Charitable
Gift Planning
A Practical Guide
for the Estate Planner
Second Edition
Thomas J* Ray, Jr.
Section of Real Property, _ , .. ,.. .
r 7 Defending Liberty
About the Author xiii Preface to the Second Edition xv Acknowledgments xvii Introduction xix
CHAPTER 1
Charitable Deduction Rules for Gifts by Individuals
and Their Estates 1
Introduction 1 The Individual Income Tax Deduction 1 Qualified Organizations 2 What Is a Deductible Gift? 3 When Is a Gift Deductible? 19 Valuation 22 The Reduction Rules 27 Taking the Income Tax Deduction 48 The Gift Tax Charitable Deduction 58 Qualifying Charities 60 Substantiation Requirements 61 The Charitable Deduction and Value Adjustment Clauses 61 The Estate Tax Charitable Deduction 63 Qualifying Charities 65 Qualifying Transfers 66 Ascertainable Requirement 70 Death Taxes 70 Generation-Skipping Transfer Tax 73 CHAPTER 2
Donor Controls and Private Foundations 75
Introduction 75 Donor Controls on Inter Vivos Contributions 75 Earmarked Gifts 76 Contingent Gifts 83
Private Foundations 85 Establishing a Private Foundation 92 Operational Restrictions 99 Administrative Requirements 140 Private Foundation Alternatives 146 Terminating a Foundation 154 CHAPTER 3
Foundation Substitutes 159
Introduction 159 Supporting Organizations 159 Supporting Organizations Under the Treasury Regulations .. 161 Supporting Organization Reforms Enacted by the Pension
Protection Act of 2006 178 Community Foundation 190
Donor-Advised Funds 192 Congress Responds 192 Donor-Managed Investment Accounts 198 CHAPTER 4
Charitable Remainder Trusts 201
Introduction 201 Legislative Background 203 Rules Governing the Creation and Operation of Charitable
Remainder Trusts 205 The Grantor 205 The Grantor Trust Rules and the Date of Creation 208 The Trust Must Qualify for the Income, Gift, and Estate
Tax Charitable Deduction 213 The 10 Percent MRI Test 214 Noncharitable Benefits Limited to Payment of the Unitrust
Estate Tax Considerations 276 Generation-Skipping Transfer Tax Considerations 279 Distribution of the Remainder Interest 282 CHAPTER 5
Dangerous DIPS for Charitable Remainder Trusts 285
Introduction 285 Debt 285 Recourse Mortgage Debt 285 Unrelated Business Taxable Income
and Debt-Financed Income 286 Bargain Sale Consequences 290 Investments 292
Investments Generating Unrelated Business
Taxable Income 292 Stock Options 306 Comprehensive Environmental Response,
Compensation, and Liability Act (CERCLA) 319 Prearranged Sales 320 The Current Standard: Revenue Ruling 78-197 320 Applying Revenue Ruling 78-197 324 Corporate Redemptions 325 Self-Dealing and the Other Private Foundation Rules 328 Self-Dealing and Charitable Remainder Trusts 328 Application to Charitable Remainder Trusts 332 CHAPTER 6
Financial and Estate Planning Applications for Charitable
Remainder Trusts 335
Introduction 335 Charitable Remainder Trusts and Irrevocable
Life Insurance Trusts 336 Irrevocable Life Insurance Basics 336 Using the Irrevocable Life Insurance Trust with a Charitable
Accelerating the Remainder Interest 366 Cashing Out the Unitrust Interest 368 CHAPTER 7
Other Deferred Giving Arrangements 373
Introduction 373 Life Insurance Gifts 373 Income and Gift Tax Rules 374 Estate Tax Consequences 379 Using Insurance within a Charitable Remainder Trust 381 The Demise of "Charitable Split-Dollar" 385 Reporting Requirements 389 Charitable Gift Annuity 390 How the Annuity Amount Is Determined 392 Terms of the Annuity Payment 392 - Income Tax Deduction to the Donor 393 Deferred Payment Gift Annuity 399 Gift Tax Consequences 400 Estate Tax Consequences 401 Regulation of Gift Annuities 402 Planning Opportunities 404 Stop the Bleeding, Part II: A CRT "Rolled Over"
to a Gift Annuity 405 Gift of Future Interest in a Personal Residence or Farm 406 What Is a "Personal Residence" or "Farm"? 407 Structuring the Transaction 409 Tax Consequences 412 Qualified Conservation Contributions 417 Qualified Real Prop'erty Interest 418 Qualified Organization 420 Use Exclusively for Conservation Purposes 421 Income Tax Deduction 426 Transfer Taxes 429 Notice 2004-41 432 CHAPTER 8
