Ask André

Ask André: Q&A with Pentera's Founder

André R. Donikian, JD
Founder

andre@pentera.com
ext. 222

We invite you to submit a question or call André directly at (317) 875-0910, ext. 222.

2017
Is it OK to leave stock in a donor-advised fund as the only asset?

Dear André,

A donor prospect wants to create a donor-advised fund that is funded with closely held stock. And he wants to leave the stock in the DAF as the fund's only asset. He will use the returns generated by the stock to fund his charitable activities. Is it OK to leave the stock as the only asset?

Liam


Dear Liam,

Unlike a trust or CRT, a DAF is not subject to prudent investor-diversification requirements.

But keep in mind that DAF assets belong to the sponsoring charity, so the more important question is how does the charity feel about holding on to the stock.

Thanks,

André

Who pays the tax on a gift of commercial annuities?

Dear André,

We have a donor who made our university the beneficiary of commercial annuities in her estate. How are taxes handled in this circumstance?

Sincerely,

David


Dear David,

It's a great gift because it avoids both estate tax and income tax. Smart planning!

Regards,

André

Can donor give charitable remainder trust payments directly to charity to avoid taxes?

Dear André,

I have a donor to our school who established a CRT that is managed by a third party. I do not know the funding asset. The donor has shared a concern that the trust will soon be experiencing a substantial increase in capital-gain taxation. He asked if there is any way to restructure the trust or if there are tactics that can be used to avoid this taxation issue.

What I do know about the donor is that a patent of his was recently granted FDA approval for human use. This patent is co-owned and is forecast to have first-year sales of more than $100 million. The donor's private company is the sole licensing agent for the product. My gut leads me to believe that the donor may have placed his ownership of the patent in the CRT—if that can be done.

Any thoughts or recommendations on this?

John


Dear John,

The trust is tax-exempt, so it cannot "experience capital-gain taxation." And generally you cannot restructure a CRT.


Dear André,

The donor explained more that clarifies his question: Several years ago he and his wife created this CRT and funded it with stock. The initial value has more than doubled because they never took any funds out of the CRT since its creation. Due to his wife's recent death, he must start withdrawing some of the funds—and he would like to find a way, if possible, to donate those funds directly to charities so that the withdrawals will not be considered taxable income to him.

Thanks,
John


Dear John,

He cannot do that! The donor should ask the manager of the CRT if he or she has any insights that I am not aware of. But your university cannot act as the donor's lawyer or provide him with specific legal advice.

Can college serve as trustee while receiving funds from trust?

Dear André,

We have an alumnus from the class of 1958 who has responded via phone to our newsletter (produced by Pentera). He wants to establish a multimillion dollar trust or fund as follows:

  • Via his will.
  • Trust or fund is apart from our endowment.
  • Trust or fund provides scholarship support of undergraduate students on a perpetual, ongoing basis.
  • On an annual basis, 50 percent of earnings would be reinvested to grow the fund and 50 percent would provide scholarships.
  • He is open to our school serving as trustee.

We tried our best to sell him on an endowed scholarship fund, but he's insisting that his estate gift funds a trust such as described. To me a trust of this nature is unique and perhaps odd to do because we would be the only charity that would benefit. Nonetheless, I'm told it's possible.

My questions:

  1. What type of charitable trust should we suggest to our donor?
  2. Can we serve as trustee of a charitable trust from which we receive ongoing support?

Thank you,

Michael


Dear Michael,

  1. Suggest to your donor a perpetual charitable trust.
  2. Yes, you can serve as trustee, though I would not recommend it.

Regards,

André

Can an IRA charitable distribution be made in the form of stock?

Dear André,

Can an IRA charitable distribution be made in the form of stock? Not sure why, but this is how a donor envisions making the distribution to us. Are there issues we should consider? Thanks.

Mike


Dear Mike,

Yes, it can from an IRA but not from a 401(k).

Regards,

André

Can IRA gift be made with an option to give during life or at death?

Dear André,

We have a 55-year-old donor who plans to give a $1 million gift. Part of his gift will be a planned gift of $270,000 from his IRA at death. My colleague, who is the major gifts officer, wants to know if the donor could start making gifts to the university at 70½ from the IRA as an option in the gift agreement.

She also thinks that we would get the interest accumulated from his account. I told her that if he sets the designation for the beneficiary for $270,000 that we would get only the $270,000 unless the donor allocates a percentage of the portfolio instead of a specific amount.

Ely


Dear Ely,

Yes, your donor can start making gifts from his IRA starting at the age of 70½. He can make direct transfers from the IRA of up to $100,000 to your university without including the amount in his gross income but would not receive an income-tax charitable deduction. Or he can contribute whatever amount he withdraws from the IRA (taxable) and contributes (deductible).

You are quite right regarding the second part.

Best regards,

André

Can widower serving as trustee specify the gift’s purpose?

