Basic Gift Planning Concepts

Basic Gift Planning Concepts

Or What They Didn't Teach George In Law School
Article posted in General Counsel Memoranda on 24 June 1999| comments
audience: National Publication | last updated: 18 May 2011


Charitable remainder trust, charitable gift annuity, or pooled income fund -- which one best accomplishes your clients' personal and philanthropic goals? In this edition of Gift Planner's Digest, University of Rochester planned giving specialist Jack Kreckel reviews the basic planned giving vehicles and challenges gift planners understand every tool in the gift planning arsenal.

by Jack Kreckel

A true story, but the names have been changed?

George is proud of having graduated from a top-ten law school 30 years ago. By reputation alone he has attracted dozens of very wealthy clients, making him a mover and shaker in his upstate New York community.

On a snowy February day, George met with Mr. and Mrs. Clark to review their estate plans. Between sips of coffee, the discussion eventually turned to transfer taxes and philanthropic planning options. George had anticipated this turn in the conversation and confidently suggested they consider funding a charitable remainder annuity trust (CRAT) with a $200,000 gift of appreciated stock. He knew just the bank to manage and administer the trust and offered to call his friends at Friendly Trust Company with the proposal.

The Clarks readily accepted George's proposal. They had both graduated from the University of Rochester and asked George to call me in the development department of the University to discuss the ultimate use of the gift. He agreed and, in fact, was buoyed to be the one to inform the University of its good fortune. Not only was he making the Clarks happy by suggesting a CRAT, but also Friendly Trust and the largest nonprofit in town-or so he thought.

I was delighted to receive the call from George and to review the programs that would benefit from the Clarks' generosity. Ten minutes into the conversation George informed me that the gift vehicle would be a charitable remainder annuity trust managed by Friendly Trust. I was silent long enough for George to pause and ask if I was still there.

Given this specific set of facts, I knew the Clarks could receive superior tax and financial benefits by funding a charitable gift annuity (CGA) with the University and not incur the legal or management fees associated with establishing a CRAT.

I politely asked George if he had considered a CGA. He paused and was chagrined to have to ask what was a charitable gift annuity?

This scenario is not intended to diminish the important role and valuable services that attorneys, trust companies, and other professional advisors play in the planned giving process; but rather, to illustrate the appropriateness of certain planning recommendations in the presence of perhaps more efficient alternatives. However, most experienced fundraisers have stories like this to tell of otherwise skilled attorneys or financial planners who do not know the full spectrum of gift planning concepts.

For simplicity's sake, the following discussion does not reference the tax code, give the logic behind certain rules, or mention esoteric planning options tested only by a private letter ruling. Some other notable concepts are not included largely because they affect so few but occupy the majority of classroom time at conferences. The Planned Giving Design Center offers articles that can provide a more detailed review of the topics outlined in this article.

The "Big Three" Taxes: Income Tax, Capital Gains Tax, and Estate Tax

Income Tax

Federal Income Tax Rates
(All dollar figures represent adjusted gross income.)
15% 0+ 0+
28% $25,750+ $42,350+
31% $62,450+ $102,300+
36% $130,250 $155,950+
39.6% $283,150 $278,450+

Charitable giving is one of the only discretionary ways an individual can reduce federal income tax. The charitable income tax deduction was designed to provide incentive to give, not to leave the donor better off financially. To perform an analysis of the net cost of a gift, the gift planner has to be aware of applicable income tax rates.

It wasn't long ago that the top tax rate was 70% versus the current top rate of 39.6%. This drop in tax rates has increased the net cost of giving for many individuals. Despite this, giving has risen dramatically since the days of a 70% rate. This increase in giving, despite a higher net cost to many donors, serves as evidence that charitable intent supercedes tax planning as an incentive to give.

A few things to remember about the income tax deduction:

  • The charitable income tax deduction only benefits those who itemize.