Charitable Lead Trusts ; 433
Term of the Trust 455 Private Foundation Restrictions 457 Taxation of the Charitable Lead Trust 457 Source-Ordering Income Payments 458 Effect of Unrelated Business Taxable Income 460 Capital Gains 461 Earnings in Excess of the Annuity or Unitrust Amount 461 Tax Benefits to the Donor 462 Income Tax Consequences to the Grantor 463 Gift Tax 464 Estate Tax 467 Generation-Skipping Transfer Tax 467 Testamentary Charitable Lead Trusts 471 "Grantor" Charitable Lead Trusts 472 Triggering the Grantor Trust Rules 473 Income Tax Rules for Contributions to "Grantor"
Charitable Lead Trusts 475 Gift Tax Consequences: Grantor Charitable Lead Trust 476 Grantor Charitable Lead Trust Created
during the Grantor's Life 477 The "Supergrantor" Charitable Lead Trust 477 CHAPTER 9
Financial and Estate Planning Applications
for Charitable Lead Trusts 479
Introduction 479 The "Double Discount" Charitable Lead Trust/Family
Partnership Combination 479 Family Limited Partnership 479 The Charitable Lead Trust and Family Limited Partnership
Combination 480 Caveats 482 The "Layered" Testamentary Lead Trust 483 The Testamentary Charitable Lead Trust and Charitable
Remainder Trust Combination 486 "Batting Cleanup": Using Testamentary Charitable Lead Trusts
to Effectively Eliminate Estate and Generation-Skipping
Transfer Taxes 488 Using the Testamentary Lead Unitrust to Zero Out Taxes . . . . 488 Maximizing the Generation-Skipping Transfer Tax
Exemption with a Testamentary Lead Unitrust 490 Using the Lead Annuity Trust and Lead Unitrust Together . . . 490 CHAPTER 10
Trustee Issues 493
Charitable Remainder Trusts 493 Potential Trustees under State Law 493 Federal Tax Consequences of Self-Trusteed Trustees 496 Cautions on Self-Trusteed Trusts 503 Charitable Lead Trusts 508 CHAPTER 11
Charitable Planning with Retirement Plan Assets 511
Introduction 511 Lifetime Transfers of Retirement Plan Assets 513 Testamentary Transfers of Retirement Plan Assets
to Charity 523 IRD Basics 525 Interplay of the MRD Rules and Charitable Contributions
of Retirement Assets 527 Passing Retirement Plan Assets to Charity
through an Estate or Trust 536 Charitable Remainder Trust Applications 544
Retirement Plan to Testamentary Charitable
Remainder Trust 545 The Charitable Remainder Trust as a Credit Shelter Trust
for Retirement Plans 553 Special Considerations for Certain Lifetime Distributions
of Qualified Plan Assets 561 Other Methods 569 Gift Annuities 570 Charitable Lead Trust 571 CHAPTER 12
Charitable Planning with Business Assets 573
Introduction 573 Charitable Giving by Business Entities 573 Contributions by C Corporations 573 Contributions by Flow-Through Entities 577 Charitable Tax Planning Using Business Assets 579 Sole Proprietorships 580 Partnerships and Other Pass-Through Entities 587 S Corporations 592 C Corporations 602
Appendix 1: Drafting Guide for Private Foundations 613
Appendix 1-1: Private Foundation Articles of Incorporation 617 Appendix 1-2: Private Foundation Organizational
Appendix 2: Drafting Guide for Charitable Remainder Trusts 651
Appendix 2-1: Revenue Ruling 72-395 657 Appendix 2-2: Revenue Procedures 2003-53 Through 2003-60 683 Appendix 2-3: Revenue Procedures 2005-52 Through 2005-59 701 Appendix 2-4: Charitable Remainder Annuity Trust Agreement . . . 735 Appendix 2-5: Charitable Remainder Unitrust Agreement 745
Appendix 3: Drafting Guide for Life Estate Reserved Agreement
and Gift Annuities 757
Appendix 3-1: Gift Annuity Agreement (One Life) 759 Appendix 3-2: Gift Annuity Agreement (Two Lives) 761 Appendix 3-3: Deed Establishing Life Estate Reserved,
and Maintenance and Ownership Agreement 763
Appendix 4: Drafting Guide for Charitable Lead Trusts 767
Appendix 4-1: Charitable Lead Annuity Trust Agreement 769 Appendix 4-2: Charitable Lead Unitrust Agreement 777
Appendix 5: ACGA Rates 785 Table of Cases 795 Table of Statutes 801 Table of Treasury Regulations 811 Table of Letter Rulings, Revenue Procedures,
