When a Steady Income Is Better Than a Big Inheritance

Testamentary gifts (gifts made at death) are the most common type of planned gift, estimated to be 80% or more of planned gifts received by charities. Donors typically have to confront complicated family and financial issues in the estate planning process.  Ask any gift officer who has been involved in planned gift fundraising. They can tell of donors sharing compelling stories of family addictions, marriage instability, costly medical conditions, and financial mismanagement. Donors anguish over leaving a potentially large inheritance to a family member who may lack the skills to prudently manage the inheritance. To complicate matters further, the donor is conflicted about making a final gift to a favorite charity from their estate that will divert assets away from a family member in need of financial support. A testamentary life income gift that will pay steady income to their family member for life, with the remainder going to charity when the life income gift terminates, may be the answer for such a donor. The role of the gift officer is to educate the donor about the possibilities, and if the donor has interest, to encourage a collaborative discussion with the donor’s financial and estate planning advisors.

Involve the Donor's Advisors

The donor’s advisors must be included in the discussion. The donor’s financial advisor can advise as to the type of life income plan that will best suit the donor’s heirs. Depending on the age and financial needs of the designated heir, the reliability of fixed income from a charitable remainder annuity trust or gift annuity might be the best choice. For other beneficiaries, a charitable remainder unitrust or even a pooled income fund could be the vehicle that works best. The donor’s financial advisor or estate planning attorney can advise the donor about the tax implications of a testamentary life income gift. If the income beneficiary has an advisor, that advisor should also be part of the discussion to ensure that any federal or state benefits currently being received or anticipated in the future are not placed in jeopardy by an additional stream of income.

Choosing the Funding Asset

The donor may use a provision in a will or trust, assets from a retirement account such as an IRA, a life insurance policy, or other transfer-on-death accounts to establish a testamentary life income gift. From a tax perspective using assets in a retirement account (assets considered income in respect of a decedent or IRD) which have never been taxed can result in tax savings to the heirs of the donor. If a charity receives IRD assets to fund the life income gift, neither the charity nor the beneficiary will not be subject to immediate income taxes on these assets. The donor can leave non-IRD assets in their will or trust to other heirs, which assets those heirs will receive with no income tax liability.

Testamentary Charitable Gift Annuity

For the donor who wishes to provide fixed payments to their heirs, a testamentary charitable gift annuity will likely accomplish their objective. The estate document establishing the funding source for the gift annuity should specify a fixed dollar amount or a percentage of the estate or account that is to be used to fund the annuity at a named charity. Ideally, the donor should enter into a gift annuity agreement with the charity during life.  The payout rate will be based on the beneficiary's age at the time the donor passes away,  The terms of the annuity agreement will need to comply with the charity’s gift acceptance policy. For example, the agreement could state that the payments are deferred until the annuitant attains the charity's minimum age for a gift annuity.  The annuity rate can be the rate suggested by the American Council on Gift Annuities (ACGA) as of the date of death of the donor and for the closest birth date of the annuitant. The gift annuity agreement should specify the payment frequency. The estate will receive an estate tax charitable deduction for the present value of the charitable portion of the gift annuity, which can be used if the estate is subject to federal estate taxes. The estate document should also provide that if the annuitant predeceases the donor the amount that would have funded the gift annuity shall become an outright gift to the charity, if that is what the donor desires.

Testamentary Charitable Remainder Trust

If the testamentary charitable gift annuity does not meet the donor’s objectives, there can be more flexibility with a testamentary charitable remainder trust (CRT). As with the testamentary charitable gift annuity, the estate document establishing the funding source for the CRT should reference a CRT agreement that is in existence at the death of the donor. It is also permissible for the terms of the CRT to be in a will or revocable living trust, to become active when the CRT is funded. The CRT will have a pay-out rate established by the donor, along with the identity of the income beneficiaries and charities that are to receive the remaining trust assets. Whereas the annuitants for a charitable gift annuity are limited to two, there can be multiple income beneficiaries with a CRT. As with any charitable life income gift, there will be IRS regulations, and tax and reporting compliance. The trust document should state the name of the trustee, which should be an individual or institution that has experience in administering charitable remainder trusts.

Testamentary Life Income Gifts - a Charitable Way to Provide for Family

Donors often have family issues to consider as part of their estate and gift planning. When a gift officer can propose a solution to resolve a family issue that also results in resources coming to charity, the gift officer has performed a service for the donor and for the charity the gift officer represents. Planned gifts present these opportunities, dependent only upon the gift officer being knowledgeable about these various gift options.