A life income gift, such as a charitable gift annuity or a charitable remainder trust, serves a dual purpose: it provides philanthropic support for your chosen charity as well as an income stream for you and/or your loved one, either for life or for a specific number of years. You or your estate can receive a charitable tax deduction when your life income gift is created.
Charitable Gift Annuity
Couples, married or not, may use a charitable gift annuity (CGA) to provide a lifetime stream of income to each other outside of probate while ensuring support for a nonprofit, such as Duke. In exchange for your charitable gift, your chosen nonprofit agrees to pay you and/or your loved ones a fixed annuity for life, backed by the assets of the charity. The size of the annual payment is determined at the time the gift is made and will not fluctuate with the market.
Example: Addison and Blair have been partners for 18 years with Addison earning the bulk of the household’s annual income. Concerned about the consequences if she were to die first, Addison creates a charitable gift annuity that will provide a fixed, lifetime stream of income to Blair and eventually fund a gift to support Duke Libraries. The annual payment amount to Blair is determined at the time the annuity is funded. The CGA could make payments: (1) to Addison and Blair jointly for their lives, (2) to Blair only for life, or (3) consecutively (first to Addison for life, then to Blair if Blair survives). Though there are different tax implications for these choices (see below), all of them ensure that if Addison dies first, Blair will receive a fixed income stream for life backed by Duke’s assets.
Charitable Remainder Trusts
A charitable remainder trust (CRT) allows you to transfer assets to a trust to benefit one or more individuals for a period of years or for life, with the remainder of the assets passing to Duke and/or other nonprofit charities when the trust terminates. In this way, you can provide income to your partner outside of probate while also ensuring that your charitable goals are eventually achieved. Partners may also decide to include a right to terminate the income stream if the relationship should terminate.
An inter vivos CRT—a trust created during your lifetime—can be used to create an income stream to you (the grantor) for life, then to your partner for life if he or she survives you. To avoid an immediate gift tax liability, in cases where there is no marital deduction allowed, you may want to retain the right to terminate your partner’s interest. Upon your death, the present value of your partner’s income interest will be included in your estate for tax purposes but not for distribution and probate purposes.
Example: Andrew and Ben have been partners for 30 years with Andrew bringing in the bulk of the household’s annual income. They have not married. Concerned about the consequences if he were to die first, Andrew creates a CRT that will pay Ben an income stream based on a specified percentage of the trust’s fair market value each year (i.e., 5% of the trust balance each year so that the actual payment will vary with market fluctuations). Andrew also specifies that after the death of both partners, the amount left in the trust will support Duke Chapel, a place Andrew holds dear. The CRT could make payments: (1) to Andrew and Ben jointly for their lives, (2) to Ben only for life, or (3) consecutively (first to Andrew for life, then to Ben if Ben survives Andrew). Though there are different tax implications for these choices, all of them ensure that if Andrew dies first, Ben will receive a market-sensitive income stream for life as long as the trust has assets.
A testamentary CRT—a trust created after your death through your estate plan—can be created to take effect upon your death to benefit your partner. This can be especially effective for large retirement accounts when couples have not married and no tax-free marital transfer of assets is available. By leaving these accounts to a CRT instead of directly to your partner, you can greatly reduce the estate and income tax liability on the account assets, with a charitable deduction available to the estate and income tax due from the heir only upon each installment of the income stream.
Example: Ann has decided that she wants to include a gift to Duke in her estate plan to create a scholarship, but she is very concerned about her brother Bill. Bill often has financial difficulties and needs Ann’s help on a regular basis. Knowing that she will take care of her brother during her life but that he may outlive her, Ann includes a provision in her estate plan for a testamentary CRT. If Bill survives her, a trust will be created with a gift from her estate that will provide him with annual payments for life (rather than a lump sum). Whatever remains in the trust will go to Duke after Bill’s death to fund the scholarship Ann wants to create as her legacy at Duke.
Tax Implications for Life Income Gifts Between Federally Unmarried Couples
Note: The tax implications for these gifts are complex and our summary is not intended to be comprehensive. Rather, this information should be considered general information and merely a starting point for analysis. Tax professionals should be consulted to address any specific facts. This information is NOT intended to be legal advice specific to your situation and cannot be used for the purpose of avoiding tax penalties or promoting, marketing, or recommending any transaction to another party.
When couples are married, they are able to avail themselves of the marital deduction and pass assets to each other without gift tax implications. However, couples who remain unmarried cannot take advantage of the marital deduction. This can present a challenge for couples who are interested in creating a life income gift, such as charitable remainder trust or a charitable gift annuity. As a result, if you use your personal assets to create a joint life income gift (paying you and your partner jointly) or a single life income gift (paying only your partner), there may be a taxable gift to your partner. The amount of this gift is calculated to be the present value of the future income stream your partner will receive from the life income gift.
One way to approach this challenge is to make yourself the primary beneficiary and your partner a successive beneficiary, while you reserve the right to terminate your partner’s interest through a will (a testamentary “right of termination”). This structure avoids gift tax liability because your gift is not considered “complete.” Your household will receive an income stream while you are alive and, if you outlive your partner, there are no further tax implications. If your partner outlives you and you have not terminated the interest, the income interest that your partner receives at the time of your death is treated as a transfer from your estate for estate tax purposes (but not for distribution and probate purposes).
Because the evaluation of various forms of life income gifts depends on a couple’s financial situation, you should consult a qualified professional advisor to determine if a life income gift is right for you.
Finally, please note that there may be income tax implications when a donor creates a CGA using appreciated assets rather than cash if that CGA benefits another person, such as a partner or other relative.