Dear André,

I am working with a widower who is the trustee of his wife's trust. The trust stipulates the academic department of our school for the charitable proceeds but does not articulate a purpose (scholarships, lab, etc.). The trustee would like to specify the purpose of the gift. Does he have the power to do so? Are there legal issues or other specifics to consider?

Regards,

John


Dear John,

It all depends on whether the trust document gives the trustee the power to do so; otherwise, it goes to the academic department to spend as the department deems proper. Best to check with a local attorney.

Hope this helps,

André

How can charity handle a trust funded with rental property?

Dear André,

A donor would like to contribute rental real estate to a charitable remainder unitrust and name our university as remainder beneficiary and trustee. However, our policy is to serve as trustee only when a trust is funded with cash or publicly traded securities. Our business office is concerned about liability if there should prove to be environmental issues with the property, and it is reluctant to assume responsibility for managing and selling the property. Another concern is that the donor could possibly blame our university if the selling price is below expectations.

Our donor wants to be relieved of ongoing trust administration and investment of trust assets. What can we do to obtain this gift?

Kristy


Dear Kristy,

You could ask your donor to serve as trustee until the property is sold, when your university can become the successor trustee. This way your university will not be exposed to any liability connected with being on the chain of title, and it will bear no responsibility for management of the property—or blame if the eventual selling price is lower than your donor had hoped.

Further, your university will be acting according to policy—for at the time it begins to serve as trustee, the trust will hold cash.

Your donor would need to assume certain responsibilities: obtain a tax identification number for the trust, establish a bank account to receive rental income and pay expenses, hire a listing agent, respond to offers, make payments to beneficiaries, and do trust accounting. The prospect of assuming these responsibilities may discourage your donor; however, the financial institution that your university has retained for management of its trusts may be willing to handle some of them. An alternative is for your donor's own accountant to provide various services.

Actually, it is common practice for a donor to serve as initial trustee of a trust funded with real estate. Some donors welcome being able to control the sale of the property because they are directly affected by the sale proceeds. Then they are pleased to offload responsibility for investing the proceeds and handling all other trust-management responsibilities.

The trust agreement could provide that your university automatically becomes successor trustee upon the sale of the real property, or your donor could write a letter of resignation and appointment of the university as successor trustee. In either case, offering successor trusteeship after the donor serves as initial trustee makes it possible to consider a wide range of real estate gifts for charitable remainder trusts.

Regards,

André

2016
Can other retirement plans be part of IRA charitable rollover?

Dear André,

I just received a call from a donor asking about using funds withdrawn from other qualified tax-deferred retirement accounts—such as a 401(k)-type plan or profit-sharing—as part of the IRA charitable rollover.

My understanding is that cannot be done because it is not part of the provision. Can you please help me confirm?

Many thanks,

Melissa


Dear Melissa,

You are right, Melissa. However, tax-wise the result would be the same in most cases.

Best regards,

André

Can a donor write his own charitable gift annuity document?

Dear André,

I am working with a donor who would like to take out a charitable gift annuity with my organization—with the caveat that he says, “I would like to write my own annuity." He is both a donor and a financial professional and has been interested in doing business with us in the past. Is this even possible (writing the annuity)?

Thank you,

Amy


Dear Amy,

While it is possible for the donor to draft the agreement, I would try to encourage him to let you do it and then have it approved by his counsel. It is just speculating to try to guess his motivations for wanting to draft it himself, but it may be as simple as wanting to be sure there is language specifying the purpose and use of the gift. If so, he may be satisfied to submit a statement that could be incorporated into the agreement.

The final document, regardless of who actually drafts it, has to meet all the requirements for an appropriate charitable gift annuity document. Some states may require specific language—such as disclosure language similar to that required by the Philanthropy Protection Act of 1995.

If he does write his own annuity agreement, he has to make sure to include the required provisions in order to qualify for the tax benefits. I suggest you send him your standard agreement as a guide for him.

I hope this is helpful.

André

What exactly is an “outright” transfer from an IRA?

Dear André,

In our upcoming mailing we are including a section on the IRA charitable rollover. In the copy provided by Pentera, it mentions that these types of gifts must be "outright." My VP asked what exactly this meant; I couldn't give her a clear answer. Would you please explain it?

Best,

Megan


Dear Megan,

It means it has to be an immediate transfer to charity. Thus the transfer cannot be to a deferred vehicle such as a CGA, CRT, or PIF.

Hope this helps,

André


It does, thank you!

Megan

Can the IRA charitable rollover be split? And if so, how?

Hi André,

A sweet donor (and planned gift prospect) just asked me if IRA rollovers can be split among the charity and other people or other charities. Can you please advise me?

Thanks,

Norma


Norma,

It can be split among charities up to $100,000, but not "others."

Best regards,

André

What are the tax implications of a gift of a commercial annuity?

