Episode 56: Planned Giving Part 3 - Charitable Trusts and Bargain Sales

Welcome to another edition of “Around with Randall”, your weekly podcast making your nonprofit more effective for your community, and here is your host the CEO and Founder of Hallett Philanthropy, Randall Hallett. I welcome you back to another edition of “Around with Randall”. 

Today's part three of our four-part series on planned giving, and in the first podcast in this series we talked about some of the challenges that come with planned giving, and one of which was that's legal and complicated. And so the two middle podcasts two and three the one before this and this one are designed to make it easier to help overcome maybe that thought process that's too challenging. We talked about two particular things, two particular instruments in planned giving last time. The first was bequests and then annuities. Today, as promised, we're going to talk about trusts. But interestingly in the last 10 days I’ve had two questions that related to another type of instrument and because of that I thought maybe it'd be smart to throw it in here as an educational piece. So today the conversation is trusts, charitable remainder trusts, CRTs, and bargain sales, which is about land.

Let's take charitable remainder trusts first. And in some ways, depending on how they're set up, they may look and feel like an annuity that we talked about. A charitable annuity that we talked about last time. In some ways, they're very similar, but in other ways they're different. So let's start with the basics, make it really simple, because it really is. No one's asking a gift officer or an organization to draft the contractual obligation that comes with a charitable remainder trusts or charitable annuity. What we're talking about is being able to know just enough when somebody says certain things you know how to respond and you have a little bit of the information that's necessary just to have an appropriate level conversation, trust. So let's jump into that one first. 

Charitable remainder trust - it is also a legal instrument - it's a contract that has benefits for the person making it as well as a charity. The trust is built out to do a couple things. Number one to get money out of an estate, which can help with tax implications if these stakes are big enough and provide a steady stream of income or revenue for a beneficiary, most of the time it's probably the person or the couple who gave it, but it could be for a child or a grandchild or someone of that nature. So, let's kind of break these this apart. What generally happens is a pool of money or assets - could be stock, could be other things, is taken from an individual or let's say a couple, and is put into a trust and the idea is is that that trust is going to pay - we'll talk about this here in a moment - money to the beneficiary, whoever's named over a period of time, usually maximum of about 20 years. And at the end, whatever's left is going to go to the charity, which you may say, “well gosh doesn't that sound like a an instrument like what we talked about last time in some type of charitable annuity.” 

The difference here is that last time we said the money is given to the charity and they manage it, invest it, hold it, and make the payments. With the charitable remainder trust, an outside trustee is usually named so it could be a bank, could be an individual, could be an investment house. And the reason they do that is they have more investment opportunities. If you remember we said that their standards, that the percentage is set nationally with charitable annuities, that depending on your age or the donor's age, or the donor and a couple. So, the two life scenario, those are absolutely locked in. There's no advantage from one charity another because by law they have to all be the same, depending on the age, birth date, really of the person or people that are making that possible. 

With a trust that's totally different. The trust can invest that money however deems appropriate. It could be more aggressive. It could be less aggressive, really, dependent on who the individuals choose as the trustee officer or trustee entity to manage that investment. So, let's take an example. Let's say that a person has a great deal of wealth and they want to guarantee themselves some income. So they take a million dollars out of their world, out of their personal assets, place it in this trust instrument and then it's invested in. Every year they will receive a payment. They would have received a taxable donation to a certain level for the money coming in, and some of the money coming out is going to be for an income on an annual basis, going to be tax-free. 

But it gets a little bit more interesting. Remember with charitable annuities we talked about the idea of it, a percentage is set. There are two options with a trust that are a little bit different. Number one, we talked about somebody else can invest. They could be more aggressive but we also have the option of taking two types of payments, one is the annuity, meaning we set a percentage, excuse me, a dollar figure that's going to come out every year. So let's use that million dollars and we say we want $10,000 a year, so one percent return seems pretty easy. You could also say we want a 10% return which would be a $100,000. Well that puts a lot more pressure on the investments to make sure they're making enough money. No matter how those investments do, if you set the dollar figure, that money is paid to you every year. That's what's called a CRAT, charitable remainder annuity trust, and all it means is that a dollar figure is set.

