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Posted September 21st, 2015

Relinquishing Life Income Payments: What Are the Issues?

Not infrequently, individuals entitled to receive gift annuity or charitable remainder trust (CRT) payments step forward and say they want to give up the right to receive the payments. They do so typically because they don’t need the income and because they’re just as glad to accelerate a benefit to charity. Sometimes the payout recipient wants to “cash out” by transferring (assigning) his or her right to receive payments to the charity in question in exchange for a lump-sum cash payment.

Is there any problem here? Well, maybe not or maybe. Suppose, for example, the donor set up a CRT under her will that is to make payments to her son for life. Let’s assume the donor did this because her son has various problems, including a problem managing his finances. Can the son now “cash out” by assigning to the charity in question his right to receive the trust payout in exchange for a lump-sum payment? In some states, the answer might be no. Why? Because courts in those states might not want the son to be able to re-write the donor’s carefully considered estate plan. In other words, there’s a state law issue here.

Suppose state law is not a problem and the son and the charity go forward as the son has proposed. The trust will then terminate (assuming there is no other payout beneficiary named in the trust instrument). Will the son have to report his cash payment as income? Answer: Yes, as a capital gain.

Assuming the son simply gives up his right to receive the trust payout, can he get a federal income tax charitable deduction for the relinquishment? The answer is a qualified yes. Why qualified? Because the son may need to get a qualified appraisal, and that may be tricky.

So far, the discussion is on solid ground. The ground becomes less solid when dealing with the relinquishment of gift annuity payments. There the tax law is murky.

Click here to download our free white paper “Relinquishing Life Income Payments – The Whole Story” for more information on this topic.

by Jon Tidd

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