Hi André,

I hope you're well. I have a couple who wish to gift a commercial annuity to our school, around $2 million. Their life giving is in excess of $50 million. This is one of those odd deals, and of course we want to keep them happy.

Their advisor is telling us we can either cash in the annuity or receive the payments of about $100,000 a year. If we cash it, what sort of tax liability do we have? I'd appreciate a quick conversation about this, as I've never done an outright gift on a commercial annuity contract.

Jason


Jason,

Assume your donors paid $600,000 (their cost basis), it's now worth $2,000,000, and they surrender the annuity policy for cash. They would recognize a taxable gain of $1,400,000 that would be treated as ordinary income, not capital gain. Any portion of the cash proceeds that they contribute to your school would be fully deductible subject to the percentage limits set forth in Section 170.

Instead, if they give the policy itself to your school, they would still be subject to ordinary income tax on the full appreciation of $1,400,000. Since the gain has been recognized, their charitable deduction would be based on the full value of the policy. Your school would not be subject to any tax when it surrenders the policy and receives the $2,000,000 proceeds.

All the best,

André


Jason replies:

Thank you, André. You confirmed what I suspected on a couple of fronts (but we just don't do enough commercial annuity outright gifts to know offhand). If we terminate the contract and take the cash, there is no tax—but is there a possible penalty? Would that be buried somewhere in the contract, or is that more IRC (Internal Revenue Code)?

Jason


André replies:

Good point, Jason. There could be a penalty if surrendered before a certain date spelled out in the contract. So check.

André

Is the donor affected if we sell a real estate gift for less than the appraisal?

Dear André,

With a gift of real estate, what is the impact on the charitable deduction of the donor if our foundation sells the property for less than the appraisal?

Thanks so much,

Mike


Dear Mike,

Unless there is fraud involved, there would be no consequences if the land is sold after three years from the date of the gift. If the land is sold within three years of the date of the gift for less than the claimed value and the IRS contests the valuation, the donor has to be prepared to defend his or her deduction and convince the IRS it is valid and supported by the facts.

Usually, a deduction within 5% to 10% of the sale amount will not raise eyebrows. The important factor is the value on the date of the gift, not on the date of the sale (e.g., a fire that destroys a property after the gift is made does not affect the claimed charitable deduction).

Hope this helps; call if you wish to discuss further, Mike.

André

How should unexpected planned gifts be recognized?

Dear André.

Are you aware of any policies for an organization to use when receiving an unexpected planned gift concerning how to recognize the donor with regard to the legacy society and other recognition? Any insight would be most appreciated. Thank you.

All the best,

Juliette


Dear Juliette,

Thank you for your e-mail. You didn’t specify what type of unexpected planned gift, so here is a response that addresses different types of gifts.

If it is an unexpected bequest from a person who has died, I should think it would be listed among estate gifts (but the charity would not list the deceased person with the list of living legacy society members).

If the charity learns about a living person who has named it in a will or living trust or who has named it as a beneficiary of life insurance or retirement funds, and the charity did not previously know of this provision, then yes, the person should be welcomed into the legacy society.

Likewise, if the person established a CRT and named the charity as a beneficiary without previously notifying the charity, the person should be welcomed into the legacy society.

A gift annuity would, of course, involve a contract with the charity, so there could not be a surprise gift annuity.

I believe that a charity should welcome into the legacy society any person who has arranged any form of future gift of whatever size, whether or not a representative of the charity helped set up the gift.

Please let me know if you have further questions.

Thank you,

André

Bargain sale of home with payments to heirs may not be the best option

Dear André.

We have an alum who intends to donate his house testamentary to our school as a bargain sale. We’d be offered the property at 50% or 60% of the market value at that time. Payments would likely be made to his two daughters (who live in California and Florida) annually for 20 years.

My question is how the payments to the daughters will be taxed. Any insight would be much appreciated.

Thanks,

Michael


Michael,

At the donor's death the value of the house would be stepped up to its value at the date of death. So the capital-gain considerations would no longer exist until further appreciation takes place post death.

It would be best for the donor to leave the house to the daughters so they can get an income-tax deduction for any proceeds of the sale of the house that they donate to your school.

André

Who controls the "remainder" of a charitable gift annuity?

Good afternoon, André.

I'm pleased to write with a question that has not previously come before our planned giving program—a sure sign of its growth and sophistication, thanks in part to our work with Pentera.

Several years ago a donor established a charitable gift annuity (CGA) with our college. The purpose of the remainder of the gift annuity is not spelled out in the agreement, which pre-dates our current templates and policies. The donor is interested in naming a purpose for that remainder. Two questions come to mind:

1. Since the gift has been made and the donor relinquished control of it, can we work with him to now designate a purpose for the annuity remainder? I'm hopeful this is acceptable practice. The purpose would not inure to the benefit of a certain person or program and is in alignment with our gift-acceptance policies.

