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Friday September 22, 2017

Article of the Month

Blended Gifts - Part V


The idea of asking donors to make a "blended gift" is an emerging trend in the world of philanthropy. A blended gift is the combination of a current gift, or a commitment to make a series of current gifts, together with a planned gift, such as a bequest, charitable trust or charitable gift annuity. The current gift portion of the blended gift will provide the donor and charity with benefits today while the planned gift portion typically provides both current and future benefits. With a blended gift, a donor can make his or her giving go further.

Over the past decade, the focus of charitable capital campaigns has shifted so that many campaigns now include goals with respect to planned gifts. Campaigns now target 20% to 40% of the overall goal towards the receipt of planned gifts. Individuals who have made regular gifts in the past, who strongly support a charity or who have the capacity to make a large gift, may be asked to consider making a blended gift.

As the likelihood of a blended gift request grows, professional advisors—attorneys, CPAs, financial advisors and insurance agents—who work with potential donors will increasingly be asked to help their clients assess the feasibility, benefits and best structure for their clients to make these gifts. This article series will focus on twelve of the most common blended gifts arrangements and the potential donor benefits for each.

This is the final installment of our five-part series on blended gifts. Part V of this series focuses on two types of blended gifts—a gift of a charitable gift annuity (CGA) income interest back to charity combined with a charitable bequest and a gift of a charitable remainder unitrust (CRUT) income interest together with a charitable bequest. This article will discuss some of the unique aspects of these gifts, the motivating factors for why your client might find these giving strategies attractive and the specific benefits that both gift concepts will provide. Examples are provided to illustrate these concepts. While there are a number of reasons why a client might be reluctant to make a large outright current gift, a blended gift offers unique advantages that can help the client overcome his or her reluctance while still achieving his or her financial and philanthropic goals. A blended gift will enable your clients to make an immediate impact with their gift while also providing long-term support to the causes that matter most to them.


As the previous articles illustrate, a blended gift allows a donor to make an immediate impact and leave a lasting legacy to charity. Charitable gift annuities are an attractive option for a donor who desires regular, fixed annuity payments for life and has specific charitable intent. As time passes, however, a donor may find that he or she no longer needs the gift annuity payments. In such a case, the donor might want to make a charitable gift of his or her annuity interest back to the charity that originally issued the annuity. The annuity interest is a valuable property right and by making an irrevocable gift of all of the income interest to charity, the donor may be entitled to take a charitable income tax deduction.

The gift of the annuity interest provides an immediate benefit to the charity. In many states, the charity that issued the CGA is required to hold sufficient funds in a reserve account to make future annuity payments. Once the gift of the income interest is made, however, the charity is no longer required to hold those funds in reserve. This allows the charity to immediately use these funds to further its mission. As a result, an added benefit to donors who make gifts of their CGA interest are able to see their gift put to use by the charity while they are still living.

The gift of a CGA income interest can also be coupled with a charitable bequest. This will allow the donor to retain control over his or her assets, particularly more liquid assets, and other income until death. The charitable bequest may reduce the donor's estate taxes. This blended gift strategy allows a donor to give today and plan for tomorrow in cases where the donor may be reluctant to make a large current gift due to concerns about future financial needs.

The donor may be entitled to a charitable income tax deduction in the year the annuity interest gift is made and the bequest may produce an estate tax deduction in the year of death. The amount of the charitable income tax deduction will be equal to the lesser of any unrecovered basis plus unreported capital gains or the present value of the annuity interest on the date of the gift. The donor will be subject to deduction limits, the amount of which will depend on the original type of asset used to fund the gift annuity. If the CGA was funded with cash, then the gift may be deductible up to 50% of the donor's contribution base, typically adjusted gross income (AGI). If the annuity was funded with long term appreciated (capital gain) property, the gift may be deductible up to 30% of the donor's AGI. If the annuity was funded with a mixture of cash and appreciated property, the charitable income tax deduction is up to 50% of the donor's AGI, with the cash counted toward the limit before the appreciated property. If the donor exceeds the allowed charitable income tax deduction, he or she may carry forward the deduction for up to five additional years.

