The life income gift arrangements that make up a significant portion of planned giving – charitable gift annuities, charitable remainder trusts, and pooled income funds – are all irrevocable. In order to qualify for a charitable deduction and special tax treatment, these vehicles cannot allow any changes, and the donors cannot “take them back” in any way. There is, however, a provision that may be included in these legal arrangements which allows the donor to revoke the income interest of another person at some point in the future.
The easiest way to understand this is to remember that the revocation clause can only be utilized where there is more than one person involved in a life income gift. One example is when the donor establishes the arrangement to provide income to a second person; another example is when the donor establishes the arrangement to provide income first for himself or herself, and then to a different person. Note that when a donor sets up an income arrangement for another person, that transaction is considered a “potentially taxable transfer.” There is actually a gift to the other person for the value of the income interest, which is theoretically subject to gift tax.
The revocation clause only allows the donor to revoke the income of interest of the other person; in many cases, the right to revoke is possible both during life and at death. The revocation itself occurs rarely, but the inclusion of the clause allows the donor to claim that the gift “has not been completed,” therefore, no transfer tax can be assessed on the transfer at that point.
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