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wall street sign

A less-than-obvious, but ideal asset for charitable giving is appreciated, long-term, publicly traded stock. The merits of this giving tool are numerous, but there are some questions I hear from donors considering this options. For instance, when do you assess the value of a stock donation—before the donation, during, or after? And, how do you determine a specific dollar value on an asset that’s perpetually fluctuating?

Simple Stock Equation

math equation on chalk board

Forget stock charts or complicated formulas, there’s a simple solution. The value of a gift of publicly traded stock is the mean average of the high and low prices on the date of the gift.

For example, Jill Donor gifted 100 shares of Twitter stock to her favorite charity. On the date of Donor’s gift, the high was $25 per share and the low was $23 per share. In this case, the value of a share for charitable deduction purposes would be $23.50 ($25 + $22 divided by 2). The charitable deduction value of Donor’s gift would be $2,350 ($23.50 per share x 100 shares).

Any subsequent sales price, or current valuation (if the charity retains the stock), is irrelevant for valuing publicly traded stock and determining a donor’s charitable deduction. Again, only one factor matters: the average of the high and low selling price of the stock on the date of the gift! Of course, this equation doesn’t account for changes in the stock market in terms of what day would be better to donate over another. For that you’ll need to talk to your financial professional advisor or watch the trends to donate on a date with preferred value.


If you’re interested in gifting stock to a qualified charity, ensure you’re doing so in a way that maximizes all of your financial benefits and contact me for a free consult. Or, if you’re a nonprofit leader wanting to accept gifts of stocks but are unsure of how to facilitate, don’t hesitate to reach out via email or phone (515-371-6077).

church pews

I worry about all the folks going to church this morning. (I use “church” as a term that could be easily replaced with other houses of worship: synagogue, mosque, etc.) Here’s my specific concern: when the collection plate comes around, do folks give cash? Probably. And if so, are they documenting their charitable gift? Probably not. For most people, it’s a $20 here and a $10 there, but over the course of many Sundays that can add up quickly. The total figure of such donations to a tax-exempt organization, like your church, could be claimed as a federal income tax charitable deduction. But, without substantiation, you cannot claim the beneficial charitable deduction.

The IRS requires you to have records and documents backing up your claims of charitable donations. The greater the amount of the deduction you seek, the more records that are required. Let’s start with a basic category: gifts of cash less than $250.

Substantiation requirements for monetary gifts less than $250

wallet with cash money on top

A federal income tax deduction for a charitable contribution in the form of cash, check, or other monetary gift is not allowed unless the donor substantiates the deduction with a bank record or a written communication from the donee showing the name of the donee, the date of the contribution, and the amount of the contribution.

Meaning of “monetary gift”

For this purpose, the term “monetary gift” includes, of course, gifts of cash or by check. But monetary gift also includes gifts by use of:

  • credit card;
  • electronic fund transfer;
  • online payment service;
  • payroll deduction; or
  • transfer of a gift card redeemable for cash.

Meaning of “bank record”

Again, to claim the charitable deduction for any monetary gift, you need a bank record or written communication from the donee. The term “bank record” includes a statement from a financial institution, an electronic fund transfer receipt, a cancelled check, a scanned image of both sides of a cancelled check obtained from a bank website, or a credit card statement.

Meaning of “written communication”

The term “written communication” includes email. Presumably it also includes text messages. But, again, the written communication, whether paper or electronic, it must show the name of the donee, the date of the contribution, and the amount of the contribution.

I must repeat. A federal income tax deduction for a charitable contribution in the form of cash, check, or other monetary gift is not allowed unless the donor substantiates the deduction with a bank record or a written communication from the donee showing the name of the donee, the date of the contribution, and the amount of the contribution.

How about monetary gifts [as defined above] which are $250 or more? As to cash contributions of at least $250, an extra set of substantiation rules apply. Click here to read more.

pulling dollar out of wallet

Responsibility lies with the donor

Interestingly, the responsibility for obtaining this documentation lies with the donor. The donee (the charity) is not required to record or report this information to the IRS on behalf of the donor.

If this sounds like a lot, know you don’t have to navigate these requirements just by yourself. Contact me at any time to discuss your situation and charitable giving goals. We’ll figure out the best course of action together.

woman holding ornament

Thanks for the reading the 25 Days of Giving series. Each day through December 25, I’m covering different aspects of charitable giving for both donors and nonprofit leaders. Have a topic you want covered or question you want answered regarding charitable giving? Contact me.

