Economic Meltdown – Charitable Planning


As the economic crisis continues, the feeling amongst most folks, is to cut back on discretionary expenses including charity. It shouldn't be. Those in need require more help during tough economic times, not less.  The charities that carry out the good deeds that make life special, that make us human, need more help, not less. So how can you creatively donate during tough times? There are a myriad of ways, including the use of gift annuities and charitable remainder trusts for donors uncomfortable parting with any cash now. While out right gifts are best for any charity, a deferred gift sure beats no gift.


Charity Isn't Only About Money

"Generosity is exactly this: to give that which is dearest to us. It is an act that transforms us. After it, we will be poorer, but we will feel richer. Perhaps we will feel less equipped and secure, but we will be freer. We will have made the world we live in a little kinder." Piero Ferrucci in his book The Power of Kindness. Feeling blue about the Dow? Make a donation. In fact, increase your donation over last year and tell the charity to use your name as an example for other donors.


Gift Annuity In Lieu of an Outright Gift



You wanted to make a $10,000 donation, but are feeling the pinch of the stock market meltdown.  Gift annuities are a hybrid to let you give and receive! A gift annuity is a contract between you and your favorite charity in which you give the charity a one time payment and receive a periodic payment, an annuity, for life. The amount of the annuity is determined at inception, without worries about stock market volatility. On your death (or the death of a spouse or other loved one, since you can name up to two people to get the annuity) the charity will receive the funds that remain for its charitable purposes.


Benefits to Charity:

The assumption used in calculating a charitable gift annuity is that about 50% of the value of your gift for the annuity should ultimately go to the issuing charity. So there is a substantial charitable benefit in purchasing a gift annuity. But this also leaves a significant benefit for you which might be essential in light of recent economic developments.


Benefits to You:

When you purchase a gift annuity you'll realize an income tax deduction based on the value of what the charity will receive. You will receive a monthly or quarterly cash flow stream for the rest of your life. Cash flow payments that are fixed regardless of stock market performance. Your payments will generally be substantially greater then what you would earn on a CD (assuming you're old enough when you make the purchase). If you gift appreciated property (some of you might be old enough to remember the concept) to purchase the gift annuity, you won't recognize capital gains immediately (as you would if you simply sold the property and purchased a commercial annuity). Instead, the taxable gain will be recognized over your actuarial life expectancy. Gift annuities are highly regulated (by the same folks that watched our backs with sub-prime mortgages?) so that there is assurance that you'll receive the payments expected. If the Charity cannot met the payments required from the reserve it sets up, it will have to use its general funds to make the payments. If the charity failed, your payments would stop. Thus, while gift annuities are safe, they are not an absolute guarantee.



John Doe is 67 and single. John has generally made six figure gifts to his favorite charity. However, since his savings have be cut in half by recent market declines he's feeling uncomfortable. John believes it important to show some commitment to the charity, but is reluctant to part with cash. John figures he can earn about 4% on CD. Instead of forgoing any charitable efforts John opts to purchase a $200,000 gift annuity from the charity. At his age, the rate of payment he will receive is 5.9%. So his annual annuity will be about $11,800, substantially more than he could get on a CD. In addition, then the amount John receives from his gift annuity is not fully taxable, so he will net even more after tax then with a CD. John knows that on a present value basis about ½ of the $200,000 will eventually inure to the benefit of the charity.


Issues Affecting Gift Annuities:

Gift annuities have a number of shortcomings. The main negative to the charity is that there are no immediate dollars to spend. For you as a donor, there is no flexibility. You cannot reach the principal of the gift annuity if you need it for an emergency. Your annuity is a fixed payment which may not keep pace with inflation so that over time your purchasing power will erode. Part of the solution to these issues is to limit the portion of your investment assets you use to purchase gift annuities. Thus, it might be better in some instances to give a smaller outright gift and retain complete control over the investment of the funds you retain.


Give-Back Charitable Remainder Trust (CRT)



If you feel too financially insecure to make a large outright contribution, consider a charitable remainder trust (CRT) with a twist. We'll call it the "Give-Back CRT". First let's explain the CRT technique, then we'll show you how you can use it to continue substantial support of your favorite charity, even while feeling economically insecure.


Classic CRT Example:

You establish a charitable remainder trust ("CRT"). A CRT is a special trust which requires a payment be made periodically, perhaps annually, to you for a set number of years or life. This payment can be made to you and your spouse (or in some instances other beneficiaries). So the trustee of the CRT could be required by the terms of the trust document to pay you and your husband a 7% annuity every year for your joint lives. If you contribute $1 million to this CRT, the trustee must pay $70,000 each year until the last of you dies. At that time, after the final $70,000 payment, the remaining balance of the trust will be distributed to the charitable beneficiary you named. Your trustee is not only authorized, she is required, to make this charitable distribution. The charity doesn't receive any current funds, but it has a substantial future commitment it can rely upon (but see below).


CRT versus No Donation:

So Richie Rich had a set back on some of his comic book ventures and is feeling a bit pinched on donating to his favorite charity. But Richie knows he needs to show leadership during these tough economic times to motivate others to give. Richie had been planning a $1 million contribution, but isn't comfortable giving anything now. However, Richie is also aware that if he doesn't lead the way, the charity will have even a tougher time soliciting others. So Richie opts to give a $1 million, but in a way he can feel comfortable doing so. He gifts $1 million in a 7% CRT. Richie discussed this with the planned giving professionals from the charity and believes that authorizing the charity to announce this larger gift will show a major long term commitment that will motivate other donors. For Richie personally, the fact that he will receive $70,000/year from the CRT makes the "gift" comfortable. If the economy continues to worsen, he'll have cash flow coming from the CRT. That assurance gets Richie over the big gift hurdle. So Richie will help lead the charitable fund raising effort through tough times while simultaneously securing his financial future so he's able to make the commitment. The only piece missing is that the charity still needs current dollars for its laudable efforts.


Give-Back CRT:

The real impediment to Richie making the $1 million outright gift he initially intended were his financial worries. The CRT got Richie past that, but what about the charity? Richie can make a non-binding commitment that he'll donate whatever portion of the $70,000 annual payment he receives each year back to the charity. This approach gives Richie comfort, but also the encouragement and moral obligation to donate as much as he can each year. At some point, Richie can terminate the CRT so that the charity will receive the then current value of its remainder interest. If a CRT is terminated early, Richie as the noncharitable beneficiary, will report capital gain based on the value of the assets distributed to him as a taxable exchange under IRC Sec. 1001. PLR 200314021 and 200733014.  Richie would be effectively treated as selling his interest in the CRT to the charity as remainder beneficiary. At that time Richie could also donate as much or all of the proceeds from this settlement to the charity.




There are many ways to creatively continue charitable gifts in spite of economic adversity. While the need for current dollars by every charity is great, it is still better to make a deferred commitment then no commitment.

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