Recently released data indicates that charitable giving in the United States is continuing to make a slow recovery from the significant declines experienced in the wake of the Great Recession that began in 2007. While totals are still below the record years of giving just prior to the economic slump, a number of estimates that had reported sharp drops in 2009 and 2010, now report a slow, but steady, recovery in total charitable giving. 

 

CAE Reports

Of special interest is a recently released report on giving to higher education compiled by the Council for Aid to Education (CAE).1 This benchmark is based on actual gifts reported by the United States’ leading colleges and universities, rather than estimates derived from econometric models, as is the case with the annual Giving USA and a number of other reports on overall giving in the United States. The CAE reports are based on June 30 fiscal year results, with the most recent numbers reflecting giving between July 1, 2011 and
June 30, 2012. As such, the CAE reports on giving are widely considered an important indicator of trends in private philanthropy, especially among higher income donors and those with significant net worth.

CAE numbers reveal that giving by individuals to higher education declined slightly in the 2012 reporting year, after rebounding in 2011 from a 20 percent drop between 2008 and 2010. Note, however, that these totals are still some 11 percent below the peak year of 2008 (see “Trends in Individual Gifts,” p. 12).

 

The individual gift totals reflect the combination of outright gifts by individuals, gifts via realized bequests and the present value of charitable remainder trusts (CRTs), gift annuities and other deferred gifts.

Since the low point of 2009, outright gifts have grown by 14 percent, and bequests have declined by 14 percent, while the greatest growth has been in the deferred gift category, with an increase of some
35 percent reported. “Estimated Deferred Gifts to Higher Education,” p. 13, shows the estimated face value of these gifts since 2009.

This report represents the first concrete evidence of a trend toward increasing numbers of CRTs and other irrevocable deferred gifts in one of the leading sectors of non-profit fundraising.

 

In fact, this is the only known reliable indicator of these trends, since Internal Revenue Service income tax deduction data combines the deductions taken for outright gifts with current tax deductions taken for the present value of deferred gifts, and it’s impossible to separate the amounts of each component.  

 

Giving USA Reports

Giving USA reports make no attempt to shed light on deferred gifts apart from bequests. They’ve historically relied heavily on IRS estate tax deduction reports. Those numbers, in turn, contain gifts other than bequests, for example, when a CRT was included in a gross estate of a decedent under the terms of Internal Revenue Code Sections 2036, 2037 and/or 2038 before being deducted from the taxable estate. Giving USA data combines those amounts with bequests, so the Giving USA data on bequests includes bequests and amounts from grantor CRTs when beneficiaries pass away. The present value of those trusts were already deducted from individual income tax returns in the year the trusts were created, so the assets in the trusts are effectively “double-counted” in IRS reports and not separated out from either the income tax charitable deduction or estate tax charitable deduction reports.

 

Growth Expected

In my May column, I predicted that we’re likely to see record numbers of charitable trusts created in the coming decade. To recap, that’s because the leading edge of an estimated 70 million baby boomers are now beginning to reach their late-60s when, according to IRS data and fiduciary data, split-interest charitable gifts are typically funded. This comes after an extended period of slow or no growth in the numbers of charitable trusts created by individuals born in the 1930s (who would have been most attracted to CRTs), as a result of precipitous birth rate declines during that decade. To put this in perspective, nearly twice as many persons were born at the height of the baby boom in 1957 than at the low point for births in 1932 .

In addition, rebounding investment market and real estate values are now combining with higher capital gains and income tax rates for many in ways that offer powerful renewed tax and other financial incentives for the creation of CRTs and similar vehicles.

Two other factors may also be serving to drive growth in demand for these vehicles. As increased threshold levels for federal estate and gift taxes have eliminated the burden of these taxes for over 99 percent of decedents, tax incentives to leave charitable bequests at death have all but disappeared for most. That doesn’t mean, however, that we can necessarily expect a significant drop in testamentary giving, as a number of surveys have reflected.2

Savvy donors and their advisors may now, however, see an opportunity to accelerate gifts that would previously have been in the form of charitable bequests and, instead, make them through CRTs, gift annuities and other irrevocable split-interest gift vehicles. Here’s why.

First, assets given at death that wouldn’t give rise to estate tax savings can be used to make gifts that create immediate income tax deductions that result in contemporaneous tax savings for a gift that takes place at death. Charitable beneficiaries receive funds at death in either case, but with a CRT and similar gifts, the donor realizes an immediate income tax deduction based on the anticipated future gift value. 

Second, because a CRT is itself a tax-exempt entity, capital gains tax is avoided or delayed at the time of a gift. Third, for the same reason, the trust enjoys a tax-free trading environment for the duration of its existence. As noted earlier, when an estate exceeds taxable thresholds, the amount remaining in CRTs will, generally, be excluded for estate tax purposes, just as if the gift had been made via a revocable bequest by will or other testamentary provision.

Fourth, income received from a CRT can be taxed to a greater or lesser extent at capital gains or other tax-favored income under the tier structure of income reporting, which preserves the nature of the income received by the trust as it’s paid to beneficiaries.3

Another motivator for irrevocable deferred gifts that’s totally unrelated to tax incentives can be found in the increased anxiety level for many wealthier individuals regarding anticipated entitlement reform. For those with significant net worth, there’s a growing concern that future changes in entitlement programs may bring copays and other forms of contributions toward health care that aren’t currently a major concern of current retirees. Combine these worries with predictions of growing numbers of individuals living past the age of 100, and the desire to set funds aside in irrevocable trusts that provide income, but aren’t reachable by creditors, may hold increasing appeal.

For those who’ve already planned to include charitable gifts as part of their estate and financial plans, irrevocable split-interest gifts may, thus, hold special appeal, as those individuals realize they can never recover the assets contributed to such trusts, but no one else can either. Combined with demographic forces and the tax and other financial benefits referred to above, a powerful confluence of events is driving the increases we’re seeing in giving to higher education, which will also, no doubt, occur across other non-profit sectors.

 

A Word of Caution

Other bodies of law apart from the tax arena must be considered when counseling clients on the advisability of making use of this gift-planning vehicle.

During the last boom period in the creation of CRTs and certain other gift vehicles, some individuals, as well as corporate fiduciaries and asset managers, engaged in the practice of marketing CRTs and other gifts as investments and, in some cases, attempted to charge charitable remainder institutions commissions and finder’s fees to be named to receive the remainder of such trusts.  

In response, Congress modified federal securities laws, as part of the Philanthropy Protection Act of 1995, to provide that charitable gift annuities, pooled income funds and certain CRTs and other gift vehicles were, in fact, securities. They were and continue to be exempt from registration, however, and those that market them needn’t be registered investment advisors. This exemption was conditioned on a number of factors, including that no commissions could be paid, and each donor was to be furnished appropriate disclosure statements. The law also made it clear that the anti-fraud provisions of securities law continued to apply to these gifts.

For this reason, as renewed interest builds in CRTs, it’s important that we learn from past experience the best ways to structure split-interest charitable gifts for the mutual benefit of donors and their philanthropic interests, while being mindful that the primary purpose of these plans is to make meaningful charitable gifts possible.

In upcoming columns, I’ll explore the many ways that CRTs and other vehicles can be used to make gifts, while meeting a number of other financial and estate-planning goals.  

 

Endnotes

1. See http://cae.org/fundraising-in-education/category/vse-survey.

2. See Bank of America 2012 study, http: //newsroom. bankofamerica.com/press-kit/bank-america-high-net-worth-philanthropy-study.

3. See Internal Revenue Code Section 664(b).