Ask André Archive

2014
Funding a gift with master limited partnership shares

Dear André,

I was approached by a donor who has funded three charitable remainder unitrusts (CRUTs) with stock about the possibility of funding another CRUT with shares of a master limited partnership (MLP). After several discussions with an experienced attorney, it became clear that the donor would be better advised to hold the MLP shares and give us another asset. Even the attorney, who has quite a reputation in our field, was not immediately familiar with some of the nuances of MLPs.

As MLP investments become increasingly popular, I would suggest that you consider addressing them in your seminars. When we convene again for the Advanced Seminar, I would be interested to know if there are win-win ways for us to deal with proposed gifts of MLP shares.

Of course if you have suggestions before that time, I would be glad to listen!

Thank you,

Jeff


Dear Jeff,

MLPs certainly have generated much interest since the recent Kinder Morgan announcement (one of the largest energy mergers in history that included the buyout of three MLPs). I do plan to discuss the topic at the Advanced Seminar next year.

As to tax considerations, principally it's a matter of holding period: the longer a donor holds the MLP, the more adverse the tax results because of the taxable appreciation.

All the best,

André

Note: Pentera’s next Advanced Seminar, recommended for those with five or more years of planned giving experience, is Sept. 9-11, 2015, in Saratoga Springs, New York. See http://www.pentera.com/services_training.html.

How can trust payments go to a loved one after a donor dies?

Dear André,

We have a donor who is 76 years old and apparently not in very good health. She would like to create a charitable remainder trust that would make payments to her for life, but if she should die within the next few years, she would like a nephew to derive some benefit from the trust.

However, she does not want to have payments continue for the life of the beneficiary because that would greatly reduce her deduction. Could she have payments made to her for life and then to the nephew for 20 years?

Regards,

Chuck


Dear Chuck,

No, that is not permissible. However, she could provide that payments be made for the longer of her life or 20 years. If she dies after seven years, the nephew would receive payments for 13 years. If she should live for 22 years, the trust would terminate at her death and the nephew would receive no payments.

Thanks for writing, and I hope this helps.

André

When do gifts of artwork need to be appraised?

Dear André,

Please confirm for gifts of artwork:

1. An appraisal is needed if current market value is greater than $5,000.
2. For gifts of art through one's estate: If the estate wishes to take an income-tax charitable deduction, an appraisal is required.

Also, in the absence of an appraisal does the charity give any dollar credit to the gift? I don't believe so but wanted to confirm.

Many thanks,

Karen


Dear Karen,

1. Yes, for income-tax purposes an appraisal is required if the value is more than $5,000.

2. You don't often see a gift made by the estate itself; usually the bequest passes through the estate to charity or to a beneficiary—spouse, child, etc.—who then makes a gift of the asset to charity and receives an income-tax deduction. If the bequest goes directly to charity, an estate-tax deduction is available. If the estate has prior authorization, the executor could make a gift from the estate to charity—with an appraisal—and get an income-tax deduction. Please note that while an estate is not bound by the FIT qualified appraisal rules, it still has to value estate assets for federal estate-tax purposes.

As to the last issue, giving credit for a gift is a policy issue; however, you usually do credit gifts for internal and external purposes.

Hope you are well,

André

Can a charity negotiate gift annuity rates?

Dear André,

Our published gift annuity rate for a 75-year-old donor is the standard 5.8 percent, but we have a donor who tells us that another charity has offered her a rate of 6.0 percent—and she will make the gift to us only if we match that rate.

We have also had the opposite situation, where a donor was willing to accept a rate lower than the published rate in order to increase the value of the gift. That was before I came here, but my understanding is that we did lower the rate.

My question is this: Can we negotiate the rates on a case-by-case basis? Please let me know ASAP, because this donor is chomping at the bit!

Thanks,

Annette


Dear Annette,

Your charity operates in a regulated state where you have to submit a schedule of the rates you follow, so you cannot pay an annuitant a rate higher than the one you submitted. However, you may pay a lower rate—with full disclosure to the donor of your current rate schedule and with the donor’s written consent.

Even if you were operating in a state that does not require a submission of your schedule of rates, it is not a good idea to pay a higher rate unless there are extenuating circumstances, such as a documented shorter-than-normal life expectancy. Paying a higher rate not only increases the financial risk to your charity but also makes you vulnerable to the charge of unfairness if two donors of the same age receive different rates.

Hope this helps and that she says yes anyway.

André

The tax implications of an IRA funding a CRT

Dear André,

What are the income-tax and estate-tax implications of a donor directing his IRA to a charitable remainder trust (CRT) to be funded upon his passing?

Thanks,

Karen


Dear Karen,

Clearly there would be no current income-tax deduction. However, at the donor's death a full estate-tax deduction would be allowed if the donor's spouse is the sole beneficiary: a combination of a charitable deduction for the remainder interest and a marital deduction for the income interest.

If a non-spouse is the beneficiary of the CRT, then only an income-tax deduction is available for the present value of the remainder interest.

Be well and call if you wish.

André

What to tell donors about the IRA rollover

Dear André,

Several of our donors who have taken advantage of the IRA charitable rollover in the past have asked if that option will be available again this year. I know the House passed a bill extending the rollover, but I don’t believe there has been any corresponding action in the Senate. What do you think the chances are of the rollover being extended, and what should I suggest to my donors when they ask?

Phil


Dear Phil,

If legislation is passed to extend the IRA charitable rollover this year (50-50 chance), the earliest I can see it happening would be mid to late December. So I would suggest that your prospects go ahead and make the transfer now, without waiting for Congress. If it passes, great: their gift is complete, it won’t be included in their gross income, and it will count toward their minimum distribution amount.

If it doesn’t pass, the transfer will simply be included in their gross income with an offset for the charitable deduction—assuming of course that your donors itemize. And the transfer will still count toward their minimum distribution amount. The important point is to give donors a reason to act now and not wait on Congress.

André

How to handle multiple beneficiaries of a trust

Dear André,

I am working with a husband and wife, each aged 84, who would like to establish a charitable remainder trust with $1 million of low-basis securities. They want to have trust income paid to themselves as long as either is living, and then to their two daughters, who are now ages 55 and 53. How should this trust be designed, and what are the tax implications?

Thanks,

Sandy


Dear Sandy,

Considering that two of the beneficiaries are relatively young, a unitrust with a 5 percent payout rate is recommended. This will increase the potential for income growth to keep pace with inflation. It will also enlarge the income-tax charitable deduction and the ultimate gift to the charity.

One concern: If, following the death of the surviving parent, 50 percent of the income were paid to each daughter and then 100 percent to the surviving daughter, then the surviving daughter’s income increases upon the death of her sister—and knowledge of this fact could affect the relationship between the sisters. To prevent this from happening, the trust agreement could provide that when the first daughter dies, half of the trust principal is distributed to your organization.

This arrangement results in your organization benefiting from a portion of the gift at an earlier date, and it also increases the charitable deduction from $209,480 to $293,225.

If it is quite certain that the parents will not exhaust their gift/estate-tax exemption, then they need not retain any power of revocation of beneficiaries’ interests when the trust is established, and they would report the taxable gift on Form 709. However, if gift tax is a concern, each parent could retain the right to revoke the income interests of beneficiaries resulting from his or her share of contributed assets. This conceivably could increase future estate tax if trust assets grow significantly and/or the estate-tax exemption is decreased.

The primary takeaway is this: When there are multiple beneficiaries, consider a partial distribution of trust assets when each beneficiary dies.

André

IRA beneficiary: Spouse or trust?

Dear André,

Which is most advantageous as the beneficiary of an IRA: a testamentary charitable remainder trust or the surviving spouse? And when an IRA transfers to a testamentary CRT, do the fund balances have to be liquidated and reinvested?

Rachel


Dear Rachel,

There could be a benefit to leaving the IRA to the surviving spouse. If the spouse were to then make a gift of the assets to charity, he or she would be entitled to an income-tax deduction that would not otherwise be available. Of course if the spouse decides not to give the IRA assets, then the tax benefit vanishes—and the charity receives nothing.

The assets do not have to be liquidated at death before being transferred to charity.

André

Is a Roth 401(k) like a Roth IRA?

Dear André,

I have a donor who, among other assets, has a Roth 401(k). He is 70 years old and doesn’t need additional income at this point. Once he turns 70½, will he be required to take a distribution from the Roth 401(k), or are the distribution rules the same as for a Roth IRA?

Thanks for your help.

Tom


Dear Tom,

A Roth 401(k) shares some of the same attributes as a Roth IRA (contributions are made with after-tax dollars and distributions are tax-free), but unlike its IRA cousin, distributions from a Roth 401(k) are required after the age of 70½. If your donor also has a Roth IRA, he could roll the 401(k) over into the IRA and avoid the distribution requirement that way.

André

A gift in the form of a loan can help the donor

Dear André,

Good news! A wealthy donor would like to make $5,000,000 available to our organization for a new building. We are ready to begin construction and need the money now. However, because of our donor’s projected income and carryover charitable deductions, an additional $5,000,000 deduction at the present time would be of little benefit to him. He would be in a position to start using this additional deduction six or seven years from now. What do you recommend?

Patrick


Dear Patrick,

One possibility is for your donor to make an interest-free demand loan of $5,000,000 to your organization and then to start forgiving the loan once he is able to use additional deductions. Each portion of the loan that is forgiven is equivalent to an outright gift and can be deducted.

The problem with this solution is that an interest-free loan to a charity in excess of $250,000 will result in imputed interest to the lender. In other words, he will be taxed on the phantom interest he does not receive, calculated at the applicable federal rate. (See Reg. Sec. 1.7872-5T(b)9). Because he is effectively contributing back to the charity the interest he should have received, he would receive a deduction for the amount of the interest. If he is able to use the entire deduction, he could make the interest-free loan at no cost.

However, he may be unable to use the entire deduction because of the limitation on charitable deductions and because of the loss of itemized deductions when income exceeds a certain level. Thus the loan could entail a net cost. At the present time, the imputed interest rate is quite low on a loan where the lender can demand repayment at any time, so even if there is a cost, it should be relatively small.

Your organization, of course, would much prefer to have an irrevocable gift and not run the risk that your donor might change his mind and actually require repayment. Thus it should be quite certain of your donor’s capability and intentions before entering into the transaction. The opportunity to name your new building contingent on the loan’s being forgiven would help assure that your donor performs as promised.

Hope this idea helps.

André

Ways to get more surprise trusts

Dear André,

I hope you won't mind if my question is not as technical as some, but I have a situation for which I'm hoping you can give me some advice and guidance. Recently we have uncovered a number of prospects who have charitable remainder trusts naming us as the remainder beneficiary, in some cases all of the trust and in some cases a portion of the remainder. Several of these CRT donors have no record of any previous gifts. I'm wondering what might be the best way of finding out if we have more prospects like this and how we might go about trying to further engage them with our organization. Any help would be greatly appreciated.

Thanks in advance.

Mark


Dear Mark,

You have some excellent questions, and you’ve given me a chance to put on my marketing hat for a few minutes. Your situation certainly is not unique. Quite a few CRTs are created by donors with the help of their financial and/or legal advisors without involving the recipient charitable organizations.

I have some questions for you. How did you uncover your recent CRT donors? Was it by chance or design? If by design, continue what you are doing. If by chance, keep giving yourself those same opportunities.

Hopefully, you send printed materials to your planned gift prospects. If so, consider highlighting your recent discoveries and asking your prospects to let you know if they, too, might have created a similar CRT. Do the same on your Web site. If one of your recently discovered CRT donors would be willing to discuss why he or she created the CRT and how it is performing, feature him or her in your prospect communications. Do you have a profile of your existing planned gift donors? If so, the next time you send out a planned gift piece, pick out a few prospects who best fit that donor profile and give them a call.

As far as engaging the donors you do know about, does your institution act as trustee of CRTs? How are your investment returns? Would your financial office be willing to share the results with CRT donors? Consider inviting your CRT donors to meet with your financial professionals and discuss investment strategies, policies, and procedures. They could compare results, and your financial professionals could give donors who are doing well a chance to feel good about what they are doing.

Obviously you should recognize your CRT donors as members of your legacy society; if there are enough of these donors, consider creating a separate group of those who are actively managing their philanthropy.

Mark, I hope this helps and perhaps gives you a few more things to think about. Please let me know if you have further questions, and I’d love to hear how things are going.

Thanks so much for writing.