I’ve covered the term quid pro quo in a previous legal word-of-the-day blog post and much of that applies to understanding quid pro quo donations. In short, quid pro quo (now you know Latin!) translates to “something for something” and means an exchange of goods or services, where one transfer is contingent upon the other. In the case of nonprofit organizations, sometimes a good or service is offered in exchange for a donation. When the donor makes a charitable donation more than $75 and the nonprofit offers a good or service in exchange for said donation, the tax-exempt charity must provide a written statement to the donor disclosing the following:

  • Statement of the good(s) or service(s) received in exchange for donation
  • A fair market value (FMV) of the good(s) or service(s) received.
  • Information for the donor that only a portion of the total contribution (the portion that exceeds the FMV) is eligible for a federal income tax charitable contribution deduction.

What Nonprofits Need to Know

merry christmas event menu

As a nonprofit organization offering a quid pro quo donation situation, there’s a penalty for not making the required disclosure of contributions great than $75. The penalty is $10 per contribution up to $5,000 per fundraising mailer or event. If your nonprofit fails to disclose, but can prove the failure was due to a reasonable cause, the penalty may be avoided.

Offering a good or service as an incentive for a donation can be a great way to spark donor interest, but you’ll definitely want to determine the FMV and have a reasonable method, applied in good faith, for doing so. This can be easier said than done for goods and services that are not generally or commercially available. If that’s the case it’s recommended to estimate the FMV off of similar/comparable products and services that are available. Let’s consider a couple examples:

Example 1.  For a contribution of $20,000 an history museum allows a donor to hold a private event in a ballroom of the museum. The museum doesn’t typically rent out this room, so how can a FMV be determined if there’s no standard rate? Looking at other similarly sized and quality ballrooms in the surrounding, general area cost $3,000 a night to rent. So, even though the museum’s ballroom has unique artifacts, a good faith estimate of the FMV of the museum’s ballroom is $3,000. The donor would then have a charitable contribution deduction total of $17,000.

Example 2.   Your charity offers a one-hour golf lesson with a golf pro at the local country club to anyone who donates $500 or more. Usually the golf pro can be hired for a one-hour lesson for $100. An estimate made in good faith of the lessons’s FMV is $100.

Example 3. What if the service offered is unique, but is typically free? A state park foundation fundraiser advertises that a donation of $200 or more entitles you a spot on one of four different guided nature hikes with a volunteer park ranger. Typically the foundation doesn’t offer guided hikes to the general public, but hiking in the state parks is otherwise free. So, the FMV made in good faith for the hike is $0 and the charitable contribution eligible for deductions would be the full amount.

The only time you wouldn’t need to disclose the quid pro quo donation is when the good(s) or service(s) are of insubstantial value. The IRS also says disclosure is not required when the donor makes a payment of $75 or less (per year) and the exchange is only membership benefits that equate to, “Any rights or privileges (other than the right to purchase tickets for college athletic events) that the taxpayer can exercise often during the membership period, such as free or discounted admissions or parking or preferred access to goods or services.” The contribution can also stay undisclosed if the good/service is, “Admission to events that are open only to members and the cost per person of which is within the limits for low-cost.”

Basics of What Donors Need to Know

woman in winter with scarf

As a donor, if you’re making a contribution to an organization and receive something in exchange, know that it’s almost like you’re paying for the good/service you receive, but then can deduct the rest of the contribution.

Let’s say you make a charitable contribution of $100 to a 501(c)(3) organization that helps mistreated farm animals. To celebrate their anniversary, the organization is offering donors that gift $80 or more a large coffee table book filled with stories, poems, and photographs of the animals the organization has helped over the years. The book’s fair market value is $30. This FMV is based on the price if you were to buy it outright from the organization’s online shop. In this situation you as a donor would need to receive a written disclosure detailing your contribution amount ($100), FMV of the good (the book) received ($30), and the portion that is considered a tax-deductible charitable contribution amount ($70).

Even though the tax-deductible charitable contribution amount is $70 (less than the $75 threshold), the total donation was $100, so the charity is still required to provide a written disclosure.

