It is not unusual that a charitable remainder unitrust (CRUT) or pooled income fund (PIF) gift made by a donor years ago no longer meets the donor’s or charity’s financial objectives. A trust donor may fear that a stock market correction will deflate trust assets and her income. Or a trust with a high payout rate may be headed toward trust assets exhausting. A charity’s pooled income fund may have only a few remaining participants and the charity desires to terminate the fund because of excessive fees.
Following the December 2017 passage of the 2017 Tax Act, some in the gift planning community raised the question of whether the 2017 Tax Act’s elimination of miscellaneous itemized deductions extended to the deduction for unrecovered investment in contract (UIC) at the death of the last annuitant of a charitable gift annuity, as that deduction had appeared under the heading “Other Miscellaneous Deductions” on Form 1040 Schedule A. But the 2017 Tax Act only eliminated the miscellaneous deductions subject to the 2% floor, which the UIC deduction was not subject to. The UIC deduction remains available, as is confirmed in the tax forms, instructions, and publications the IRS has issued to reflect the 2017 Tax Act changes for 2018. This deduction equals the total of all tax-free portions of the annuity that have not yet been distributed as of the death of the last annuitant and is taken on the deceased’s final income tax return.
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.
A special needs trust is a type of irrevocable legal arrangement established for the benefit of an individual with physical or mental disabilities while at the same time allowing the beneficiary to receive essential needs-based governmental assistance. A parent, grandparent, guardian or a court typically creates a special needs trust, also known as a Third Party trust. Some special needs trusts are set up with assets that the person with disabilities already owns, such as an inheritance or a legal settlement, and are called self-settled trusts, or First Party trusts.
I learned recently of a donor who left money to charity in a manner that made it seem like she wanted to establish a so-called “college annuity” for her seven-year-old granddaughter. The applicable bequest language indicated that the annuity would begin “on or about July 30 of the year the beneficiary attains the age 19 years, and the payment shall continue for a term of 5 years.” If perhaps you’re not familiar with the college annuity, it’s a deferred charitable gift annuity established for the life of a young child, with the deferral period ending – and payments beginning – when the child is age 18 or 19. Shortly after the annuity is established, the child’s guardian (usually a parent) exercises a right explicitly reserved in the gift annuity agreement to commute the lifetime payments into a stream of payments made over the course of only four or five years. Because the present value of the lifetime payments must equal the present value of the commuted payments at the time the commutation provision is exercised, each commuted payment is quite a bit larger than each lifetime payment would have been.