André

Funding academic chairs

Dear André,

We have several academic chairs that are not fully funded. Can we consolidate and utilize these funds to closely fulfill the donor’s original intent of providing an academic chair (but in some cases for a different or a rotating academic department)? Do we have to go through the state attorney general to get approval for these changes if there are no living heirs? What are our options if there are living heirs but the actual donors are deceased? In most cases, gift agreements were not established when these gifts were made decades ago. Now gift agreements are required by our institution.

Mike


Dear Mike,

With the donors deceased and no gift agreements “in most cases,” this sounds like a question for the state attorney general, regardless of whether or not there are living heirs.

I hope this helps.

André

Be careful how life insurance is marketed

Dear André,

I have received a couple of requests from alumni to promote the sale of life insurance more prominently with our younger alumni as a means of leaving a legacy gift in the future. The university would be the owner. What do you think about this? Of course we market this type of gift through our literature, but we have not been in the market to aggressively sell this type of program. Thank you for any advice you may have.

Leslie


Dear Leslie,

On the plus side of this suggestion, young people can buy a lot of life insurance for not much money, especially if it is term. However, most term policies have provisions that the insurance cannot be renewed beyond a certain age—often 70. If the donor outlives a term policy, then your organization gets nothing. So it needs to be the right type of policy.

Often these requests are from members of an organization (in your case, alumni) who are seeking the contract to market the insurance to other members. The problem is that other members of your organization also sell life insurance for a living, and you don't want to alienate the ones not chosen to market the plans.

One way to deal with that is to use a company where the agent is not a member of your organization but is able to give exceptional value—and contributes a portion of the gross premiums to your organization. Members are happy to have you get some of the premium because they are still getting a great deal on the insurance.

André

Construction now, gift later?

Dear André,

Attached you will find the documents that our prospective donor promised to send and I just received this afternoon. They are the pledge and response letters to and from another organization for his $3 million gift to them in May. This gift was the springboard which initiated our conversation about doing something similar for our organization. As you recall, the donor said several different things during our conversation:

1. He likes the idea of funding the renovation of the music center.
2. $5 million doesn’t seem to be a problem.
3. He wanted it all to be an estate gift after he “folds his wings,” but he wants to see construction begin in his lifetime—hopefully immediately after the gift is finalized.
4. But then he allowed us to make an appointment with his CPA to work out a way to fund it that doesn’t require him to pay taxes, using the other organization’s gift agreement as a model. This may include a cash gift, hopefully.

I have two action items before we meet with his CPA:

1. Discuss the options with you for advice on various approaches.
2. Obtain the latest construction/renovation plans from our facilities department.
Let us hope that the cost is in the $5 million range and not something significantly higher. If it is, we will need to do more planning because our donor wants to see construction begin immediately. I don’t know of any other major donor in the wings.

Dale


Dear Dale,

Regarding this case may I suggest that you and your colleague propose to him that he consider accelerating his gift to be effective while his wings are still “flapping” for the very practical and tax-wise reason that this would produce about a $2,000,000 income-tax savings (39.6% of $5,000,000), an opportunity that will not be available after his wings fold.

He can substantially increase his philanthropy by giving you the $2,000,000 tax savings and receive a further $800,000 income-tax savings, which in turn can continue his cycle of philanthropy.

Hope this helps.

André

Pop-up foundations

Dear André,

Can you tell me what a pop-up foundation is?

Mike


Dear Mike,

A pop-up foundation exists to “demonstrate different ways that people can change their lives for the mutual benefit of communities and the planet.” It is an umbrella organization that promotes grassroots movements to achieve these goals.

Mowing your yard would not be at the top of their goals.

I had not heard of pop-up before today, so I Googled it and, voilà!

I hope this is helpful.

André

Taxable or not taxable gift of retirement assets

Dear André,

I have a donor who is interested in making our institution a charitable beneficiary of a portion of his retirement assets. His financial advisor has raised a concern that the gift may be taxable (I assume the IRD tax) as we receive the distribution. As a 501(c)3, I don’t believe the gift would be taxable but, never having been asked this question, I wanted to confirm this opinion. Can you advise?

Jack


Dear Jack,

You are right. The portion you receive is tax-free to you because your institution is tax-exempt.

André

Gifts of undivided partial interest

Dear André,

We have a donor who is selling a recreational home and wants to give 10% to charity as undivided partial interest. The question is “10% of what?” Is it 10% of the total appraised amount—but isn’t the 10% discounted because of it being a minority interest? Or if in this scenario the intent of the parties is to sell, can a document be written to ignore the discount and just give 10% of the total appraisal amount?

Laird


Dear Laird,

1. Execute a document making a gift of an undivided 10% in the property to charity.
2. Donor and charity sell their respective interests to the buyer.
3. Donor gets a qualified appraisal.
4. Donor then claims a charitable deduction based on the appraisal.
5. Donor does not mess around and lose his deduction or get himself audited.

André

Avoiding income tax on IRA

Dear André,

Can one avoid the income-tax bite on an IRA if one makes the residual beneficiary an irrevocable grantor trust that has an irrevocable charitable residual beneficiary—even if the trust pays out distributions to others (like children) for a period of time? I know there is no income-tax deduction but am not sure if the income tax itself goes away.

Bruce


Dear Bruce,

No. It’s like saying you can avoid income tax on CRT distributions because the remainder will eventually go to charity.

André

Direct transfer keeps your gift out of your AGI

Dear André,

Can you explain the bullet point in the IRA text of our newsletter regarding: “You live in a state where a charitable deduction is not available for state-tax purposes”? What is meant by “not showing up in AGI”?

Also, the last bullet point in the text is a little confusing: “without the hassle of having to report the transfer on your income-tax return.”

Karen


Dear Karen,

Here in Indiana we have a flat state income tax of about 4%, but itemized deductions are not allowed against adjusted gross income (AGI). Ohio and a couple of others have similar laws.

So, if you personally take out $100,000 from your IRA and give it to a qualified charity, you have to include it in your income but are not allowed an offsetting charitable deduction, thus costing you $4,000, whereas in Massachusetts and most other states you are allowed a deduction.

A direct transfer to a charity obviates this extra cost because the $100,000 does not make it into your AGI.

The last point simply means you don’t have to report the direct transfer on your income-tax return.

André

Gift credit or gift acknowledgement

Dear André,

Can our organization provide gift credit and gift acknowledgement for a gift-in-kind of services (architectural services)? An architect has been paid for services in design of a building at our school. This architect (a graduate) also provided approximately $100,000 in additional services that were not part of the contract—most were changes to the original plan. The architect isn’t looking to get paid but has requested a letter acknowledging this gift of services.

Mike


Dear Mike,

I think it would be fine to acknowledge the contribution of the services but not cast that acknowledgement as a gift receipt. We often do this with people who contribute services as a way of thanking them—and we sometimes do record it in our gift records at a reasonable value of those services. It is not, though, deductible, and the letter gives us a chance to reinforce that message in the context of thanking them: “While the IRS does not allow deduction of services, you have conveyed a significant financial benefit on our organization by contributing your valuable services”—or something like that.

Even though it is not directly stated, my guess is the architect is hoping to deduct the value of his services. On the other hand, he may just want official acknowledgement that he has provided something of meaningful value.

André

My daughter needs a charitable deduction

Dear André,

A colleague of mine asked a donor for a gift, and the donor said, “I don’t need a charitable deduction this year but my daughter does.”

If this donor wants to give a gift of appreciated stock to her daughter, the stock is valued at $10,000 so gift tax isn’t an issue.

What is the tax situation if the daughter holds it for a week and then transfers it to us as a charitable gift? Is her deduction limited to her cost basis? Does the cost basis transfer from the mother to the daughter? Would the daughter be better off holding the stock for a year and a day?

Can you help me think this through?

Chris


Dear Chris,

The daughter’s basis in the gift from her mother would be $10,000, and the daughter would be entitled to a charitable deduction of $10,000 when she makes her charitable gift. And no gift-tax issues involved.

André

Relinquishing income interest in favor of charitable beneficiaries

Dear André,

We have a donor in Illinois who established a CRUT about 10 years ago. He was approached by a company out of Washington, D.C., to purchase his income interest. The donor serves as trustee. He likes the idea, but really does not want to recognize the income. I spoke with him and suggested he consider releasing his income interest in the trust to our institution and the other two charities. I have not seen the trust, but I asked a series of questions and do not think he would be prohibited from releasing his interest. He is also a lawyer and is convinced that is the case. Our institution is to receive the largest percentage of the remainder, and the other two charities would be very interested in seeing money now.

Assuming he can release the income interest, does he need to have an appraisal for his charitable deduction? If "yes," does PG Calc offer that service or can a donor simply rely on the planned giving calculations we could provide? I was under the impression an 8283 is necessary (income interest is about $60,000 in this case) but have been unclear about the role of a qualified appraisal.

Also, for an early termination of a trust I believe consent from the Illinois attorney general is recommended (perhaps necessary). Do we need involvement of the attorney general for a release of the income interest? (I can follow up with colleagues in Illinois on that question but thought you would have insight.)

Thanks for all of your help!

David


Dear David,

My favorite gift! Unless there is a spendthrift provision in the trust, which is highly unlikely, the donor can indeed release and relinquish his income interest in the trust in favor of the charitable beneficiaries. Good idea to get the attorney general’s blessing. A qualified appraisal is also required, whether you use PG Calc or someone else.

André

CLT vs. CRT

Dear André,

While living, a widow funds one or more CLUTs with cash, and our institution serves as trustee. The CLUT will pay us for a term of years (or until certain ages are reached), with principal going to grandkids.

In addition to reducing/eliminating gift/estate tax, will she receive a current income-tax deduction for present value of the charity’s lead interest?

I’ve found confusing information about “ownership” and “prohibited powers” regarding nongrantor trusts. l understand that deductions are higher with the CRAT, making it more attractive to donors from that standpoint. My understanding has always been that if you’re going to skip a generation, the deduction for a CRAT won’t be calculated until the end when it distributes to heirs, presumably due to the fact that the heirs receive the benefit of all growth above the distribution percentage, as opposed to it being shared, as with the CRUT. For example, you can imagine the potential corpus outcome of, say, a 3 percent 40-year CRAT that distributes to a newborn grandchild.

Since it’s nongrantor and there’s no income-tax deduction, would we still need to buy munis (municipal bonds) with the cash to generate tax-free income for the charitable distribution? Obviously the yield on those securities is so low that it’d be difficult to generate a rate that would result in a decent deduction (without going to 50+ years, of course).

In turn, if we bought a total return portfolio, would the trust pay capital-gain tax on liquidations to make the distribution? Along those same lines, what if appreciated property was given? Would sales to make the distribution generate capital-gain tax?

Because of these complications related to the CLT not being tax exempt, I’ve always thought the inter vivos CLT was a better concept than a practical planning tool. Hopefully I’m missing something, though, because this widow is loaded with dough and charitable intent, having already donated almost $10 million with her late husband.

Thank you very much!

Jeff


Dear Jeff,

You are right. The CLUT is the way to go with grandchildren in so far as the generation-skipping transfer tax (GSTT) is concerned, and that applies to both inter vivos and testamentary CLTs.

I agree with you as to inter vivos CLTs—but on the basis that a testamentary CLT provides a step-up of basis to the date of death values (thereby protecting prior-to-death appreciation from capital-gain tax when the assets are sold) and at her age, why rush? What is worse would be if she did a CLT now and then died in a year or two and forfeited the benefits of step-up for her heirs.

All transactions within the CLT are taxable, including gain on assets sold to make payments to charity. Yes, it would be ideal if munis are used, but with interest rates at historical lows this is not very feasible. So a total return portfolio is the way to go, stressing capital-gain growth portfolios. Unfortunately, the future of qualified dividends is cloudy at present, and we would need to wait until the dust settles.

CRTs are being used more and more often because of the low interest rate environment. IRS stats show that while CRTs are in a slow state of growth, CLTs are accelerating in use. There are not that many, but they hold a disproportionate amount of wealth compared to CRTs.

Again, testamentary is the way to go, but inter vivos trusts are very productive—especially if you have high-basis assets.

André

How best to carry out specific wishes left in a trust provision

Dear André,

Here is the scenario:

A donor died about a month ago. Her living trust has a provision that she wanted to create an income stream for the rest of her son’s life in the amount of $100,000 annually. The son is 68 years old and is a Florida resident. The trust actually states to provide about $8,333 a month. A gift annuity would be a great fit, but here is the issue: The donor’s trust also says that if her son’s wife, 71, survives her son, then she, too, is to receive an income stream but wants to drop the income to $4,000 a month.