Whether you’re a donor or a nonprofit leader, I’m here to help promote and maximize charitable giving in Iowa. Questions about written disclosure compliance or FMV calculation? Don’t hesitate to contact me.

holiday wreath with ornament

Merry Christmas Eve and thank you for reading the 25 Days of Giving series! In the spirit of the holiday season I’m covering different aspects of charitable giving…perfect to get you thinking about your end-of-year giving.

Earlier this year I read an article in Forbes about two tax court cases where families claimed large charitable contributions on their federal income tax and, given that they were fraudulent claims, failed to have the substantiation to back it up. As the article stated, “the IRS is NOT messing around when it comes to holding taxpayers to the substantiation requirements for charitable contributions.” The substantiation is required in exchange for the federal income charitable deduction.

Note there is, of course, a limit to the charitable deduction on your taxes. Mind this when considering maxing out your charitable deduction.

Substantiation requirements

First and foremost, the donations must be made to a qualified charitable organization. You must then be able to substantiate your contribution to said qualified charitable organization. The record keeping required by the IRS depends on the amount of your contribution. At their most basic, the IRS substantiation rules for the charitable deduction are as follows:

  • Gifts of less than $250 per donee — you need a cancelled check or receipt
  • $250 or more per donee — you need a timely written acknowledgement from the donee
  • Total deductions for all property exceeds $500 — you need to file IRS Form 8283
  • Deductions exceeding $5,000 per item — you need a qualified appraisal completed by a qualified appraiser

Gifts of $250 or more per donee

Let’s focus for today on gifts of $250 or more per donee. Specifically, the income tax charitable deduction is not allowed for a separate contribution of $250 or more unless the donor has written substantiation from the donee of the contribution in the form of a contemporaneous written acknowledgement.

The $250 threshold

Note this $250 threshold is applied to each contribution separately. So, if a donor makes multiple contributions to the same charity totaling $250 or more in a single year, but each gift is less than $250, written acknowledgment is not required. [Unless the smaller gifts are related and made to avoid the substantiation requirements].

Written acknowledgment

The written acknowledgement must indicate:

  1. the name and address of the donee;
  2. the date of the contribution;
  3. the amount of cash contributed;
  4. a description of any property contributed;
  5. whether the donee provided the donor any goods or services in exchange for the contribution; and, if so;
  6. a description, and a good faith estimate, of the value of the good or services provided or, if the only goods or services provided were intangible religious benefits, a statement to that effect.

Contemporaneous acknowledgement

The IRS definition of contemporaneous is that the acknowledgment must be obtained by the donor on or before the earlier of [a] the date the donor files the original return for the year the donation was made; or [b] the return’s extended due date. A donor cannot amend a return to include contributions for which an acknowledgment is obtained after the original return was filed.

Responsibility lies with the donor

Interestingly, the responsibility for obtaining this documentation lies with the donor. The donee (the charity) is not required to record or report this information to the IRS on behalf of the donor.

If this sounds like a lot, know you don’t have to navigate these requirements just by yourself. Contact me at any time to discuss your situation and charitable giving goals. We’ll figure out the best course of action together.

blue and tan present

Thanks for reading the 25 Days of Giving series! Plan on coming back to the blog every day from now through Christmas Day.

25 days of Christmas - Holiday giving

In December there is gift giving with wrapping paper abound, but when it comes to charitable giving the important assets (like your retirement assets) don’t need ribbons or bows. Let’s first focus on a major retirement asset giving tool, the IRA charitable rollover.

IRA Charitable Rollover

This federal law allows donors age 70½ and older to make direct distributions of up to $100,000 from his/her IRA each year to any qualified charity. The donation is not treated as taxable income and, moreover, counts toward the donor’s required minimum distribution for that year.

At the end of 2015, Congress made the IRA charitable rollover a permanent giving tool, unlike the year-to-year renewal basis they had operated on since the introduction of the IRA charitable rollover in 2006 (as part of the Pension Protection Act).  The result? Tax savvy IRA account holders can now plan charitable giving in a more reliable way.

Other Options

There are two other accessible ways to direct retirement benefit plan assets to your favorite charity:

  • Gifts at death via beneficiary designations.
  • Withdrawals over age 59½ followed by outright deductible gifts that can effectively result in tax-free retirement plan gifts.

Keep in mind, too, that the IRA charitable rollover applies only to IRAs. These two options — gifts at death via beneficiary designations and withdrawals by those older than 59½ — will work with virtually all qualified retirement plans, including 401(k)s and 403(b)s.