  • When the nature of the gift to a public charity is cash, the donor is allowed to deduct the value of his/her contribution up to 50% of adjusted gross income. When the nature of the gift includes a long-term capital asset such as stock or a residence, the donor is allowed to deduct the value of the contribution up to 30% of his/her adjusted gross income. A capital asset is considered long-term if it has been held at least one year and a day.

    If the 30% or 50% limit prevents the entire deduction from being claimed the first year, the remaining balance may be carried over for five additional years. The donor may not arbitrarily apportion the deduction over the six-year period. Instead the donor is required to use as much of the deduction as possible each year.

    The donor of a long-term capital asset may elect to exercise the 50% limitation and not the 30%. In this case, the deduction is reduced to the cost basis.

    If the donor is transferring high-basis property, the 50% election may be an attractive option.

  • Rules impacting the deductibility of gifts to private foundations further limit annual deductions and the amount of stock that can be given in any one company.

  • Joint and single filers with an adjusted gross income (AGI) of $126,600 and married filers submitting separate returns with an adjusted gross income of $63,300 will have their itemized deductions reduced by an amount equal to 3% of their AGI that exceeds these amounts. Itemized deductions include, but are not limited to, charitable deductions as well as mortgage interest, state income taxes and real estate taxes. Thus, most individuals impacted by this limitation have other itemized deductions out of their control that are in excess of the 3% threshold; the charitable deduction, therefore, should not be diminished.

Capital Gains Tax

Holding Period Rate As Determined By Adjusted Gross Income
12 months or less
(short-term gain)
same as ordinary income tax rates
12 months+
(long-term gain)
10% or 20%
5 years+
(as of 1/1/2001)
8% or 18%
Exception: Collectibles such as artwork, antiques, and coins will be taxed at 28%.

We have a special relationship with our appreciated assets. We make decisions about what to invest in--we watch the asset grow, helping us to achieve our long-term financial objectives for retirement, vacations, net worth, college education, or that beautiful 30-foot sailboat. This relationship with our capital assets leads to visceral negative feelings toward the impact of capital gains tax on meeting these long-term objectives. It's the one we all like to avoid. In fact, the size of many gifts is determined by the fair market value of a particular capital asset, which is being donated only to avoid the capital gains tax due if it was sold. For example, a donor who wanted to give one share of Berkshire Hathaway A to avoid the gain, talked only in terms of avoiding capital gains tax and not in terms of making an $80,300 gift (the value of the stock in February of 1999).

A few things to remember about capital gains tax:

  • Short-term gain is taxed at ordinary income tax rates. Thus, the donor is less advantaged when compared to donating a long-term appreciated capital asset.

  • The impact of depreciation on a donated asset depends on whether the asset is ordinary income property or capital gain property.

  • If tangible personal property is donated, but not related to the mission of the respective charity, the gain cannot be claimed as an income tax deduction. Thus, the donor's deduction is limited to basis.

Estate And Gift Tax

Taxable Gift Or Estate Tax
$650,001 to $749,999 $211,300 plus 37% of excess over base of range.
$750,000 to $999,999 $248,300 plus 39% of excess over base of range.
$1,000,000 to $1,249,999 $345,800 plus 41% of excess over base of range.
$1,250,000 to $1,499,999 $448,300 plus 43% of excess over base of range.
$1,500,000 to $1,999,999 $555,800 plus 45% of excess over base of range.
$2,000,000 to $2,499,999 $780,800 plus 49% of excess over base of range.
$2,500,000 to $2,999,999 $1,025,800 plus 53% of excess over base of range.
$3,000,000 to $10,000,000 $1,290,800 plus 55% of excess over base of range.
(A $211,300 unified credit eliminates tax on estates of <$650,001.)

For those with taxable estates, federal estate and gift taxes are often sobering incentives to initiate planning.