Is there a way to set up a successive CGA that would pay the equivalent of the $100,000 a year, but then have provisions that a percentage is then released so as to only provide the $48,000 a year if the wife survives? I thought that since it’s a contract we might be able to do that. The donor has a taxable estate and would be interested in the charitable deduction. If we were able to do this, I’m not sure if that impacts the deduction.

I thought this might be easier with an annuity trust, but the trustee of the donor’s trust is concerned about the trust exhausting—as remote as that might be.

I have not seen the trust, but the trustee said the document gives them “options” to accomplish providing an income stream—and he didn’t seem to think a CGA would be prohibited.

A gift annuity of $2.2 million would be our largest by far, but would also make up just under 40% of our CGA pool. Since the son is 68, I’m wondering if it makes sense for us to propose the CGA—if it is possible to utilize in this situation.

Your help is greatly appreciated!

David


Dear David,

That would work unless someone objects. You could establish two CGAs: $52,000 for her son only and $48,000 for both her son and his wife. As you observed, a CRAT would be more flexible.

André

2013
A 50th reunion gift of stock

Dear André,

We have an alum who called me and is going to be making a reunion gift to our school’s fund. He has 600 shares of Alcoa stock as part of his IRA, and he would like to give those to our school as his 50th reunion gift. The current value of the stock is around $5,000. I shared with him the instructions to follow when making transfers of stock and encouraged him to let me know if he had any questions.

But here is my question. Because this gentleman is not 70½ or older, he does not qualify for the IRA direct distribution under the American Taxpayer Relief Act of 2012 (ATRA) that extended the qualified charitable distribution (QCD) provisions for 2012 and 2013. Are there any special tax implications or considerations when donating out of one’s IRA? I don’t think it matters if he sends over the stock itself or if his broker sells the stock inside the IRA and sends a check to us, because withdrawals from an IRA are taxed as earned income at face value of the withdrawal. Then he will claim the deduction as a charitable gift and it should be a wash as far as federal taxes are concerned. There might be an advantage to gift appreciated assets from an after-tax account—but this is not our business to give advice. Am I correct in my thinking here?

Dale


Dear Dale,

You are correct; it is not our business to give legal advice.

André

Pourover of CLAT to a unitrust

Dear André,

Is a CLAT (charitable lead annuity trust) that pours over to a unitrust still possible to be accomplished? What are the tax benefits to considering such an arrangement—gift tax and any charitable income-tax benefits?

Pete


Dear Pete,

Yes, indeed, the arrangement will work. It’s a good way to delay the transfer of substantial assets into the hands of a beneficiary who is not ready to manage the assets. Usually the assets would be distributed to the beneficiary(ies) at the end of the CLT (charitable lead trust) or divided between a CLT and a CRT (charitable remainder trust). There is no income-tax deduction for the CLT but the grantor could receive an immediate income-tax deduction for the present value of the charitable interest in the CRT.

A case that I was involved in back in the nineties for a particular institution almost did happen, but the wife got cold feet at the end. I proposed an immediate CLAT and a CRUT (charitable remainder unitrust) so that the two children would benefit from a stream of income for 12 years, at which point they would receive a distribution of the assets from the CLAT—a seamless arrangement. The prospect, who was a board member, was really excited about the proposal—but alas it ended up being an outright capital gift, for much less.

Again, there is no income-tax deduction for the CLAT but a healthy one for the CRUT. Regarding gift tax, the present value of the remainder interest in the CLAT and the income interest in the CRUT are taxable gifts.

André

IRA rollover gift must be made by December 31.

Dear André,

Can you confirm that the donation must be made in 2013? In the past donations could be made through April and still be counted for the previous year's requirement.

Holly


Dear Holly,

The rollover gift for 2013 must be made by December 31.

Last year the legislation extending the rollover was not adopted until the beginning of January, so the IRS allowed a person to make a gift in January 2013 and have it count as a 2012 rollover. A person who did that could do another rollover gift this year for the 2013 year. It was never possible to wait until April and have a rollover gift count for the previous year.

André

Explaining a nonqualified retirement plan

Dear André,

Could you provide more information on a nonqualified retirement plan in regards to what it was designed for, along with the tax and charitable implications that come with such a plan? Also, can a charity be named as beneficiary of this type of plan?

Louis


Dear Louis,

A nonqualified retirement plan, sometimes known as a Rabbi Plan, is designed to supplement an executive's retirement benefits without having the funds that are set aside treated as current compensation and thus currently taxable. This is usually accomplished by having the benefits subject to a substantial risk of forfeiture or by not funding the plan until after retirement. The tax treatment is the same as for IRAs and 401(k)s, etc. The charitable implications are the same as for these plans.

On second thought, the value of the nonqualified assets would have to be added to the other retirement assets to determine the MRD (minimum required distribution). And yes, you can designate a charity as beneficiary of the plan.

The Rabbi Plan gets its name from a situation in which a real rabbi was involved with the IRS about his plan.

André

Challenge of giving an IRA too early

Dear André,

We have an alum and donor who recently retired as Chairman and CEO of a major multi-national company. He owns, as you might expect, a boatload of stock in the company. He feels the dividends will serve him well in retirement, so that is not an asset he wishes to part with.

He does, however, have a couple of IRAs (one located in the U.S, one overseas) that he wants no part of. He would like to give them both to our institution. The current focus is the one in the States, valued at approximately $1.5 million. His wife is in full agreement with this desire, as she is also an alum. First challenge: He is currently 64 years of age. For purposes of our discussion, we are assuming that the tax-free treatment of direct distributions to charity will not be in force at the time he is old enough. Tax deductions are not of interest to him as far as this gift is concerned.

We are prepared to accept his pledge (non-binding) that he will give the IRA or begin giving the IRA when he reaches 70½, and we have proposed this. He and his advisors have come back saying that because of taxes he would be able to give only about $800,000. I am of the opinion that he should be able to opt out of the requirement that the IRA withhold money for taxes on the distribution and that any distribution given to us will be a wash—tax liability on the recognition of income versus the deduction.

Am I missing something?

Steve


Dear Steve,

He does not have to wait until he is 70½ to make his gift. He can start now. Let's say he withdraws $200,000 from the IRA and gives it to your institution. He will have to declare $200,000 as income and also claim a $200,000 charitable income-tax deduction, basically a wash transaction so long as his income is high enough to absorb the deduction. Any excess can be carried over, of course.

André

Confused about contributions from U.S. citizen working in Canada but giving to U.S. institution

Dear André,

A U.S. citizen who just graduated from our business school is moving to Toronto to work with a major corporation. He is engaged to a recent graduate of our medical school who will be doing her residency in the U.S. He would like to begin making donations to establish a medical scholarship at our university. He hopes to take advantage of U.S. tax deductions and a matching gifts program at his new place of employment. How will his contributions be treated for tax purposes?

Jeff


Dear Jeff,

He will be able to deduct his contributions on his U.S. income-tax return.

André

Rolling interest into a charitable gift annuity

Dear André,

Is it possible to terminate a charitable remainder trust by rolling the income interest over into a gift annuity?

Elizabeth


Dear Elizabeth,

It is possible to terminate a charitable remainder trust and roll the income interest into a gift annuity, but not the trust corpus. The latter is owned irrevocably by the designated charity or charities in the trust.

André

Leaving a gift of gold and jewelry - but not to the kids

Dear André,

I need to know what to do with gold and jewelry from a donor in Arizona who wants to leave it to us in her estate—and just as important, wants to be sure her kids don't get it. She likes to look at it, so giving it to us now likely isn't an answer.

Laird


Dear Laird,

She can leave it to charity in her will or revocable living trust and stipulate that her intention is not to have any of it go to her children. To prevent the children from helping themselves to the stuff while she is alive or right after she dies, she should place the jewelry in a safe deposit box and make a detailed inventory for her estate lawyer.

I think it would be well worth her time to speak with her estate planner to determine the better outcome for herself and her estate.

André

Giving intellectual property

Dear André,

Is it possible to give intellectual property as a gift?

Peter


Dear Peter,

Yes, it is possible—complicated but possible. I am referring to the charitable deduction aspects. The rules are different for different types of intellectual property—patents in contrast to copyrights, for example. Valuation is complicated as well.

André

Terminating a troublesome trust

Dear André,

I received a call from the son of one of our donors. His mom and dad set up a NIMCRUT in 1995. Dad is now deceased. We do not serve as trustee. Over the years, his mom has changed charitable beneficiaries through her will, and our institution is now a 50% beneficiary. The trust provisions say that upon the death of the survivor, distribution will go to charities named in her will—if none, then to their church.

The son did not know how the trust worked, so we walked through the principles. He said that the trust is "more trouble than it's worth"—issues with the trustee, I think—and mom does not need the income. He said the trustee said it was not worth trying to terminate the trust. Before seeing the trust document, I said there might be an option to release the income interest, effectively ending the trust. Mom could receive another deduction, but of course none of the corpus.

I now have a copy of the trust, and there is nothing specific about releasing the income interest. But there is no spendthrift clause, and she has the right through will or deed to change the charitable beneficiaries.

I was wondering what you thought about the possibility of mom releasing her income interest. I think the deduction calculation is based on the current AFR (applicable federal rates). I can send you a copy of the trust if helpful. Would we have to notify the state attorney general (Arizona resident)?

My other thought is that she is 92, so perhaps just let it run its course. But she likes the idea of seeing an endowment set up during her lifetime. We do too!

I was wondering if you might be able to help. Thank you so much!

David


Dear David,

Indeed, she can terminate the CRT by assigning her income interest to the respective charitable beneficiaries. At her age the charitable deduction obviously will not be substantial, but she does get one. I am pretty sure the attorney general will have to be apprised of the termination of the CRT.

André

Canadian citizen donating a sculpture to an American university

Dear André,

A Canadian citizen living in Toronto wants to donate a sculpture valued between $30,000 and $50,000. The University desires it for a specific purpose. The donor's accountant recently warned him that, according to Canadian tax law, he would be subject to capital-gain tax on the $20,000+ of gain. Is this true? Would a bargain sale arrangement address the assumed threat of capital-gain tax?

Jack


Dear Jack,

The donor would be taxed on 50% of the gain. Suppose the sculpture is appraised for $40,000 and the cost basis is $10,000. The taxable gain would be 50% x $30,000 = $15,000. The top combined federal and provincial tax rate in Ontario is approximately 46%, so the tax would be 46% of the taxable gain.

If the gift is to a Schedule VIII university, you would issue a donation receipt for the appraised value and the credit would be approximately 46% x $40,000. Thus the credit would exceed the tax on the gain, so there would be net tax savings.

It is possible to eliminate tax on the gain by electing under section 118.1.6 of the Income Tax Act to value the property at cost (or at any amount between cost and fair-market value), but that would also reduce the tax credit and normally would not make sense.

A bargain sale would not reduce the tax on the gain.

André

Note: Answer courtesy of Frank Minton.

CGA for key employee

Dear André,

Can a company take out a charitable gift annuity contract for a key employee as part of that employee's retirement package?

Bruce


Dear Bruce,

The present value of annuity payments will be currently taxable to the employee, and the employee will have to pay tax when receiving annuity distributions.

André

Buying back donated real estate

Dear André,

Can a donor buy back real estate he donated over three years ago? At the time of the gift, its value was $58,000. It has been listed during this time. Currently, it is listed for $30,000. Thank you!

Chip


Dear Chip,

Indeed he can, so long as it is at current fair-market value. There is no issue of self-dealing since no CRT is involved.

André

Financed charitable life insurance programs

Dear André,

Do you have a position or any information on these “financed charitable life insurance programs”? We have a connection with a coach here trying to sell us on this idea. I studied some of this when I was with a previous employer a few years ago, and our impression at the time was it was borderline unethical and could actually be considered unrelated business income. I am afraid that our president could be swayed through a meeting with this company, and if this is not an ethical idea I want to be prepared as to why. Thus, I am reaching out to the experts.

Tom


Dear Tom,

Several years ago a board member at my school who also happened to be a very successful life insurance salesperson proposed that the school engage in a similar program. He also offered to step down from the board to avoid any appearance of conflict.

I spent hours analyzing the proposal and could find nothing wrong with it. I asked a colleague to look at it, and he could not find anything wrong with it. Still the board turned it down; it did not pass their smell test. It just rubs people the wrong way. Another charity did sign up with another outfit, but the smart planned giving director realized that the premiums were outrageously high so he dropped it.