Lights and small house - for charity

Naming your favorite charity as beneficiary

Donors considering charitable bequests may not realize that they can make a meaningful gift simply by naming their favorite charity as the beneficiary of an IRA, 401(k), 403(b), or other retirement plan. Giving retirement assets in this way is easy, and does not require drafting or amending a will or trust. A donor simply has to contact his/her financial institution holding the retirement benefit plan and request a change of beneficiary form.

Note, however, that if the account holder is married, the spouse should be informed and may have to consent to the gift. The plan assets may also be left to a charitable or marital trust[s]. In the latter case, professional advisors should be consulted. (Hint: call me!).

Give now!

Donors could also choose to make current gifts using funds withdrawn from their qualified retirement plans. Individuals over age 59½ may generally withdraw funds from retirement plans without penalty, make a gift with these funds, and then claim an offsetting charitable deduction. In most cases, a gift made in this manner will be a “wash” for tax purposes.

Let’s take a quick example. Rebecca (age 64) wants to make a very generous donation of $10,000 to her favorite charity. She can withdraw $10,000 from her IRA or 401(k) account, and make that donation. Assuming she itemizes her tax deductions, the $10,000 donation should leave her “even Steven” with regard to taxes – the $10,000 in income is offset by the $10,000 charitable deduction, resulting in zero net income taxes.

Advice is Priceless

The decision to want to give to you favorite causes this season is easy. Knowing exactly where to start with smart giving can be a little more complex. If you have questions about the IRA charitable rollover or any other giving strategy, don’t hesitate to reach out via email or by phone (515-371-6077). My firm’s mission is to maximize charitable giving in the state of Iowa and I want to help YOU maximize your personal charitable giving (in a way that is also tax efficient).

Hope Lodge Iowa City

From the outside looking in, with its lush landscaping and towering brick chimney, the Russell and Ann Gerdin American Cancer Society Hope Lodge in Iowa City gives an immediate impression that it’s a home. Which is what the facility does indeed become for the cancer patients receiving lifesaving treatments.

Hope Away from Home

Doors to the Hope Lodge opened in September 2008 following a $4 million donation from the Lodge’s namesakes, Russell and Ann Gerdin. (University of Iowa provided the land for the construction.) It was the first of its kind in Iowa and the 28th facility of its kind in the U.S. The Hope Lodge offers amazing service in the form of 28 private guest rooms free of cost to cancer patients (and their adult caregivers) undergoing active outpatient cancer treatment at area medical facilities: The Veterans Administration Medical Center, Mercy of Iowa City, or University of Iowa Hospitals and Clinics. The guest rooms each have a private bathroom and two beds, but the bedrooms are just the start when it comes to the other welcoming, inviting spaces.

Hope Lodge; Hope Sweet Hope

Quinn Hackert, assistant manager of the Hope Lodge, said that the facility has a Midwestern “lodge-y” feel to it and has plenty of community spaces to encourage people to get out their rooms and “really get to know each other.” Guests can enjoy a community dining area, sit in two screened-in porches, computer room, laundry, library, exercise room, and cook meals in two complete kitchens. Musical groups and weekly potluck dinners are another community-building opportunity to take advantage of.

The level of service the Hope Lodge is able to offer is truly amazing with a small staff of 12 (most are part-time employees), they were able to offer 13,355 nights of free lodging in 2016. Hackert said the Hope Lodge is typically full; if that’s the case and a patient needs/qualifies for accommodations, the American Cancer Society hotel partner program is utilized until a Hope Lodge room opens up. The hotel partner program means hotels in the area can offer a room for free or a significant discount. “The average length of stay is 22 days, however that’s a little skewed since our radiation patients often stay for six to eight weeks,” Hackert said.

American Cancer Society - Hope Lodge

In order to stay at the Hope Lodge patients must meet some eligibility requirements, such as the patient must live at least 40 miles away from the treatment center, have an end date to their current plan, and be cleared by a physician of infectious diseases, among others. According to the Hope Lodge’s website, prospective guests need their physician or a member of their cancer health care team to fill out a Hope Lodge referral form.

Another major benefit for patients staying at the Hope Lodge is the breadth of cancer-related services and programs including support groups for general cancer support, breast cancer, head and neck cancer, as well as a group specific for female patients.

