Trust Matters: Life Income Gifts and Revocable Living Trusts
In our work with planned giving professionals, we receive questions from time to time about donors using trusts in conjunction with life-income gift arrangements. The most common question is whether charitable gift annuity (CGA) payments – or beneficiary payments from charitable remainder trusts (CRTs) – can be issued to trusts rather than directly to the annuitants or trust beneficiaries. But there is a second question that comes up as well – whether a trust can be the donor or grantor of a gift annuity or CRT.
Life Income Payments to a Trust
The answer to the first question is fairly simple and straightforward. There are no general prohibitions against making payments from life income gifts to trusts. Rather, making payments to the trust is simply a gesture of accommodation toward the annuitant or beneficiary. Payment obligations will continue to be owed to the annuitant or beneficiary as an individual, will still be reported for CGAs on IRS Form 1099-R, and income from CRTs will be reported on a K-1 in the name of the annuitant or beneficiary.
Funding Life Income Gifts with a Trust
The answer to the second question is more nuanced. Generally speaking, life income gift arrangements – charitable gift annuities and CRTs – don’t have any specific prohibitions against being funded by trusts. The challenge is in knowing – or in making the determination – that a specific trust is authorized to establish life income gifts.
The Revocable Living Trust
It would be impossible to cover all types of trusts in this brief discussion, so let’s sharpen the focus and look at what is by far the most popular example: The Revocable Living Trust (RLT). What is an RLT? It is a simple trust created by a grantor or trustor; because it is created during the grantor’s lifetime, it is called a “living” or “inter-vivos” trust. It allows the grantor to transfer property and other assets into the trust, but the ownership for tax purposes is still considered to be under the grantor’s Social Security number. The over-arching value of the RLT is what happens upon the incapacitation or death of the grantor.
When assets are held in a person’s name, and the person becomes incapacitated, it can be quite challenging to restructure control and even ownership of the assets without undertaking extensive legal work. With assets held in an RLT, on the other hand, there are specific provisions for the control and ownership of the assets upon the grantor’s becoming incapacitated. This avoids significant legal work and its associated costs.
Even more significant is the distinction of how assets are handled upon the person’s death. With assets held simply in a person’s name, the decedent’s estate will be managed and settled through a process in probate court; this process can be time-consuming and expensive. Moreover, the process becomes public information, and there is virtually no ability to shield any details from public scrutiny. On the other hand, when the grantor of an RLT passes, the trust contains specific provisions for how the assets are to be conveyed. Any and all assets held by the RLT can be transferred directly to the heirs, and the information is not part of the public probate court process.
So how does all of this relate to the broader questions of whether an RLT can fund a life income gift? The critical factor here is that the gift planning professional can never know the answers to those questions without becoming familiar with the governing documents of the RLTs. And that is not the purview of the gift planner. In the first place, it is highly unlikely that a gift officer would feel comfortable asking to review a donor’s RLT; moreover, it is equally unlikely that a donor would be willing to share the details of his or her RLT.
Every trust has a governing trust document, and every governing trust document is unique. The document specifies what the trust can do and what will be done in the trust under certain circumstances. In some cases, it also specifies what the trust cannot do. For any areas not covered by the governing trust document, the trust is governed by applicable state laws. And those, of course, can vary considerably from state to state.
The bottom line is that the gift planning professional should exercise great caution in making any comments about how a donor’s RLT can be used in conjunction with life income gifts. It is not the role of the gift planning professional to render a legal opinion on what the RLT allows; indeed, the gift officer does not even have the authority to do such.
Here’s a better way to approach the questions: Generally speaking, if the taxation of all activity in the RLT is considered to be activity by the grantor, then the trust is essentially a temporary conduit for holding the grantor’s assets. In that case, the trust does not have its own tax identification number, and the trust should be able to make gifts to, and receive payments from, life income gifts on behalf of the grantor.
That being said, the gift annuity or charitable remainder trust funded by an RLT should not be established in the donor’s name. Rather, the donor in his or her capacity as trustee of the RLT may be able to make a gift of assets held in the name of the trust to fund a CGA or CRT. For instance, a gift annuity agreement might state “This agreement is made between the Jeffrey Frye Living Trust and The Charity,” and ultimately be signed by “Jeffrey Frye, Trustee.”
To avoid confusion, it may be preferable to have the RLT distribute assets to the donor and then for the donor to make the gift. This is an area where the donor or donor’s counsel must determine if the trustee has authority to make a direct distribution to fund the CGA or CRT.
But the gift officer should take care to make statements that are general and not specific to an individual trust or donor. The donor, as grantor of the RLT, is ultimately responsible for all actions pertaining to the trust, and he or she bears the legal burden of determining what can and cannot be done.