2. If naming a designation for the remainder is permissible, can we accomplish this with a simple addendum signed by both parties? I want to be sure all bases are covered before assuming so.

Many thanks for your continued assistance.

Warmly,

Julie


Julie,

When the donor established the gift annuity, he gave up control of the "remainder" in the absence of any instructions to the contrary. So you can do whatever you please with the annuity assets. A CGA is different from a CRT (charitable remainder trust) where there is a remainder.

A CGA consists of two separate parts: the gift and the investment that generates the annuity payments. In my state of Indiana, where there are no reserve requirements, the gift portion belongs to the charity—which can do whatever it wants with the funds unless the donor has stipulated how the gift is to be used.

All the best,

André


And Julie responds:

André,

As usual, this is extremely helpful advice. Thank you for your timely response. In Illinois there is no reserve requirement, as you probably knew.

I have to note that it's validating to hear my instincts about donor control did not lead me astray. I continue to learn a great deal from your expertise, and I appreciate this invaluable offering as part of our work with Pentera.

As a student of the Chartered Advisor in Philanthropy program through the American College, I have found your "Ask André" Web page to be of great benefit to my coursework!

Warmly,

Julie

Charitable deduction based on who owns life insurance policy

André,

Our planned giving office has a couple of questions about life insurance that were triggered by a potential gift:

1. Are donors who make gifts to “cover” their annual life insurance policy premiums entitled to an income-tax charitable deduction regardless of the type of policy (universal, whole, term)?

2. If the charity is the owner of the policy, please confirm whether this gift can be revoked.

Thanks,

Melanie


Melanie,

1. Yes, donors are entitled to a deduction if the charity is the owner of the policy (but not if the donor retains ownership). It's best if the donor makes annual gifts to you to cover the premium payments and then you make the payments to the insurance company.

2. Generally, the gift cannot be revoked unless there are extenuating circumstances, e.g., fraud, etc.

Hope this helps,

André

Tax liability answer needed - by tomorrow!

André,

I hope this message finds you well.

One of our senior gift officers is meeting with a donor tomorrow who has expressed an interest in making a seven-figure gift to the college with appreciated stock that he has held for a number of years.

Our Pentera account executive was kind enough to already provide us information with regard to gifts of property. We understand that because our donor has held the stock for a number of years and is making the gift to a charitable organization, he will not incur any capital gain. However, he seems to need further convincing that he will not incur any tax liability. Will you please confirm this?

Please feel free to suggest any pertinent questions you believe we should pose in order to further qualify this gift to ensure that there will be no tax liability.

Thank you, André.

Lisa


Lisa,

The fair-market value of a gift of appreciated stock held for longer than one year is fully deductible for income-tax purposes up to 30% of adjusted gross income. Any excess can be carried over for five years. The donor also avoids capital gain on any appreciation.

Point to consider: Send someone with much more seniority and knowledge to deal with a gift of this magnitude—for example, the vice president of development or the college president.

Regards

André

Does an IRA gift earlier in the year qualify for the rollover?

Good Morning, André,

I hope this note finds you and your family well and enjoying the holiday season!

With regard to the renewed IRA charitable rollover, if a donor who fits the criteria made an IRA gift a few months ago, will that gift qualify retroactively? I assume the answer is “yes” but would appreciate confirmation.

Thank you,

Lisa


Lisa,

Yes, the answer is “yes.”

Merry Christmas and Happy New Year,

André

2015
Was the IRA charitable rollover included in the federal budget?

André,

Can you tell me the status of the IRA charitable rollover? I thought President Obama signed the budget into effect yesterday—and that the rollover would be included in that. I have a couple donors who would like to take advantage of the rollover again this year.

Jack


Sorry, Jack, it did not happen. More than likely it will happen before year-end.

Regards

André


And Jack replies:

Thanks, André. We’ll keep an eye on the news for word of the rollover. Most important, we’ll look to Pentera, as one of our most trusted advisors, to let us know when we can start sharing the good news!

Jack

What about the titling of bank accounts for smaller estates?

Dear André,

If an estate is less than the $5 million gift-tax exclusion (indexed for inflation), does it matter if the bank accounts are titled as POD (payable on death) or joint for estate/gift taxes? Would there be any other tax issues for less than $5 million?

Thanks,

Cordelia


Dear Barb,

It does not matter how the accounts are held. You have to check individual state law to find out what other issues affect estates of less than the exclusion amount.

Regards,

André

Donor wants to give real estate next to campus for a life-income gift

Hi André,

Greetings! I hope this e-mail finds you well. I am looking forward to visiting next week with my new gift planning director.

I have a potential donor, aged 50, who is considering giving us a real estate development adjacent to the campus. It is fairly significant because there are three separate apartment towers (student housing mostly) with student-friendly businesses on the ground floors of each. The appraised value is in the $9 million range.