Get Involved

American Cancer Society’s 2017 Hope Lodge “10th Anniversary Dancing for the Stars” Gala

Hackert reiterated that the Hope Lodge is supported and funded entirely through donated funds and times. The nonprofit’s highly anticipated annual fundraiser—10th Anniversary Dancing for the Stars—is coming up on November 11, 2017 at the Coralville Marriott Hotel & Conference Center. The black tie event features delicious food, enticing auction, and the main entertainment: local celebrities dancing in routines choreographed by professional dancers. Interested in attending? Tickets are $100/person and $1,000/10 person table. Hackert also indicated they’re still searching for additional sponsors.

Hope Lodge donations

On the general donations front, Hackert said, “We’re always in need of paper products like office paper, toilet paper, paper towels.” He added that those interested in donating time should contact Lynn Johnson at Lynn.Johnson@cancer.org or by phone at 319-248-5400. “We always need general volunteers and drivers that drive patients to the hospital in a Prius donated by Toyota,” Hackert said. “We have volunteers at guest services—the front desk and people can make and bring in meals for the guests.” Hackert added that the volunteers just need to go through a short orientation.


Note: GoFisch is happy to feature Iowa nonprofits and the great work they do in our community. A feature does not indicate any client relationship. If you’re interested in having your nonprofit featured, please don’t hesitate to contact Gordon.

Gordon works with nonprofits and the donors who support them in a number of different ways, including coordinating complex gifts. If you’re a donor or donee looking to maximize the benefits of your charitable gift, contact Gordon at any time by email, Gordon@gordonfisherlawfirm.com, or by phone at 515-371-6077.

hammers and tools hanging in garage

Three Parties

I’ve previously written about the three parties necessary for every trust: (1) the settlor (sometimes called the donor or grantor); (2) the trustee; and (3) the beneficiary.

Two Other Elements

Besides three parties, at least two other elements are necessary for a valid trust.

  1. The trust instrument is the document that sets forth the terms of the trust.
  2. The other necessary element is property. After all, the trustee must be holding something for the benefit of the beneficiary.

Property of the Trust

When laypersons use the word “property,” I believe they usually mean real estate. But, lawyers use the term “property” much, much more broadly, to mean literally any transferable interest. Sometimes trust property is also referred to as the res or corpus or assets of the trust. (Bonus words!)

Any property can be held in trust. Seriously, check out this list of 101 assets which would fit in a trust. You could likely think of literally hundreds more types or categories of property to place in your own individual trust.

Pour Over Trust

How about an unfunded trust that will receive property at some point in the future? Can you even do that?

Yes, that can certainly be done. This is usually called a pour over trust. (More bonus words!) The pour over trust deserves its own blog post. Briefly, a pour over trust is usually set up by language in a will. A will may validly devise property to a trust, established during the testator’s lifetime, and then funded at her death.

Example

Let’s take a very simple example. Kate has a lawyer write her will, including language that at her death all her Monster Truck memorabilia be placed in a trust for the benefit of her nieces and nephews. Only at Kate’s death will the property be transferred into the trust, not before.

monster truck as a type of property

Take Aways

The important points are that property is necessary, at some point, to make a trust valid, and that literally any transferable interest in property – anything! – can be held in a trust.

Let’s Talk Trusts

It can be difficult to determine on your own if a trust may be right for your personal situation. It certainly doesn’t hurt to take me up on my offer for a free one-hour consultation. Give me a call at 515-371-6077 or shoot me an email at gordon@gordonfischerlawfirm.com.

A trust really isn’t as complicated as it first may seem. After all, there are only three parties to a trust.

A Settlor, Trustee, & Beneficiary

A trust is created when a property owner transfers the property to a person with the intent that the recipient holds the property for the benefit of someone else. So, there are three parties to a trust: (1) the owner who transfers the property (the settlor, or sometimes called the donor or grantor); (2) the person receiving the property (the trustee); and (3) the person for whose benefit the property is being held (the beneficiary).

Three men walking down the street

Note that although a trust involves three parties, it does not require three persons. One person can play multiple roles. For example, in a typical revocable inter vivos trust, it is quite common for the person establishing the trust to be the initial trustee and the principal beneficiary. In this situation, one person is all three parties – they are the settlor, the trustee, and the beneficiary.

