Ten Charitable Planning Mistakes to Avoid

Ten Charitable Planning Mistakes to Avoid

Article posted in Compliance on 19 July 2002| comments
audience: National Publication | last updated: 16 September 2012


In this edition of Gift Planner's Digest, Vaughn W. Henry and Johni Hays, advisers specializing in trusts and estates and gift planning, discuss ten charitable planning mistakes that tax practitioners should avoid in designing and implementing charitable trusts of different stripes.

by Vaughn W. Henry and Johni R. Hays, JD, CLU

Vaughn W. Henry is an educator, consultant, and estate planner for family-owned businesses, corporations, and charitable organizations. He is recognized as an outstanding educator and lecturer on a variety of topics, including computerization of small businesses, staff training, improved management of operations, and designing multi-generational programs to pass business assets to heirs. Mr. Henry advises charitable organizations on planned giving and has a client base ranging from Forbes 400 families to some of the largest corporations in the United States. He provides workshops to many professional advisors and planned giving groups, has a consulting and estate planning practice, and holds insurance and securities licenses. He is associated with the National Association of Philanthropic Planners, the Sangamon Valley Estate Planning Council, and the Central Illinois Planned Giving Council. Mr. Henry is located in Springfield, IL and can be reached at VWHenry@aol.com and http://gift-estate.com.

Johnine (Johni) R. Hays, JD, CLU is the Director of Advanced Markets for AmerUs Life Insurance Company in Des Moines, Iowa. She is the co-author of the book The Tools and Techniques of Charitable Giving, National Underwriter Company, Cincinnati, Ohio, 2001, and she has published articles such as Charitable Planning Cuts Tax Bite on IRAs, National Underwriter, March 6, 2000, and Charitable Giving Using Life Insurance, Broker World, December, 1999. Johni frequently lectures to groups on estate and charitable planning, business succession planning, life insurance, executive benefits, pension/IRA distributions, annuities, as well as income, estate and gift taxation. Johni founded the charitable giving program at AmerUs Life and produced the first charitable giving marketing presentation package for them. Johni is a Chartered Life Underwriter (CLU) and a Fellow of the Life Management Institute (FLMI). She has been a member of both the Iowa Bar and the Florida Bar since 1993. Johni can be reached by telephone at: 515-242-4439.

This article highlights specific areas of the charitable planning process where mistakes seem to re-occur based on the authors' combined experiences as charitable planning consultants. Believe it or not, newcomers to the field of planned giving aren't the only ones making mistakes. By sharing real-life situations, the authors hope to provide practical experience and knowledge from the trenches, not from the painful school of hard knocks, but via the less painful route, "only a fool learns from his own mistakes."

Not Putting the Donor's Interests Ahead of All Others

As planners work together as a team to recommend a charitable plan for clients, it is imperative to always put the client's interests before the attorney, the CPA, the agent, and yes, even before the charity because if the gift is not in the donor's best interests, it will never be in the charity's best interest either. It seems like a statement of the obvious. But sometimes a plan can seem so good, the planner doesn't want to throw water on the proposal by bringing up the possible downsides.

A case in which the planners went a step further down the wrong path by intentionally omitting relevant information the donors needed to make an informed decision was Martin v. The Ohio State University Foundation.1 In that case, the donors of a net income unitrust with a make-up provision (NIMCRUT) sued their life insurance agent, the life insurance company, and the charity that also acted as the NIMCRUT's trustee. An attorney and an insurance agent proposed a charitable plan to a couple that included the donation of $1.3 million of undeveloped farmland to a NIMCRUT. The donors would use income from the NIMCRUT to purchase a $1 million life insurance policy costing $40,000 per year for wealth replacement for the donor's children.

The donors received several proposals over the course of a few months. Each and every proposal showed the NIMCRUT paying the donors income immediately after the execution of the NIMCRUT. Since the donor's annual income prior to the transaction was only $24,000, the donor was counting on the trust income to pay the insurance premiums.

The charity's representative wrote a comment on the last proposal shown to the donors that a net income trust funded with non- income-producing land cannot make any income payments until after the land is sold. When the insurance agent saw the comment on the proposal, he deleted it before giving it to the donors. Unfortunately, the land was not sold until two and a half years later and no income was paid to the donors during that time. In the meantime, the agent tried to loan the clients enough money to pay the insurance premiums. But in the end, the policy lapsed. The donors sued for fraud, negligent misrepresentation, breach of contract, and breach of fiduciary duty asserting they had never been told the truth about income not being payable from the NIMCRUT until after the land was sold.