He is interested in using it to fund a life-income gift. He currently makes $750,000 per year on all the properties combined (including the businesses and student apartments). He has expressed that he'd like to see an income stream from the gift in the $450,000 range.

The university is interested in this property, and our CFO has stated we would retain it and run it—expecting to keep intact the $750,000 in revenue. He says there is no UBIT (Unrelated Business Income Tax) concern. He is looking at it that we get the $9 million asset, run it as is being done now, earn $750,000 per year, and owe the donor only $450,000 per year.

So the conversation (and I've not been involved in it until now) has apparently settled between our CFO and donor on trusts and annuities. Now I've been brought in. I can possibly see a net-income trust here. I can't see an annuity working here. What am I not thinking of?

I'd really appreciate your thoughts on this. Thanks, André.

Jason


Dear Jason,

Your thinking is quite sound. And the best vehicle in this case is either a NIMCRUT or a NICRUT (net income with makeup charitable remainder unitrust or net income charitable remainder unitrust).

Too good to be true comes to mind, so due diligence is of utmost importance—especially with regard to valuation, cash flow, and soundness of investment.

Look forward to seeing you next week.

André

What are the tax implications of giving a tax-sheltered annuity?

Dear André,

Can a donor give a tax-sheltered annuity (TSA) directly to our endowment fund? If so, what are the benefits/tax implications/penalties? Donor says it is not part of any IRA. We are, of course, in New York City.

Steve


Dear Steve,

Whether the donor surrenders the TSA and contributes the proceeds to your organization or transfers the TSA directly, the tax result is the same: not good. The result is even worse if he waits until he dies and has his estate effect the transfer.

For example, assume the surrender value is $100,000 and the donor paid $40,000 for the TSA:

1. Surrender and give entire proceeds
Realized ordinary income on surrender ($100,000 – $40,000) $60,000
Tax (assuming 45% in NYC) 27,000
Charitable deduction if entire $100,000 is contributed 100,000
Income-tax savings 45% 45,000
Cost of gift ($100,000 – $45,000 + $27,000) $82,000
2. Assign TSA to charity
Appreciation of $60,000 is treated as ordinary income and is not deductible
Deduction is limited to cost basis $40,000
Tax savings (45%) 18,000
Cost of gift $82,000
3. Assign at death
No income-tax savings to donor $0
Cost of gift $100,000

By making the gift during life, the donor generates an $18,000 tax savings that vanishes at his death

Best regards,

André

Why are gifts of fractional interests less attractive?

Hi André,

I hope you and yours are well. Now that I'm entering the world of art and tangible properties, I'm wondering more than ever why undivided partial interest gifts seem to be so uncommon. It seems logical to me that museums would be well-versed in the use of such gifts, but they aren't. Thank you for your assistance.

Before I go off half-cocked with one of my crazy ideas, please tell me what I'm missing. The only negative I’m aware of is the discounted appraisal value due to the partial interest part. But I know there are instances here at our little museum where the donor is very unlikely to have income at the level that the deduction couldn’t be maximized; the value of some of the art on loan is quite astronomical—not as much as the Picasso that sold recently for $175 million, but nevertheless.

I’m considering writing a white paper for review by the museum trustees. We will be entering campaign mode in a year or so; if this is an attractive option, I need to get them thinking about it. Thanks ever so.

Thanks,

Laird


Dear Laird,

As a result of the Pension Protection Act of 2006, gifts of fractional interests in art became less attractive.

When the initial fractional interest is contributed, the income-tax charitable deduction is based on the fair-market value (FMV) of the property and whether it is put to a related use. This rule was not changed by the 2006 Act. But when subsequent fractional interests are contributed, the deduction is the lesser of the fair-market value of such an interest at the time of the initial fractional interest contribution or the fair-market value of the interest at the time of the current contribution. That is a big change.

Previously when you gave a fractional interest, it was based on the FMV at the time of the contribution, so the donor got the benefit of appreciation in value between the two fractional interest contributions. Suppose the painting was appraised at $100,000 in 2010 when the donor gave a 10% interest, so that interest was valued at $10,000. In 2015 the painting has appreciated in value to $150,000, and the donor gives another 10% fractional interest. The deduction would have to be based on the valuation at the time of the first gift, and thus would be $10,000 rather than $15,000.

In addition, if a donor fails to contribute all of his or her remaining interests in the property within ten years of the initial gift, the donor's income-tax and gift-tax deductions for all previous gifts will be recaptured. That is another change; previously the donor was not under such a time constraint.

Also, the charity must have physical possession of the object for the fraction of each year equal to the fraction of ownership conveyed through all contributions. For example, if a donor contributes a 25% fractional interest in the object, the charity must have physical possession three months of the year. Prior to the 2006 Act, a donor would at the request of the charity retain the artwork in his or her home for safekeeping on behalf of the charity. That circumvented the rule disallowing an income-tax charitable deduction for a gift of a future interest in tangible personal property.

