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Understanding Charitable Trusts

December 15, 2014

Most who are interested in donating to a not-for-profit organization never do so because they don’t fully understand all of the giving options. A study conducted by New Philanthropy Capital found that 10% of mainstream donors and 13% of rich donors would give more if charities provided better information about the giving options (NFP, 2013). This brief overview of the various methods of giving will help not-for-profit organizations understand the various gifting techniques in order to be prepared to offer guidance to potential donors.

As a not-for-profit, ensuring the organization has proper funding to support its mission can be a difficult task. Many organizations do not have the resources to offer guidance to potential donors who believe in what they are doing. At LGT, we work with a large number of not-for-profit organizations across the DFW area to help further their cause by providing financial advice and support.

Too often, a potential donor is deterred from giving to a not-for-profit because they were recommended to give in such a way that either sounded too complicated or too costly. As a not-for-profit, it is important to thoroughly understand all of the options and not to overwhelm potential donors with complicated terminology. At LGT, we recommend that the first step in advising a potential donor is taking the time to understand his or her intent.

Here are a few questions that may help interpret the donor’s intent:
• What do you want to accomplish with your giving?
• How much or what do you wish to donate?
• When do you want to donate?
• When do you want our organization to be able to use the donation?
• Do you have heirs?
• How much control would you like to have over the donation?

The Four General Categories

Simple Methods:

  • Outright Gift – This method is appropriate for donors who want to see their charitable dollars at work during their lifetime. A check, clothing or transferred stock given to a not-for-profit constitutes an outright gift. These types of gifts go to work for the organization immediately and typically have lower costs and administrative complications, while providing an immediate tax deduction.
  • Bequest – This is the basic method for those who want to give once they have passed. A donor can create a bequest by inserting language in their will or by adding the not-for-profit’s name to his/her IRA or life insurance policy beneficiary form. A bequest allows the donor to retain specified assets until passing, leaving the funds available should an unexpected need arise. This is a good option for donors who wish to make a large donation and avoid costs that may diminish the actual amount received by the organization. These are not tax-deductible during the donor’s lifetime, however, they may provide a deduction to the estate of the donor.

Complex Methods

  • Life Income Gift – This category includes the charitable gift annuity (CGA), the charitable remainder trust (CRT), the charitable lead trust (CLT) and the pooled income fund. All life income gifts are irrevocable, inhibiting the donor from changing the arrangement once it has been made, with a few exceptions. The methods below are appropriate for donors who want to give assets now for later use, who seek some form of direct financial return from their giving and who have unique tax and estate issues. A few types of assets that are gifted in this manner are land, real estate, stocks, paintings, other collectable items and cash. Once given to the not-for-profit, the organization will own and manage the gift until the donor’s death, while paying the donor or beneficiary an annual amount, without either party owing capital gains tax.
      • A CGA is more complicated than a bequest but much simpler than a gift trust. The payout of a CGA is guaranteed by the assets of the not-for-profit. The donor receives a tax deduction at the time the gift is made based on the true gift amount of the asset, not on the portion that is slated to be returned to the donor as part of the lifetime payout.
      • There are various types of CRTs that can be used to support your organization. These are a good choice when the donor has an asset that is not currently being used and can be utilized to produce income for him/her and the organization. Once the trust has terminated, due to the death of the donor or when a set date is reached, the remainder of the trust will then go to the not-for-profit previously determined. CRTs also significantly lower gift and estate tax because the present value of the gift is no longer included in the estate. The most popular of these types of trusts are the Charitable Remainder Unitrust (CRUT) and Charitable Remainder Annuity Trust (CRAT).

        A CRUT pays its beneficiary a fixed percentage of the revalued annual principal, no lower than a specified percentage, based on the performance of the investment.

    A CRAT pays its beneficiary a fixed dollar amount determined at the creation of the certificate, no lower than a specified percentage, regardless of the performance of the investments annual performance.

  • A CLT produces an immediate cash flow for the organization. This type of trust can be established during the donor’s lifetime or established as a testamentary trust through his or her will. A lead trust may be arranged to provide for the beneficiary through a CRAT or CRUT.
  • The pooled income fund is composed of numerous gifts invested together. The fund will pay its charitable organization recipients quarterly and allow the donor to make a current tax deduction.
  • Family Foundation – Best for donors who want to keep their gifted capital intact while making smaller annual charitable distributions and retain administrative control. A family foundation is a separate financial entity established to hold, manage and distribute gifted assets. This is the most complex form of giving but comes with benefits others do not. A family foundation allows the donor to establish a legacy, maintain close control over income distribution and provide learning opportunities for the family. With a family foundation, the donated assets remain intact and generally grow over time. Annual distributions to charitable organizations are made, generally at a minimum of 5 percent of trust assets per year. The donor will have a high degree of administrative control and be responsible for adhering to a large body of government regulations.

In order to create value for both your organization and your donor, it is important to understand these methods so you can effectively advise potential donors.

The below are charts provided by Richard Livingston in order to help visualize the characteristics and differences of the various options (Livingston, 2005). If you would like further advice in understanding charitable gifts, please contact one of our financial advisors who specialize in the not-for-profit industry at http://www.lgt-cpa.com or (214) 871-7500.
Giving Graphics_Page_1Giving Graphics_Page_2

References
Livingston, R. (2005). Charitable Giving Methods . Retrieved from http://www.cpgr.org/lal/files/File/uploads/Methods.pdf

NFP. (2013, March). Money For Good UK. Retrieved from http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=2&ved=0CCkQFjAB&url=http%3A%2F%2Fwww.thinknpc.org%2Fpublications%2Fmoney-for-good-uk%2Fmoney-for-good-uk-2%2F%3Fpost-parent%3D7442&ei=XxmGVO7pJ4upgwTcz4GQBg&usg=AFQjCNFFNL2un-IwDK0hSLavxUEPdDsLi

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