In the Martin case, the advisors failed to give the donors accurate and complete information as to how the charitable gift would work in their situation. They intentionally deceived the clients for what appears to be their own financial gain. At all times and in all aspects of planning with clients, the goal must be to provide advice that is in the clients' best interests. Clients deserve objective, comprehensive, and accurate advice from their planners even if it prevents the charitable gift from occurring.

Misconstruing the Financial Impact of Charitable Gifts

Some planners tend to sell a charitable gift as if it were a financial product. But a charitable gift is not a product; it must be considered part of an integrated estate and charitable planning process. To illustrate, one planner wanted to set up a charitable remainder annuity trust (CRAT) for an older client funded with farmland. The planner had a fixed annuity he wanted to sell to the trustee using the proceeds from the land. The planner was under the impression the trust was required to purchase a commercial annuity since it was a charitable remainder "annuity" trust. The planner was then counseled on how a well-balanced mutual fund might be a more suitable vehicle for the proceeds. The planner responded that he wasn't licensed to sell mutual funds.

Upon further learning that the annuity would produce "tier one" ordinary income at the client's marginal income tax bracket of 42 percent, the planner replied that since his client would be obtaining a large income tax deduction, he could afford to pay more in income taxes.2

Sadly, this situation demonstrates a product-selling planner who isn't mindful of the downside of recommending a charitable remainder trust (CRT). The planner did not ascertain his client's charitable interests. Instead, he recommended the concept as a means to avoid or even evade capital gains taxes when, in fact, it would potentially increase his client's tax liabilities. The recommendations made for this plan were not in the client's best interests and could be considered malpractice on the part of the planner.

Serving As Trustee

Another misstep can occur during the charitable planning process when the advisor serves as the trustee for either the client's life insurance or charitable trust. Financial planners, brokers, and insurance agents need to be extremely cautious when asked by their clients to serve as the trustee. The best answer to give a client is "No, thank you." Serving as trustee can create a serious conflict of interest if the trustee benefits in any way through any transaction with a charitable entity, not to mention SEC problems if the agent or broker has a securities license.

If the life insurance agent is selling the policy to the trustee when he also serves as trustee, he is selling a product to himself for which he earns a commission using someone else's money. It is a conflict of interest and it is best to leave the trustee's duties to a trust professional.

Generally, nonlegal advisors are not well trained in the duties imposed on the trustee as a fiduciary. Moreover, nonlegal advisors are generally not trained to understand the language used in trust documents and what each paragraph means in layman's terms. Moreover, most insurance companies will not allow their agents to act as trustees for trusts funded with their own insurance policies. Additionally, most errors and omission malpractice coverage does not cover acts by an insurance agent acting as a trustee.

Even attorneys are reluctant to serve as trustees because attorneys know all too well the complex duties involved when acting as a fiduciary and following the prudent investor rules. One trust officer, who found out too late what the trustee's duties are, served as the trustee of a testamentary CRAT. He asked how long he could wait to begin making payments to the income beneficiaries as the land inside the CRAT hadn't sold and there were no other assets inside the trust. Three years later, the income beneficiaries still hadn't received their first income payment from a trust that has no legal recourse but to distribute income or assets annually, whether those assets are liquid or not.

Donating Inappropriate Assets

A charitable planner can find himself in an uncomfortable position when he is unfamiliar with the consequences of making gifts using various assets. The tax rules covering charitable deductions for different kinds of assets can be complex, so the best way to prevent these types of mistakes from happening is to know the rules for each type of asset.

To illustrate, one planner suggested a client donate art worth $3 million to a charitable remainder unitrust (CRUT) requiring a 10 percent income payment. Even though the client properly executed the CRUT, the client continued to display the artwork in his home. The planner mistakenly thought the charity would advance the 10 percent income payment to the trust each year. He did not know the artwork couldn't be kept indefinitely on display at the client's home.3 To make matters worse, the charitable deduction was not based on the artwork's fair market value -- although the planner told the donor her deduction would be based on FMV -- but instead the deduction for tangible personal property that has no "related use" to the trust was based on the donor's much lower cost basis.4

Another planner was working with a client whose only other asset aside from $75,000 of mutual funds was a $350,000 IRA. The planner didn't realize the entire IRA would be subject to income taxes and possible penalty taxes if the client donated it to a charity in exchange for a charitable gift annuity.5 Adding to the misunderstanding was the offending charity's IRA donation "proposal" which failed to adequately disclose the disadvantages of using an IRA for an inter vivos charitable gift under current tax laws. (As a side note there is proposed legislation to allow IRAs to be given to charities during the donor's lifetime without creating a taxable event. See Senate bill S. 1924.)