André

Non-U.S. resident CGA with a U.S. charity

Dear André,

I have a curious question that just came my way and wonder if you know the answer. Is there any reason why a non-U.S. resident (a Costa Rican citizen) could not set up a CGA with a U.S. charity?

Don


Dear Don,

I don't think so unless it's illegal under that person's local law.

André

Qualified profit-sharing plan contribution

Dear André,

A donor with a qualified profit-sharing plan wonders if such assets can be contributed to our institution. How might this happen, or not?

Pete


Dear Pete,

Of course they can. A 401(k) plan is similar to a profit-sharing plan or a 403(b) plan. They are defined contribution plans. The donor can make a beneficiary designation of some or all of the benefits to your institution.

André

The five-year look-back for Medicaid

Dear André,

If a donor sets up a charitable gift annuity, does this fall under the five-year look-back for Medicaid?

David


Dear David,

Yes, it does.

André

Different scenarios of making a charitable gift of a painting

Dear André,

I have a few questions. Assume that the husband of a married couple is an artist who has produced a painting. If he were to make a charitable gift of the painting, the gift amount would be the direct costs associated with creating the painting.

Question 1: If the husband (artist) dies and leaves the painting to his wife, is her cost basis the amount of direct costs associated with producing the painting or the actual market value (based on a qualified appraisal) as of the date of inheritance?

Question 2: If the husband (artist) gives his wife the painting during his life, is her cost basis the amount of direct costs associated with producing the painting or the actual market value (based on a qualified appraisal) as of the date of the lifetime gift?

Question 3: If the husband (artist) gives his wife the painting during his life and she gifts the painting to a charity, is the charitable deduction based on the amount of direct costs associated with producing the painting or the actual market value (based on a qualified appraisal) as of the date of the charitable gift? Does she have to wait 24 months to make the charitable gift?

I know I am probably analyzing this too much, but I want to make sure I completely understand the logic and rules behind these scenarios.

Mark


Dear Mark,

  1. The charitable deduction for artwork contributed by an artist who created the object is limited to his/her out-of-pocket expenses since the artwork is considered to be ordinary property similar to inventory.
  2. If the artist dies and leaves the artwork to his spouse, the spouse’s basis is the same as her husband’s since there is no step-up available for ordinary income property (similar to treatment of an IRA).
  3. If the artist gives the artwork to his wife during his lifetime, her basis is the same as her husband’s.
  4. In your question three, if the wife makes a charitable gift of the artwork, her deduction is limited to her basis which is the same as her husband’s.
  5. It does not matter whether the wife waits 24 months or not.
  6. Appreciated property you receive from a decedent if you or your spouse originally gave the property to the decedent within one year before the decedent’s death: Your basis in this property is the same as the decedent’s adjusted basis in the property immediately before his or her death, rather than its fair-market value.



André

Explaining the new IRA distribution legislation

Dear André,

I have been told that Congress stipulated that the donor must have taken his IRA distribution (in December) before he made his charitable gift (in December) to be able now to reclassify that gift as an IRA rollover gift.

Robert


Dear Robert,

That doesn't make sense to me.

If a person took his distribution in December, he can make a cash contribution of all or part of it in January, and his taxable income will be reduced by the contributed amount (up to 100k limit).

If a person took his distribution prior to December, he can do a rollover in January and count it as a 2012 contribution, allowing him to do another rollover later this year and count it as a 2013 contribution. However, the entire distribution taken before December will be included in his 2012 taxable income.

André

Setting up a CRUT for the lives of the kids

Dear André,

I am trying to draft a CRUT for a widow with three children. She wants it to run for her life and then for the shorter period of either the lives of the kids or 20 years. This was the only way I could get it to meet the 10% remainder value limitation based upon their ages. Her question to me is: If any children predecease her or die during the term of the trust, can the deceased child's spouse step into the "shoes" of the deceased spouse? You would be using the birth date of the deceased spouse and NOT that of the surviving spouse. Can this be done?

Tom


Dear Tom,

No. This cannot be done because you would be adding an unauthorized beneficiary.

André

Relinquishing retained life-income interest

Dear André,

I have two donors (a husband and wife) that currently have a 5.5% NIMCRUT that is not producing much income due to the decrease in market value. Could the donors relinquish their retained life-income interest, which would provide early termination of the trust, and exchange it for a gift annuity or CRAT? Just thinking outside the box.

Mark


Dear Mark,

You are right on the “mark.” Indeed, they can exchange their income interest for a CGA or CRAT.

André

Accepting a CGA with strings attached?

Dear André,

I had an alum recently pose this question to me and could use your expertise and assistance:

"I am presently engaged in trying to convince several folks that there may be a way of accepting a charitable gift annuity even if there is some benefit to the donor (such as waiving some fees for retirement communities or tuition for college). Did you ever hear of such a thing? I am curious as to who handles your charitable gift annuities? For example, I know of one company that administers them for some agencies, and they are (incorrectly, I believe) taking the position that a charitable gift annuity cannot be entered into a figure if there is any benefit to the donor. My belief is the tax code allows for splitting interests and only ‘that part’ of a gift which has no inurement to the donor can be used for charitable gift deductions. I’d be interested in any point of view you have on this general topic. I think it would have application to your college if, for example, someone gave the college a $100,000 gift annuity, and the college waived the tuition worth, say $30,000, for a designated individual."

Lisa


Dear Lisa,

The bottom line for this is that you cannot waive tuition for a child or grandchild when someone enters into a gift annuity arrangement. It violates the private inurement rules. The rest of it is incoherent. And you should not be dispensing legal advice. That is the province of his or her legal advisor.

André

Creating a single-life CGA with payments to two churches

Dear André,

We have a donor who wants to create a gift annuity for us based on his life alone. However, he asked that the income payments be sent directly to two churches. Here is my thinking on this:

1) By definition, a CGA must make payments to one or two individuals. So, this would be disallowed, even if the payments are based upon his life. (Or am I wrong and the payments could be disclaimed annually but sent to the churches, which would issue a receipt to him for the annual outright gift? I am guessing that he legally cannot disclaim the annuity payments while directing them to a third party.)

2) My thought is that even if I am wrong about number 1 it would still be best for this 88-year-old to receive his partially tax-free annuity payments and then turn around and make an equivalent outright gift to the churches. This would enable him, in effect, to deduct part of his gifts to the churches against other taxable income.

I await your wise counsel. Thank you.

Jeff


Dear Jeff,

He can do this, but you have to 1099 him and make the payments to the two churches as his agent. A side agreement for this would be in order. He would then be able to claim the payments as deductions to offset his CGA income.

André

Gifting stock and buying it back

Dear André,

I am seeking your advice. We have a donor who plans to gift $3 million in stock and then buy it back from our institution with cash. Does this raise any concerns?

Mike


Dear Mike,

So long as at the time of this gift your institution is under no obligation to sell the stock back to him, then he is okay.

André

2012
Changing the trustee on a Flip CRUT

Dear André,

I have a question. I prepared a Flip CRUT for a single guy 10+ years ago with him as the trustee and the charity as the successor trustee. I provided that there would be NO fees for either the donor or the successor, which was to be the charity in the event of his incapacity or unwillingness to serve. Now he wants to resign, and the charity does NOT want to be the trustee. He wants to appoint a bank trustee now to manage the CRUT. The CRUT was funded with real estate, and the donor wanted to manage the investments at the outset, so I named him as the original trustee. He also wanted control to determine and approve the sale price of the property. It was subsequently sold many years ago. My question is this: Can I amend the trust to provide for the corporation trustee to receive fees for its investment management services?

Tom


Dear Tom,

I don’t think you can do this without court approval. It is a pain, but I think it is a necessary step.

André

The REPIFs plan potential is intriguing, but scary

Dear André,

I have a question about Real Estate Pooled Income Funds. Our institution is at the moment interested in knowing a bit more. The appeal, of course, is the plan’s potential to raise a good chunk of capital in a short time. Do you know if anything has changed since 2009 that reduces the viability of the REPIF? Do you know whether any institutions have set one up in recent years? The REPIF is intriguing, but a little scary too.

Anne


Dear Anne,

I am not aware of any developments that affect the status or viability of REPIFs. And I don’t know of any charities that have pursued this route.

André

Does the related use rule apply when funding a CGA with tangible personal property?

Dear André,

When funding a CGA with tangible personal property, does the related use rule apply? We are considering taking a work of art to fund a CGA, but I can’t remember from my days at the art museum how we handled that. I know we have to have an appraisal with it and complete Form 8283, but I can’t remember if we can immediately turn the piece over (which obviously is different in how the gift is accepted under the related use rule, if it applies). Since I can’t seem to find anything that seems to address this directly, I knew I could turn to you, and you’d have the answer.

Dennis


Dear Dennis,

Here, it is definitely unrelated use since you plan to sell it. So you have to compute the deduction on the donor’s cost basis. The annuity should be based on the value of the property, but I would discount it to reflect selling costs and lack of marketability.

André

Income beneficiary wants to make a gift of retained life-income interest.

Dear André,

I have an income beneficiary of a standard CRUT that wants to make a gift of her retained life-income interest. Do you, by any chance, have a sample letter of instruction or agreement to accomplish that task, or could you point me to a possible source?

Mark


Dear Mark,

All you need is a letter from her stating that in the interest of accelerating the charitable purposes for which the trust was created that hereby she is irrevocably renouncing her income interest in the CRUT and assigning the same to your institution with no further obligation on the CRUT to make any payments to her.

André

Clarification on CRTs: Change of beneficiary

Dear André,

I need some clarification on CRTs (CRAT/CRUT). I understand that these trusts are irrevocable. However, I’m unclear as to whether the donor/executor/trustee is allowed to change the beneficiary. Will you please confirm? If in fact they are able to change the beneficiary, will this be stipulated in the agreement, or is it merely interpreted in that manner given the nature of the vehicle. Specific highlights would be helpful!

Lisa


Dear Lisa,

A grantor of a charitable remainder trust can retain the power to change the charitable remainder beneficiary of a CRT. The grantor can also include a trust provision whereby a non-charitable beneficiary’s right to the income payment will fail upon the occurrence of an event (e.g., divorce, not finishing school or not getting a degree, etc.). Another way of doing it would be to give a third party other than the grantor the right to sprinkle income among the beneficiaries so the trustee has the discretion to pick and choose who gets the income and how much on an annual basis.

Once the CRT is created and non-charitable beneficiaries are designated, the beneficiary’s income interest cannot be revoked except under a testamentary power at death.

André

College assistance with a CGA

Dear André,

I saw an article about college assistance with a CGA. I have been trying to find more about the commuted CGA and have only found one or two articles.

My question stems from one of the articles that states one should have a Private Letter Ruling from the IRS prior to making this gift type an option.

What is your take on this idea?

James


Dear James,

That is the ultra-safe route to take, but I don’t think it is necessary.

André

CRUT revocation

Dear André,

A number of years ago I set up a CRUT for a client. It is a 5% standard CRUT with the donor as the trustee. The beneficiaries of this CRUT are the donor for his life, and after his death it will go to a niece and nephew with the remainder then going to a charitable institution. Now, he and his nephew are at odds, and his question is whether he can revoke the nephew's interest. There are no powers of revocation within the document. What do you think? I have never had this one before.

Tom


Dear Tom,

I don't think he can revoke his nephew's interest without the nephew's consent. Under section 664(f) he would be able to revoke upon the occurrence of an event that is spelled out in the trust.

André

Gift of real estate with retained life estate

Dear André,

Does a gift of real estate with retained life estate use have to have a structure on it?

A donor has a decent piece of waterfront property that he uses for fishing and swimming. He would consider gifting it to us, but he's unsure if he wants to really give it up.

Chris


Dear Chris,

According to PLR 8015017, it can take any form but it must have cooking, sleeping, and sanitation facilities. So it must have a structure. A farm is any land used for the production of crops, etc. Thus, it need not include a structure. But, it also cannot be undeveloped land. It must have some farming activity going on. See Reg. Section 1.170-A-7(b)(4).

André

What to do with NIMCRUT growth

Dear André,

I have a quick question. We have a donor who established a NIMCRUT with a single asset—a commercial annuity. This is the first time I have personally dealt with this scenario in practice. My question is, if the annuity has growth from one year to the next, is that an income that needs to be paid out, or does it just keep growing with no payout at all until the beneficiary dies?