If the charitable income tax deduction is over $5,000, the donor will need to obtain a qualified appraisal in order to substantiate the value of the gift. This requirement applies even if the annuity was originally funded with cash. This is because the annuity interest that will be appraised is the right to receive income, which is an intangible noncash asset. The full list of requirements for a qualified appraisal can be found in Sec. 170(f)(11)(E)(ii). The appraisal must be made no earlier than 60 days prior to the gift and no later than the date the donor's tax return is due (including extensions). The appraiser must be qualified under the IRS regulations and must provide a completed Form 8283 showing the value of the income interest. The donor includes this form and the appraisal with the donor's tax return.

Because a portion of each annuity payment is a return of basis, the basis in the CGA will be recovered over the course of the donor's life expectancy as calculated at the time of funding. If the donor has recovered the entire basis in the annuity interest and all capital gains have been reported, then there is no charitable deduction granted for the gift of a CGA income interest to a charity. The donor may still want to make the gift, but the gift will not entitle the donor to an additional charitable income tax deduction.

The blended gift with the bequest in the estate plan may provide a charitable estate tax deduction. A charitably-inclined donor may still find this a favorable arrangement even in cases where the gift of the annuity contract to charity produces no charitable income tax deduction, since the gift annuity payouts will no longer be included in his or her taxable income in that year and future years. Depending on the donor's circumstances, this could have the effect of moving the donor into a lower tax bracket and avoiding the healthcare law's 3.8% excise tax.

Each time a CGA is created, the donor's deduction is calculated according to IRS prescribed methods. The Sec. 7520 discount rate, also known as the applicable federal rate (AFR), is used to determine the donor's income tax deduction. Under IRS rules, the AFR for the month of the gift or either of the prior two months may be used to calculate the donor's deduction.

The AFR is also used to value the gift of a CGA income interest. If the annuity was funded at the time of a low AFR and the AFR has substantially increased by the time the donor gifts the annuity interest to charity, the present value of the gift may be less than the unrecovered basis. When valuing the gift of the income interest, choosing the lowest AFR of the available three months will maximize the present value of the annuity interest gift and maximize the charitable income tax deduction allowed.

Example 1
Kenneth, 83, and Barbara, 80, have strong ties to their local charity. They funded their first charitable gift annuity in 2010 and their second in 2015. They used a total of $400,000 of appreciated stock to fund the annuities. Both were immediate annuities, meaning they each began to make payments within one year of their funding date. The $200,000 CGA funded in 2010 when Kenneth and Barbara were 75 and 72, with a payout rate of 5.4%, makes quarterly payments totaling $10,800 per year and provided an initial charitable income tax deduction of $66,079. The 2015 CGA funded when Kenneth and Barbara were 80 and 77, with a payout rate of 5.5%, makes quarterly payments totaling $11,000 per year and provided an initial charitable income tax deduction of $82,017.30.

Kenneth and Barbara recently downsized their home and have since realized they no longer need the payments from one of their gift annuities. Their income is more than sufficient for their lifestyle and they are looking for ways to lower their tax burden. Because of their affinity for their local charity, they wish to make additional charitable donations as a tax planning strategy.

When Kenneth and Barbara approached the local charity's planned giving department to discuss an additional gift, Pam Planner suggested that they make a gift of their gift annuity interest coupled with a bequest in their estate plan. Pam explained some of the concepts related to this blended gift. Specifically, she described that the gift amount would be based on the lesser of either the present value of the annuity interest or the sum of their unrecovered basis and unreported long term capital gain in the annuity. Based on calculations, Pam recommended that Kenneth and Barbara make a gift of their income interest in the 2015 CGA. This gift would generate a charitable income tax deduction of $98,192 compared to a deduction of $80,424 if Kenneth and Barbara made a gift of their CGA interest in the 2010 annuity. Kenneth and Barbara agreed to make a gift of the 2015 annuity interest and update their estate plan to include a bequest of $500,000. The bequest may reduce their estate taxes by $200,000.

By making a gift of the annuity interest, Kenneth and Barbara will free up money for the charity's immediate use. This provides them with the additional benefit of seeing how the charity will put their gift to use during their lives. Kenneth and Barbara also receive satisfaction in knowing they will be providing for the charity's future through the substantial bequest in their estate plan.
The gift of a CGA contract to charity is also an option in cases where one of the spouses in a two-life annuity has passed away. The same rules from Example 1 apply; the charitable income tax deduction will be the lesser of the unrecovered basis and unreported capital gain or the present value of the contract. Generally, when an annuity changes from a two-life annuity to a one-life annuity, the present value of the annuity interest decreases significantly. When the annuity becomes a one-life annuity, the tax deduction is likely to be lower than if it had been gifted when both spouses were alive.