A financial planner, who also wasn't aware of the consequences of donating the specific asset he recommended, knew his client was coming into a large sum of money soon from the sale of his business. The planner recommended that his client quickly donate the business to a CRT to help his client avoid taxes. Later, the planner discovered the client had actually sold his entire business five years earlier and this large sum of money was the final payment in a series of installment payments for the buyout.

Sidebar: Donating Various Types of Assets

These assets need extra special handling:
Encumbered real estate
Closely held "C" corporation stock
Tangible personal property, including artwork
Restricted (Rule 144) stock
Stock with a tender offer in place
Sole proprietorships, partnerships, and on-going businesses
"S" corporation stock

These assets should generally be avoided in charitable gift planning:

Property with an existing sales agreement
Installment notes
Stock options (both qualified ISO and nonqualified stock options)
Lifetime transfers of IRAs and Qualified Plan dollars
Lifetime transfers of commercial deferred annuities
Lifetime transfers of savings bonds

Reinvesting CRT Assets Improperly

Often, a charitable trust is set up by a financial advisor or insurance agent with the expectation that the donor, who often serves as trustee, will look to the advisor or agent to reinvest the proceeds of the gifted asset once it's sold. While there is nothing wrong with this, advisors need to be educated on the complexities associated with prudent investor rules, charitable trust accounting, tax deductions, and other charitable rules before they can fully understand the consequences of their recommendations.

An example of improperly invested CRT assets occurred when a planner recommended his middle-aged donor establish a CRAT. Inside the CRAT, the donor-trustee bought a "life-only" single premium immediate annuity to "guarantee" the annuity income payable to the income beneficiary. The flaw underlining this transaction is that the charity would be left without any assets when the trust terminates, as a single premium immediate annuity for "life only" will end upon the death of the client with no principal balance left over. This recommendation would make the trust subject to oversight by the state's attorney general for imprudent investment and all its advisors are potentially liable to the charity. The planner didn't realize a CRT is a split interest gift, and there are two beneficiary groups with a legal interest in these tools. So, the trustee must wear two hats, one for the income beneficiary and one for the charity.

To compound an already unpleasant situation, when the planner was told about the flaw in his proposal, he and the lawyer argued that the trustee's purchase was valid because the trust "passed the 10 percent test."6 They didn't understand the difference between the 10 percent test in terms of obtaining a charitable deduction and the subsequent problems inherent in investing CRT assets improperly.

Another planner, who also recommended a similar plan, suggested his trustee purchase a life insurance policy to pay the charity its portion when the immediate annuity payments end. However, this plan was similarly destined for failure, as the CRAT cannot accept ongoing contributions to pay a lifetime of insurance premiums.7

Improper investing occurred with a stockbroker who chose to invest his client's CRT funds with several partnerships, creating unrelated business taxable income (UBTI) in the first year of the CRT's existence. This choice created a taxable CRT that does not avoid the capital gains liability when the appreciated asset that funded the CRT was sold.8 In addition, there was no income tax deduction to offset the reinvestment error, compounding the harm from the broker's poor advice.

In the case of Henry E. & Nancy Horton Bartels Trust v. United States, the Bartels established a supporting organization under section 509(a)(3) for the University of New Haven.9 As trustees, the Bartels invested in securities using funds borrowed from their stockbroker. The court found the income derived from securities purchased on margin to be UBTI.

Other mishaps have occurred when the trustees were given access to a charge card on a money market account held inside a CRT. Trustees with charge cards on CRT assets open up self-dealing and debt-financed problems similar to trading on margin accounts and charging the CRT interest on the loan when the trades do not materialize as expected.

If a planner "sells a CRT" as a way to take assets under management or sell wealth replacement, it is not unethical but it can be shortsighted. It's also likely to result in unhappy clients who find themselves stuck with an irrevocable plan that does not meet their needs. Agents and planners who recommend charitable gifts must be knowledgeable of charitable gift laws and be prepared to pull in a team of experts to implement a plan in the donor's best interests.

