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Chris S. Jacobsen: Gifts are better to give and to receive

It’s the Law

Posted: November 19, 2009 9:38 p.m.
Updated: November 20, 2009 4:55 a.m.
In the current economic times, contributions to charities are lagging. Undoubtedly, some portion of the reduction in charitable donations is a result of the personal financial uncertainty of prospective donors and their diminished willingness to part with their property.

However, charitable gifts can be structured in a number of ways in which donors may make their gifts and have them too.

By the establishment of a trust, a donor may effectively split the principal of the assets to be given from the income to be generated from the assets. The donor may then retain one portion and make a gift of the other.

By the use of a charitable remainder trust, assets are transferred to the trust with the income going to one or more individuals (which may include the donor) with the named charity receiving the assets upon the expiration of the trust period. This device benefits the donor or his designated income beneficiaries by providing income for a period of time, transferring the assets to the charity as of a future date and yielding tax savings for the donor.

If the trust is established during the donor’s lifetime, the donor is entitled to a charitable deduction for income tax purposes in an amount equal to the present value of the charity’s remainder interest, and the transferred assets are removed from the donor’s estate and thus escape estate taxes.

If the trust is created in the donor’s will, the transferred assets are removed from the donor’s taxable estate.

Further, if the donor contributes appreciated assets to the trust, the donor need not recognize the capital gains that would have resulted from a sale of those assets. If the trust later sells the appreciated assets, it pays no capital gains tax as it is a tax exempt entity.

The sale of appreciated assets by the trust may further benefit the income beneficiary by maximizing the base from which income is generated. If the trust is a charitable remainder unitrust (CRUT), the income is measured by a percentage (but not less than 5 percent) of the value of the trust principal in a given year.

As such, this trust may also serve as a hedge against inflation since, as the value of the trust assets rises, so does the income payout. On the other hand, in a charitable remainder annuity trust (CRAT), a fixed amount of income is paid out each year and thus no hedge against inflation is provided.

A CRUT may also serve as a retirement plan. Although a CRUT pays out a percentage of the trust’s annual value, it can provide that the distributions not exceed the actual annual income earned by the trust. Any shortfall in any given year may then be distributed in a later year when sufficient income is available.

Thus, during the donor’s pre-retirement years, the trust may be invested in growth stocks or other assets which produce little income. Later, upon retirement, the assets may be sold and reinvested in income-producing assets sufficient to cover the required percentage plus the earlier shortfall. Payouts are thus deferred to later non-earning retirement years.

The gifted interest in the trust may instead be the income interest. In a charitable lead trust (CLT), the donor retains the remainder interest in the trust assets (or names individuals to succeed to this remainder interest), while the charity benefits from the trust income for the term of the trust. As the charitable remainder trusts, the CLT yields current income tax deductions (for the donated value of the income interest) and a reduction of capital gains taxes.

CRATs, CRUTs and CLTs are not for everyone and must meet a series of specific requirements. These gifting techniques should only be considered and implemented in consultation with competent professional advisors.

Chris S. Jacobsen is a partner with Poole & Shaffery, LLP, a law firm which provides general counsel and litigation services to businesses, community associations and management personnel. His column reflects his own views and not necessarily those of

The Signal. “It’s The Law” appears Fridays and rotates between members of the Santa Clarita Valley Bar Association. Nothing contained herein shall be or is intended to be construed as providing legal advice.


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