What a Merger Means

There is one limitation to the rule of one person wearing multiple hats. The same person cannot be the sole trustee and the sole beneficiary of the trust. In such an event, it is said merger occurs, and the trust is terminated. Why so? The essence of a trust is that it divides legal title from beneficial ownership, and merger ends this division.

In practical terms, however, merger is rarely an issue. “Wait!” you shout. You just said that in a typical revocable inter vivos trust, the person establishing the trust can be trustee and beneficiary. Yes, in this situation one person is all three parties – she is the settlor, the trustee, and the beneficiary. But, in almost all situations, one person isn’t the sole beneficiary. Such a trust will designate other beneficiaries who will benefit from the property after the settlor’s death. So, one person can indeed wear three hats.

Woman with hat

Let’s Talk More About Trusts

Trusts aren’t that difficult to understand and also can provide so many helpful benefits. Want to learn more? Email me at gordon@gordonfischerlawfirm.com. I offer a free one-hour consultation to everyone, without any obligation. I’d be happy to talk to you any time.

Settlor (or Donor or Grantor)

The person who creates a trust is called the settlor (sometimes called the donor or grantor). It is the settlor’s intent which is of paramount importance. It is the intent of the settlor that determines whether a trust has been created.

Here’s a great read with a rundown on the basics of what a trust is:

Intent Is Everything

If a settlor transfers property to a recipient with the intent that the recipient hold the property for someone else, then a trust has indeed been created. If the settlor transfers property with the intent that the recipient use the property for her own benefit, then NO trust has been created.

BONUS WORD! Precatory Trust

What if a settlor transfers property to a recipient with just a wish that the recipient use the property for the benefit of someone else, but does not impose any legal obligation? In such a situation, no legal trust is created. Instead, this is called a precatory trust, but is not a trust at all, because the settlor placed no legal responsibilities on the recipient. A precatory trust is, again, not a trust and is not governed by the law of trusts.

Three Easy Hypotheticals

  • Let’s look at three quick examples to make this clear. Mackensie gives stock to Julie. Mackensie intends that stock be for Julie’s own use. Mackensie is NOT the settlor of a trust, because no trust has been created.

Stock market sheet

  • Mackensie gives a vacation house to Maddie, intending that Maddie hold the house for the benefit of Zach. Mackensie is the settlor of a trust. If a settlor transfers property to a recipient with the intent the recipient hold the property for the benefit of someone else, then a trust is created.

Vacation home in Santorini Greece

  • Mackensie gives a coin collection to Parker, just wishing that Parker would hold the coins for Tom. This is a mere precatory trust, not a trust at all, because the settlor is not imposing any legal responsibilities on the recipient.

coin collection

Questions? Let’s Talk.

This hopefully clarified the important role of settlor to assist your estate planning decisions, but you may have questions…which is great! Contact me to discuss further the status of your estate plan and decisions regarding your trust. Reach me by email at gordon@gordonfischerlawfirm.com or phone at 515-371-6077.

Money sign against black screen

Charitable remainder unitrusts (CRUTs) are an important charitable giving tool. CRUTs can provide both an income stream and income tax deduction to you as well as a contribution to your favorite charity. In certain situations, though, a traditional CRUT may be limited in effectiveness. Two other types of CRUTs: the NIMCRUT and the Flip CRUT, can be useful alternatives. I’ll explain more about those below and have also written on them in the past.

How CRUTs Work

In a simple CRUT, the donor contributes assets to a trust and may take a current income tax deduction equal to the present value of the gift that will eventually be distributed to a worthy charity. The CRUT pays the non-charity beneficiary (the annuitant can be the donor, or someone else) a percentage of the trust assets, valued each year either for the annuitant’s life or for a term of years (not more than 20 years). At the end of the trust term, the remaining assets go to the charity (or charities) the donor named as beneficiary.

Giving flowers in open hands

Simple Example of a CRUT

Let’s say Jill Donor starts a CRUT, funding it with $1 million. Assume that the CRUT terms require the trust to pay Donor seven percent of the value of the trust assets each year for 20 years. Donor will receive a distribution of $70,000 in the first year. If the trust assets grow to $1.1 million in the second year, Donor will receive $77,000. At the end of the trust term, Donor’s favorite charity will receive the balance of the trust assets.