All of these changes have diminished gifts of fractional interests in artworks.

Regards

André

Is there a formula to figure out how much to ask a donor for?

Dear André,

Is there a formula, based on the donor's capacity, to assess the ask for a planned gift?

Cordelia


Dear Cordelia,

I would say that talking with the donor is the best way to arrive at a gift size. Formulas don't work (too cut and dried) because formulas don't reveal what other obligations the donor has. It is better to talk with the donor and lead with stories and opportunities.

Here is what one respected colleague who is a gift planner says: “We do our prospect research and ask our prospect leading questions. Tomorrow I'm going to talk to a donor about endowing his $10,000 annual gift with a charitable remainder trust (CRT), a gift annuity, or a bequest. That often gets donors thinking about what they can do, and then I regale them with stories of what others have done (bigger gifts).

“One time I just asked the donor what he wanted to do, because I knew he really wanted to do something big. He told me that he couldn't really do what he wanted to do because of so many other obligations. I told him that people often find that they can do just about anything they want to do if we can be creative enough. In his case it was a $2 million gift that he fulfilled with three vehicles: A CRT, a bequest, and life insurance. I don't like insurance gifts but it worked for him—and he wanted to be able to say that he gave at a $2 million level.”

The key is to start with donors where they are in their thinking and then help them get to where they would like to be.

All the best,

André

How can a trust change charitable beneficiaries?

Hi André,

I have an alumnus who wants to include our university as one of the beneficiaries of his charitable remainder trust that he established about ten years ago or more with an attorney. He is the trustee and manages the investments on the trust. He no longer is in contact with the attorney who established the trust. The beneficiaries that he included in the trust are no longer in existence (charities went out of business), so he wants to know how to go about changing the beneficiaries to include our university.

Thank you for your assistance.

Thanks,

Ely


Dear Ely,

He would have to get a local lawyer to seek a cy pres motion from the local probate court to make a substitution of the charities in his will. Please note that cy pres (which in French literally means “so near” or “so close”) requires that the newly substituted charity has the same or very similar charitable mission as the charity that no longer exists.

All the best,

André

Giving part of a home can eliminate capital gain

Dear André,

A 79-year-old widower who supports our organization currently resides in a $600,000 home and is looking to sell it—but fears the capital-gain tax from the sale. I am not a certified financial planner, but I believe he would receive a $250,000 deduction, leaving a $350,000 capital gain and a tax bill of roughly $100,000.

The donor is charitably inclined but would need additional income for assisted living. I anticipate that a family charitable remainder trust to make a gift of the home is in order, but are there other options to consider? Is there a way to place just the home’s capital gain into the trust and allow the donor to retain his principal investment?

Thanks,

John


Dear John,

There would be $350,000 of capital gain only if the home has a zero basis, which is unlikely. The tax would be the applicable capital-gain tax rate multiplied by ($600,000 — $250,000 — the adjusted cost basis).

If the donor is prepared to move, he could give a fractional interest to a charitable remainder unitrust and retain a fractional interest. Upon the sale, the donor would have a sum of cash plus income for life. If we know the adjusted cost basis, we can calculate the fractional interests to be contributed and retained that would eliminate tax on the gain when the property is sold.

Another possible option for additional income for this donor might be a charitable gift annuity.

Hope this helps and would love to see you at our Advanced Seminar on planned giving in September in Saratoga Springs, New York!

André

IRA gift benefits donor, with or without charitable rollover

Dear André,

I have a donor who is currently 70½ (the age at which required minimum distributions from IRAs begin). If she gives us an IRA distribution now and Congress later renews the law allowing the IRA charitable rollover, will her gift qualify for the Pension Protection Act (the original 2006 law that initiated IRA rollovers)? Or is it best for her to wait and see whether the rollover legislation passes?

Thanks for answering all of our questions over the years!

Monica


Dear Monica,

You are more than welcome for our Q&A; we now have a decade of selected questions posted at Pentera.com!

Regarding your donor: If she makes a gift now and the legislation is subsequently passed, most likely the law will be retroactive to the beginning of the year (as in the past) and her gift will be a qualified distribution. On the other hand, if she makes the gift now and the legislation does not pass, she will still be entitled to a tax deduction for the gift.

Thus you can tell her she has nothing to lose by making the gift now.

Warm regards,

André

Check registration requirements before offering CGAs

Dear André,

Our school is preparing to offer charitable gift annuities, and we already have an interested donor. We have some preliminary questions, both from us and from her:

Do we need to be registered in our state in order to offer CGAs? If so, how could we find out if we already are?

What is the CGA rate for an approximate age of 75 years old?

Thanks,

Liz


Dear Liz,

To answer your last question first, the “approximate” CGA rate for an “approximate” age of 75 is 5.8 percent. The suggested maximum CGA rates have held steady since January 2012; the American Council on Gift Annuities reviewed them again just last month.