Learn from the mistake of an insurance company that allowed a commercial deferred annuity to be removed from inside a CRT. The CRT's trustee was the owner and beneficiary of the annuity and the husband was the annuitant. At the husband's death, the death claim papers were sent to the surviving spouse who checked the box on the claim form allowing the surviving spouse to change the ownership of the annuity to her own name as an individual. She then withdrew all the interest earnings in the annuity. The error wasn't caught until the spouse complained of the large IRS Form 1099 she received the following January for the interest income she received. This is a problem with NIMCRUTs using a deferred annuity when the insurance company incorrectly sends out a Form 1099 to the annuitant, instead of to the tax-exempt CRT, while the CRT is properly issuing a K-1 for the same income distributions, thus doubling the income tax exposure.

Understanding the four-tiered system of accounting in a CRT is daunting.10 Often planners may not fully comprehend all the issues involved. This leads to mistakes. For instance, one attorney counseled his client to fund a CRT with farmland. He had the trustee purchase tax free municipal bonds after the land sold to obtain tax- free income from the CRT. However, what the professional didn't realize is how the capital gain income from the sale of the real estate is higher on the four-tier accounting system than any new tax- free income generated by the municipal bonds. Understandably, the client was quite unhappy when the income wasn't "tax-free."

Professional trustees can get themselves into trouble as well. In the case of In re Estate of Rowe, the trustee of a charitable lead trust was replaced via a court order for failing to diversify IBM stock.11 The decedent established an 8 percent lead trust in 1989 with 30,000 shares of IBM stock worth approximately $3.5 million. Eight years after the trust was initially funded, the trust still owned 20,000 IBM shares, now worth $1.9 million. The court noted the bank failed to follow its own policy manual of diversification and ordered the bank to refund its commissions and pay damages totaling $630,000. The court found the bank to be negligent and that it acted imprudently in failing to diversify the trust's assets immediately upon receipt of the stock.

Not Monitoring the Wealth Replacement Sale

A charitable planning case can be effectively implemented with the appropriate professionals including the client's attorney, CPA, planned giving officer, and the life insurance agent. However, in charitable plans where life insurance is a part of the overall plan, the purchase of life insurance inside an irrevocable life insurance trust (ILIT) should be monitored by the donor's estate planning attorney. Attorneys should direct the process and clearly indicate to the donor, the trustee, and the life insurance agent how the process should work and in what order each step should occur. Otherwise, what can happen is the insurance sale can be implemented in a way that undermines the donor's estate plan.

The following are life insurance missteps that can cost clients hundreds of thousands of dollars in estate or gifts taxes.

  • The insurance policy is issued prior to the life insurance trust's implementation. This occurs when the insurance company issues the policy before the irrevocable trust is executed and funded. If the policy is applied for before the trust is executed, it is commonly applied with the insured as the policyowner. If that policy is issued with the insured as the owner, and then the ownership is thereafter transferred to the irrevocable trust, the transfer within three years of death rule occurs causing the policy to be pulled back into the insured's estate if he or she dies within three years of the transfer.12
  • It is a preferred practice to have the donor's insurability determined using "trial" applications. But once insurability is approved, the policy should not be issued until the ILIT is executed, funded, and Crummey withdrawal power letters have been sent to trust beneficiaries and the Crummey powers lapse.13 At that point, the agent submits completely new applications with the trustee as the owner and beneficiary. The trustee then pays the premium to the agent and the policy is then officially issued.
  • The insurance agent accepts the premiums directly from the insured and applies those premiums to the policy owned by the ILIT. The proper procedure requires that the agent obtain the premium check from the trustee's funds, not from the insured's personal funds, when the trust beneficiaries have withdrawal powers. The goal is to have the trust funded and the withdrawal beneficiaries notified and their rights to those annual exclusion gifts lapse prior to the trustee paying the premium.
  • If, on the other hand, the agent obtains a premium check directly from the donor's personal funds, the premium amount is not considered a gift of a present interest since the trustee never had the funds, nor have the beneficiaries been notified of their withdrawal rights.14 Therefore, their gifts cannot qualify for annual exclusion gift amount. The insured must file a gift tax return for these gifts and use part of his estate tax exemption equivalent of the unified credit -- currently $1 million -- to cover the premiums.15