CRUT Defers Taxes on Appreciated Assets

CRUTs can be ideal vehicles to defer tax liabilities on appreciated assets. Why? Because the trustee of a CRUT can sell the appreciated assets transferred to the trust without incurring capital gains tax, although the annuitant is responsible for income tax on the payment she receives each year.

Going back to our example, if Donor sells $1 million of stock, for which she had paid $100,000, she will pay $180,000 in tax, leaving her $820,000. To receive the $70,000 annual income stream she needs, she will have to earn a 9 percent return. If instead she funds a CRUT with the stock, and the CRUT sells it, the full $1 million will be available to invest because the CRUT will pay no immediate capital gains tax.

Stocks & figures on paper

CRUTs and Currently Unproductive Assets

A traditional CRUT won’t work as well when funded with assets that produce no income, such as real estate. If the assets held by a CRUT do not produce enough income to meet the annual payment obligation, the trustee will be forced to use the trust corpus to transfer a portion of the assets back to the annuitant as a part of the payment. Of course, this will reduce the trust’s ability to produce income in the future and leave less for the charity at the end of the trust term.

NIMCRUT Can Hold Currently Unproductive Assets

If Jill Donor in the example were interested in funding a CRUT with assets that are currently unproductive, but likely to be productive at some point over the trust term, she should consider using the net income with make-up CRUT (NIMCRUT) instead.

Under a NIMCRUT, the annuitant receives the lesser of either the net income earned by the trust during the year or a fixed-percentage amount. A make-up account is established for years when the trust pays less than the percentage amount, and any shortfall is made up in years the trust earns more income than the percentage amount.

Using our previous example, if the NIMCRUT earns $60,000 in the first year, Donor will receive a payment in that year of $60,000, because this is less than the seven percent required amount. If the trust earns $90,000 in the following year, and assuming the value of the trust is still $1 million, Donor will receive a payment of $80,000—the $70,000 percentage amount, plus an additional $10,000 to make up for the prior year’s $10,000 shortfall.

By using a NIMCRUT, the trustee avoids having to distribute a portion of the trust corpus to an annuitant as part of the annual payment in years in which the trust does not produce enough income. Thus, a NIMCRUT preserves trust corpus while still, over time, paying the annuitant the percentage he or she is entitled to under the trust.

The trustee, however, may face another issue if the unproductive asset is sold. Generally, the terms of a NIMCRUT forbid the trustee to pay the fixed-percentage amount from capital gains or trust principal. Therefore, the trustee may feel pressured to invest for current yield, and produce additional income to make up prior shortfalls to the annuitant, rather than to invest for total return, which may better serve the long-term interest of the charitable beneficiary.

Money Rubix cube being twisted by haneds

Flip CRUT Can Benefit Annuity and Charity More Equally

To benefit the annuitant and the charitable beneficiary more “equally,” Donor, in our example, might be wise consider a Flip CRUT. The Flip CRUT begins as a NIMCRUT and can be funded with an unproductive asset. This allows the trustee to make small or even no payments to the annuitant in years the trust is earning little or no income. Once the asset is sold, however, the trust flips to a traditional CRUT, which then pays the annuitant the fixed-percentage amount, allowing the trustee to invest for total return.

For instance, using our prior example, if Donor funds a Flip CRUT with an unproductive asset valued at $1 million, the trust will earn no income and Donor will receive no annual payments. When the trust assets are sold and invested in income-producing assets, Donor will begin to receive fixed percentage payments of 7 percent of the trust assets as valued each year, but will receive no make-up for payments not received in prior years.

To qualify as a Flip CRUT, though, at least 90 percent of the fair market value of the trust assets must be unmarketable at the time of trust funding, and the trust’s governing instrument must provide that it will be a NIMCRUT until the unmarketable assets are sold. At that point, it will flip to a standard CRUT and the annuitant will forfeit any make-up payments.

CRUTs, NIMCRUTs and Flip CRUTs

If you want to make a charitable donation while retaining an income stream that can continue for the benefit of your spouse or children? CRUTs, NIMCRUTs and Flip CRUTs can all be effective estate planning techniques to reach these worthy goals.

Wealth is of the heart and mind

Let’s Talk

This concept can be confusing, so don’t hesitate to reach out for more information and explore how a charitable remainder unitrust could be beneficial to you. Feel free to contact me at any time at Gordon@gordonfischerlawfirm.com or by phone at 515-371-6077.