Those who do not wish to relinquish control over assets during life find a bequest is the avenue of choice for philanthropic expression. It is common to discover an individual who has made provisions in his/her will for seven-figure gifts, but has yet to make a lifetime gift of any kind. Much of the incentive stems from a desire to direct the money to a charity instead of having it fall into the federal government's black hole. Many nonprofits provide added incentive by awarding membership in recognition societies for those who include the organization in their wills.

Legal counsel illustrating the damaging affects of estate tax, working in partnership with charities to outline philanthropic objectives, can be an effective team in preparing a plan for the donor.

A few things to remember about estate and gift tax:

  • The amount sheltered from federal estate tax by the unified credit will gradually increase each year until it reaches $1 million in 2006.

  • The annual gift tax exclusion on $10,000 lifetime transfers from individuals and $20,000 from couples is now indexed to inflation rounded to the nearest $1,000. The unified credit can be used during life to shelter gift amounts that exceed these limits. Transfers to charity are free of gift tax.

  • There is a surcharge of 5% applied to estates between $10,000,000 and $21,040,000 bringing the effective bracket to 55%. After $21,040,000, the surcharge disappears bringing the bracket back to 55%.

  • Capital assets receive a step-up in basis when transferred at death. Heirs inherit the donor's basis if the transfer takes place during life.

  • An unlimited amount may pass to a surviving spouse as long as the spouse is a U.S. citizen.

  • Beneficiary forms should be used to designate retirement plan assets. Wording in a will may be inadequate, thus leading to adverse tax consequences.

  • If a normal life expectancy is anticipated, it is often to the donor's advantage to make transfers during life and benefit from an income tax deduction, as well as experience the joy of giving.

Income, capital gains, and estate taxes dominate tax planning for the majority of donors. Generation skipping tax, corporate tax, and alternative minimum tax issues are not common. In cases where these less common taxes come into play, the donors tend to be significant, and expert counsel should always be sought.

Methods Of Giving: In The Simple Terminology Of The Gift Planner

Outright. An outright gift is available for immediate use by the charity. The donor does not retain a controlling interest in the gift; therefore, the income tax deduction is equivalent to the fair market value of the asset donated. The donor making an outright gift is seeking the highest income tax deduction available and desires to witness the impact of the gift on the charity during his or her lifetime.

Methods Of Giving That Provide Income To The Donor. So often the word "trust" is used erroneously to describe the variety of gift methods that may act like trusts, but in fact are not (e.g., gift annuities). Another common misperception is that a client needs to consider a minimum of $100,000 to fund a life income arrangement. In fact, most charities will fund life income gifts with as little as $5,000.

Because the donor retains a life income interest in the gift, a charitable income tax deduction is limited to the fair market value of the gift minus the present value of the future income stream. The shorter the life income arrangement is expected to last (based on life expectancy and/or term of years), the higher the tax deduction because the present value of the future income stream is less.

Often the individual who funds a life income gift avoids tax on capital gains, increases discretionary income, reduces his or her taxable estate, benefits from an income tax deduction and at the same time accomplishes a philanthropic objective. This is a powerful mix of incentives. Following is basic information on common life income arrangements.

Charitable Gift Annuity. In a history of the charitable gift annuity (written in 1991 by former chairman of the Committee on Gift Annuities, Dr. Charles W. Baas), it is claimed that the first gift annuity contract was consummated in 1843. Since then it has become one of the most common of gifts that provide income back to the donor or other named beneficiary. Often the attraction is its simplicity.

The annuity is a contract that guarantees a fixed income in exchange for a gift. The assets of the respective charity back up the obligation even if the charity decides to reinsure. The minimum gift is typically $5,000, but some charities issue annuities for as little as $1,000. Payments are typically made quarterly. A number of states heavily regulate charitable annuities and require organizations to be licensed in order to offer them. Other states allow only cash or marketable securities as funding assets. Some states do not regulate charitable annuities at all. It is best to check with the respective charity to see if they offer charitable gift annuities.

In the context of Mr. and Mrs. Clark, had the University not offered gift annuities, the charitable remainder trust or pooled income fund would have been the only remaining choices.

