Many of our nonprofit partners have requested that Kitsap Community Foundation provide a detailed example of how a complex gift comes to life and how you and your team can seize the opportunity. We’re pleased to share this playbook to illustrate a situation where a charitable remainder trust is an ideal planned gift for a major donor. We’re also highlighting how–and when–KCF can step in to help in situations like this.
Remember, whether your organization currently houses its endowment or reserve fund at Kitsap Community Foundation, or whether your staff and board are considering it, our team is here to help. We’re just a phone call or email away, and we look forward to hearing from you!
Without further ado, here we go!
A major donor is in your office, dropping hints
Imagine that you’re meeting with a long-time donor, Tom Browning. Tom is a 67-year-old real estate investor. Tom is a widower. Tom has supported your organization for many years. Indeed, your records show that your organization consistently receives donations from a donor-advised fund established years ago by Tom and his wife, Paige.
Since Paige passed away last year, Tom has been spending more time volunteering at your organization, and he’s commented several times recently that he might be considering a major gift.
Tom mentions a piece of real estate, and you think this may be your moment!
After the two of you catch up on your organization’s latest news, Tom says 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 still pretty strong for new residential development in that particular area. I need to act fast, though, because I think the real estate boom is waning. Oh, and there’s no mortgage on the property. And I would love for your organization to get a portion of the proceeds.”
Wow! This is exciting! You might be tempted to encourage Tom to list the property for sale immediately. Before you do that, though, stop for a moment and consider that you might be able to save Tom a lot of money and also help him expand the pattern of philanthropic support that he and Paige established years ago. So instead of jumping right into a discussion about the sale of the property, you call the team at Kitsap Community Foundationto see if they can help.
Kitsap Community Foundation jumps in to assist
Moments later, you’ve got Kitsap Community Foundation on speaker phone and the conversation continues with something like this:
“Great to talk with you both–let’s definitely put our heads together here because it sounds like there is a way for Tom to use this real estate opportunity to fund his favorite charitable causes, including this organization.”
In an effort to continue gathering information., “Now, remind me,” the Kitsap Community Foundation professional asks Tom, “does this property produce any income for you right now?”
“Unfortunately, no,” Tom replies. “I’ve never had time to develop the land, so it just sits there. At least the value has been going up–at least for now.”
“Ah,” responds the KCF team member. “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 funding your charitable goals, capitalizing on the property’s high value, and gaining tax benefits.”
“That sounds great,” is Tom’s response, which you predicted.
A strategy emerges
You, Tom, and the Kitsap Community Foundation team member begin to discuss the advantages of Tom setting up a charitable remainder trust (“CRT”). A CRT is a “split interest” charitable planning tool that allows a donor like Tom to transfer an asset (in this case, real estate) to an irrevocable trust, receive income for life, and earmark what’s left (the “remainder”) to pass to charities of choice.
In Tom’s case, the fund he and his wife established years ago at Kitsap Community Foundation can serve as the recipient of the assets remaining in the trust following Tom’s death. The terms of the fund can be updated, alongside creating the CRT, to accommodate Tom’s intentions for distributions to your organization and Tom’s other favorite charities, too. In this way, Tom can achieve his goal to leave a meaningful legacy to all of his favorite causes.
Here’s why this works so well
Because the charitable remainder trust qualifies as a charitable entity under the Internal Revenue Code, here’s what happens from a tax perspective:
When Tom transfers the property to the trust at a fair market value of $2 million with a cost basis of $200,000, and then the trust sells the property, the trust itself does not pay tax on the $1.8 million capital gain. Tom would have had to pay this tax if he had sold the property himself.
This leaves the full $2 million in the trust to be invested for growth, subject to Tom’s lifetime income payments.
Tom is eligible for a potentially significant charitable income tax deduction of the fair market value of the property given to the trust, minus the present value of the retained income stream.
Lifetime payments to Tom (in an annual amount equal to at least 5% of trust assets) generally are subject to income tax during each year of the distributions, but the overall income tax hit to Tom likely will be less than if he had transacted an outright sale.
Because the charitable remainder trust is an irrevocable trust, the property and the sale proceeds (other than what winds up in Tom’s estate from any unspent income stream payments) are excluded from Tom’s estate for estate tax purposes.
Contrast this with an alternative scenario in which Tom had sold the property, realized a $1.8 million capital gain, paid tax on that gain, and made gifts to charities from what was left, holding back enough to live on. And, in that situation, the proceeds would be included in Tom’s estate tax purposes. Ouch!
The net-net
Your meeting with Tom–with the Kitsap Community Foundation team on speaker phone–is an excellent reminder of how KCF can serve as your partner in securing major gifts and bequests.
Note also that a donor’s fund at Kitsap Community Foundation can be an excellent landing spot for complex gifts that a donor wants to make to your organization as well as to other organizations. KCF will administer the gift and distribute the assets according to the donor’s wishes. This relieves a donor of the quandary of having just a single piece of property to give but multiple charities the donor would like support.
The team at Kitsap Community Foundation is here for you! We look forward to getting that call the next time you have a donor like Tom in your office–or anytime you have a question about a complex gift or charitable giving strategy.
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