August - Professional Advisors Community Connection

Community Connection

Professional Advisors Edition - August 2021

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Case study: How to spot a prime CRT opportunity

Imagine that a client sits down at your conference room table and begins the meeting something like this:

“I’ve got a prime tract of land I bought for $200,000 just 10 years ago, and now I am sure I could sell it for $2 million because the market is so hot for new residential development in the area. I need to act fast because I am not sure how much longer this real estate boom will last.”

What’s your response? Before you suggest that your client put the property up for sale as soon as possible, consider asking a few more questions that could save your client a lot of money and help satisfy the client’s income and charitable giving goals at the same time.

“That’s fantastic,” you say. Instead of jumping to getting the property listed, you go deeper.

“Your current estate plan already includes bequests to hospice, animal rescue, and the art museum,” you remind the client. “There actually is a way to wrap those goals into your strategy for selling the land.”

“Hmmm,” the client says, considering your idea. “If it’s all the same in terms of which charities receive money when I die, sure, I’m open to it.”

“Good,” you respond. “Now, remind me, does this property produce any income for you right now?”

“Unfortunately, no,” replies your client. “I’ve never had time to develop the land, so it just sits there. At least the value has been going up.”

“Ah,” you respond. “With the technique I have in mind, you may be able to secure an income stream for the rest of your life, in addition to satisfying your charitable goals and capitalizing on the property’s high value.”

“That sounds great,” is your client’s response, which you predicted.

So what idea is on your mind for this client? Hint: Its initials are C R T.

That’s right. CRT. A charitable remainder trust (“CRT”) is a “split interest” charitable planning tool that allows your client to transfer an asset (in this case, real estate) to an irrevocable trust, retain an income stream, and earmark what’s left (the “remainder”) to pass to a charity or charities of the client’s choice.

For example, in our hypothetical situation, your client could establish a fund at the community foundation to receive the CRT’s assets following the termination of the income stream, in this case, on the client’s death. The client’s fund at the community foundation can provide for distribution of those assets to hospice, animal rescue, and the art museum according to the client’s wishes.

Because the charitable remainder trust qualifies as a charitable entity under the Internal Revenue Code, here’s what happens from a tax perspective:

When the client transfers the property to the CRT at a fair market value of $2 million with a cost basis of $200,000, and then the CRT sells the property, the CRT itself does not pay tax on the $1.8 million capital gain.
This leaves the full $2 million in the trust to be invested, subject to the client’s retained income stream.
The client is eligible for a charitable tax deduction of the fair market value of the property given to the trust, minus the present value of the retained income stream.
Payments to the client generally are subject to income tax during each year of the distributions, but under more favorable terms than if the client had conducted an outright sale.
Because the CRT is an irrevocable trust, the property and its proceeds (other than what winds up in the client’s estate from the retained income stream) are excluded from the client’s estate for estate tax purposes.

Contrast this with an alternative scenario in which your client sells the property, realizes a $1.8 million capital gain, pays tax on that gain, and ends up with, say, $1.5 million (probably less!) with which to invest, give to charity, and draw from for income. And, in this situation, the proceeds would be included in the client’s estate for estate tax purposes. Ouch!

When you spot a client who could benefit from a CRT, give us a call! CFCI is happy to help you as you serve your clients from the moment a client walks in the door through fulfilling the client’s wishes after the client passes away.

Planned giving starts now: Tips and talking points for lifetime charitable gifts

According to 2020 statistics released in June 2021 as part of the Giving USA report, Americans’ bequests to charity totaled nearly $42 billion last year. That’s a tremendous amount of charitable giving flowing to community organizations from donors after they die. Still, it’s a fraction of the $324 billion Giving USA reports was given to charities in 2020 by living individuals.

As you work with your philanthropic clients, do not only consider the benefits of building philanthropic components into clients’ estate plans for distribution after death, but also consider helping your clients make meaningful gifts during their lifetimes.

Here are three tips for encouraging your clients consider “giving while living” as part of their plans:

Clients get to see the results of their gifts and have an opportunity to get involved, whether as a volunteer, board member, or simply an observer at a site visit to each charity they support.
Clients can involve their children and grandchildren in making the gifts, especially when the clients are working with the community foundation through a family donor-advised fund or other collaborative vehicle.
Clients are eligible for an income tax deduction for lifetime charitable gifts, and the gifted assets are no longer subject to future estate taxes.