Example 2
A few weeks later, Kenneth passed away. Barbara wishes to make a gift in her husband's honor and update her estate plan with an additional bequest of $500,000 to their favorite local charity. Barbara remembered the annuity interest was a great gift option previously. Barbara met with Pam to discuss the details of making a gift in honor of her late husband. The two-life annuity is now treated as a one-life annuity payable to Barbara as surviving spouse. The present value of the annuity interest is based on Barbara's life only. The combined unreported basis and unreported long term capital gain remain the same at $80,424. However, the present value of the annuity interest has decreased from $104,856 to $85,599. The income tax deduction is limited to the combined unreported basis and unreported capital gain. Barbara will be required to obtain a qualified appraisal since the charitable income tax deduction is over $5,000. Barbara receives a substantial charitable income tax deduction and honors her husband's memory. Barbara will also reap the benefits of the bequest of $500,000, which may reduce her estate tax further by $200,000.


As discussed above, a gift of a charitable gift annuity contract can be an excellent way for the donor to reduce taxable income for the year and potentially receive an additional income tax deduction. There exists a similar gifting strategy for charitable remainder unitrust income beneficiaries. Part III of this blended gift series introduced the unitrust and its variations. Once a unitrust has been funded, the donor may decide that he or she does not need the income and may wish to make a gift of that unitrust income to the charity. The gift of the CRUT income can also be combined with a bequest to create additional benefits for both the charity and the donor and meet the donor's goals of leaving a legacy.

This gift is a good fit for donors who have sufficient income from other retirement sources. The gift of the CRUT income is a great option because it can reduce the donor's taxable income and create a charitable income tax deduction for the donor in the year of the gift. If the donor transfers his or her entire income interest to the charity, then under the doctrine of merger the charity owns the entire income interest and remainder interest. At that point, the trust terminates and the charity will receive access to use the funds to further its mission.

The charitably-inclined donor may propose making outright charitable gifts of the unitrust income after the income has been paid from the trust to the donor. A more tax favorable approach might be for the donor to make a gift of the unitrust income directly to the charity. This coupled with a bequest may have a greater charitable impact as well as more favorable tax benefits. A donor should be cautioned, however, to refrain from making a gift of the CRUT interest close in time after creating the unitrust, as the IRS may scrutinize the transaction more closely. A gift of the CRUT income should not be made within one year of the creation of the trust. Otherwise, the transaction may appear as though it was done to avoid application of the partial interest rules. The partial interest rules are meant to limit abuse of the charitable income tax deductions on certain gifts, prohibiting income tax deductions for gifts of less than the entire interest in the asset.

The gift of the unitrust income is considered a capital asset, even if it was funded with cash. As a capital asset, the donor's charitable income tax deduction is subject to the 30% appreciated property deduction limit. If a donor exceeds the deduction limits for the year, he or she may carry the deduction forward for up to five additional years. The unitrust income, similar to the annuity interest, is an intangible noncash asset and therefore must have a qualified appraisal if the charitable income tax deduction is over $5,000.

Example 3
Jim, 65, and Paula, 60, created a unitrust with their favorite charity as the vested remainder beneficiary. It has been a few years since they set up the unitrust. Their unitrust's current value is $100,000 with a 5% payout quarterly. They want to allow the charity to use those funds for its current fundraising campaign. Jim and Paula want to allow the charity access to the total amount in the unitrust. They obtain the required qualified appraisal to gift the entire income interest to the charity. They then visit with their attorney to execute the proper paperwork. They also include a $500,000 bequest to the charity in their estate plan. They receive a charitable income tax deduction of $69,843 and a possible future estate tax deduction of around $200,000. Once the unitrust income is transferred to the charity, the charity owns the entire interest in the unitrust and is able to use the funds to meet its campaign goals. The bequest will also further the charity's mission and leave a significant amount to charity at their passing.
The gift of the unitrust income interest must be an undivided interest in either the entire income interest or an undivided percentage of the income interest. If a donor does not want to relinquish the entire unitrust income stream, he or she can make a gift of a percentage of the income interest. As long as the portion of the interest is undivided, the donor will receive a charitable income tax deduction.