Mark


Dear Mark,

The big tax advantage of a commercial annuity is that it allows for the tax-free growth of assets it holds on a tax-free basis. When assets are distributed they are treated as ordinary income regardless of what they consist of and to whom they are distributed. There is no requirement that growth in value from year to year be distributed or taxed to the beneficiary. Because of this tax treatment, they are a good way to benefit a charity since charity does not have to pay any income tax on any appreciation.

André

Effect of divorce on an annuity contract

Dear André,

In the event of a divorce, is it possible to change the annuity contract by either removing the spouse from the contract or changing the second annuitant to a son or daughter? If a change takes place, will the calculations of the contract need to be changed for the distributions based on the new age of either the individual contract holder or the new joint annuitant? If a change can take place, do we have to complete a specific form to initiate the change, or will a signed statement qualify for the request? Since the contracts are joint contracts, will the spouse have to sign off for the change to take place as well?

Dale


Dear Dale,

A donor who establishes a gift annuity with his/her own property can retain the right either during life or in a will to revoke a beneficiary’s interest in a gift annuity. But once the contract is entered into, the beneficiary’s interest in the annuity payments becomes irrevocable, and only the beneficiary can relinquish his/her right to the payments.

Regarding your last question, the answer is yes. He/she can give up his/her income, or the annuity contract, that would be considered a gift to your institution, or he/she could sell his/her interest to his/her spouse. Usually such terminations are done pursuant to a divorce decree.

André

Gift of commercial real estate

Dear André,

The hospital has a donor who owns three parcels of commercial real estate and is interested in them for its use. It is long-term property held in the joint names of the donor and his wife. He is getting me his cost basis, and the hospital is getting the appraisals so the negotiations can begin. I think basically he just wants his cost basis out in cash. With the current market he just wants out so he can concentrate on his business.

Thoughts and help?

Tom


Dear Tom,

Basically this is a bargain sale. He will have to pay some capital gain on the amount he receives from the hospital. All you need is a transaction agreement spelling out the details and stressing the gift aspects of the transfer.

André

Avoid taxes, maximize gift to charity, and receive guaranteed income

Dear André,

I have an alumnus who wants to use $2 million to set up a CRUT or maybe a CGA—he really likes the idea of guaranteed income. The complicated part is that the assets he would like to use are an IRA and a commercial annuity. He described the annuity as an “investment annuity,” one that he bought “before Congress changed the rules in 1973.”

He wants to avoid taxes and maximize his gift to charity. He also wants to be sure there is an income for his wife through her lifetime—his lifetime too—but he is 84 and she is 60.

He also owns three properties worth about $1.5 million that are rentals now, but which he might like to have go into the trust when his wife decides she can no longer keep those up.

I am feeling that it must be possible somehow to make this happen. I think I need some guidance on the right questions to ask him in order to advise him well about what options are possible.

Anne


Dear Anne,

Regarding the IRA, let’s say he withdraws $1,000,000 from his IRA and gives the proceeds to you. He would have to include the $1,000,000 in his gross income, and he would then be entitled to a $1,000,000 deduction that would seem to offset the includible amount and result in zero tax. However, since this is a cash gift he can deduct up to 50% of his adjusted gross income. So if his only income is the IRA distribution, the most he can deduct this year would be $500,000. The rest of his deduction is carried forward for five years.

If he were to create a gift annuity or a trust his deduction would be further reduced and, voila, a bigger tax liability.

The same principle applies to the commercial gift annuity except that whatever his basis is in the contract is not includible in his gross income and, therefore, could provide an additional deduction.

These are IRD items, and the tax does not go away.

André

Guidelines for a gift in kind

Dear André,

I have spoken with some colleagues about an item a donor is making to auction. We have indicated that the items worth more than $5,000 require an appraisal and that because we will not be holding the items for three years, the donor will be able to take the deduction only for the amount the item actually sells for at the auction. Have we correctly related the scenario to the donor? What are the guidelines on a gift in kind? Can you reply in a general way so we can use the information for all donors of gifts in kind for the auction?

Thanks,

Julie


Dear Julie,

As you probably know, gifts of tangible personal property to a qualified charity are deductible at fair-market value if the use of the property is related to the exempt purposes of the charitable organization; and when the gift is made, it is expected that the charity is going to hold onto the property and not sell it. If the property is sold within three years of the gift, the charity has to file Form 8282 informing the IRS of the sale and the sale price.

If the use is unrelated or there is an expectation that the charity plans to sell the property, then the donor’s deduction is limited to his/her cost basis.

If the tangible property is given to a charity to be auctioned at some event, the donor’s deduction is limited to cost basis.

André

Calculating a gift of stock

Dear André,

We have recently received a transfer of actual stock certificates. It is a gift of stock the value of which was to be directed into a newly created CRT. The question is, What is the formula to determine the charitable deduction to the donor? We would appreciate your direction as to how to properly calculate this gift.

Lisa


Dear Lisa,

That would be a function of the number and age of the beneficiaries, the payout rate, the amount transferred, the discount rate, and if it’s a unitrust or an annuity trust.

André

Adding properties to a FLIP CRUT

Dear André,

I am working with a couple who is leaving their entire estate to charity: 50% to us and 50% to another school. Most of their assets are in the form of rental property (nine properties worth approximately $5-$6 million). The couple’s AGI is usually between $250,000 and $300,000. We are discussing FLIP CRUT options, and I wanted to know if it is permissible to add properties to the trust over time to take maximum advantage of the charitable deduction. Assuming that one could add properties over time, how can one establish a triggering event? Should the triggering event be the sale of the last property put in the trust or the age of the grantor(s), say 85? Currently, the donors are in their late sixties.

Any ideas would be very helpful.

Thanks,

Aaron


Dear Aaron,

Indeed. It is permissible to add assets of any kind to a FLIP CRUT, and you will follow the same rules for valuation, etc. The additions would be bound by the triggering event established in the trust—age or discrete event, such as the sale of a particular nonmarketable piece of property. I think the property has to be in the trust when it is established.

André

Termination of a NICRUT

Dear André,

If the beneficiary of a NICRUT agrees to termination of the trust, would you value the income interest on the basis of the stated unitrust percentage or on the basis of the current discount rate?

Bob


Dear Bob,

In PLR 20075044 and PLR 200733014 the IRS ruled that where a NICRUT is involved the charitable deduction is determined by using the lesser of the current CMFR in the month of termination or the stated payout rate.

André

Deferred gift annuity income will be taxed depending on how gift is given?

Dear André,

When a charitable remainder trust is collapsed and the assets are transferred to our institution, we will take the life-income interest and set up a deferred joint-life gift annuity. Given that the assets are coming from a charitable vehicle, is there any difference in how the deferred gift annuity income will be taxed to the donor if the assets arrive in cash or in kind (marketable securities)?

Thanks,

Amy


Dear Amy,

It is all a capital asset with a zero basis.

André

Gift of one-week time-share apartment

Dear André,

Ownership has been gifted to the university for a one-week time-share studio apartment unit at a local resort. The equivalent value for the week is $5,200. Does the gift get recorded at that value each year as long as it remains on the books? Should I calculate over a period of expected use (say 10-15 years) and value based on that? Estimated sale value on similar units is $25,000-$35,000, with an expected use of 20-25 years. Should I use an estimated value of $30,000?

Ardrina


Dear Ardrina,

If it is a gift of the donor’s undivided interest of one week of ownership, then the donor’s deduction is the fair-market value of the unit based on a qualified appraisal. And that’s how you record it on your books—just once.

André

Tax consequences after a transfer of stock

Dear André,

We have a donor who transferred $100,000 of IBM stock with a cost basis of $40,000 to his son. Six months later, his son gifts the stock to a charity. What are the tax consequences now that the stock is worth $120,000?

Thanks,

Louis


Dear Louis,

Assuming the father had purchased the stock more than a year before the son contributed it, the son gets a deduction for $120,000 and is not taxed on the gain. The son takes over the father's cost basis and holding period.

André

Individual wants his corporation to fund a gift annuity

Dear André,

I just received a call from a golfer who wants to create a $50,000 charitable gift annuity for the benefit of a former coach. However, he wants his corporation to fund the gift. Do you see any problems with this?

Frank


Dear Frank,

It is possible for a corporation to fund a gift annuity, but you have to be mindful of tax consequences.

If this is an S corporation, the charitable deduction would flow through to the shareholders. If it is a C corporation, the corporation would report the deduction on its corporate tax return.

Even though the former coach is not an employee, I think that any payment by a corporation to an individual would be treated as a taxable benefit. I believe the tax rules (annual exclusion and lifetime exemption) apply only to gifts by individuals. If I am correct, the present value of the gift annuity would be taxable compensation to the coach in the year the annuity is established.

If the corporation retains the right, exercisable by a written instrument, to revoke the coach's annuity payments, each year's payments to the coach would be taxable. Whatever the coach receives will be taxable. The question is whether it is better to have the entire present value of the payments taxed up front or to be taxed annually on payments received.

From the coach's standpoint, the better alternative is for the donor to take a taxable dividend from his company and then contribute cash for the annuity. In that case a substantial portion of the coach's payments would be tax-free. The donor's charitable deduction would at least partially offset the tax on the dividend.

André

Is that legal in California?

Dear André,

I am using Pentera's article titled "Your Simple Gift Can Benefit Generations" in our upcoming newsletter. The article mentions the TOD Plan and the Totten Trust. I was wondering if both are legal in the state of California.

Thanks,

Linda


Dear Linda,

Yes. It is approved in California. Please refer to this URL: http://law.justia.com/codes/california/2010/prob/5500-5512.html.

André

Remainder beneficiaries

Dear André,

We just received news that the widow of a former student has passed on. According to the CRUT created by her husband, it looks like our institution will receive 25% if both children are still alive or 50% if both children are deceased. When one of the children dies, half of the remaining CRUT will be distributed between us and another institution, with the other retained half generating income for the surviving child. When the second child dies, the remainder of the assets will again be distributed between us and the other institution in equal shares. Who is qualified to receive payouts from a charitable remainder trust?

Dale


Dear Dale,

I am happy to say that a CRT can have any number of income beneficiaries as long as one of them is human. The CRT can have only qualified charities as remainder beneficiaries.

André

How the market affects minimum distributions to an IRA

Dear André,

I have a donor who is asking if the benefit of reducing required minimum distributions in subsequent years would change if the markets rebounded in the future. What if his IRA made money? Would anything change?

Thanks,

Jeff


Dear Jeff,

The minimum required distribution is based on the value of the IRA on December 31 or the year prior to the year the required minimum distribution has to be made. So if the value of the IRA goes up a lot, so will the required payment. This will be partially offset by the fact that this minimum required distribution percentage goes down each year according to the IRS table.

André

Small organizations can set up gift annuities

Dear André,

How would you recommend small organizations go about setting up gift annuities if they don’t want to put all of their money on the line?

Rosalie


Dear Rosalie,

This can be accomplished through a community foundation, or they can be reinsured.

André

2011
When to issue an 8283 regarding property in a flip trust

Dear André,

There is a FLIP trust that holds a condo in Cape May, New Jersey. The property has been appraised but not sold. Can we issue an 8283 to the donor when the property is deeded into the trust, or should we wait and issue an 8282 when it is sold?

Lisa F.


Dear Lisa,

Your note states that the flip trust "holds" a condo; that implies that the condo has already been transferred to the trust, which means that the trust should or would have to issue the 8283 even though the condo has not been sold. If the trust sells the condo within three years, the trustee would then have to file an 8282.

André

How to reflect a gift of gold

Dear André,

The exchange of the gift of gold is complete. Now that that part of the transaction is complete, there seems to be some internal debate as to the type of gift and how to properly reflect it in the gift receipt letter. I would welcome your thoughts on closing this out.

Lisa K.


Dear Lisa,

Your receipt should reflect and describe the asset that was given to your institution—in your case, ten Krugerrand coins. You should not place a value on the gift in your receipt. There is a conflict of opinion as to what type of an asset (i.e., tangible personal property or cash equivalent) a Krugerrand would fall under.

André

Invading principal from a QTIP trust

Dear André,

We have a proposed QTIP trust where the trustee and beneficiary are the same person, the donor's wife. Can the principal be invaded for her benefit if an ascertainable standard is included in this invasion?

Pete


Dear Pete,

Yes, you can allow her to invade the principal.

André

Family foundations vs. giving to an institution

Dear André,

I have a prospective donor who has noted the following intentions in his planning.