We can help you assist your clients with a philanthropy plan, starting with the basics. Here are a three talking points to help you begin the conversation with your philanthropic clients:

“Give to what you know. Most Americans get the greatest joy from giving to causes with which they are personally familiar. This makes it easier to understand how the charity is using your dollars. So, for example, if you’ve had experience with helping foster children, you are likely to understand how the organization is using your donation to support training for foster parents. Or if someone in your family suffers from an eating disorder, you will understand what it means to give money to support an individual to receive an extra six weeks of treatment beyond what insurance will pay. And do not be afraid to ask! Most organizations are happy to share the tangible impact of your donation—whether it is $10, $100, $1,000 or more.”

“Give where you are. Many Americans support charitable causes overseas, and that is wonderful. But don’t forget that sometimes the greatest needs are right here at home. Look for opportunities to support local charities who are celebrating year-end giving by offering information about the overall need, the mission they serve to meet that need, and the positive impact of a year-end gift on the lives of others. When you give to local organizations, you are in a much better position to have confidence in your gift.”

“Above all, give to the charities you love. Gifts that are aligned with a passion and your own love of humanity carry the most energy and ultimately make the most difference. The bottom line is that giving should feel good. Certainly understanding how a charity is using the money is a part of that. But don’t let that get in the way of doing good and enjoying every minute of it.”

Need more tips and talking points? The CFCI team is always here to help.

“Insider giving” and seats at the table: A team approach is essential to crafting an effective philanthropy plan

As corporate valuations soar, you may be getting more frequent questions from executives at publicly-traded companies about the tax benefits of transactions involving highly-appreciated stock. Proper planning is critical to optimize the tax aspects of a transaction, but no advisor should go it alone. A client’s attorney, accountant, and financial advisor should be at the table together to ensure that all parties are coordinated and unintended negative consequences are avoided.

For transactions involving charitable giving, consider inviting a knowledgeable professional from CFCI to participate in the planning. Not only can we offer structures to streamline administration, create tax efficiencies, and maximize your client’s charitable wishes, but we can also serve as a source of up-to-the-minute developments in charitable tax planning policy and regulation.

An excellent example of this will be discussed in an upcoming issue of the Duke Law Journal on the topic of “insider giving.” A study conducted by University of Michigan professors found that charitable gifts of stock by shareholders who own 10% or more of a company’s shares tend to be “suspiciously well-timed.” Thus, charitable transactions involving securities may very well begin to receive more scrutiny from the SEC.

Our team is watching this and other developments closely to help you help your clients succeed. With CFCI at the table during estate planning meetings involving philanthropic strategies, emerging pitfalls such as "insider giving" are more likely to be avoided.

Donor privacy:

Ongoing concern for a common client priority

In an era of social media and intense polarization of rhetoric, it’s no wonder so many charitable individuals and families choose to give to their favorite causes anonymously. And, bolstered by the United States Supreme Court’s decision last month in favor of donor privacy (affirming a position advocated by parties across the political spectrum), this trend is likely to continue.

At CFCI, we make it easy for you to help your clients who wish to give anonymously by establishing a charitable giving fund. For example:

Your client can select a name for the fund that is something less obvious than their own. For example, instead of the “Sam and Vera Barker Fund,” your client can name the fund the “SVB Fund,” “Desert Family Legacy Fund,” or whatever the client would like.
Sometimes your client will wish to recommend that certain grants (but not all grants) from a fund be issued anonymously. We offer your clients the ability to opt into anonymity on a grant-by-grant basis.
Your client can rest assured that no solicitations will flow directly to them; we handle all correspondence related to nonprofit grants from the fund.
CFCI does not disclose information about your client or the fund to any third party, nor is detailed information available through a Form 990.

We're proud of our accreditation with National Standards for U.S. Community Foundations®. This accreditation, signified by this Seal, indicates that the Community Foundation of Central Illinois meets the highest standards for philanthropic excellence. The 26 national standards establish legal, ethical, effective practices for community foundations everywhere and indicates CFCI’s commitment to excellence and accountability. Learn more about the accreditation process at cfstandards.org.

Community Foundation Of Central Illinois

3625 North Sheridan Road

Peoria, IL 61604

309-674-8730

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