E.3. Deferred Gifts
Spring 1992
Development Policy and Administration Manual
Chapter IV. Gift Administration Procedures
Section E. Pledges, Bequests, and Deferred Gifts
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DEFERRED GIFTS
The term "deferred gifts" covers a class of gifts that share a
common characteristic: the gift is divided into a present
interest and a future interest, and the donor irrevocably gives
one interest but either personally retains the other interest or
retains it for another beneficiary. For this reason, the gift is
sometimes referred to as a split-interest gift. The term
deferred gift historically arose because, in the most common
forms of this type, the donor retains the present interest and
gives the future interest to charity. However, this is not
always true (for the most obvious example see "Charitable Lead
Trusts", below), and in any case the donor has not deferred
making a gift, but has only deferred the time when the University
may enjoy the benefit of the gift. For this reason, the term
planned gifts is frequently used.
Deferred Giving Vehicles
The Internal Revenue Code recognizes various basic types of
deferred gift vehicles, of which The Regents currently accept the
following: charitable remainder annuity trusts; charitable
remainder unitrusts; pooled income funds; and charitable lead
trusts. Another vehicle, not technically a deferred gift, is
the charitable gift annuity, a contract entered by a charitable
organization and a donor to provide a lifetime annuity for up to
two persons, in exchange for a current gift. On approval from
the California State Insurance Commission, expected in 1992, The
Regents, in exchange for current gifts, will enter into
charitable gift annuity contracts for immediate and deferred
charitable gift annuities (see discussion on page 166).
Before acceptance by The Regents, provisions of a proposed trust
are to be submitted to Development Policy and Administration,
Office of the President, which will coordinate review of the
trust terms with the Treasurer's Office and General Counsel.
Text for pooled income fund agreements and charitable gift
annuity contracts are provided by Development Policy and
Administration.
Charitable Remainder Annuity Trust
A charitable remainder annuity trust is created when cash or
securities (or, in exceptional cases, income-producing, debt-free
real property) is irrevocably transferred from the donor to a
trustee in return for a guaranty that named beneficiaries will
receive at least annually a fixed-dollar amount established at
the time of the transfer of assets. This fixed amount must be at
least five percent of the fair market value of the trust assets
at the time of transfer, and must be paid from principal if
earned income does not reach a level at least equivalent to the
guaranteed annuity. Any excess income over the required annuity
payment to the beneficiaries is returned to the trust principal
for reinvestment.
The donor receives a charitable income tax deduction equal to the
value of the remainder interest and, if the trust is funded with
appreciated property or securities, the donor avoids all tax on
capital gains (although the appreciation is a preference item for
purposes of the alternative minimum tax).
No formal minimum amount is required to establish a charitable
remainder annuity trust. For gifts to The Regents a minimum
guideline of $50,000 has generally been used, although, depending
on the circumstances of the gift, a larger or smaller amount may
be appropriate.
Once an annuity trust has been established, no additional gifts
may be made to the trust; it is possible, however, to establish
additional annuity trusts. Charitable remainder annuity trust
assets may be pooled with other assets for investment purposes.
An annuity trust may be established for the lifetimes of one or
more individuals, or for a fixed term not to exceed twenty years.
Payments from the trust may continue to a beneficiary after the
donor is deceased, but may not continue beyond the lives of the
originally named beneficiaries, all of whom must be living when
the trust is established.
Charitable remainder annuity trusts are valued by the University
for reporting purposes at the amount of cash or the market value
of other assets at the time they are received, unless it is
anticipated that the principal will be invaded to meet the payout
obligation, in which case the gift should be reported at its
estimated net realizable value.
Charitable Remainder Unitrust
A charitable remainder unitrust is identical to a charitable
remainder annuity trust, except that payments to beneficiaries
are based on a fixed percentage (not less than five percent) of
the market value of the trust as calculated on the valuation
date(s). For purposes of calculating the payment to the
beneficiary, the fair market value of the trust is redetermined
at least annually. Unlike annuity trusts, the payments from
unitrusts may therefore increase (or decrease) over time,
potentially providing a hedge against inflation. Also unlike
annuity trusts, a unitrust is permitted to receive additional
contributions. As with annuity trusts, unitrust assets may be
pooled with other assets for investment purposes.