And yes, you must be registered in your state of New York in order to offer gift annuities to state residents. You can start by asking your business office if you are registered in New York. The next step would be to ask the state insurance department (part of the department of financial services) if it has a record of your registration.

Good luck with your new program and your first donor!

André

Does a gift of a trust’s income interest require an appraisal when the trust is securities?

Dear André,

We have some exciting news and, of course, a question: The sole beneficiary of a charitable remainder unitrust has concluded that he does not need the trust income, and he wants to contribute his income interest to our charity, which is already the remainder beneficiary.

The assets of the trust consist entirely of publicly traded securities and cash. Is it necessary for this donor to retain a qualified, independent appraiser to value the income interest? When this trust was initially funded with publicly traded securities, no independent appraisal was required, and our office used our planned giving software to calculate the value of the remainder interest.

Thanks for answering our question!

Thomas


Dear Thomas,

An independent appraisal is required even if the trust holds only publicly traded securities and cash. The reason is that the income interest is being contributed, not the securities and cash in which the trust is invested, and income interest is not exempt from the appraisal requirement (as are securities). So an independent appraisal is necessary—assuming, of course, that the deduction claimed exceeds $5,000.

Congratulations on the gift.

André

But what if the trust includes real estate?

Dear André,

We have a donor who wants to contribute her income interest from her charitable remainder trust with us. Our question is what appraisals are necessary when the current trust assets include real estate as well as publicly traded securities and cash.

We know that when real estate is one of the funding assets, there needs to be an independent appraisal of it. Then, based on the appraised value of the real estate, we think we can calculate the value of the remainder interest. Or is it more complicated than that?

Thanks for answering all these questions,

Jeanine


Dear Jeanine,

Two appraisals would be required if the trust holds real estate as well as publicly traded securities and cash. The first appraisal determines the value of the real estate, and it should be done by an appraiser credentialed to appraise such property.

The second appraisal determines the value of the income interest, taking into consideration the appraised value of the real estate plus the value of other assets held by the trust. It should be done by a person qualified to appraise income interests in trusts.

Hope this helps,

André

Does a late appraisal jeopardize the charitable deduction?

Dear André,

Our organization is both trustee and remainder beneficiary of a donor’s charitable remainder trust, and we need your help with a recent donation to the trust from the donor and the possible impact on the charitable deduction. Here is the situation:

Last fall our donor planned to contribute a rental duplex to the trust and secured a qualified appraisal dated October 10, 2014. He intended to transfer the property to the trust at the beginning of December (no later than 60 days after the appraisal). However, because the legal review of the trust agreement and certain due diligence matters took more time than anticipated, he did not actually transfer the property to the trust until December 29, 2014.

It is now well into 2015, and the donor would like to claim a charitable deduction on his 2014 return. He has a Form 8283 signed and dated by the appraiser and now wants us to sign the form acknowledging receipt of the property. He says that he thinks the appraisal and existing Form 8283 will be acceptable because the appraisal was just a little over 60 days old at the time of the gift and the appraiser doesn’t think the value changed in the meantime.

I am concerned that the charitable deduction will be disallowed. What do you think we should suggest that the donor do to ensure the deduction?

Thanks,

Clara


Dear Clara,

Your donor may want to avoid the hassle of an updated appraisal, but he risks losing the deduction if he tries to get by with an appraisal conducted more than 60 days prior to the gift.

He should ask the appraiser to do an updated appraisal valuing the property as of December 29, 2014. When an appraisal is done subsequent to a gift, the appraiser should be instructed to determine what the property was worth on the date of the gift.

The new appraisal may vary little, if at all, from the earlier one, especially if market conditions did not change and there were no new comparable sales that might alter the valuation. The cost of the new appraisal should be much less than for the original appraisal, which required extensive analysis of the property.

The appraiser should enter the pertinent data on a new Form 8283 and sign it. Your charity should also sign it, acknowledging receipt of the property.

Best regards,

André

What happens when the first gift annuity payment is held over to the next year?

Dear André,

We are working with a donor who is setting up a gift annuity with a gift that will be made later this year, and she has an interesting question.

She intends to make her gift on or about November 15 but has asked if her first payment could be delayed until March 31 of next year—and that the first payment be for one full quarter of 2016 plus the prorated amount for the last quarter of this year (from November 15 to December 31).

Like many charities, we normally make gift annuity payments at the end of each calendar quarter. Can we do this? If so, will we have to send her a Form 1099-R at the end of this year showing the taxable amount due for the first partial quarter of the annuity, even though she will receive no money until March 31 of next year?

Thanks for all of Pentera’s help,

Samuel


Dear Samuel,

Yes, by agreement with the donor the first payment can be made the year following her gift and more than three months after the date of the gift.

If she makes the gift on November 15 of this year, the gift annuity agreement can contain language stating that the first payment will be made on March 31, 2016, and that it will be prorated from November 15, 2015, to March 31, 2016.

