14.13 Donations Through Trusts

Outright gifts are not the only way to make deductible gifts to charities. You may transfer property to a charitable lead trust or a charitable remainder trust to provide funds for charity.

A charitable lead trust involves your transfer of property to a trust directed to pay income to a charity you name, for the term of the trust, and then to return the property to you or to someone else. A charitable remainder trust is one that provides income for you or another beneficiary for life, after which the property passes to a charity.

Trust arrangements require the services of an experienced attorney who will draft the trust in appropriate form and advise you of the tax consequences.

Deductions for gifts of income interests in trust.

Current law is designed to prevent a donor from claiming an immediate deduction for the present value of trust income payable to a charity for a term of years. In limited situations, you may claim a deduction if either: (1) You give away all of your interests in the property to qualifying (14.1) organizations. For example, you put your property in trust, giving an income interest for 20 years to a church and the remainder to a college. A deduction is allowed for the value of the property. Or (2) you create a unitrust or annuity trust, and are taxed on the income. A unitrust for this purpose provides that a fixed percentage of trust assets is payable to the charitable income beneficiary each year. An annuity trust provides for payment of a guaranteed dollar amount to the charitable income beneficiary each year. A deduction is allowed for the present value of the unitrust or annuity trust interest.

Planning Reminder

Life Income Plans

A philanthropy may offer a life income plan (pooled income fund) to which you transfer property or money in return for a guaranteed income for life. After your death, the philanthropy has full control over the property. If you enter such a plan, ask the philanthropy for the amount of the deduction that you may claim for the value of your gift.

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Because income remains taxable to the grantor, alternative (2) will probably not be chosen, unless the income of the trust is from tax-exempt securities. If such a trust is created, a tax may be due if the donor dies before the trust ends or is no longer the taxable owner of trust income. The law provides for recapture of part of the tax deduction, even where the income was tax exempt.

Charitable remainder trusts.

A charitable deduction is allowable for transfers of property to charitable remainder trusts only if the trust meets these requirements: The income payable for a noncharitable income beneficiary’s life or a term of up to 20 years must be guaranteed under a unitrust or annuity trust. If a donor gives all of his or her interests in the property to the charities, the annuity or unitrust requirements need not be satisfied. The value of the charitable deduction allowable for a gift in trust is determined by IRS tables.