| Real estate or other illiquid assets can be good alternatives to cash or publicly traded securities for charitable gifts. Selling highly appreciated real estate may not only deprive a donor of income, but may result in high capital gains and even ordinary income taxes.
Using a variety of charitable techniques may preserve or increase a donor’s income stream while also avoiding, reducing, or deferring taxes and providing a significant charitable gift. Consider using real estate to make a gift that pays income for a lifetime.
Charitable Remainder Trust:
A donor gives real estate to a trust, and receives an annuity payment periodically from the trust for the lifetime of one or more donors, or for a period of years, or a combination.
The payment may be fixed (charitable remainder annuity trust or “CRAT”) or may fluctuate with the value of the trust (charitable remainder unitrust or “CRUT”). In either case, the capital gain on the sale of the real estate will be spread out over many years.
Usually with real estate gifts, the trust will be structured as a “Flip CRUT” (one that begins making annuity payments after the occurrence of a specific event, such as the sale of the real estate) or a “NIMCRUT” or “NICRUT” (one that pays out only net income, and doesn’t have to begin making payments until it actually earns income, such as following the sale of real estate).
When the real estate is sold, proceeds go into the trust and are invested, and the trustee begins making annuity payments. At the end of the term of the trust, the remaining assets go into your endowed fund at The Minneapolis Foundation. This fund can be a:
- Donor Advised Fund (advised by children or others you name)
- Field of Interest Fund
- Designated Beneficiary Fund
- unrestricted Community Action Fund
Charitable Gift Annuity:
A donor gives real estate to The Minneapolis Foundation, and in return, the Foundation signs an agreement to make annuity payments to one or two persons for their lifetimes.
The payment is calculated on a percentage of the appraised value of the real estate, and the percentage paid is based on the age(s) of the annuitant(s), using rates set periodically by the American Council on Gift Annuities.
The agreement is backed by all of the unrestricted assets of the Foundation.
Once the last donor dies, the remainder goes into an endowed fund you create at the Foundation. This fund can be a:
- Donor Advised Fund (advised by children or others you name)
- Field of Interest Fund
- Designated Beneficiary Fund
- unrestricted Community Action Fund
Part of the appreciation in the real estate is not subject to capital gains tax, and the portion of the capital gain that is taxable to you is spread out over your life expectancy. Part of the annuity may also be tax-exempt.
In order to evaluate a potential gift of real estate, the Foundation will work with the donor to learn the specifics of a particular property, including such things as fair market value, marketability, possible environmental issues and related questions.
The Minneapolis Foundation can provide written guidelines to assist in compiling the necessary information and illustrations of how a charitable remainder trust or charitable gift annuity might work. |