With that we could also run out of money. Let's say you had the 10 percent a million dollars put in $100,000 payment per year and in five years you lost x percent of the of the investments because stock market did badly. You actually could run out of money in that instance, and when that happens generally it means the charity doesn't get anything and it becomes more dependent on the trustee to be really good at investing, to controlling that original amount of dollars coming in, that million dollars, and investing it wisely. That's a CRAP, charitable remainder annuity trust. A CRUT, c-r-u-t unitrust is - we set a percentage. We just say it's going to be eight percent per year. 

So let's take an example. Same million dollars goes in the first year, eight percent would be $80,000. Let's say the trustee does a great job of investing and they make 20 percent, so we'll take away the distribution. A million dollars invested at 20 percent return, that becomes a $1.2 million dollar corpus or trust, and they, the  beneficiaries get eight percent of it. So the amount every year could be different, could be higher, could be lower. But there's a lot less chance of it running out of money because it's only going to be a percentage of whatever is left at a certain time frame, every year the same. It's not any more complicated than that. 

The benefits are as mentioned. You get some tax benefits immediately, or the person making the contribution, they have the ability to have a different investment strategy with that trustee, that there's a benefit for the charity, although sometimes it's unknown how much that money will be at the end of that term, even though they can do some planning for it. And one of the downsides to consider is, it's a lot more complicated, you have to find the trustee. Everyone has to agree to the terms. Usually smaller-type investment vehicles don't work. Dollar figures really, a $10,000 charitable remainder trust doesn't make any sense but a $10,000 charitable annuity would because it's pooled together. It's much easier for the charity to manage that so it's also not as advantageous. You get more out of charitable deductions with the annuity, charitable annuity, rather than the trust because there's more variability with the trust, more unsure times to come. We don't know how much the investments are going to be so there's a lot of things at play here. The real key is is that when - we'll talk about this a lot more next time - this is that people when they say “I want to guarantee income,” this is an option, particularly if they're like “I want more than three and a half or four percent,” or whatever the level is that a charitable annuity prescribes. A charitable trust remainder trust allows there to be that option. So that's just a high level conversation about trusts and what i'm hoping is is that all of a sudden you're like, “Oh, I kind of have a better understanding of this, making it less scary so to speak.” 

The other one instrument I wanted to talk today about, just for a minute or two, is the idea of a bargain sale. And this is something I haven't seen as often in my career, but it's becoming more prevalent because of the increasing costs dramatically. Particularly the last two-three years of real estate. All a bargain sale is, is the sale of a piece of land for less than its fair market value, what it would be on the market for, and the remainder is basically a charitable deduction. So, let's take a, let's take an example, let's say there's a piece of land that's next to the hospital or to the property of the hospital or the educa -  you know the school - and somebody says “I’d love for you to buy my property,” because they know that hospital, schools, other entities like that need to continue to expand or want to continue to expand, at least have that option. And, they say, “we think the fair market value of this piece of land is a million dollars,” and your comment is, “Yeah, we don't have a million dollars to pay,” you can do a bargain sale. If the true market value, fair market value of that piece of land is a million dollars and the charity nonprofit can pay half of it- $500,000 - the charity can also then

indicate that a charitable contribution has been made in the difference between what was paid in cash and the fair market value. So, in our instance a million dollars for the piece of property, half a million to be paid by the, let's say it's an educational unit or a hospital, there would be a $500,000 charitable deduction that would go with it because the person sold it for less. There's a couple provisos with this number. One is - this is the most important part of a bargain sale - the charity, the nonprofit, can't be setting the fair market value. You can't say, “well, we think it's worth a million.” There needs to be an outside appraiser that's going to set that level and the protection that the organization needs to present for itself is to never put a charitable dollar amount on the property or on the transaction. It's just a statement of fact that we purchased this property for $500,000 and the seller is going to get an independent appraisal of the land and the difference, if above $500,000 between that number and $500,000 would be a charitable deduction.

