “I’ve seen a lot of universities in my time and in my travels, and I think CU is one of the best,” says Knott, who recently decided to put the college in his estate plans. More>>

Another way to make a gift is to transfer the asset, but defer the benefit to the organization. For example, you may have an income-producing asset that is an important part of your annual income stream, but selling the asset creates capital gains exposure, and you still need the money it produces. In fact, you may be able to create a higher yield than you are currently getting. Consider a life income gift such as investing in the pooled income fund, a gift annuity or a charitable remainder trust.

A Pooled Income Fund is a trust that commingles gifts from many donors. The donor makes an irrevocable gift to the fund, and receives a proportional interest in the net income earned by the fund each year. Upon the death of the donor, the value of the donor's fund units is distributed to the organization. The donor gets the benefit of a discounted present value charitable deduction. You must pay ordinary income tax on the income, but the income may be higher than the funds were previously yielding. In addition, you have bought the units with the fair market value of the assets, not the discounted value after paying capital gains, and you have sheltered future appreciation from capital gains. You derive current benefit while still having made a gift. Another advantage of this gift vehicle is that the investment threshold is fairly low, and no special trust documents must be prepared.

The Charitable Remainder Trust is a financial and estate planning tool that has been used for nearly 30 years. It provides for multiple levels of tax savings: the avoidance of capital gains through the use of particular assets to fund the trust, the sheltering of tax exposure of the appreciation that accumulates within the trust, and the removal of the assets from your estate to save estate taxes. It creates an income stream for you or your heirs, and can be set up for a variety of purposes like retirement income or educational/tuition trusts for children or grandchildren. The pay-out can be a fixed dollar amount as in an annuity trust or can be a fixed percentage of the net fair market value of the trust, revalued each year, as in an unitrust.

There are many variations of these two models, including a retirement planning technique where the gift is made, the trust is created, but the income stream is deferred. Professional legal advice is crucial to determine which best suits your needs. The key planning point is that your philanthropy may be deferred while the assets produce income for yourself or your family, but you still determine how the principal of the trust will ultimately be used. Furthermore, keep in mind that the principal (and therefore the impact of your gift) will continue to grow over the life of the trust. Through the use of this common and popular gift planning strategy, you are able to make a significant gift to the organization you want to support, while saving taxes and retaining an income stream.

Note: There is a variation of the charitable trust that accomplishes the reverse: that is, the donor gives up the income production of the asset for a fixed period of time and allows the beneficiary organization to "own" the income stream from the asset. At the end of the trust's term, the asset then reverts back to the donor or the donor's heirs. This is called a Charitable Lead Trust. There are gift tax implications in this model, and sophisticated professional advice is needed to implement such a trust.

An interesting life "income" gift is actually a life "use" gift. This is a gift of real estate with a retained life interest. In this case, the transfer of ownership of the residence or farm takes place, and the donor retains the right to continue to live in (or lease) the property for the rest of his or her life. Here again, the value of the charitable deduction is based on a calculation of present value of the remainder interest. The donor freezes the value in time, eliminating both future capital gains exposure and the potential estate taxes that would be due upon the donor's death since the property is removed from the donor's estate.

A testamentary charitable trust is also possible. If you are unsure whether your assets are sufficient to take care of your needs during your lifetime, but you want to leave a legacy to your children through a life income and still make a significant deferred charitable gift, you may want to set up the charitable trust only at your death. This would also have the effect of removing the asset from your estate and avoiding estate taxes.

The above was taken from "Becoming a Philanthropist" by Enid M. Ablowitz (copyright 1998) and is meant to be representative only. You should consult with your attorney about the applicability of tax laws and specific gift strategies to your own situation.