Is the annuity rate negotiable? A donor can always request a lower annuity rate, but it's improbable that a higher rate can be successfully negotiated. The American Council on Gift Annuities is a volunteer-led organization that recommends rates. Though these rates are not binding, most charities follow them. A sampling of the recommended rates effective for transfers on or after July 1, 1998 follows:

(Editors Note: New rates are effective for transfers after 7/1/99)

Age(s) Annuity Rate
(7/1/98 rates)
Percentage Of Gift
That Is Tax Deductible*
50 6.3 17.8
60 6.7 26.5
70 7.5 36.1
80 9.2 46
55-60 6.3 14.7
65-70 6.7 24
75-80 7.5 35.6
85-90 9.6 45

*March 1999 discount rate of 5.8% assumed; percentage deductible will change month to month as the discount rate fluctuates.

Annuity payments can be immediate or deferred. By deferring payments, both the annuity rate and income tax deduction increase because the projected present value of payments is less. The impact of deferring payments is illustrated below.

Age For Immediate Payment:
Percent Deductible
Donor, age 60, defers payments until:
Percent Deductible

The number of annuitants cannot exceed two. Tax treatment of annuity payments is determined by the basis of the funding asset. For example, bargain sale rules apply and dictate that a portion of any capital gains is attributed to the gift and a portion to the investment. The portion of gains applied to the investment must be accounted for in equal installments over a period of time equivalent to the life expectancy of the annuitant(s). Return of principal is considered tax-free. The less gain there is to report, the more of the annuity payment will be considered return of principal, and thus tax-free.

Age of Annuitant: 70
Annuity Rate: 7.5%
Gift: $10,000 of stock with a 50% basis
Discount Rate: 5.8%

Tax Schedule of Annuity Payments

Capital Gain Tax free Ordinary Income Total Annuity Payment
1999-2013 201 201 348 750
2014-2014 180 180 390 750
2015-death 0.00 0.00 750 750

Age of Annuitant: 70
Annuity Rate: 7.5%
Gift: $10,000 cash
Discount Rate: 5.8%

Tax Schedule of Annuity Payments

Capital Gain Tax free Ordinary Income Total Annuity Payment
1999-2013 0.00 402 348 750
2014-2014 0.00 360 390 750
2015 onward 0.00 0.00 750 750

Most donors over the age of 75 will find the gift annuity attractive for its high guaranteed payments and simplicity. The contract is typically one or two pages in length.

For more detail on the gift annuity and the latest rate tables, the National Committee on Planned Giving's web site ( links to the American Council on Gift Annuities' web site.

Pooled Income Funds. A pooled income fund is analogous to a mutual fund except the investor, in this case the donor, cannot make withdrawals. Each gift to the pool is assigned units. The income beneficiary(ies) receives quarterly payments for life. The value of these units changes with market conditions. When the surviving beneficiary dies, units assigned to the initial gift (and any additions) are withdrawn and used by the charity as designated by the donor when the gift was made.

Payments are fully taxable for purposes of federal income tax. Many charities offer at least two pooled funds with different investment strategies. The most common investment strategies for pooled funds include conservative bond funds and 60/40 balanced funds. Unlike the gift annuity, income is tied to investment performance and not to the ages of the beneficiaries.

Pooled income funds generally only accept cash or marketable securities. If appreciated stock is the funding asset, tax on capital gain is avoided. The typical donor makes initial gifts to a pooled income fund in the range of $5,000 to $250,000.

The pooled income fund appeals to individuals who prefer variable rates of income that track market conditions. Donors with life expectancies of 15 years or more may be attracted by the growth in principal offered by a balanced pooled income fund.

Charitable Remainder Trusts. Gifts are placed irrevocably in trust with the named beneficiary(ies) receiving a fixed (annuity trust) or variable income (unitrust) for life or term of years not to exceed 20. The income designated for the beneficiary (unitrust or annuity trust amount) has to be at least 5% of the initial value of the trust. Like the gift annuity and pooled income fund, the donor avoids tax on capital gain when appreciated property is placed in trust. Upon termination, the remaining corpus is made available to the remainderman (charity).