I’ve run into this a number of times in my career where the donor wants a letter that has a dollar figure. Well you need to tell me that it's worth a million dollars and my response is, “I’m not an appraiser.I don't know how to do that. I can ensure that we will give you all the details of the transaction on our letterhead but you need to go get an independent appraisal of that land to get to the dollar figure of what the land's actually worth.” This is becoming more and more important because land prices with houses and others have increased dramatically in the last decade or two. And so someone who purchased a piece of land for $50,000 25 years ago, and if you're in a place like California or New York, certain places in Florida that could - that piece of property for $50,000 thirty years ago could be worth two or three million dollars today. And if they really want the charity to benefit they can allow the charity to purchase the piece of property or the home or the whatever at a discounted rate and receive a charitable deduction and because prices have gone up so much there's more cash to be taken out of it in the sale price. So let's take that $50,000 piece of land with a house on it that was purchased 30-35 years ago and it's now it's worth two and a half million dollars because it happens to be in California, which is not an unusual circumstance. They can sell that piece of property for let's say half so 1.25 million in cash and get a tax deduction. If the fair market value is $2.5 million - let's assume it is - and get a tax deduction for a million two five they can carry that forward for seven years and use it against other income. It’s incredibly advantageous because remember the land only cost $30,000 and the capital gains tax will be reduced because you're not going to have as much in that difference between the $30,000 was originally purchased for the f$50,000 originally purchased for, and the $2.5 million, the gap is only going to be half that. So there's some real tax advantages in looking at bargain sales. 

Here's the other thing you need - a great gift acceptance policy - and we'll talk about this next time to make sure that there is a process to accepting land as even if it's purchased in a bargain sale or just outright given to you to make sure it meets certain standards, to make sure that it's it's at appropriate, you're covered in terms of environmental concerns and things of that nature that can burden an organization. And we'll talk more about that next time.

So today we covered the trusts big picture - take money out of someone's personal wealth or estate - could be a house, could be cash, could be lots of stock put into an instrument. That trust… that trust is invested and either they choose to get paid by a percentage of the total every year or a standard amount, same amount every year, and that money then is given on an annual basis of that percentage or those dollar figures, and at the end of that period or when that individual dies, the charity gets the remainder. The other is a bargain sale, and it's a way to reduce the amount of money that an organization might pay for a piece of property in cash, but also provide a charitable deduction for the seller. Just two additional arrows in your quiver when it comes to planned giving, and again you don't have to drop the documents, you just have to know what people are looking for, listening for. You need to listen for the key issues. I’d like to make sure I always have income or I’d like to guarantee my income or I’ve got this piece of property I don't know what to do with it, lots of different ways to get people to think about their estates and their financial thought, you know, impetus to get them to consider an estate gift of some level, and that may be the biggest gift they're ever ever able to make.

Next time we'll talk about some of the intricacies around just estate giving, gift acceptance, marketing plans, certainly some things that I would advise in terms of making sure your organization's ready for these things to really hone in on kind of the the programmatic pieces of a good planned giving program. 

Don't forget check out the website that's hallettphilanthropy.com. A lot of new stuff there, blogs, there's also now some announcements on success stories, there is information on a study - white papers - a lot of things that are being placed there by the work of the team. Encourage you to take a look. Also don't forget to make sure you're subscribing or passing along information saying hey this podcast is kind of interesting if you think so, maybe somebody else could benefit from it as well. You can get it on iTunes, you can get it on Downcast, Spotify, art radio, you can also watch it on YouTube, all kinds of different ways. And if you want to communicate with me just email podcast at hallettphilanthropy.com. 

My reminder as I do each and every episode, I hope you feel like you're making a difference if you're in the nonprofit world, you should. Go to work doesn't mean there's not trial and tribulation it doesn't mean that there's not challenges but what we know is that this is a great profession and that we're doing good work, you're doing good work. You're making a difference for people which brings me to my all-time favorite saying, some people make things happen, some people watch things happen, then there are those who wondered what happened. In life we fall into one of those categories. Every second we're breathing, and non-profit work is all about making things happen for people who are wondering what happened that's what the definition of philanthropy really means - love of mankind, love of humankind, making a difference. And I hope you feel that way each and every day, that you are helping your organization be all that it can be. Appreciate your time on part three of planned giving. We'll jump into the last section next time on the next episode of “Around with Randall.” Can't wait to welcome you then. Thank you for your time today and remember you have a great day.