A charitably inclined client generally will be able to choose any of the various types of charitable life income plans, or a gift of a remainder in a house or farm, for making a gift to a well-established public charity. Such charities may include, for example, a university, hospital, or medical foundation; a national religious organization; or even a local community foundation if it is sufficiently large and its management sufficiently sophisticated to offer all of them.

The participation required from the charity will vary with the type of gift. For a charitable remainder trust (CRT) or the gift of a remainder interest in a house or farm, the charity need only be willing to accept the gift at the end of the retained term. (For the CRT, however, the client probably also will be interested in whether the charity will serve as trustee and what, if any, fees will be charged for trustee, management, or investment services.) By contrast, for a charitable gift annuity (CGA) or a pooled income fund (PIF), the first question will be whether the chosen charity offers these gifts since both must be provided by the charity itself. In recent years CGAs have become increasingly popular with donors, prompting more charities to offer them, while PIFs have declined in popularity to the point where some charities have ceased accepting new PIF donations because participation has not justified the administrative costs.

Charitable remainder trusts. A CRT is an irrevocable testamentary or inter vivos trust that pays income at least annually to one or more non-charitable beneficiaries for life or a term of years (not to exceed 20). At the end of the CRT's term, the charitable remainder beneficiary will receive the remaining assets of the CRT. (Code Sec. 664) CRTs are divided into two major categories: charitable remainder annuity trusts (CRATs), which pay a fixed dollar amount annually to the non-charitable beneficiary, and charitable remainder unitrusts (CRUTs), which pay a variable amount annually equal to a fixed percentage of the value of the trust's assets as recalculated each year as of a specified date.

The property remaining at the CRT's termination passes to charity, so the CRT is not a device for reducing estate taxes on property passing to non-charitable beneficiaries. The CRT is useful for buying and selling assets without immediate capital gains tax because the CRT is exempt from income tax. The trustee's ability to invest and reinvest on a tax-deferred basis is particularly important when the property funding the CRT is highly appreciated.

The income tax deduction available for an inter vivos CRT gives it an advantage over a testamentary CRT. An income tax charitable deduction is allowed for the donation to an intervivos CRT for the actuarially determined present value of the charity's remainder interest in the year of the contribution (subject to applicable percentage limitations), which is computed using Treasury tables. (Code Sec. 170(f)(2)(A)) The present value of the charity's interest is based on the age of the non-charitable beneficiary (if the trust lasts for the non-charitable beneficiary's lifetime) or the period of the non-charitable beneficiary's interest (if the trust lasts for a term of years), the fixed or percentage payment to be received by the non-charitable beneficiary, the frequency and timing of the payments, and the federal discount rate.

The discount rate used is 120% of the applicable federal mid-term rate (the “charitable federal midterm rate,” or CFMR) for the month of the gift or either of the two preceding months. Because the federal rates for the next month are published by the 20th of the current month, as a practical matter the donor—from then until the end of the current month—actually has the choice of four CFMRs. If the donor uses the CFMR for a month other than that of the gift, an explicit election statement must be filed with the income tax return claiming the deduction. The value of the unitrust or annuity decreases, and the value of the charity's remainder interest increases, as the CFMR increases, so the higher the CFMR, the larger the charitable deduction (although the difference will be much more substantial for a CRAT than for a CRUT).

CRTs must meet certain requirements, and their governing instruments are required to include specific provisions, for the CRT to qualify for the charitable deductions from federal income, gift, and estate taxes. Payments to the non-charitable beneficiary are required to equal at least 5% of the net FMV of the assets transferred to the CRT, but may not be more than 50% of such value. (Code Sec. 664(e) and Code Sec. 664(d)(1)) The CRT's instrument must specifically prohibit distributions to or for the benefit of the non-charitable beneficiaries other than any resulting from payment of the unitrust or annuity amount. If the donor names a non-charitable beneficiary other than himself or herself, the donor may reserve the right to revoke or terminate the interest of that non-charitable beneficiary. The power may be exercisable only by will. The charitable interest must be irrevocable and must be at least 10% of the net FMV of the property on the date of contribution. (Code Sec. 664(d)(1)(D) and Code Sec. 664(d)(2)(D))

Rev Proc 2005-24, 2005-16 IRB 909 added the requirement that CRT instruments include a spousal waiver of any right of election against the CRT's assets that might be exercisable by the donor's spouse against the donor's estate. IRS concern apparently arose in response to the broadened definition of “estate” being enacted in some states that would allow a surviving spouse the right to elect against not only assets of the probate estate but nonprobate assets as well, which might include assets previously donated by the deceased spouse to an inter vivos CRT. Rev Proc 2005-24 concludes that if a surviving spouse may exercise a right of election that could reach the assets of the CRT, then the requirement that no amounts other than the annuity or unitrust amount be paid to any person other than a qualified charity would not be met.

To qualify for the “safe harbor” offered by Rev Proc 2005-24, the donor's spouse must irrevocably waive the right of election as it pertains to the CRT's assets. Exceptions to this requirement include any CRT created before June 28, 2005 and CRTs established after that date if applicable state law would not allow the surviving spouse such a right of election. The Procedure includes specific requirements for the waiver. Rev Proc 2005-24 has been widelycriticized as unnecessarily complicating the CRT rules, creating a trap for the unwary, and providing an inappropriate “solution” that potentially causes more harm than any problem that it purportedly addresses.

In addition to the rules generally applicable to CRTs are those specifically applicable to CRATs and CRUTs. IRS has issued sample forms for both types of CRT that reflect these requirements (Rev Proc 2003-53 through Rev Proc 2003-60; Rev Proc 2005-52 through Rev Proc 2005-59).

