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Planning “Balanced” Gifts to Achieve Multiple Goals

Robert F. Sharpe, Jr. shares his observations on how to make philanthropy more satisfying for both donors and charitable recipients alike.

As one whose career has included the practice of law working with clients considering philanthropic gifts, as well as advising charities on the best ways to structure gifts from their perspective, I would like to share some observations that could result in more satisfying philanthropy for clients, their advisors and the charitable recipients of their gifts. When these parties all work together to balance the benefits for all concerned, they can achieve tremendous results.  

Types of Charitable Gifts

From the perspective of the charitable recipient, there are three primary types of gifts—regular, special and ultimate.  

Regular gifts are often in the form of annual fund contributions, sponsorships, memberships and other gifts typically made from income, which are in many cases repeated on a regular basis. These gifts are usually unrestricted and used to fund current operations. They’re often raised using speculative, mass-based approaches and media, and there may be little or no personal contact with donors.

Special gifts are gifts of relatively larger amounts that are made less frequently and because of their size are more likely to be funded with property other than cash. Charities rely heavily on this type of gift to fund capital needs, and as a result, gifts of this type are typically restricted to a particular purpose. These gifts usually involve personal contact between donors and representatives of the charitable recipient, and various advisors may also play a role.  

Finally, donors may at some point make their ultimate gift. The ultimate gift is the largest gift a donor is capable of forming the donative intent to make. By definition it’s a “gift of a lifetime” and isn’t typically repeated.  

For many, the ultimate gift is of such a magnitude that it can’t be completed during lifetime and is made through a provision in a donor’s estate. In some cases, an individual will fund a gift of this nature during his lifetime but will retain income and/or access to principal in case it’s needed to meet other needs later in life. Ultimate gifts can involve the most extensive interaction among donors, charities and advisors.

Power of the “Why” 

In past columns, I’ve explored the many and varied reasons that individuals choose to voluntarily redistribute assets and/or income to charitable entities of all types. Tax motivations are, for example, of paramount importance to some and of little or no interest to others. Some give primarily for ego gratification, others based on psychological, emotional or spiritual impetus.1 

Once it’s determined why a donor wishes to make a gift, whether regular, special or ultimate, that reason can sometimes influence the way the gift is structured. For example, if a client has little donative intent but wants to achieve maximum tax and other financial benefits, an advisor will understandably focus on the ways to maximize the donor’s benefits with minimal thought to the ultimate value of the gift to the charity and/or how long it may be before any funds are actually available for charitable purposes.

A CRUT Meets One Client’s Needs

Suppose a 48-year-old client is anticipating the sale of a business founded with a partner 20 years ago. After completion of the sale, he’ll have many millions of dollars in stock in the acquiring company with a close to zero cost basis. The stock pays little or no dividends. The client is loathe to forfeit 30% of the value of his life’s work in payment of state and federal capital gains taxes for the privilege of diversifying the stock to minimize risk and produce more spendable income.  

He would also like to remove assets from his estate as he anticipates he’ll die with an estate worth far in excess of current gift and estate tax exemption amounts.  

His accountant suggests that he might want to make sizable outright charitable gifts using a portion of the stock to help offset the tax on the stock he decides to sell, but the client isn’t yet of a mind to make large charitable dispositions. He would also like his college-aged children to receive as much as possible with minimal tax consequences, but doesn’t want them to receive too much too early in life.

One of his investment advisors suggests he consider a charitable remainder unitrust (CRUT) as part of the solution to his dilemma. It’s recommended that he fund a CRUT using $5 million of the stock he’ll receive as consideration for the company sale.

The trust will make payments equal to 5% of the trust’s assets as valued annually. The first year, the client will receive $250,000. If he’d sold the stock and paid 30% in combined state and federal capital gains taxes, the remaining $3.5 million invested at 5% would generate just $175,000 the first year.  

The CRUT thus generates 43% more income than would be enjoyed following a sale of the stock and reinvestment of the proceeds. It’s assumed that the trust will earn an average of 8% over time and thus grow 3% per year, an amount that should result in both the corpus and the income it produces compensating for inflation over time.

A 48-year-old has an estimated life expectancy of 35 years. Over that time frame, the income produced by the trust under the above assumptions will grow to just over $700,000 per year. At the donor’s death, the corpus would be worth approximately $14.1 million. 

As an added benefit, the client can use the tax savings generated by his $1.2 million tax deduction along with a portion of the income each year to purchase a life insurance policy that will serve to provide an inheritance of as much as the after-tax amount his children would have received had he left them the proceeds of a sale of the stock. Not a bad result for the donor should all go according to plan. 