The donor receives a charitable income tax deduction equal to the
value of the remainder interest and, if the trust is funded with
appreciated real property or securities, the donor avoids all tax
on capital gains (although the appreciation is a preference item
for purposes of the alternative minimum tax).
As with annuity trusts, there is no formal minimum gift required,
although the same guideline of $50,000 has generally been used,
depending on the circumstances of the gift.
A unitrust's earnings may be less than the prescribed percentage
of the market value of the trust assets. In this case, one of
several things may happen. If the trust is not a net income
unitrust and income is insufficient, the principal will be
invaded to make the payments to the beneficiaries. In the case
of net income unitrusts, however, only the net income is paid to
the beneficiaries; the principal remains inviolate. Depending on
the trust's terms, the income payout for subsequent years may
exceed the fixed percentage stated in the trust agreement in
order to compensate for any deficiencies from prior years in
which the trust earned less than the stated percentage (called a
"makeup provision"), or there may be no provision for recovery of
the shortfall in subsequent years.
For all charitable remainder unitrusts, regardless of type, any
excess income earned over the stipulated payout is returned to
the trust principal for reinvestment. As with an annuity trust,
a unitrust may be established for the lives of one or more
individuals, or for a fixed term not to exceed twenty years.
Payments from a unitrust may continue to a beneficiary after the
donor is deceased, but may not continue beyond the lives of the
originally named beneficiaries, all of whom must be living at the
time the trust is established.
Charitable remainder unitrusts, like charitable remainder annuity
trusts, are valued by the University for reporting purposes at
the amount of cash or the market value of property or securities
at the time the assets are received.
Pooled Income Funds
Pooled income funds resemble charitable remainder trusts in that
assets are given irrevocably to the University in trust, and the
donor or other designated beneficiary retains a life interest in
the income earned on the gift. Pooled income funds also resemble
mutual funds, in that the income generated by a pooled fund is
paid on a prorated basis to all the participants in the pool.
At present, the University offers two funds: the UC Long-Term
Income Fund and the UC Balanced Growth Fund. Brochures fully
describing the funds and the text for agreements are available
from the Development Policy and Administration Office, Office of
the President.
Donors' gifts to pooled income funds are held for investment
purposes in one pool, which functions similarly to a mutual fund.
When a donor makes a gift to the fund, units are assigned to the
named beneficiaries based on the market value of the gift. The
income from the pool is then prorated and paid periodically to
each beneficiary on the basis of the number of units assigned.
Because the fund's entire income must be distributed each year,
the income stream to the donor is potentially greater (or less)
than is the case with a charitable remainder trust. (Capital
gains are not distributed to donors but are retained by the
pool.)
Because of different investment criteria, and because certain
management costs are avoided, smaller gifts may be more appro-
priate for pooled income funds than for charitable remainder
trusts. The minimum gift to enroll in one of the University's
pooled income funds is $5,000, with additions of as little as
$1,000 accepted.
Cash or marketable, taxable securities can be donated; gifts of
tax-exempt securities cannot be accepted because they would
disqualify the pool. By the same token, a check drawn on a tax-
exempt money fund should not be accepted. In unusual cases,
gifts of real property and closely held stock may be accepted
with approval from the Office of the President. However, because
the pool would assume liability from the donor for short-term
capital gains taxes, the University will not normally accept into
the pooled income funds securities that have been held for less
than the minimum long-term capital gains holding period. To
avoid delay of deposits into the fund, securities should be sent
directly to the Treasurer of The Regents. If there is anything
unusual about the securities, the Treasurer's Office should be
consulted beforehand.
The donor receives a charitable income tax deduction equal to the
value of the remainder interest and, if the donor gives
securities, all tax on capital gains is avoided (although the
appreciation is a preference item for purposes of the alternative
minimum tax).
Pooled income fund gifts are valued by the University for report-
ing purposes at the amount of cash or the market value of securi-
ties when the assets are received.
