Planned gifts come in various sizes and shapes. Some result from modifications of wills, insurance policies, retirement plans and other planning tools that donors have in place primarily for non-charitable purposes. Other planned gifts are in the form of charitable trusts, gift annuities, pooled income funds, and other plans that are created specifically for the purpose of making a gift. Some planned gifts are revocable at any time the donor chooses while others are permanent and, once funded, the donor cannot “retrieve” his or her assets.
Many programs understandably place special emphasis on irrevocable life income arrangements, such as charitable remainder annuity trusts and unitrusts. This is especially true in the context of capital campaigns where public recognition may be given for a gift and there is a need for as much certainty as possible. Under the terms of the tax law, such gifts must also be irrevocable in order to enjoy maximum tax savings, and thus the donor cannot take them back…or can they?
“Irrevocable” planned gifts
Under the terms of the Tax Reform Act of 1969 and other pertinent law and regulations, qualified charitable remainder trusts must be irrevocable arrangements. Early trust documents prepared after the passage of the 1969 tax act typically provided for the naming of one or more charitable recipients, and provided for an alternative disposition should one or more of the named charities cease to exist. These provisions became the norm and were routinely included in pro forma documents prepared during this period.
The more things change
As time went on, more and more donors began to realize and take advantage of the fact that while a charitable trust itself must be irrevocable, donors could still retain the right to change the charitable beneficiary of such a trust at any point in time after the original execution of the trust.
There are a number of reasons that a donor might conceivably wish to change the remainder beneficiary of a charitable trust. Donors’ interests may change over time, institutions’ needs may change, or a donor may subsequently make an outright gift to one charitable beneficiary and decide to remove that one from their trust, as they feel they have otherwise fulfilled their gift intentions for that charity.
It is rare to see the retention of the power to change the charitable beneficiary of a trust where the trust was prepared by a donor and his or her advisors with the help of a charitable interest. On the other hand, the power to replace the remainder beneficiary is very common, if not the norm, in trusts prepared by donors with the help of their advisors with little or no participation by charitable interest in the process. In fact, it would arguably constitute malpractice were an attorney not to tell a client that they could retain this right. With the growth of interests in charitable trusts among for-profit advisors has come an increase in the number of charitable remainder trusts where the charitable remainder interest is changeable and thus essentially equivalent to a bequest expectancy, remainder interest in a retirement plan, or other revocable gift.
What to do?
When charitable organizations or institutions are notified of their inclusion in a charitable remainder trust where the donor has worked with outside advisors to create the trust without the knowledge of the charitable beneficiary, the charity involved should have a well thought out procedure and begin to execute it immediately.
If recognition is being sought for a gift, it may be legitimate to request a copy of the trust to determine the exact nature of the charity’s interest. The possibility for bestowing recognition for a gift offers the opportunity to discuss the feasibility of making a revocable provision permanent.
If an organization offers recognition for bequest expectancies in campaigns and as part of other fund development efforts, it may be more difficult to use recognition in a campaign as a way to encourage irrevocability.
As noted earlier, where it is determined that the charitable remainder interest in question is, in fact, revocable and the donor is not open to making the gift permanent, the gift is very similar to a bequest expectancy and should be treated accordingly. The intended charitable remainder recipient may want to consider enrolling the donor in a gift recognition society, maintaining personal contact through visits, inviting the donor to special events, sending birthday cards, and engaging in other similar relationship-building activities. It is incumbent upon the future charitable recipient of the trust to help maintain the donor’s interest in the organization just as in the case of a bequest expectancy.
Effective ongoing communication with donors who have included an organization as the remainder interest in a trust may act as an early warning system if a problem is in the making. Keeping in touch with the donor, in much the same way you would communicate with a bequest donor, can mean the difference between your organization’s receiving the charitable remainder or forfeiting the trust assets to other charitable interests that have done a more effective job stewarding their relationship after the completion of the trust.
Note, too, that just as it is possible to be removed as a remainder beneficiary of a trust, it is also possible for your organization to be added to such a trust already in existence. This may occur as a replacement of or in addition to the existing beneficiary. Donors who have charitable remainder trusts with revocable beneficiaries may be thought of as persons who have a “pocket” from which they can make major commitments simply by changing a beneficiary and/or making an existing designation irrevocable.
This is important to keep in mind when considering the various ways donors can fulfill campaign and other gift commitments in an era that will increasingly be marked by gift planning activities that are driven by donors and their advisors apart from organized fund gathering efforts.