Income distributions are taxed to the beneficiary as it is earned by the trust in the following order: ordinary income, capital gain, tax-exempt, and return of principal. This is commonly referred to as the four-tier system of taxation. If low-basis stock is used to fund a trust, the trust inherits the donor's holding period and basis. When the stock is sold by the trust, it may take a number of years to recognize the gain, even if the trust is distributing tax-exempt income. In other words, the trust may be receiving tax-free income, but it will be taxable to the beneficiary if there is still gain to distribute from when the stock was sold by the trust.

Why would someone fund a CRT instead of a pooled income fund or charitable gift annuity?

  1. If the funding asset is hard to value, such as closely held stock, an apartment complex, tangible personal property (no income tax deduction in this case), or vacant land. In general, pooled income funds and gift annuities cannot be established with these assets, and the CRT is the only option.

  2. CRTs can have numerous beneficiaries (more than two) and variations on term (e.g., life, then term of years) neither of which are commonly allowed in the case of gift annuities nor pooled income funds.

  3. In general, if the gift is more than $250,000, a charity will be reluctant to place it in a pooled income fund or annuity reserve fund due to respective investment restrictions. Many trustees judge it prudent to manage a trust of this size with a well-defined investment strategy concurrent with risk and income obligations.

  4. If the trustee anticipates the trust will be invested in tax-exempt bonds, the CRT is the only option.

  5. A CRT is more flexible for estate planning purposes, especially when a testamentary life income gift is contemplated.

A few things to remember about life income gifts:

  • When the income recipient is someone other than the donor or spouse of the donor, and is a U.S. citizen, there will be gift tax considerations.

  • If stock is used to fund a gift annuity, and the owner is not the first annuitant, there may be an immediate capital gains tax liability to the donor.

  • The charity does not benefit from the gift until the surviving beneficiary dies. This may result in the charity awarding only partial credit for campaign purposes.

  • There are commonly no management fees charged against a gift annuity contract or pooled income fund account.

  • The income tax deduction calculated one month might vary the next month because of changing variables including the discount rate. The discount rate equals 120% of the mid-term Annual Applicable Federal Interest Rate (AFR) rounded to the nearest two-tenths of 1%. The PGDC refers to this as the Charitable Federal Midterm Rate (CFMR). When calculating the deduction, the CFMR for the month the gift is made or for either of the previous two months may be used. The CFMR is a projection of what the charity will earn on the trust before it terminates. The rate has no impact on the pooled income fund calculation.

  • There are limits placed on CRT payouts that are designed to assure that at least 10% of the contributed value is left for charity.

Non-Grantor Lead Trusts: Income To The Charity And Corpus To The Heirs. If a donor is in one of the highest estate tax brackets and is able to give up control of significant assets, then a non-grantor lead trust may be the ideal method of giving. Most commonly, the donor funds the trust with income producing assets that are ultimately earmarked for heirs. Income flows to a designated charity for a predetermined term, after which, the trust assets pass to heirs free of transfer tax on appreciation realized since the trust was established. The taxable transfer is also reduced by the present value of the distributions to charity as calculated when the trust was established.

The ideal funding assets include cash, high-basis securities, or income producing real estate. Once the cash or high-basis stock is placed in trust, reinvestment will be made that allows for the greatest appreciation while meeting the payment obligation to charity. Remember that the main goal of a non-grantor lead trust is to pass along as much appreciation as possible to heirs free of transfer tax. Non-grantor CLTs are also commonly established on a testamentary basis and used to leverage the GSTT exclusion.