"My aunt's assets are in an FLP. So on demise, her FLP shares value in excess of unified credit may be the contribution to the family foundation. My parents' estate was in an FLP, and my brother and I co-own and manage it today. I am planning to put my house in QPERT for my kids to get it out of my estate. If future estate tax stays at the 2009 level, either poor asset performance in markets or distribution by me may bring assets to unified credit. If the reverse happens and the family foundation idea works, I am going for it."

What do you think about the planning he has done or is thinking of doing?

Alice


Dear Alice,

It would work the same if he gave the excess to your institution.

André

Selling remainder interest in a CRT

André,

Have you ever heard of a remainderman selling their remainder interest in a CRT to the income beneficiary (for cash)? Are there any adverse tax consequences, especially upon the merger that you are aware of (such as a deemed sale of the underlying assets)? Also, can you petition a court with the consent of all parties to override the spendthrift provision?

Emil


Emil,

This would seem to happen when the trust includes a spendthrift provision that would prevent the income beneficiary from assigning his/her income interest so that the parties cannot terminate the trust. Your suggestion would seem to offer a way out of this, but I wonder if there would be any self-dealing issues.

André

Steps to be taken to give a gift of real estate

Hi André,

I am in touch with a question regarding a gift of real estate. One of our elderly and distinguished scientists has a home in Puerto Rico. He wants to give this property to our institution now. I need to follow-up with the donor and our director as to what steps need to be taken. Obviously, an appraisal needs to take place. As to how many and who will cover the cost, I don’t know. There is also a need for a gift agreement. Anyway, I would be grateful if you would let me know the proper way to proceed and the steps that need to be taken.

Kristine


Hi Kristine,

It is his gift and his deduction. Therefore, he needs to get the qualified appraisal, pay for the appraisal, and claim the charitable deduction on his income-tax return to which he has to attach Form 8283 provided by your institution to which he attaches the qualified appraisal. He retains a lawyer in Puerto Rico to transfer the house to your institution.

Your institution retains its own real estate agent to sell the house unless it wants to keep it for its purpose (a base for research projects, etc.).

André

Correct bequest language address

Hello André,

Our institution’s current headquarters is in Washington, D.C., but our 501(c)(3) letter shows us in another city and state. For our bequest language, what town do we use?

Thank you.
Steven


Steven,

For your bequest language you will want to use the town in which your institution is legally incorporated.

André

Setting up a CRUT with multiple properties

Hello André,

I have a 59-year-old donor who has most of his wealth tied up in real estate. He has no heirs. He is interested in endowing a fund that would produce enough income to help us with subsidized costs for underprivileged children to attend our institution.

So, in my mind, there are two scenarios he could look at.

First, could he fund a straight CRUT with property? (Could he fund it with multiple properties?) That said, I don’t get the sense he is that concerned about an income stream. He is more interested in activating the income off of the endowment during his lifetime. Which leads me to my main questions.

Could he set up a lead trust, fund it with multiple properties, allow us to live off of the income from the trust, and after 20 years the trust goes to us, the charity, since he has no heirs? I realize that the lead trust is usually attractive to donors interested in providing an inheritance for grandchildren while at the same time helping the charity. Is the lead trust a better option for him, or is it better for him to create a CRUT and donate the payments to us so he can see the endowment at work during his lifetime?

I appreciate your thoughts. Thank you.

Spence


Spence,

If your donor does not need the property or the income and has no heirs and likes you, why go through all the hoops you mention? Also, a lead with a charitable beneficiary is a wholly charitable trust.

Now, if he gives you the assets directly to fund an endowment to carry out his wishes, he will get a charitable income-tax deduction for the fair-market value of the assets and avoid any capital gain on the appreciation. You sell the real estate and use the proceeds to accomplish his objectives.

No trust, no muss, and no unnecessary expenses or complications.

André

CGAs exempt from creditor claims

Hello André,

Are CGAs exempt from creditor claims, as commercial annuities are? Thanks.

Tim


Tim,

Yes, they are. The annuity payments are not, however.

André

Writing a CRUT so that it terminates if the beneficiary remarries

André,

Can a CRUT be written so that it must terminate if the income beneficiary remarries?

Laird


Laird,

Yes, IRC 664(f).

André

Charity providing a third-party appraisal for a gift of art

André,

We have a Trustee who is being rather insistent that we provide him with a third-party appraisal for a recent gift of art. If the charity provides the appraisal to the donor how cross ways do we get with the IRS?

This really is a political problem more than anything given how obstinate the Trustee is being. I wish that were not the case.

Jason


Jason,

You can pay for it and then provide him with a 1099 for the cost so he can include it in his income because your organization is discharging his legal obligation.

André

Setting up a CGA to benefit a wife and then a survivor

André,

Can a donor set up a gift annuity to benefit his wife and also his assistant if the assistant survives the wife?

Thanks,

Melissa


Melissa,

Your donor can indeed set up a gift annuity to first benefit his wife and then his assistant if the latter survives his wife.

He can also set up the gift annuity so payments are made to his wife and to the assistant and then to the survivor. So if the annuity is $10,000, each would receive $5,000 and the survivor would receive $10,000 for his or her life.

Hope this helps,

André

Consequences of withdrawing funds from an IRA to establish a charitable gift annuity

André,

We have a donor who wants to withdraw funds from his IRA and make a charitable gift annuity of the same amount with us. What are the consequences?

Ed


Ed,

Assume he has $100,000 in his IRA. If he withdraws the funds, he would have to include the $100,000 as income on his tax return. If he then funds a CGA with the $100,000, he would receive a partial deduction that would depend on his age and would offset part of his taxable income.

Hope this helps; call if you have questions.

André

Are gift annuities subject to federal and state tax?

André,

With Texas having no state income tax, I have never thought much about gift annuities being subject to state tax. I have a donor, a Texas resident, who is talking with a charity in another state that does have a state income tax about a gift annuity. It is his understanding that he will have to pay state as well as federal income tax on the taxable portion of the annuity. Is that correct? Is there a deduction allowed for state taxes paid?

Thanks for your help and best wishes.

Randy


Yes, and yes, Randy. The taxable portion is income as any other income item, and if you itemize you can deduct the state tax. Over the past few weeks I have been in DFW many times connecting to out west. Thought of you. Hope you are well.

André

Using the sale of a home to endow a coaching position

André,

Here's one of our prospects, and we're hoping that you might be able to help with any alternative.

He is interested in endowing the men's lacrosse coach position; while there are considerable assets, some more liquid than others, he seems to be stuck on using some of the proceeds from the sale of a house currently on the market for approx. $10 million. He is looking at a potential gift of $1 million and wants to do this over a couple of years.

The College would like to announce this gift over Memorial weekend, but we feel as though we should have some real commitment on his part before doing this. How about using a portion of the value for his gift—locking it into a flip trust? We'd love your sage advice...

Thanks,
Jackie


Hi Jackie,

What about suggesting that he make an immediate gift of a 10% undivided interest in the house (value about $1 million) and a side agreement that he will make up the difference if the house sells for less than $10 million?

Let me know what you think.

André

A Gift of an Undivided Partial Interest in a Retained Life Estate

André,

How does one make a gift of an undivided partial interest in an RLE?

For example, can a husband gift his undivided partial interest (50%) in their home in an RLE and the wife not do so? In other words—a retained life estate for half the value of the property?

Laird


Laird,

Yes, he can.

André

Effect of the Generation-Skipping Tax on Trusts?

André,

I'm getting hung up on a few things related to a conversation with a donor. I am going to show him a five-year grantor illustration. (He's 84).

Also, I'm planning to show a generation-skipping version for the grandkids but was curious to know how to zero out a testamentary lead trust to grandchildren, or if I should show a tiered level for children and grandchildren.

What effect would the GST apply to the grandchildren if the trust were done while he was living vs. testamentary?

Regards,

Aaron


Aaron,

Are you referring to a five-year grantor lead trust where assets revert to him (upfront charitable deduction but remains taxable on all trust income including distributions to your organization)? If so, would he have tax-free bonds to fund the trust? Otherwise, why would he do it?

If the payout/trust term combination is high enough, you can zero out the GST. This can only be done with a CLAT.

I don't think it would make any difference if the trust was inter vivos or testamentary. The only difference is that with the latter you are dealing with assets stepped up to date of death. As I said, if I was his lawyer I would recommend that he do a testamentary CLAT.

May I suggest that you keep the proposal straightforward without delving too deep into technicalities at this juncture. The complex aspects should be taken care of by his counsel.

André

Transferring funds from an annuity to establish another annuity

Hi André,

I have a donor who wishes to establish a $25,000 gift annuity. I have covered about every way for him to do this, but his last question of me was this: He purchased an annuity with Met Life for $15,000 (not pre-tax) in the mid-'90s, and it is now worth $29,000. He wishes to "transfer" $25,000 from this annuity to our organization to establish an annuity with us. I am not sure what he means by transferring the money, but if he can't he says he will just cash it out and give cash for the CGA. Any thoughts on this?

Thanks!

Brad


Brad,

The best bet is to cash in the annuity and give you the cash. He will have to recognize the appreciation as income. But his deduction should offset much of the tax.

Good to hear from you,

André

Making an addendum without redrafting a will

André,

Is it possible to do an addendum to a will without redrafting the will so that our organization gets a mention?

Thanks again for your help,

Dale


Dale,

Yes, it is called a codicil, executed with the same formalities required of a valid will. The donor's lawyer should do this.

Regards,

André

Deadline for a gift from an IRA to charity after a donor’s death

André,

A question in your area of expertise:

My recollection is that when a charity is named as beneficiary of all or some portion of an IRA, the deadline for distribution to the charity is September 30 following the year of the IRA owner's death. Is this correct? Can you give me a citation in support?

Frank


Frank,

You are correct. See Reg. Section 1.401(a)(9)-4, A-4(a), re Beneficiary Finalization Date.

André

Termination of a CGA during a donor’s lifetime

Dear André,

Our VP for development is visiting an annuitant who has a number of CGAs with the College. Her accountant has advised her to stop funding any additional annuities (she has 22 as of today's date), and our VP would like to speak with her about the possibility of relinquishing a few CGAs to the College during her lifetime so that the remainder can begin to fund the scholarship that is the beneficiary of all of her planned gifts.

We have never handled a termination of a CGA during a donor's lifetime. Obviously, before our VP speaks with the donor, she wants to be sure there is some benefit to the donor as well as to the College.

Can you walk me through the process to let me know how such a termination is handled? We use PGCalc software.

Here is an example of one of our donor's CGAs: a $100,000 gift received 8/24/05 to establish a one-life CGA at 8.6%. Charitable deduction at the time of the gift was $47,504. From now until 2013 the donor receives $6,037.20 tax-free income, no capital gain, and $2,562.80 ordinary income each year. In 2014 that amount will switch, with $2,218.99 of income being tax-free and $6,381.01 being ordinary income. In 2015, all income becomes ordinary.

Thank you for any help you can provide.

Sincerely,
Rebecca


Dear Rebecca,

If the annuitant were to relinquish her interest in the CGA and assign her interest to the College she would be entitled to a charitable deduction for the present value of her remaining annuity interest. The present value of your donor's annuity interest as of February 14 is $41,971, but her unrecovered investment in the contract is only $19,474, and the lower amount is the charitable deduction she is allowed.

Please note that there is a split of opinion as to how much the charitable deduction should be; the above represents the majority opinion, so her counsel should be the one to determine how much she should claim.

She will need a qualified appraisal to claim the deduction. You can obtain this from PGCalc for a fee.

All the best,
André

Does a donor receive a charitable deduction after making a gift from an IRA?

André,

If someone makes a gift from an IRA, they avoid taxes, but do they also receive a charitable deduction for making a gift to charity? I don't think they receive a deduction, but want to confirm.

Thanks!

Meg


Meg,

That is right. A direct transfer of up to $100,000 to your organization in 2011 does not provide a charitable deduction, but it also is not included in the donor's gross income. So the out-of-pocket cost of a $100,000 transfer is $65,000 because the donor avoids income tax of $35,000.

André

Use of qualified charitable distribution from an IRA to discharge pre-existing enforceable pledge

André,

Can a qualified charitable distribution from an IRA be used to discharge a pre-existing enforceable pledge?

Brad


Brad,

Yes, it can. The IRS stated in Notice 2007-7, 2007-5 IRB 1, that a taxpayer may use a QCD to discharge a pre-existing enforceable pledge and not be in violation of the self-dealing rules. The IRA funds belong to the taxpayer so there is no self-dealing. In contrast, a taxpayer may not use a donor advised fund for the same purpose because the assets belong to the charity and thus would be discharging the taxpayer's legal obligation.