Selling the Numbers on a Charitable Illustration

The various illustrations from charitable planning software vendors are generally provided to prospective donors to give them diagrams or flowcharts to describe the type of charitable gift being presented. The mistakes made when presenting these illustrations arise from a misunderstanding of the variables behind the illustration. For example, a common mistake is to create a CRT with the donor, spouse, and child as income beneficiaries, and the illustrations are printed without any cautionary words about the loss of the marital deduction and the effect of taxable gifts with a CRT being included in the trust maker's estate. The software produces the correct "income tax deduction," but does not address the more complex gift or estate tax issues.

The charitable planner must know the variables that produced these calculations and numbers. The planner must know and understand the footnotes and assumptions behind every proposal. With a CRT, for example, the planner needs to know what interest rate is being used to assume the future growth of the CRT's assets. In addition, the interest rate must be a reasonable number. In turn, the planner must inform the client of the variables used in the illustration. The client must know what numbers he can rely on and those he cannot. It's an education process. The more the client knows and understands, the better informed and happier the client will be.

Selling Charitable Gift Annuities

Planners new to the field of charitable giving frequently have a misconception surrounding charitable gift annuities. Since planners may sell commercial annuities to clients for commissions, they sometimes assume that a charitable gift annuity is an annuity offered for sale to the public from their insurance company.

However, a charitable gift annuity is not a commercial annuity offered by a life insurance company. It can be offered only by a charity and is an agreement between a donor and a charity in which the donor gifts an asset in exchange for lifetime income for the donor. The income provided to the donor from the charitable gift annuity is always paid by the charity.

This misconception is best illustrated by a young planner who was asked to work with a particular charity's donors to conduct seminars and help establish charitable gift annuities. The planner thought the insurance company had an annuity for him to sell at the seminar and that he would be earning a commission on each charitable gift annuity "sold." The agent asked if these donors would be bringing their checkbooks to the seminar and if these gift annuities are mostly "one-interview sales."

To make the confusion even worse, a few charities are under scrutiny for their practice of paying advisors a "finder's fee" for bringing clients to establish a charitable gift annuity with them.16 Not only are these practices considered highly unethical by some professional advisors, but they also may violate the Philanthropy Protection Act of 1995. An advisor cannot help fulfilling the donor's charitable mission and values by giving donations to causes in which the client feels strongly if the advisor steers all potential donors to only one charity -- the one that will pay him a finder's fee.

Drafting Errors or Unknowingly Practicing Law Without a License

Improper use of formbooks or software can generate trouble. One attorney who hurriedly drafted a trust for his client found this out the hard way after inserting boilerplate language from a forms book. The language gave the trustee of the CRT the power to pledge trust assets and to borrow funds. Those powers put the exempt status of the CRT at risk.17

Another drafting error occurred when another attorney used the wrong trust form in his word processing program and drafted a NIMCRUT for his clients instead of a standard CRUT. When the clients' CPA informed the clients they shouldn't have been taking a fixed 7 percent amount, they immediately went to their attorney to see what went wrong.18

A different error occurred when a CRUT was drafted giving all of the investment powers to the "investment counsel" and none to the trustee. Since IRS regulations prohibit restrictions on the trustee's power to invest trust assets, the IRS found the trust did not qualify as a CRT.19

One client who intended to leave the bulk of her estate to a private foundation controlled by her family found out that the trust was drafted to limit the receiving charity to a public charity, hence eliminating her private foundation as a charitable recipient. Fortunately, the IRS allowed a reformation after noting it was due to the correction of a drafting error.20

In Estate of Kenneth E. Starkey v. United States, the lawyer drafted a testamentary trust for the benefit of a church and a college.21 Unfortunately, the language used to describe the church was "missionaries preaching the Gospel of Christ," which the court found provided for an unspecified class of beneficiaries and hence did not comply with the requirements of section 2055. The document did not contain language or express an intent that would allow it to qualify for a charitable deduction, hence losing a $1 million charitable deduction. The decedent's son was the lawyer who did the drafting and the court noted he "never claimed to have any estate or charitable planning expertise."