Charitable gift annuities. A CGA is a simple contract between a donor and a charity in which the donor contributes cash or other property acceptable to the charity in exchange for fixed annuity payments to one or two designated individual beneficiaries, guaranteed by the charitable organization. No trust is involved. The annuity payments usually may be made monthly, quarterly or annually.

The transaction is part purchase and part gift—the donor is eligible for a charitable income tax deduction for the difference between the value of the contribution and the value of the annuity, computed under Treasury tables. As with lifetime CRTs, the deduction is based on the age(s) of the annuitant(s), the rate of return to be paid, the frequency and timing of the payments, and the CFMR. Also as with CRTs, the CFMR for the month of the gift or either of the two preceding months may be used. Selecting a lower CFMR will reduce the charitable income tax deduction.

The rules applicable to CGAs are those governing debt-financed income; the charity must meet these requirements in Code Sec. 514(c)(5) to avoid incurring unrelated business taxable income (UBTI) on its CGAs. The CGA must be payable over the life of one or two individuals in being at the time the annuity is issued (no term-of-years annuities and not more than two annuitants). The value of the projected residue must exceed 10% of the value of the property contributed (that is, the value of the annuity must be less than 90% of the value of the contribution). The CGA contract may not specify a maximum amount of payments and may not provide for any adjustment of the amount of the payments by reference to the income received from the transferred property or any other property.

Unlike CRTs, CGAs are not required to pay out any minimum or maximum rates. Most charities follow the annuity rates recommended by the American Council on Gift Annuities, which sets rates designed to leave the charity with an amount equal to 50% of the contribution at the annuitant's death.

Capital gain on CGAs is determined under the bargain sale rules, and the property's adjusted basis is allocated pro rata between the gift portion and the value of the annuity. The capital gain is reportable ratably over the annuitant's life expectancy if the annuity is nonassignable and the donor is the sole annuitant or the first annuitant with a designated survivor annuitant. An annuity will be considered nonassignable even if the donor retains the right to revoke a survivor annuitant's interest or to relinquish to the charity the donor's right to receive future payments. If the donor transfers encumbered property to the charity, however, all of the gain attributable to the encumbrance must be recognized in the year of transfer rather than ratably. If a donor names another person as annuitant and is not the primary annuitant, the capital gain is required to be reported in the year of the transfer rather than ratably.

As an alternative to a CGA with annuity payments beginning immediately, charities generally also offer deferred-payment CGAs that begin annuity payments more than one year after the transfer to the charity. Charities have used deferred CGAs to further broaden the arrangements that may be made with their donors.

Pooled income funds. A PIF is a trust maintained by a charitable organization that pools gifts of multiple donors. (Code Sec. 642(c)(5)) Each donor contributes an irrevocable remainder interest to the charity and retains an income interest for the life of one or more beneficiaries. Income from the fund is distributed to the fund's beneficiaries according to their share of the fund. After the death of the beneficiary, the beneficiary's share of the fund is severed and transferred to the charitable organization.

A PIF may be established only by a public charity as defined in Code Sec. 170(b)(1)(A). A gift to a qualified PIF will be eligible for a charitable income, gift, and estate tax deduction. The deduction is allowed for the value of the remainder interest on the date of contribution, computed under the Regulations.

Although PIFs seem to fill a niche by allowing relatively small donations and an alternative to the fixed payments of CGAs, they have generally declined in popularity over the years compared with other techniques. Some charities have terminated their PIFs, or have closed them to new donors and plan to terminate them as soon as the remaining individual interests terminate. Other charities that have not previously established a PIF now consider it unlikely that they will do so.

Remainder interest in home or farm. A donor may make a charitable gift of the remainder interest in a personal residence or farm and retain the right to use the property for one or more lifetimes or for a term of years. (Code Sec. 170(f)(3)(B)(i)) The gift of the remainder interest must be irrevocable; imposing a condition on the gift could disqualify it for the charitable deduction unless the possibility that the condition could defeat the charity's interest is so remote as to be negligible (a 5%-or-less probability of occurring). (Rev Rul 85-23, 1985-1 CB 327)

To qualify for the charitable deduction, the gift of the remainder interest in the home or farm cannot be in trust. This is consistent with the provisions mandating that gifts of remainder interests in trust qualify for a deduction only if they meet the requirements of a CRT, which of course would be impossible for the gift of the remainder interest in a home or farm—there would be no funds for the required income payments, and the retained use of the home or farm would constitute self-dealing.

The donor receives a current income tax deduction for the present value of the remainder interest passing to charity. (Code Sec. 170(f)(3)(B)(i)) The charitable income tax deduction (but not the gift tax deduction) is reduced to reflect depreciation (computed on the straight-line method) and depletion. (Code Sec. 170(f)(4)) To calculate the deduction, the following facts must first be determined:

The FMV of the property allocated between the land and improvements.

The estimated useful life of the structure.

The value of the structure at the end of its estimated useful life.

As with other split-interest gifts, donors are allowed to choose the CFMR for the month of the gift or either of the previous two months in calculating the charitable deduction. But unlike other split-interest gifts, the higher the CFMR, the smaller the charitable deduction for the remainder interest.

The charitable deduction does not extend to gifts of furniture, furnishings, or other personal property included with the home or farm. If a donor wishes to give such items to the charity, the donor should consider bequeathing them. The charity will then receive them at the donor's death (which could coincide with its receipt of the home or farm), and the donor's estate would receive a charitable estate tax deduction for the FMV of the items at date of death.

Charitable planning should be considered with caution and with proper advice.