CLTs can be very complex, and there are other variations besides the one described here. Grantor CLTs can accomplish income tax planning objectives, while the more recent "Super-CLT" can produce income and gift tax benefits. If you have a client in the highest income and estate tax brackets, the CLT is worth a very careful look. Bargain Sale. A bargain sale is the deliberate sale of an asset for less then the appraised value. The difference between the sale price and appraised value is the income tax deduction. This is part gift and part investment. Therefore, a portion of the gain on the donated asset is reportable but the portion attributed to the gift is not. For example, if a property valued at $100,000 with a 50% basis is sold to a charity for $40,000, the income tax deduction is $60,000 ($100,000 - $40,000). The reportable gain is $20,000 (40% of $50,000 gain). It's important that a qualified appraisal establish value, and that the donor put in writing the intention to sell the property for less than the appraised value. The most common asset in a bargain sale situation is real estate.

Gift Of Residence With Retained Life Use. Most often the donor considering a gift of residence with retained life use is an individual above the age of 80 who does not want to move, but is concerned about how an executor will manage the sale of a primary residence or vacation home. Estate taxes are often an additional concern for such an individual.

A primary residence or vacation home is given to charity, but the donor, or other designated individual, retains the right to live in it. All maintenance costs remain the responsibility of the individual living in the home. An income tax deduction for a portion of the appraised value is granted, and the home is removed from the estate. In addition, the donor no longer has to be concerned about how the home will be managed after death. If the individual retaining the interest leaves the home before death, the balance of the life interest can be sold or given to obtain another income tax deduction.

This gift is a personal favorite of mine. The donor can make a substantial gift but not experience a change in lifestyle.

Bequest. According to Giving USA (1998), 8.8% of the $143.46 billion donated in 1997 was in the form of bequests. The number is so high partly because bequests are an easy way to meet philanthropic goals. All of the gift methods mentioned above can also be made by bequest (testamentary). Most bequests are expressed as a percentage of the residual estate. Tough privacy issues compel most donors not to inform charities of respective bequest provisions; however, it is best to have charities informed to guard against inappropriate designations.

Retirement Plan Assets. Not all assets are treated the same. Perhaps the most "ill treated" from a gift or estate planning point of view may be assets in a retirement plan. During life, withdrawals are subject to income tax and potential penalties. At death, they are subject to both income and transfer taxes.

For estate planning purposes, retirement plan assets are the assets that should be designated to fund bequests to charity. In so doing, both income and estate taxes are avoided. Beneficiary forms drive designations to charity and should work in concert with provisions spelled out in a will. Naming a charity as beneficiary will impact required minimum distributions; thus, they have to be carefully considered.

Assets. My experience has taught me that an increased awareness of the assets that can be given is one reason for increased giving from year to year. This manifested itself in a memorable conversation I had with an older donor. I suggested a gift of her home, and she responded by saying that she had never thought of that possibility despite being a cash donor for many years. She made the gift.

Listed below are assets most commonly given. This is not a comprehensive list but represents the range of gifts of the vast majority of donors.

  • Cash
  • Common Stock
  • Privately Held Stock
  • Real Estate
  • Paid-up Life Insurance Policies
  • Tangible Personal Property
  • U.S. Savings Bonds

Donors must attach qualified appraisals to their income tax returns for gifts to charity worth more than $5,000 ($10,000 for transfers of closely-held stock). For gifts of marketable securities, no appraisal is required. The cost of the appraisal is deductible, but as a separate miscellaneous itemized deduction.


While this article is intended only to scratch the surface of discussing the many vehicles and options that are available to gift planner's and their clients, its message is to encourage planners to understand and evaluate all of the planning options available to their clients and to deliver the most efficient recommendation to accomplish the client's personal and philanthropic planning objectives. In that connection, planners and their clients might be well served in contacting the planned giving office of the organization(s) they wish to benefit to ascertain the types of gifts and planning vehicles the organization offers and accepts, along with the resources and services they offer advisors to implement such plans.

Finally, what became of Mr. and Mrs. Clark, the donors whom George and I worked with in February? Well, they have funded the charitable gift annuity and are now considering a second!

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