Planned giving in the face of uncertainty

Nadia Yassa
Nadia Yassa

PJ’s Ret Boney talked with Nadia Yassa, a trusts and estates attorney and director of estate and gift planning at the Boston Foundation, about how the recession has affected planned giving and what strategies are helpful in this new environment of uncertainty.

Question: How is planned giving different in the wake of the recession?

Answer: There are two forces that have created uncertainty for donors. The first is the economic crisis. Donors have experienced a reduction in the value of their assets.  They don’t know how much they’ll have to live on or how much they’ll be able leave to their heirs or charity.

The other factor is the uncertainty with respect to the estate tax. How will assets be taxed at death and what can be done to maximize both what is left to heirs and to charity?

Because of these uncertainties, we’re seeing a greater emphasis by donors on deferred giving. Bequests, for example, are popular because they require the least amount of commitment from the donor, are revocable, but can have the highest impact for a charity in the long term.

But even though donors don’t know what will happen in the end, they are still including bequests in their estate plans, particularly residuary bequests to charity.

In addition, donors are looking to charitable gift annuities to provide an income stream that’s higher than what they could get from a certificate of deposit. So donors are looking for high payout rates.

This can create tension because charities – particularly those that have existing contracts that are underwater — are wary of the implications of issuing gift annuities at higher rates, particularly 8 percent to 9 percent payout rates to older donors.

In some cases, charities are deciding to issue gift annuities with rates lower than those recommended by the American Council on Gift Annuities, and will treat the ACGA rates as the ceiling, not the floor.

There’s a tension between donors wanting higher rates and charities thinking twice given their experience with gift annuities – and that has everything to do with timing and the market.

Q: Given the uncertainty donors are facing, what strategic shifts are required by planned giving professionals?

A: As planned giving professionals, we need to think creatively in anticipating this sense of discomfort brought on by economic and transfer-tax uncertainty.

First, donors and advisors can look to existing charitable vehicles to meet the needs of both donors and charities.

One strategy we’re seeing is the charitable remainder trust commutation, which the IRS has permitted, and which can be beneficial for a donor who needs cash in the near-term.

This strategy allows a donor to take an existing CRT, terminate the trust early and take a lump-sum distribution of the net present value of his or her interest in the trust, while accelerating the distribution of the remainder portion to charity.

So, taking a very simple example, assume a $1 million charitable remainder trust.

Assume the net present value of the payments to the donor or income beneficiary calculated equals $400,000. The donor would terminate the trust, take back the $400,000 and the remaining $600,000 would pass immediately to the charity.

With such a scenario, the donor gets much-needed cash and the charity doesn’t have to wait for the term of the trust to get the value of the gift.

One drawback of doing a CRT commutation in a low-interest environment is that the lump-sum payment to the donor will be reduced due to a low discount rate.

As a result, many donors and advisors are watching interest rates and plan to proceed with CRT commutations when discount rates reach a higher point.

For donors who no longer need the income payments from the charitable remainder trust anymore, but could use an income-tax deduction in the current year, the donor can accelerate the termination of the trust and assign the income payments to the charitable beneficiary.

So in the case of a $1 million charitable remainder trust, the donor terminates the trust, takes the $400,000 due him or her, and assigns it to the charity, along with the $600,000 remainder portion already payable to the charity, for a total gift of $1 million.

The donor then gets the immediate tax deduction in the amount of $400,000 – the amount he or she gave up in income payments.

In both scenarios, the donor doesn’t have to dip into existing accounts in order to meet his or her needs, but is able to make an additional gift to charity.

Q: What should planned giving professionals focus on when soliciting new gifts?

A: Recognizing the uncertainty caused by both the economy and the estate tax laws, we recommend building flexibility into the estate plan whenever possible.

One way to do that is through disclaimers.

For example, take the beneficiary designation for individual retirement accounts. There is a huge tax benefit to leaving an IRA to charity. An IRA left to an heir is subject to income and estate taxes.

So if a donor names an heir as the beneficiary of a $1 million IRA, the heir could receive as little as 34 percent of the total. But a charity receiving an IRA will get the full $1 million.

One strategy is to name a spouse or other heir as the primary beneficiary and name a charity or donor-advised fund as the secondary or contingent beneficiary.

In this case, when donor dies, the primary beneficiary can disclaim, or refuse to accept, all or part of the gift. What is disclaimed will pass to the charity and also will provide an estate tax charitable deduction, thereby offsetting estate taxes that may be due.

Another way to use disclaimers is by incorporating them into estate planning documents in connection with donor advised funds.

The general rule governing disclaimers is that if someone disclaims an asset, he or she cannot control what ultimately happens to that asset.

But the donor can write into the will that an heir may disclaim all or part of the asset in favor of a donor-advised, a fund of which the disclaimant may serve as an advisor and make grant recommendations.

The IRS has permitted this type of disclaimer because the heir is not deemed to have legal control of the assets since all grant recommendations from donor-advised funds must be approved by the grantmaking organization that holds the donor-advised fund.

Under this scenario, anything that is disclaimed by the heir will pass to the donor-advised fund and the estate will receive a charitable deduction in the value of what has been disclaimed, reducing the estate-tax liability.

The alternative, which may not be as tax efficient, is that the heir gets the full gift. The heir then takes the money and sets up a donor advised fund.

While the estate won’t get the tax deduction, the heir can take a personal income tax deduction.

So if there’s no estate tax in effect when the donor dies, the heir doesn’t disclaim the gift, but does receive the benefit of the income-tax deduction.

The overarching theme is that there is a way to build in flexibility for individuals who have a sense of uncertainty. It allows donors to build in flexibility that may provide charitable planning after death that can be customized to reduce the estate tax as much as possible.

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