A charitable lead annuity trust (CLAT) is an irrevocable split-interest trust in which the income interest is to be paid over to one or more charitable organizations, in the form of an annuity, and the remainder interest is to be paid over to one or more noncharitable beneficiaries.  Typically, CLATs are designed to provide an annual payment that is level throughout the trust term - either a stated amount or percentage of the value of the initial trust corpus.  But according to attorney Jerry McCoy, an expert on charitable tax planning, unlike the case with a charitable remainder annuity trust, "a CLAT may provide for an annuity amount that is initially stated as a fixed dollar or fixed percentage amount but increases during the annuity period.  The only stipulation is that the value of the annuity amount must be ascertainable at the time the trust is funded."  See Rev. Proc. 2007-45.

A CLAT may then start out at a very small amount and increase during the trust term.  The increase may be gradual or irregular, even with an enormous increase just on the final year of the term.  By adopting such a strategy, it allows the trust corpus to be maintained at a higher level than otherwise would be possible.  And with investments that outperform the IRS actuarial rate on an after-tax basis (always an uncertainty), this may result in a higher distribution to the remainder noncharitable beneficiaries (typically family members) as well as a higher distribution to the charitable beneficiaries.  A true win-win.

One example of such strategy is referred to as the "shark fin" in which the CLAT pays out $1 in annuity payments for all years of the trust term except for the final year, in which it pays one big amount to the charitable beneficiaries.  With a $5 million initial funding value, 15-year trust term, a Section 7520 rate of 2.40%, and a post-tax rate of return of 6.50%, here is a comparison of numbers provided by McCoy, with attribution to DC attorney Daniel J. Dorward:

CLAT with constant annuity payments of $400,867:

• Total payments to charity:     $6,013,005
• Charitable gift tax deduction:  $4,999,994
• Final remainder value:           $3,165, 371

• Total payments to charity:     $7,136,234
• Charitable gift tax deduction:  $4,999,999
• Final remainder value:           $5,722,962

He further cautions:  "Be aware that there is no specific guidance from IRS ... just what the agency's position will be on these trusts.  ...  [I]t is possible that IRS might seek to limit the amount of the CLAT's charitable payments that may be deferred until later in the trust term.  In the case of a grantor retained annuity trust or "GRAT," the regulations limit any increase in trust by out to 20% per year.  Accordingly, a prudent planner may wish to include a similar limitation in an increasing-payment CLAT."  Whether the IRS would view such strategy as abusive may depend in large part on whether the potential advantage to the noncharitable remainder beneficiaries comes at the expense of the charitable beneficiaries.  On first blush, this does not appear to be the case.  But in the shark fin example, it may be concerning that the charitable beneficiaries run a higher risk of not receiving any substantial payouts if the trust busts before the final income distribution is made.

Arizona exempt organizations attorney Ellis Carter kicked off her new blog, CharityLawyer, with a great post on nonprofit governance mistakes (from a lawyer's perspective).  Here's her list:

I just completed the first part of my new Bylaws Review website (still under construction).

Here are some excerpts:

Basics About Bylaws

Bylaws may contain any provision, not in conflict with law or the corporation's articles of incorporation, for the management of the activities and for the conduct of the affairs of the corporation. Bylaws should provide guidance to the corporation's board of directors and reassurance to government authorities, funders, and other interested stakeholders. In addition, they allow contractual parties to verify that corporate actions were properly taken.

...

Common Problems

Here are some common problems I find when reviewing bylaws of California nonprofit corporations:

• Outdated mission statement. Organizations evolve over time. If your activities no longer fall within the scope of your mission, the mission statement in the bylaws must be amended. You may have other charitable trust issues as well. Talk to an attorney.
• Board actions by email.  Not allowed.  See my post on the Nonprofit Law Blog: Board Actions by Email - California Nonprofits.
• Directors voting by proxy.  Not allowed. 
• Director election provisions that do not meet actual practice. 
• No restriction on interested directors.  Not more than 49% of the board of a nonprofit public benefit corporation may be "interested persons." 
• The period of notice for a special meeting of the board is far too long. The notice period should not be so long as to prevent a board from responding to an emergency.
• The quorum requirement is too low.  While the law generally allows a quorum to be as low as one-fifth of the board, such a low quorum serves to discourage attendance and disempower the directors.  For example, if you have 20 directors, and a quorum of 25%, then you only need 5 directors to hold a valid meeting, and 3 votes out of the 5 to take a valid board action (i.e., as low as 3 out 20 directors can take an action).
• Failure to distinguish between the "authorized number of directors" and the "directors then-in-office" when describing the requirements for a quorum and particular board actions.
• No differentiation between board and non-board committees. 
• Executive committees given more authority than is permissible under law. 
• Volunteer board chair holding the title of CEO without consideration of whether the Executive Director would be in a more appropriate position to carry out the associated responsibilities. 
• Officer election provisions that do not meet actual practice. 
• Officer job descriptions that do not meet actual practice. 
• Inclusion of provisions for "board officers" and "corporate officers" without clarify about their respective duties and responsibilities. 
• No provision for electing or appointing subordinate officers.  What happens when an officer is on vacation or absent for an extended period?  A subordinate officer, like an assistant secretary,to hold office for a specific, short term may be a good solution.
• Indemnification provisions that do not reflect the board's decision whether to maximize protection of the organization's directors, officers, and/or other agents.
• Reporting requirements not required by law and not consistently observed. 
• Lack of clarity whether the organization has or does not have voting members. 
• Unclear membership qualification provisions. 
• Membership termination provisions that do not provide the due process required by law. 
• Members given management and/or governance responsibilities that create a greater exposure to liability than necessary.
• The notice provisions for membership meetings do not comply with the law and/or are inconsistent with actual practice.
• The quorum requirement is too high.  As a result, an organization may not be able to hold a valid membership meeting to take required actions like an election of directors.
• Electronic communications between the organization and the members do not comply with the law.
• Ballot voting provisions do not comply with the law and/or are inconsistent with actual practice.
• Proxy voting provisions do not comply with the law and/or with actual practice.
• Incorporation of Robert's Rules, adding over 600 pages of additional policies and procedures to know and follow.  See Disorder From Robert's Rules of Order, Charity Governance Blog.
• Conflicting provisions that result in fights among directors and/or members and that can lead to litigation and harmful media coverage.
• Modification of statutory provisions that changes their meaning and results in a failure to comply with applicable laws.