The unauthorized practice of law can be committed by a nonlawyer when that person provides legal advice to another or prepares or approves legal documents for others.22 The unauthorized practice of law can occur in charitable and estate planning through the misuse of computerized legal documents also known as "specimen" documents.23

The reason for providing specimen documents is so the planner can bring something to the planning process as a "value added service" for the client's attorney. These sample documents are intended for use by the client's attorney when that attorney may not be an expert in the field and could use a "starting point" in drafting. It is a way for the agent to be professional and helpful in the planning process.

Unfortunately, the planner or the client can misuse these specimen documents. Some nonlawyers have asked if they can "just fill in these blanks" because their client doesn't want to pay an attorney. Whether it is a specimen life insurance trust or a CRT, many costly errors have been made when a nonlawyer or donor takes the position that one document fits all and fills in the blanks of a specimen document. Further, many of these specimen trust agreements are ineffective as they are based on IRS prototype documents that are overly rigid and don't provide donors with the flexibility to create a legitimate planning tool that meets their unique needs.24

Lack of communication among all parties involved led to an erroneously drafted trust document that should have been a NIMCRUT but was drafted as a standard CRUT. The error occurred when the planned giving officer of the charity provided the attorney with a specimen document of a CRUT after the clients indicated to the planned giving officer that they wanted a NIMCRUT over a CRUT.25

Charitable gifts are complex, and the laws with respect to charitable giving as well as property law can and will vary by the donor's particular state law. Specimen documents do not take into account any state law nuances. In fact, for this very reason, the practice of providing specimen documents to planners has caused enough litigation to stop some insurance companies from supplying these documents.

Recommending Aggressive Charitable Techniques

Planners could seriously harm their professional reputations when they are involved in aggressive planning techniques and later the IRS or the courts condemn the plan they once recommended. One of the most recently promoted aggressive charitable planning arrangements was charitable reverse split dollar. This was an idea whereby the donor purchased a policy and had the death benefit split between the charity and the donor's family. However, the donor took a charitable deduction for the entire premium knowing that the donor's family would personally benefit from this transaction. In 1999 Congress ended charitable reverse split dollar arrangements (P.L. 106-170, the Tax Relief Extension Act of 1999) and the IRS handed down some severe penalties in Notice 99-36, 1999-26 IRB 3. (For the text of the Notice, see Doc 1999-20718 (8 original pages) or 1999 TNT 114-5.)

Some life insurance companies refused to accept or underwrite business from their agents if this concept was behind the life insurance sale. Other companies accepted the life insurance premiums without passing judgment on how that business came to the insurance company or how the agent advised their clients on tax deductibility.

Even though legal use of this technique was ended by the 1999 legislation, some of its promoters are still using the concept. The latest version of the technique uses a CRT that owns life insurance under the guise that the donor-income beneficiary is an "employee" of the CRT. The trust is employing the donor-income beneficiary, and under this employment theory the charitable plan is promoted to fall outside the split-dollar funded life insurance prohibiting legislation.26 However, this plan may raise self-dealing issues that will be sure to capture the attention of the IRS.

Another charitable scam includes the "lease-purchase" of insurable interests. A charity is approached about the purchase of life insurance inside its life insurance trust, but with a twist. The donor agrees to allow the charity to purchase a $200,000 life insurance policy on his life. The goal is to obtain 1,000 insureds within 30 days and create a $200,000,000 trust. The kicker is that the insureds are guaranteed that they will never make a cash gift or premium payment to the charity's trust. All premiums are paid by a "good fairy" third party. When the trust reaches its goal, the good fairy determines the discounted value of the trust and pays the charity approximately $2,000 per insured -- say $2 million in total. As the insureds die, all the insurance proceeds are paid to the third party.

What is really happening, of course, is that the third party- good fairy is using the charity to create an insurable interest on 1,000 people's lives -- where there was no insurable interest. Entering into an arrangement that benefits a third party could cost the charity its tax-exempt status since the charity is greatly aiding in the private inurement of the third party.

From the third-party's perspective, look to the Better Business Bureau's Web site ( www.bbb.org/library/giftingclub032000.asp), which cautions the public about "gifting clubs," which is a third party's pyramid scheme. To join a gifting club, individuals are asked to make a contribution to the top-ranking members of the gifting club. People are then encouraged to bring in other members to advance themselves up the pyramid. Pyramid schemes frequently pay off only those who create the scheme, leaving many "investors" with nothing.


