Deferred charitable giving provides flexibility for donors Tax Matters by David A. Katzman If you would like to make a tax-advantaged gift to a charity but you need the income from these assets during your lifetime, there are options that accommodate both needs. Generally, gifts of cash, securities or both are acceptable as deferred charitable gifts. The most common deferred charitable gift is the pooled income fund. These funds resemble mutual funds in that your money is pooled with gifts from other donors. The money is then invested and you receive a distribution of the income earned by the fund. Upon your death, your designated charity is allowed to withdraw the remaining amount of your gift. The income you receive is generally paid quarterly, is based on the returns earned by the fund and is taxed at your ordinary income tax rate. Your tax savings come in the first year, when you are eligible to take an immediate tax deduction for your gift. However, the amount you are allowed to deduct is not the full value of your donation. Your actual deduction is based on a calculation combining your age and the fund’s highest return during the previous three years, which is designed to determine the present value of the gift. The risk to this type of gift is the market risk you assume regarding ongoing income. Distributions are based solely on the fund’s investment success. In today’s economic climate, distributions could be non-existent so you may not receive income. If you would prefer to keep your gift separate from other donor’s gifts, you have a few additional deferred giving choices, including a CRUT, a CRAT and a charitable gift annuity. A CRUT is a charitable remainder unitrust, which is a separate investment fund, which will become your designated charity’s property upon your death. A CRUT also provides an immediate tax deduction based on your gift’s present value. Because this type of fund is handled individually, many charities cannot accommodate CRUTs unless your donation is sizeable. In this type of fund, you still assume financial market risk. CRUTs allow you to designate the annual percentage of the fund’s value that will be returned to you as income for life. For example, if your fund’s fair market value is $100,000 and you set an annual return of five percent, you would receive an annual income of $5,000. If the fund’s assets appreciate or decline the next year, however, your income grows or shrinks accordingly because the rate of return is a set value. A CRAT is a charitable remainder annuity trust. The difference between this and a CRUT is that a CRAT allows you to set a fixed dollar amount of your annual return, generally based on an age-based table. If you made a $100,000 gift to a CRAT and designated that you should receive $5,000 annually for life, the fund would sell some assets to meet this requirement, if necessary. However, if the fund earned more than the designated annual amount, the excess earnings are retained in the fund. Your immediate tax deduction for a gift to a CRAT is calculated according to your age and the dollar amount designated as an annual payment. A charitable gift annuity is a third option. It works in much the same way as a commercially purchased annuity. You are entitled to a set annual return, which is not dependent on returns and is not negotiable, such as for a CRUT or a CRAT. A charitable gift annuity allows you to take an immediate tax deduction for any amount you paid that exceeds the established value for an equal commercial annuity. The deduction amount is based on an Internal Revenue Service (IRS) table. Then, a portion of each year’s income payment, based on your life expectancy, is also tax-free because the IRS allows you to recoup the original cost of your gift over the course of your remaining lifetime. While deferred charitable giving may not be viable for all taxpayers, the many options available can be a valuable way for some taxpayers to provide for a charity while retaining rights to some ongoing income from their assets. David A. Katzman is a certified public accountant licensed to practice in the State of Florida and the Commonwealth of Massachusetts. He is also a certified financial planner and certified senior advisor. Please consult your tax advisor for details and assistance in applying this general information to your specific situation.