André

Estate-tax changes in 2011

André,

What happens to the basis in the new law? I'm presuming that because there is an estate tax in 2011 assets will pass through at the value at time of death and not at the original basis as in 2010. Am I close?

Laird


Laird,

You are right. They have a choice for 2010.

André

Arranged IRA distribution directly from a donor’s IRA in 2010

Dear André,

What if a person, for some odd reason, arranged for an IRA distribution directly from her IRA to our organization a few months ago? (To be clear—directly to us from the IRA administrator, not via her nor as a check she made out to our organization.) I decided to have a regular gift receipt issued to the donor, but I sent it with a cover letter saying that, if the IRA rollover gets extended, we will need to work with her and her IRA administrator to decide if that distribution can be recharacterized as a direct distribution and therefore not included in her taxable income for 2010, in which case I would write my "regular" IRA rollover gift letter and perhaps a second letter saying the gift receipt would be rescinded or declared null and void.

What is your advice on how to go about this, assuming she says she does want to recharacterize the earlier distribution as a qualified distribution?

Marv


Marv,

I think you have the proper approach to the situation. Many people have done the same thing in anticipation that the rollover would be extended, and they are in the same boat as your donor.

André

2010
Gifts of Closely Held Stock

André,

I have an idea in my mind to pursue gifts of closely held stock from smaller privately owned corporations. I realize there cannot be a pre-arranged buyback of the stock from the donor. What are the pros and cons of this type of gift? It would seem to be very advantageous for both the donor and the charity ... a charitable tax deduction for the corporation and cash for the charity. I'm hung up on this "pre-arranged buyback" issue. Is this something to pursue or leave alone? Your thoughts?

Joe


Joe,

It's one of my favorite gift arrangements. A pre-arranged sale can be easily dealt with. So long as the charity is under no obligation, express or implicit, to sell the stock to a pre-designated buyer selected by the donor, the gift will work.

André

Gift of Partial Interest in a Retained Life Estate

André,

Is it possible to gift a partial interest in a retained life estate? I mean – can a donor gift an RLE of 75% of his property and keep 25% wholly for himself?

L


L,

Yes, it is.

André

Creating a gift with California municipal bonds

Hi André,

We are having discussions with a benefactor who has acquired, during his life, California municipal bonds. He is interested in creating a CGA.

Would we need a qualified appraisal or are they considered marketable securities?

Thanks!

Kevin


Hi Kevin,

I believe they would be considered marketable securities. Has he considered creating a CRAT to preserve the tax-free nature of the payments? Is he worried that the bonds may be defaulted? I imagine there is considerable appreciation in their value.

If you wish to discuss, you can reach me at 317.875.0910 x222.

André


André,

Thanks, I'll circle back with the gift planners about the CRAT. I don't know if they considered it.

Kevin

Does a donor recognize capital gain with a pledge from appreciated property?

André,

A question for you—does a donor recognize capital gain when a pledge is satisfied with appreciated property?

David


Dear David,

Over the weekend I checked Rev Rul 64-240. 1964-2 CB 172, and it states that pledges do not create a debt for income-tax purposes (even if enforceable under applicable state law). Thus, there is no capital-gain recognition if a pledge is satisfied with appreciated property.

See also Rev Rul 81-110 as to gift-tax implications if a third party discharges a donor's enforceable pledge.

Warm regards,

André

Best gift for acquiring a nearby building for hospital use

Hello André,

We have a physician who owns an office building near one of our hospitals. The hospital would like to have the building to house a free community clinic. The building has an approximate value of $1 million. The physician is 56 years old. We would like to present some options that will benefit both parties.

Our Foundation's executive director asked me if we could use a lead trust. I can't see how this would accomplish anything but maybe a nice tax deduction for the physician and we would use the building for 25 years or so without making lease payments. I am assuming the imputed lease payments would be the income distribution from the trust. The physician would get the building back at the end of the term. Would this work? Wouldn't the physician have to pay tax on the distributions (amount designated as lease payments)?

A deferred CGA is another option but since the building will not be sold for several years, the annuity payments would have to be made by the organization.

Can you see any other options? I know you are busy and I will be grateful for any input you may have. I thought you might have run across this scenario sometime in your career.

Thank you,

Mary Pat


Mary Pat,

The nongrantor lead trust does not generate any income-tax deduction; it merely shelters future appreciation from transfer tax. If there is rent, that could be used to make the payments to charity—otherwise there have to be distributions in kind. At termination the assets would be distributed to children.

The grantor lead trust would result in an upfront income-tax deduction for the present value of the charitable payments, but the donor would continue to be taxed on the trust income—including distributions to charity. At the end, the building would revert to the doctor.

I think I mentioned to you the medical practice building in Michigan owned by five doctors who exchanged their respective undivided interests for five deferred gift annuities. It worked like a charm because the hospital really wanted the building. Here you could defer the payments until age 65 or 70, which means no negative cash flow for 9 or 14 years. Plus you own the building. If the doctor continues to practice from her existing office she would have to pay fair-market-value rent, as do any other tenants.

I think your suggestion for a deferred gift annuity is the best solution.

André

Removing a CGA beneficiary

André,

I've attached the gift annuity agreement that we discussed. Mr. R. wants to amend the agreement to remove Ms. K. Is this possible? He established the annuity and signed the agreement. They were never married. Because she didn't sign anything, I wasn't sure if Ms. K. has a vested interest in this annuity.

Thank you in advance for your expert guidance and counsel.

Best regards,

Lucy


Lucy,

No, he cannot remove her as beneficiary in as much as he did not retain the right to terminate Ms. K.'s interest in the CGA agreement. Nor did she have to sign the agreement. The promise to pay her was made by the University and a promise is a promise. Of course, they could ask Ms. K. to renounce her interest and that would take care of the problem.

André

Making a gift from a family foundation

Hi André,

A donor called me to ask if he is allowed to make a gift from a family foundation in exchange for a charitable gift annuity or other split-income gift. If that isn't possible, he is also considering dissolving the foundation. If he does that, can he use the proceeds to make a split-income gift? Thanks in advance for your help.

Linda


Linda,

No, and no. The assets do not belong to him, they belong to the foundation—a separate legal entity. Suggest that he read the foundation document to find out how the assets can be used.

He can make a distribution of assets to your institution for a scholarship and bask in the warm glow of his good work.

André

Tax deductions for appreciated property limited to cost basis

André,

I am working on a paper for my nonprofit law class and am trying to find a resource that gives a rationale for the tax treatment of short-term capital-gain property contributions. I am trying to answer why tax deductions of contributions of appreciated property, held less than one year, are limited to the cost basis and not the fair-market value. Is this good law or is it irrational?

Thanks for any help you are willing to provide to this weary student of philanthropic studies.

Mike


Mike,

The less than one year—actually one year or less—rule defines a trader as opposed to a long-term investor.

Since one year or less transactions result in ordinary income, no charitable deduction is allowed. The rule used to be six months or less many years ago.

André

Transfer of Stock in an IRA

André,

Quick questions for a donor:

Has the provision for the transfer of assets through an IRA distribution to a charitable organization been extended yet through the end of 2010? And, can a donor make a transfer of the stock in an IRA rather than arranging for a cash/check distribution? I can’t find this information easily.

Thanks!

Mary Kay


Mary Kay,

No, not yet as of July 23, 2010, perhaps soon.

Yes, stock can be transferred, but cash is simpler for valuation purposes.

Hope you are well,

André

Charitable Deduction Rules for Gift of Personal Property

André,

Can you refresh my memory on what the charitable deduction rules are for a gift of personal papers by a professor to a library? My guess is that this is a related-use tangible personal property gift, fully deductible at fair-market value with a qualified appraisal (assuming value is over $5,000).

Also, is this gift made through a deed of gift? If not, what mechanism is necessary to convey such a gift? Thanks.

Hope all is well.

Randy L


Randy,

Bad news, your professor's deduction is limited to the cost of the paper and ink he used to create the materials. Same as if a living artist were to donate a painting to a museum; deduction would be limited to cost of canvas and paint used to create the painting even if he could sell it for a $1,000,000 in the market.

André

Determining Value of a Bond Without a Maturity Date

André,

I have a note in front of me that says this donor is interested in funding a CGA with bonds “that don’t have a maturity date.”

I didn’t know there was such a thing. How does one determine value and liquidity?

Laird


Laird,

Perpetual bonds, often called Perps, have no maturity dates. The most famous of these are UK Consols issued in 1888 and still trading.

Today, these bonds are usually issued by banks and governments for financing purposes to raise funds without jeopardizing their capital base. They offer high interest rates and are usually callable after 10 years. If they are not called, the coupon rate goes up by one percent after 10 years.

Valuation looks simple but is not in the real world: 1/Y, interest over cash flow. Better get an expert to do this.

André

Funding a CRUT with mortgaged real estate

André,

We have a potential donor who owns two houses—lives in one of them and leases the other one—valued at about $500,000. There is a mortgage of $90,000. He is intrigued with the idea of funding a CRUT with the houses. He would also like to continue living in his home and is willing to pay us rent. The university is interested in acquiring the houses for its expansion purposes for the long term, but there is no compelling immediate interest. Any thoughts on how we proceed with the gift?

Mindy


Mindy,

There are two immediate problems with the proposal that need to be addressed:

1. The mortgage would disqualify the trust ab initio; there goes the charitable deduction and potential gift tax problems may be created. Is it possible to pay off the mortgage, which is relatively small compared to the total value?

2. Unfortunately, the self-dealing rules prohibit a substantial contributor—in this case, the donor—from living in the house after the trust is created even if the donor pays fair rental.

May I suggest that you consider instead a deferred charitable gift annuity. This will solve the above problems: no self-dealing rules to contend with and the mortgage is treated as a bargain sale. Donor would have to recognize capital gain equal to the mortgage x appreciation/fair-market value.

A deferred gift annuity also enables the university to buy the homes from the foundation in about eight years, which is when it wishes to acquire the properties. In the meantime the rent from both houses will enable you to finance the annuity payments.

Hope this helps,

André

Registering a CGA program in California

Hi friend,

We have an alum who would consider a CGA in exchange for some undeveloped land in California. The value of this property is approximately $1 million. Also included in the gift package would be another separate piece of property on which he lives and would do a retained life estate. The market value is approximately $2 million. So, for a $70,000 annual annuity payment we would have one $1 million piece of property to be sold now and a $2 million piece to sell in the future. I'm putting together a couple of scenarios for the business office here to find their risk tolerance level. I'm discounting the $1 million by 20% and assuming two years to convert.

The college—out east—has not registered their gift annuity program in California. As you know, a prominent law firm out here has issued a legal opinion to a major university that it does not have to register in California or anywhere else. That is what we want to do. So, what do you think? Should I be raising the California registration issue? Of course I should raise the issue—but to what level of hysteria?

Cheers,
L


Hi L,

DEFCON 2. Also, you are not that major university.

André

Donor dying before paying IRA conversion tax

André,

I have an alum who will be 93 years old by year-end and is interested in the IRA conversion. What happens if he dies after he converts but before he pays any taxes? I don’t have a full picture of the breakdown of assets in his situation, but I strongly believe his family is wealthy enough to have estate-tax issues if he survives until 2011.

Should I be steering him in a different direction?

Also, I had a good chat with our Advancement committee chair …classic opportunity for planned gifts. She is now considering more than doubling her initial commitment to $2.25 million from the $1 million deferred CGA. Some of the $2.25 will be cash. She’s sending me a snapshot of her assets in the next week or two.

Regards,

Aaron


Aaron,

The tax would have to be paid by his personal representative and reflected on his last income-tax return.

Terrific news regarding your Advancement committee chair.

André

Using stock to make a gift

André,

Quick question. One of the gift officers recently had a conversation with a donor—aged 43—who owns several hundred thousand dollars worth of stock options in the company for which he is CFO (public company). The options have been restricted but lose that restriction this summer and he wants to use the stock (or the option) to make a six-figure gift. I do not know what the details are (i.e., the option price or how long he has held them [more than a year, at least]). I have never dealt with this precise scenario, but I seem to recall that he cannot just give the options and let us exercise them—or if he does, there are adverse tax consequences to him. Is he better off just exercising the options, then giving the stock itself? If so, is his cost basis the option exercise price? Thanks for any help on this.