Charitable Lead Trust
A charitable lead trust is the "mirror image" of a charitable
remainder trust and, as with remainder trusts, may be structured
either as an annuity trust or as a unitrust. A charitable lead
trust is established when assets are transferred to a trustee,
with instructions to make designated payments to the University
for a specified period, invading principal if necessary. On
termination of the trust, assets either revert to the donor or
pass to the noncharitable beneficiary named by the donor.
Charitable lead trusts may, therefore, be especially useful for
estate planning purposes.
No gift should be reported for the transfer of the corpus of a
charitable lead trust, nor should an estimate be made of the
present value of the income interest. Rather, income from
charitable lead trusts should be reported as a gift in each year
income is received.
Donations Sometimes Classified as Deferred Gifts
Some donations are considered deferred gifts under certain
circumstances: charitable gift annuities; real property, if the
donor retains a life interest in the property; life insurance, if
premiums will be paid to maintain the policy rather than
surrendering the policy for cash; installment bargain sales; and
externally held trusts, if they are charitable remainder or
charitable lead trusts.
Charitable Gift Annuity
Note: The Regents have applied to the California Insurance
Commission to issue charitable gift annuities. Approval is
expected in 1992.
Charitable gift annuities resemble commercial annuities issued by
insurance companies, except that the annuitant (donor) tenders a
greater sum of money (the "gift" portion of the transaction) and
in turn receives a partial charitable income tax deduction for
the gift. The charity agrees to pay the donor (or another
annuitant) a fixed sum of money annually, usually for the
remainder of that person's life.
The charitable gift annuity resembles a charitable remainder
annuity trust in that the annuitant receives a fixed payment,
except for the following significant differences:
- a charitable gift annuity is a general obligation of
the charity; a charitable remainder annuity trust is
backed only by the portfolio of the trust, and
therefore if the trust is exhausted, the annuity
ceases;
- for the initial years of a gift annuity (until the
donor has surpassed his or her lifeexpectancy) part of
the payment of a gift annuity is regarded as
a return of principal and is therefore tax
free; payments received from an annuity trust
are often fully taxable as ordinary income;
and
- it is feasible to accept much smaller amounts for gift
annuities than for charitable remainder annuity trusts.
Real Property with a Retained Life Interest
Donors may give a remainder interest in a personal residence or
farm and receive an immediate charitable income tax deduction,
while enjoying the use of the property for the rest of their
lives or for a specified number of years. These gifts may be
especially attractive to donors on fixed incomes whose houses may
have appreciated substantially in value, because capital gains
are avoided (although the appreciation is a preference item for
purposes of the alternative minimum tax) while a large income tax
deduction is usually generated.
A personal residence qualifies as a gift even if it is not the
donor's primary residence (e.g., a vacation home). The furnish-
ings, unless they are fixtures, are by definition not included in
the gift of the residence. Donors may not receive an income tax
deduction on a gift of a future interest in the furnishings.
A gift of a farm also qualifies. A farm is defined as land that
is used for the production of crops, fruits, or agricultural
products, or for the sustenance of livestock. The donor need not
make a gift of the entire farm; any portion of the acreage used
as a farm may be given.
The donor makes the gift by executing a new deed to the property.
When a gift of a remainder interest in a residence or farm is
proposed, it must be determined in advance who will pay for taxes
and other costs of maintaining the property. See Section IV: D.2
for more information about gifts of real property.
Life Insurance
When a life insurance policy is given, it may be surrendered
immediately for its cash value, or it may be maintained, in which
case it is considered a deferred gift.
For more information, see Section IV: D.5, Life Insurance, and
Section IV: C, General Information About Noncash Gifts.
Installment Bargain Sale
An installment bargain sale occurs when the University makes at
least one payment on the property in a year after the year in
which the sale is made. The installment sale permits the donor's
cash flow (and taxable gain) to be spread over several years.
(For more information on bargain sales see Section IV: D.7).
Externally-Held Trusts
Trusts may be administered by a charitable organization, such as
the University or one of the Campus Foundations, or by another
individual, bank, or trust company. Externally-held trusts refer
to those not administered by the University or a Campus
Foundation. For more information, see Section III: F.1.