The advantage is that neither your donor nor your charity has to bother with a Form 1099-R for this year. The disadvantage, though minor, is that the annuitant will have to report a little more taxable income for 2016 than for subsequent years during her life expectancy.

If the donor is willing to forgo the proration for this year, the agreement could provide that the first payment will be made on March 31, 2016, and that it will be for the regular quarterly amount.

Be well,

André

What if a "companion" lives in a retained life estate?

Dear André,

Happy New Year!

One of our alumni called last week. He is thinking about a retained life estate gift to us.

Does he receive any estate-tax deduction if his companion lives in the property after his death, and then after she passes, the property comes to our organization?

Any information would be most appreciated!

Thanks,

Claire


Dear Claire,

And a very happy new year to you, Claire.

If the "companion" is a surviving spouse, then his or her interest would qualify for the marital deduction and no estate tax. If the companion is not a surviving spouse, then the gift would qualify for a partial estate-tax deduction based on the survivor's age, etc.

A terrific year awaits you, Claire.

André

Clarifying deferred gift annuity policies

I'm pleased to be writing you with another planned giving conundrum, which is a sign that our still-young marketing efforts are proving effective.

A 90-year-old alumna would like to make a gift to fund a deferred charitable gift annuity for her 57-year-old daughter, who would be the sole annuitant. This will be the first deferred annuity on our books, and we have discovered that our current policy doesn't clearly outline the circumstances around accepting these gifts. In particular, we don't state a minimum age for a deferred gift annuitant at the time of the gift nor do we include a maximum amount on these types of gifts.

Given her daughter's age, I have recommended that the annuity not begin making payments until her 65th birthday because 65 is the minimum age for establishing an immediate gift annuity according to College policy.

Is it common practice to make these specifications around deferred CGAs? If so, could you recommend a minimum age for a deferred gift annuitant at the time of the gift and a maximum amount that you have seen work well at other institutions? I appreciate your continued counsel.

Warm regards,

Julie


Dear Julie,

What you recommended about the annuity is common and accepted practice. But you can adjust it to fit a particular situation. Fifty is the typical minimum age for a deferred annuitant. Organizations usually set minimums for annuities rather than maximums; $10,000 is a typical minimum.

Be well,

André

When is it appropriate to use municipal funds for a gift annuity?

Dear André,

I would like to introduce myself as a major and planned gift fundraiser for my alma mater. We are a fairly new print and Web client of Pentera, and I was pleased to see in the latest edition of WebWords that this entitles us to your technical expertise from time to time. With this in mind I would like to ask for your advice about a donor who is considering funding a charitable gift annuity with a commercial annuity.

I re-read Pentera's whitepaper on uncommon ways to fund a charitable gift annuity and verified that this is possible. However, there may be tax implications and early-withdrawal/end-of-contract penalties for the donor to consider, regardless of whether she transfers the commercial annuity to the college or cashes it out to fund the annuity.

We directed her to consult her financial advisor before going further because we don't know her entire financial picture. Our vice president suggested that she consider naming the college a beneficiary of the commercial annuity if the gift does not work out, which could be a great solution.

I'm wondering if you can offer some general guidance about this situation. Additionally, does the IRS form 1035 apply in this case, relieving her of the transfer tax? My assumption is that it does not because she would not be replacing the commercial annuity with another commercial annuity.

Thank you for your assistance, André.

Warm regards,

Julie


Dear Julie,

Your VP's suggestion is sound and a good and simple way to deal with the situation at hand. However, the donor does lose the benefit of an income-tax deduction for the cost basis.

Let's say by way of example that your donor invested $60,000 in the commercial annuity and it is now worth $100,000.

If she cashes it in, she'll realize $40,000 of ordinary income. This would be more than offset by her deduction of $100,000 were she to give the college the entire proceeds.

If she contributes the annuity contract to the college, her deduction would be $60,000 (fair-market value of $100,000 reduced by the ordinary income element of $40,000).

If the gift annuity produces an income-tax deduction of $40,000 or more, then this would cover her income-tax liability under either of the above scenarios. If not, she would incur some tax.

Lastly, as you note, IRC Section 1035 applies to "like kind exchanges"—and this is not one of them.

Permit me to say that you write well and clearly, a rare commodity.

Warm regards,

André

The tax implications of funding a charitable gift annuity with a commercial annuity

Dear André,

Does it make sense to fund a charitable gift annuity with municipal funds? Our donor would be converting tax-free income to partly taxable income.

Deb


Dear Deb,

It could make sense if the donor wants to make a gift and municipals are the only assets available at this time. Also, if the munis are highly appreciated, then the gift would avoid the capital-gain tax.

Consider also that the current low interest rates will be heading up sooner rather than later—and this will decrease the value of the bonds.

Hope this helps,

André

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