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| Philanthropy |
A Charitable Address
Lani Luciano
04/01/2004
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The Carpenters’ trust
will pay them monthly income over both their life times. The decision had no
drawbacks, Betsy says. The couple was spared the drudgery of a home sale and got
the satisfaction of advancing deeply held values. Their only small regret is
timing: “The California market is so volatile, and 2001 was a down year,” Betsy
explains.
Besides market timing, the other critical ingredient to a happy
CRT experience is unimpeachable tax advice. The significant financial benefits
of CRTs attract the IRS’s close scrutiny. The tax laws on this type of trust
fall under the hazy heading of “complex giving,” and Clarfeld’s Ciuffo describes
them as “fraught with pitfalls for the unwary, including reporting and
compliance requirements.” Financial planning advice is also indispensable
because each of a CRT’s many variables has wrinkles of its own. For example,
annual payouts in excess of five figures to anyone but the donor or spouse will
trigger a gift tax.
Living in Charity
While an unwanted home is
the likeliest target for donation, a treasured primary residence can still be a
charitable vehicle, even if the donor wants to continue to live there. We cannot
receive payments while occupying real estate held in a CRT, even if the
charitable beneficiary is able to fund the payments without selling the asset;
IRS regulations view this scenario as “self-dealing” and prohibit it. However,
in most states we may give a residential property to charity, live in it, and
receive an annuity income under a nontrust arrangement combining two contracts:
a charitable gift annuity and a life tenancy. (The exceptions are New York,
which prohibits this arrangement, and Arkansas, California, Florida, New Jersey
and Wisconsin, which restrict it.)
The charitable component of this
arrangement is similar to a CRT in that the contribution is calculated as the
value of the donated asset net of the payments disbursed. But there is one major
difference. Since the donated asset is not immediately sold, the charity must
fund beneficiary payments from its own resources, repaying itself when it sells
the property at the end of the annuity term, generally after the donor’s
death.
The financial obligations not only limit the number of charities
willing and able to enter into such agreements, they also limit the advantages
to donors. There have been cases in which the charity was not able to fulfill
its end of the contractual bargain. Still, the arrangement can be useful for an
older philanthropist determined to live out his or her days in a beloved
home.
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