Example 4
William, 72, and April, 69, heard that their friends Jim and Paula made a gift of their entire interest in their unitrust to charity. They would like to make a gift of their income interest to charity as well but do not feel comfortable gifting their total income interest. They decide they would like to make a gift of 20% of their income interest in their unitrust with a value of $100,000 and include a bequest of $200,000 in their estate plan. They execute the documents to make a 20% gift of the income interest in their unitrust to their favorite charity. This 20% undivided interest in the unitrust income interest results in a charitable income tax deduction of $11,664, which requires a qualified appraisal. Because the charity has a vested remainder interest it has access to 20% of the funds in the unitrust and the unitrust remains in effect for the remainder of William and April's lives. The bequest of $200,000 may produce estate tax savings of $80,000.


A blended gift is a great way for donors to contribute toward a charity's capital campaign while maintaining assets for use later in life. Often donors find that they have more than adequate income for retirement. When that occurs, they may look for ways to lower their income, assist their favorite charity and receive favorable tax results. In addition to the satisfaction of knowing that they are furthering charitable purposes, blended gift donors who combine gifts of an annuity interest or their unitrust income coupled with a bequest will garner a charitable income tax deduction as well as a possible estate tax deduction to offset their income taxes and taxable estate. Blended gifts allow the donor to make an impact on the charity now and in the future. Money set aside in a charitable annuity or a unitrust is now freed up for the charity to use to accomplish its goals. A gift coupled with a bequest provides security for the charity in knowing that additional funds will be received in the future to continue their mission. Donors have increased satisfaction knowing they are creating a lasting legacy for the future and their funds are being put to good use during their lives.

Published September 1, 2017
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Previous Articles

Blended Gifts - Part IV

Blended Gifts - Part III

Blended Gifts — Part II

Blended Gifts – Part I

Navigating the Unrelated Business Income Tax – Part II


Shelby Harder, 2018
Dr. Irving Auld and Dorothy
Roher Auld Scholarship

"Many students take for granted what a university has to offer. However, I am thankful every single day for the opportunity to attend this prestigious school. At Lawrence, you have the ability to engage in Socratic debates about the world we live in at dinner, play recreational or NCAA sports, and talk one on one with brilliant professors. At Lawrence, you don't just 'learn' a subject, you are immersed in it. You dive into the liberal arts and these professors show you the beauty in it all, and how everything is tied together. I am a Biochemistry major with a soft spot for rocket science, philosophy, and evolution. Lawrence is my dream school, and it would have never been possible without the Dr. Irving Auld and Dorothy Roher Auld Scholarship. I am forever grateful for their generosity."

Max Loebl, 2017
Grace Gates Scholarship and Schade Family Scholarship

"Lawrence has been a life changing opportunity. My experience here is made possible by the Grace Gates Scholarship and the Schade Family Scholarship. I will always be grateful for the generosity that made my life at Lawrence a reality. I am incredibly thankful for the amazing education and lifelong connections I have made here. Beyond a doubt, my time at Lawrence has been a multifarious experience; playing varsity soccer, working in the Volunteer and Community Service Center, and now serving as the President of the Lawrence University Community Council. The times spent at Lawrence will be carried with me and cherished for the rest of my life."

Magdalen D'Alessio, 2017
Lillian Seybold Wells Memorial Scholarship

"Hello, my name is Magdalen D'Alessio, I'm majoring in Psychology and minoring in Education Studies and History. I am extremely thankful to be a recipient of the Lillian Seybold Wells Memorial Scholarship as I have been able to further my education and pursue my extracurricular interests, including Dance Team, and participating in the many International programs offered on campus. I'm really glad to be able to attend Lawrence and hope to expand my knowledge of the world even further! In the near future, I plan to conduct an independent study regarding the relationship between the government and school systems and the importance of parental involvement!"