The Charitable Perspective

Let’s now consider how a charity might view this gift, especially if its mission is one related to meeting an immediate need such as finding the cure for a disease. In that case, the charity might not encourage or welcome this gift with open arms—and understandably so. That’s because nothing will be available, as this gift is structured, to meet the needs of a charitable beneficiary for a period of time equal to how long it’s been since Ronald Reagan’s second election victory in 1984.

Contrast this with offering the gift to an endowment-intensive organization, such as a university with a 200-year plus history that plans to be in existence in perpetuity. In that case, waiting 35 years to receive $14 million may be more palatable.  

But wait, suppose that university is in a capital campaign and only credits trusts and other deferred gifts at present value for campaign credit purposes. It uses its long-term endowment investment return average of 7.92% to present value future gifts to create equivalency for recognition purposes for donors who make outright gifts of cash and other property.  

The present value of $14 million to be received in 35 years discounted at 7.92% is just $972,000. Given that the donor has been shown an illustration estimating $14 million to be eventually received by the charity, what might his reaction be when offered less than $1 million in credit for recognition in the campaign?   

In all too many cases, gifts such as the one proposed above never occur because of a lack of fine tuning that helps ensure that the goals of all parties to the gift are considered and met to the greatest extent possible. The more unbalanced a gift is in any direction, the less likely it is to be completed.

A Balanced Approach

As noted earlier, in the fact pattern described above, the donor has no desire to make a $5 million regular gift or a $5 million outright special gift and is too young from the perspective of the charity to consider making a gift that could serve as the ultimate expression of his donative intent but not be realized for 35 years or longer.

The donor does, nevertheless, have $5 million worth of property he’s willing to make the source of a charitable gift under circumstances that accommodate other personal needs as part of the gift strategy.

How can we help him achieve multiple personal goals at this point in his life cycle while also making a significant charitable gift he never dreamed possible, a portion of which the charity will receive in the near term?

Let’s start with the CRUT he was considering. The first step might be to alter the terms of the trust to provide that 20% of his annual payments be irrevocably directed to the charity that will receive the remainder when he dies. That would amount to a $50,000 payment the first year that could increase over time along with his payments from the trust each year as the corpus grows. In this way he’s, in effect, “endowing” a $50,000 regular gift that can grow over time with the value of the trust.

The charity would need an endowment of $1.25 million with a spend rate of 4% to generate an amount equivalent to the $50,000 being directed from the trust each year. From the donor’s perspective, this represents only a portion of the additional $75,000 of income being generated for the remainder of his life, which represents the savings realized from not paying capital gains tax at the outset of the trust. The remaining $25,000 could be used to fund a life insurance policy held in a trust outside his estate payable to his children at his death that could serve to help replace all or a portion of the $5 million transferred to the CRUT. He didn’t wish them to receive their inheritance until his death in any event. 

He could also pledge that in eight years, at the end of the campaign, he’ll cause the sum of $1 million to be severed from the trust to fund a $1 million “balloon pledge.” The charity would no doubt welcome this gift as a valuable contribution to its campaign. It could be seen as a special gift from his assets held in the trust toward the goal of the campaign, accomplished via a partial surrender of the donor’s income interest. He may or may not be entitled to an additional income tax deduction at that time based on the value of the surrendered income interest. When the dust settles, even after severing the $1 million, the donor has provided for a regular income stream for the charity with a present value of over $746,000. The $1 million payment at the end of eight years is valued by the charity at $1 million because it’s paid before the end of the campaign. The present value of the $11.9 million expected remainder of the trust after reducing it to account for the $1 million partial termination at the end of eight years is $826,000. The donor will now be credited with a gift valued at a total of $2.6 million rather than $972,000 as the gift was originally structured.

The donor is satisfied with this result because he’s maintained the bulk of the initial benefits the trust would initially afford him while greatly increasing the amount of credit he was initially offered toward the campaign goal.    

On top of this, he still expects to receive over $13 million in income from the trust if it performs as expected. All together, the donor has employed the initial $5 million in a way that funds a gift that’s a balance of current, intermediate and terminal charitable funding, which has total value far beyond what the donor anticipated.

The charity is pleased because it will receive a significant flow of regular income and a near-term capital transfer before ultimately receiving the estimated remaining trust corpus of $12 million at the donor’s demise.

Finally, the donor’s financial advisor has provided his client with valuable advice on a way to diversify his highly appreciated, low yielding holdings free of capital gains tax at the time of his gift, while enjoying the future growth of the assets in a tax-free environment.


1. See Robert F. Sharpe, Jr., “The ‘Why’ Behind a Gift,” Trusts & Estates (October 2018).

TAGS: Philanthropy
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