Why Using Another Organization's Bylaws Is A Bad Idea

GUEST BLOG POST
This Ramadan, Give Without Fear (But Give Wisely)
By: Mazen Asbahi, Esq.

American Muslims face unique and troubling challenges in trying to fulfill their religious obligations to give charity or zakat. The laws meant to serve the legitimate purpose of preventing the diversion of humanitarian aid to terrorist groups are, instead, overly broad, ambiguous and constitutionally suspect. Sweeping powers granted to federal agencies in the wake of 9/11 resulted in the closing of nine American Muslim charities. However, the majority of these charities were not charged with any wrongdoing and only one investigation resulted in a conviction. In addition to the closures, aggressive law enforcement tactics like widespread FBI interviews with donors and mosque surveillance has led to a pervasive chilling effect in the American Muslim community with respect to charitable giving. The full extent of this chilling effect and related civil liberty issues is the subject of a recent report issued by the American Civil Liberties Union entitled Blocking Faith, Freezing Charity.

But, in recent months, these dark clouds are giving way to sunshine – sunshine that is thawing the chill felt by American Muslims, as recent public attention has shined a welcome light on the issues. When President Obama gave his highly-regarded Cairo address, he noted that the “rules on charitable giving have made it harder for Muslims to fulfill their religious obligation,” and he made the following pledge: “That’s why I’m committed to working with American Muslims to ensure that they can fulfill zakat.” As if to amplify the President’s words, only days later, the ACLU issued the Blocking Faith, Freezing Charity report, which generated significant media coverage.

Moreover, recent court decisions are chipping away at some of the more problematic aspects of these laws. A federal court recently ruled that the Department of Treasury had violated a charity’s basic due process rights. In January, a federal appeals court upheld a lower court’s ruling that the “material support” provisions of certain counter-terrorism financing laws were overly vague and therefore unconstitutional. In addition, advocacy groups for the nonprofit sector, like the Charity and Security Network and Grantmakers without Borders continue their efforts to reform charitable giving policies and pull the pendulum back towards the middle after its far swing to the right during the Bush administration.

Some observers will note that the administration has not yet taken concrete action to reform the underlying laws governing charitable giving. That may be the case. However, there are reasons to be optimistic. The Secretary of the Department of Treasury Timothy Geithner recently gave his own commitment to working with representatives from the nonprofit sector on the issues. But actual reforms of the underlying laws will likely need time. In office for only seven months, President Obama is handling an unprecedented economic crisis and two wars, and engaged in an all out effort to reform our broken healthcare system. Many key political appointments at the agency level, including the Department of Treasury, remain to be filled. Those appointees who have been appointed need time to get situated, as they are critical in pushing the President’s agenda forward. 

But let’s put all that aside for a moment: the economic downturn along with rising unemployment and lower consumer spending means charitable contributions are down, and many American Muslim nonprofits are cutting staff and scaling back on important programs. This Ramadan, you simply cannot shy away – even if you may feel constricted financially. The need is simply too great.

But Give Wisely.

Many donors, particularly those immigrants from Muslim majority countries, feel strongly that their zakat should go to the poor of their countries of origin – especially when those countries are suffering from man-made or natural disasters. However, donating to causes overseas can be very complicated. When contributing internationally, consider these few suggestions that can help minimize the risks of running afoul of counter-terrorism financing laws:

• First, consider U.S.-based Section 501(c)(3) charities that provide relief services overseas and that have a significant track record of conducting such activities. These charities are organized under U.S. laws and are accountable to federal and state authorities.
• Do your due diligence. Investigate the charity. Is the organization transparent? Does it give the names and bios of its board of directors or trustees and staff? Does it conduct annual audits and are those readily available? Are its annual filings to the IRS easily accessible? Are its board members and staff reachable and accessible to answer your questions? Important information about a nonprofit’s programs and activities are generally made available on www.guidestar.org.
• When making a contribution, clarify your intent and indicate whether the donation is to be used for a specific program or activity or whether it is for general purposes. You can specify your intention by writing a notation on the memo line of your check.
• Understand the wide variety of permitted types of charitable activities that may be funded by your zakat. While zakat is often focused on the poor, zakat may be paid to fund organizations and activities that engage in education, economic development, health care, civic engagement and community relations, just to name a few.
• Be wary of giving directly to individuals or foreign-based organizations. Direct giving is the practice most affected by counter-terrorism financing laws. The standards for due diligence, oversight and reporting are, as a general matter, too difficult and expensive for the individual donor.

For more guidance, consult resources provided by Muslim Advocates and the BBB Wise Giving Alliance. Do not let the chill of past years prevent you from giving. The need is great. This Ramadan, give without fear (but give wisely).

Mazen Asbahi is an attorney whose practice focuses on nonprofit organizations and their donors, physicians and other healthcare providers and small businesses. He can be reached at masbahi@asbahilaw.com.