This article has attempted to demonstrate the pitfalls that planners want to avoid as they work to help clients in the area of charitable planning. Clients need complete disclosure of the advantages and disadvantages of the plan being proposed. Well- informed clients tend to be appreciative of the extra effort. Take the extra time and make sure the clients' charitable plan is proposed with the clients' best interests first.


  1. Martin v. The Ohio State University Foundation, 139 Ohio App.3d 89, 742 N.E.2d 1198 (2000). See also LTR 200219012, Doc 2002-11412 (8 original pages) [PDF], 2002 TNT 92-7 , where the IRS allowed a rescission of a CRUT where the donors were erroneously told by the charity that no distribution was required to be made from the CRUT until the trustee sold the donated stock.back

  2. Section 664(b).back

  3. Section 170(a)(3); Rev. Rul. 69-63, 1969-1 CB 63.back

  4. Reg. section 1.170A-4(b)(3)(i).back

  5. Section. 72(t).back

  6. Section. 664(d)(1)(D).back

  7. Reg. section 1.664-2(b).back

  8. Section. 664(c).back

  9. Henry E. & Nancy Horton Bartels Trust v. United States, 85 AFTR 2d 2000-1352 (2d Cir. 2000), Doc 2000-11212 (19 original pages), 2000 TNT 75-7.back

  10. Section 664(b).back

  11. In re Estate of Rowe, 712 N.Y.S. 2d 662 (Sup. Ct. 2000).back

  12. Section 2035(a).back

  13. Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968), 1995 TNT 38-88.back

  14. Reg. section 25.2503-3; Crummey, 397 F.2d 82 (9th Cir. 1968).back

  15. Section 6019.back

  16. November 2, 2001 statement from the National Committee on Planned Giving and the board of directors of the American Council on Gift Annuities in opposition to the practice of charitable organizations paying sales commissions to for-profit planners in connection with the sale of charitable gift annuities.back

  17. Section 664(c).back

  18. LTR 199822041, Doc 98-16671 (6 pages), 98 TNT 104- 41 ; See also LTR 199804036, Doc 98-3876 (6 pages), 98 TNT 16-88 , where the grantors filed a malpractice action against the drafting attorney for the same error as found in LTR 199822041, and LTR 199833008, Doc 98-25748 (5 pages), 98 TNT 158-26 , where the attorney inadvertently failed to include a provision allocating realized post- contribution gain to income.back

  19. LTR 198041100; sec. 664; reg. section 1.664-1(a)(3).back

  20. LTR 199818027, Doc 98-13767 (4 pages), 98 TNT 85- 44 , and LTR 200002029, Doc 2000-1749 (6 original pages), 2000 TNT 11-31.back

  21. Estate of Kenneth E. Starkey v. United States, 83 AFTR2d Par. 99- 843, Doc 1999-17608 (36 original pages), 1999 TNT 99- 5.back

  22. See, for example, Committee on Professional Ethics and Conduct of the Iowa State Bar Association v. Baker, 492 N.W.2d 695, 701 (Iowa 1992).back

  23. The Florida Bar v. Brumbaugh, 355 So.2d 1186, 1193- 1194 (Fla. 1978) the selection and completion of preprinted legal documents is also the practice of law.back

  24. See Rev. Rul. 72-395, 1972-2 C.B. 340; Rev. Rul. 80- 123, 1980-1 C.B. 205; Rev. Rul. 82-128, 1982-2 C.B. 71; Rev. Rul. 82- 165, 1982-2 C.B. 117; Rev. Rul. 88-81, 1988-2 C.B. 127; Rev. Rul. 92- 57, 1992-2 C.B. 123; Rev. Proc. 89-20, 1989-1 C.B. 841; Rev. Proc. 89-21, 1989-1 C.B. 842; Rev. Proc. 90-30, 1990-1 C.B. 534; Rev. Proc. 90-31, 1990-1 C.B. 539; Rev. Proc. 90-32, 1990-1 C.B. 546; and Rev. Proc. 99-1, 1999-1 C.B. 6, Doc 1999-2048 (67 original pages), 1999 TNT 10-15.back

  25. LTR 200218008, Doc 2002-10748 (5 original pages) [PDF], 2002 TNT 87-42.back

  26. Section 170(f)(10); Notice 99-36, 1999-1 C.B. 1284, June 15, 1999, Doc 1999-1059 (8 pages), 1999 TNT 3-8.back

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