Joe Johnson, 2017
Amy Aplin Larsen Scholarship

"The Amy Aplin Larsen Scholarship has allowed me to pursue tons of opportunities at Lawrence as part of a liberal arts education. I have been able to take classes from close to a dozen different academic departments, perform in ensembles and theatre productions, and take part in shaping the Lawrence community. Regardless of what field I may go into, the connections I have made here at Lawrence with staff, faculty, and friends have been invaluable. Thank you!"

Milwaukee-Downer Scholarships and Professorships

Some of the many recipients of Milwaukee-Downer scholarships gather for a photo with Carolyn King Stephens M-D'62 and Marlene Crupi-Widen M-D'55 in January 2014 at the annual scholarship luncheon.

Rosamund Victoria Bille Adler Scholarship
Dr. Charles E. Albright Scholarship
Helen Daniels Bader Scholarship
James G. and Ethel M. Barber Scholarship
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Bessie A. Bell Scholarship
Berk Scholarship
Frederick C. Best Scholarship
Beta Study Club Scholarship
Lynde Bradley Scholarship
Lucia R. Briggs-Alumnae Scholarship
Edith Lange Brooks Scholarship
Anne Barman Caldwell Scholarship
Alice Miller Chester Scholarship
City of Milwaukee Student Funds Scholarship
Milwaukee-Downer Class of 1940 Fund
Milwaukee-Downer Class of 1942 Fund
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Janet Cope Crawford Scholarship
Jessie Mabbott Daniels Scholarship
F. T. Day Scholarship
Rufus Dodge Scholarship
Julia P. Ely and Hannah R. Vedder Memorial Scholarship
General Endowed Scholarship - M-D College
Dr. Alfred W. and Mrs. Ada F. Gray Scholarship
Berenice E. Hess Scholarship Endowment
Lucille Ray Hibbard Scholarship
Belle Austin Jacobs Scholarship
Helen McDermott Jurack and Ronald J. Mason Scholarship
Marjorie S. Logan Scholarship
Nellie Maxwell Scholarship
S. Annabelle & Paul McGuire Scholarship
Memorial Scholarship Fund - Milwaukee-Downer
Milwaukee-Downer Class of 1953 Scholarship
Milwaukee-Downer Class of 1955 Scholarship
Milwaukee-Downer Class of 1956 Scholarship
Milwaukee-Downer Class of 1957 Scholarship
Milwaukee-Downer Class of 1958 and 1959 50th Reunion Scholarship
Milwaukee-Downer Club Scholarship
Milwaukee-Downer/Lawrence College Consolidation 50th Anniversary Scholarship
Francis Evelyn Kelley Morgan Memorial Scholarship
O'Neill-Anderson Family Scholarship Endowment
Elizabeth A. Olson Scholarship
Gilbert Haven Peirce, Sr. and Emma Elizabeth Manor Peirce Milwaukee-Downer Scholarship
Aleida J. Pieters Scholarship
Matilda Siefert Puelicher Scholarship
Elizabeth Ann Richardson Scholarship
William M. Ross Memorial Scholarship
Elizabeth Rossberg Scholarship
Charles Frederic Sammond Scholarship
Mildred L. Schroeder Scholarship
Sivyer Educational Fund for Women
Marion Merrill Smith Scholarship
Dr. Elizabeth A. Steffen Scholarship
W. Mead and Elizabeth McKone Stillman Scholarship
Strzelczyk Family Scholarship
Clare Scherf Sweetman Scholarship
Raymond H. and Jane K. Taylor Scholarship
Jerline E. Walfoort Memorial Scholarship
Barbara E. Wehr Fund
Harmony Weissbach Scholarship
Martha and Frances Wheelock Scholarship
James G. and Ethel M. Barber Professorship of Theatre and Drama
T. A. Chapman Professorship in Music
Alice G. Chapman Professorship in Physics
Alice G. Chapman Librarianship
Milwaukee-Downer College and College Endowment Association Professorship

Kaitlin Yorde, 2017
Maurine Campbell Endowed Scholarship

"I am so thankful to be a recipient of the Maurine Campbell Scholarship. I am the first person in my family to attend a four-year college, and this would not be possible without the scholarships I receive. At Lawrence there are so many wonderful opportunities and learning experiences available. This summer I was able to participate in research in my field and have also been able to get involved with the Appleton community through ESL tutoring at the Fox Valley Literacy Council. I am sure that the Lawrence education I have received will continue to benefit me for the rest of my life!"

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