Bruce


Bruce,

The result is the same: bad.

Qualified stock options cannot be transferred.

Non-qualified stock options are ordinary income property. So you don't benefit from the gain. Check advanced seminar binders from '05 and before for my discussion of the same with examples.

André

Best practices for booking gift annuities with fundraising results

André,
What is the best practice for booking gift annuities with fundraising results? Can you count the entire amount in annual results? Do you book what the donor counts as a charitable deduction? Is the amount booked based on actuarial information?

Any direction you can provide would be very helpful.

Thanks so much,

Meg


Meg,

Generally speaking, most charities book the gift at the discounted present value or charitable deduction generated by the gift. Crediting for campaign is usually the full face value of the gift annuity. Some places go with the charitable deduction value.

Hope this helps, Meg. Call if you wish to discuss further.

André

Pro rata payment for an annuity from the last payment until the death of the donor

André,
I asked a question recently of our payables office about the pro rata payment for an annuity from the last payment till the death of the donor. Our CGA currently reads that the donor’s last payment is the one received prior to death but I always assumed we issued a final check on a pro rata basis (similar to a trust).

Moreover, aren’t we obligated to send the estate notification of the amount of any of the annuity’s principal that has not yet been returned so they can deduct from their estate taxes?

Regards,

Aaron


Aaron,

Good common-sense questions.

1. In all cases that I am familiar with, the charity’s obligation to make annuity payments ceases with the last payment prior to death. No pro rata distributions are either necessary or required.

2. If annuitant dies prior to life expectancy, the annuitant is entitled to a posthumous income-tax deduction on his or her final income-tax return for the amount of capital that has not been returned.

André

Gifts of tax-free muni bonds

André,
Have a question for you. We’ve got a donor who is going to fund an annuity ($1 million) with either cash or–here’s the question–with tax-free muni bonds. Does he still have a capital-gain consequence with this? Do I treat it like an appreciated security and get his cost basis for the calcs or as a cash transaction for the purposes of the calculations?

Thanks!

Mary Kay


Mary Kay,

You are right. You treat the munis as any other appreciated asset; hopefully it’s long term. Nice gift.

The inventor of the laser, a Union grad, did two CGAs for a total of 3.2 M, all munis. At 83, was able to get a much higher return.

Hope you have a great year.

André

Best planned gift to benefit donor’s children

André,
I met with a donor on Tuesday of this week. He is wanting to make a planned gift in the $2M to $3M range. He also wants to do this in a manner that will benefit his children. We initially had this discussion nearly a year ago. I had at the time suggested testamentary trusts for the kids with [this university] as beneficiary. It seemed pretty straightforward to me.

His estate counsel told the donor this wasn't a good idea as he would have tax issues. The donor could not articulate it any further to me, and I don't have the depth of view of the total estate that the attorney does. Anyway, I was scratching my head as to why the attorney wouldn't think this was a solid idea.

So, my question to you is: Donor wants to make a planned gift; donor wants kids to get something out of it; outside of testamentary trusts, what might be done?

Thanks,
Jason


Jason,

Donor could give [your university] the $2M or $3M outright at death and avoid all estate tax. By adding the children as trust beneficiaries he would be creating a taxable event on the value of the children's income interest. The question is, does he or does he not want to make a gift to [your university]?

You might also consider deferred CGAs for the children.

Perhaps the lawyer could elaborate on what he means. That would be helpful.

André

Binding estate-gift commitment

André,
Your thoughts please on the subject once again regarding binding estate-gift commitment. [This university] now has three such irrevocable future gift plans in place. Each has a special designation that is the purpose for making the future gift binding.

In loose conversation with donor-prospects, we have donors who make a request such as the following: “Can I get a sample clause of an irrevocable $ gift to [this university] to put into my will?”

As Louis just explained to me, such a binding future gift is more correctly considered to be a part of an estate plan rather than the will itself, since a will is a revocable document. Attached is the pledge agreement that Frank Minton introduced at your seminar in Saratoga. This document is a side agreement representing a "debt owed" by the estate. If I am correct in my understanding, why does Frank suggest that there be reference in the will to the pledge agreement, since this debt owed will come before specific bequests are satisfied in the estate-distribution process? Is Frank suggesting that it may be a moot point and therefore serves as a reminder that this pledge agreement must be satisfied?

How might you suggest I respond to our donor now seeking suggested wording? I plan to call him to discuss the eventual use, which I do not know as yet.

Pete


Pete,

As Louis so aptly put it, a will is a revocable document whereas an irrevocable pledge agreement outside and separate from the will is an enforceable debt against the estate if the will does not include a provision to satisfy the promise made by the donor.

Hope this clears it up.

André


André

My question then is whether there is any need for the bequest language when you already have the outside document (irrevocable pledge agreement)? See the document below. Louis suggests that such a binding estate-gift agreement needs to include the designation. This is language that you may have assisted Louis in preparing.


Pete

BINDING STATEMENT OF INTENT

In consideration of my interest in benefiting [XYZ University Foundation] and the [XYZ University], I, ______________________________ of _______________________________ (City, State), pledge and promise that, in addition to the contributions I have already made to the [XYZ University Foundation] (the Foundation) prior to the date of my execution of this agreement, I will contribute to the Foundation a total of not less than Five Million Dollars ($5,000,000). I further pledge and promise that any portion of the $5,000,000 I have not contributed to the Foundation by the date of my death shall become a debt owed by my estate to the Foundation, thereby obligating my estate to distribute such portion of the $5,000,000 to the Foundation subsequent to my death, provided, however, that the amount of such debt shall be reduced, dollar for dollar, as a result of any contributions made to the Foundation designated to be in partial or complete satisfaction of this pledge.

This agreement in no way limits my ability to make additional gifts to the Foundation for other purposes during my lifetime or by will or other instrument effective subsequent to my death.

I acknowledge that the Foundation's promise to use the amount pledged by me and/or the Foundation's actual use of the money pledged by me for the purposes specified above shall constitute full and adequate consideration for this pledge. In further consideration, [XYZ University] has agreed, upon satisfaction of this commitment, to name the ___________________________ in my honor and that such naming opportunity shall be reserved exclusively for me until such time as this commitment has been fulfilled. If, however, the combination of my remaining lifetime gifts and estate distributions falls below the $5,000,000 level, I acknowledge that the naming opportunity will again become available for another donor and that [XYZ University] will recognize my gifts in other ways befitting the extent of my contributions.

This pledge is to be irrevocable and a binding obligation on my estate.

This pledge shall be interpreted under the laws of the [appropriate state].

Executed this ______ day of _________________, 2009.

___________________________



Donor




APPROVED AND ACCEPTED:

[XYZ University Foundation]

_________________________________
[NAME]
President and Chief Operating Officer

[XYZ University]

_______________________________
[NAME]
[President]
_______________________________
[NAME]
[Provost and Executive Vice President for Academic Affairs]



Pete,

Yes, there is. That would make the bequest a charitable gift rather than having the pledge become a debt of the estate. Donor's lawyer should decide which route to take.

André
Treating an IRA rollover gift that was received after legislation ended

Hi André,

We have a donor who intended to make an IRA rollover gift by year-end—unfortunately the wire transfer was received from his IRA administrator on January 5—gift made from them on his behalf. Since the legislation ended December 31, are we required to issue the gift receipt to him in his name (not the IRA administrator) and treat it as an outright gift so he can take a charitable deduction for the full amount of the gift in 2010?

Thanks for your help,

Grace


Hi Grace,

You can do that because technically that is what has happened here, unintended as it may be. Tax wise it makes very little difference because the net result is basically the same either way.

Had it made a meaningful difference he could have demanded that the broker make him whole.

I hope you all have a great year.

André

Deferred gift annuity to include donor’s children

André,

Thanks for your guidance yesterday. I prepared a deferred gift annuity illustration that was presented by our VP for advancement yesterday to our potential donor. (I attached a copy for your convenience.) Again, I would not have presented a solution this early in the game, but I had to produce something for her.

During the meeting we found out a few more details about the property.

1. The property does have a mortgage; however, we don't know the amount yet. Does this pose any problems? I can't remember if you can accept a gift of encumbered, appreciated real estate in exchange for a deferred gift annuity. Again, keep in mind we are registered in New York.

2. The prospect asked what happens if she dies immediately after she does the gift. Obviously, the answer was that the contract ends with no further payments. There is a chance she would want to include her children somehow. They are 30, 27, and 19, which is really young. Any ideas on how to include them? I do not think that doing 3 deferred gift annuities with the mother and child as the annuitants respectfully would be in our best interest because of the young ages. One thought I had would be to do a straight-ahead bargain sale and have her set up a trust for the children with the net proceeds or just have it handled under her will.

Thanks in advance for any ideas and guidance you might have.

Regards,

Mark


Mark,

How much is the property worth? You need to decide if this is worth pursuing. But if you want the property to use for your exempt purposes I might recommend that the College just buy the property.

The mortgage creates another bargain-sale tier, and if the property is highly appreciated she will probably recognize significant capital gain.

Re 2, they are too young to be included in any charitable arrangement. And you cannot use a CRT because of the mortgage which would disqualify the trust.

A straight-ahead bargain sale would work. However, the mortgage is another bargain sale.

Hope this helps,

André

Recognizing the husband and wife as “joint donors” if the funds come solely from one account

Dear André,

Thank you so much for the manual ... you are too kind. I really wasn't fishing for a freebie, but I sincerely appreciate your generosity.

Quick question for you:

If a donor (wife) transfers funds from her personal trust account for a CGA or other instrument, can we recognize BOTH the husband and wife as "joint donors," or can we technically list only the wife as the actual donor since the funds came solely from her account?

Thanks,

Melanie


Melanie,

It’s ok if the wife is amenable since it’s her money. Enjoy the manual, but I don’t want you to stop calling.

André

Using an IRA remainder to fund a trust?

André,

If you’re able, I seek your advice on how to proceed with the following scenario.

A prospective donor age 63 states that he’d like to make a testamentary gift to us. His idea is using his IRA remainder to fund a trust at his passing to benefit his brother, who is a few years older, with the Foundation as a charitable beneficiary when the brother passes. Should his brother predecease the prospective donor, the Foundation would receive the IRA funds, if any. The donor anticipates a significant sum being left in his IRA.

My take on this would be that the donor must first update his IRA beneficiary form with his intentions as summarized above.

Questions:

Should the donor engage with his estate attorney now to prepare any documentation?

What, if anything can we prepare or show him that makes this gift plan seem doable?

Are there other ideas for us/him to consider?

And, would a (CRUT) trust need to be established in advance?

I welcome your thoughts if you have the inclination. Thanks so much!

Tim


Tim:

You are on the right track. As you suggest, this is best done with a beneficiary designation in his IRA document. He needs to inform the IRA trustee of his intentions and ask them to designate a CRUT as a beneficiary of the IRA funds at his death with his brother as a beneficiary. You would be named as secondary beneficiary to receive remainder of CRUT at brother's death, and if brother predeceases then you would receive proceeds at donor's death. Donor should consult with IRA administrator as to how to proceed.

Hope this helps, Tim. Call if you wish to discuss further.

André

Can a donor take a deduction if a charitable remainder trust experiences a capital loss?

Hi André,

A donor who has several trusts with us has asked this question: If his trusts experience a capital loss during the year can he take that loss as a deduction? He is speaking specifically to one of the trusts he has funded exclusively with cash. My initial reaction is no, but I wanted to check with someone quicker than myself and you certainly qualify.

Thanks

Jason


Jason,

I take it these are CRTs, if so he cannot take a deduction for the capital losses.

André

2009
Giving an IRA rollover as stock instead of cash

Hi André,

We were on a conference call with some 50 reunion class volunteers last week, and one of them asked an oddball question which I thought you might be able to answer for us. He inquired whether an IRA rollover gift could be made in kind as a stock transfer or if gifts must be in cash—we’ve always received all our distributions as checks. I’m not sure what advantage he thought we would be getting by giving stock as a rollover instead of cash, or if it is even allowed by the legislation, but wondered if you had any insight/comment so I can follow up?

Thanks André,

Grace


Grace,

Yes, it can be made. That way you get stiffed with paying the selling cost.

André

Decreasing appraisal for a retained life estate

André,

Last year we received a retained life estate. The appraisal was $256,000. The donor passed away recently, and upon a recent appraisal we have valued the property and are selling it at $160,000. Are there are any implications to the donor’s estate considering they were eligible to receive a deduction for $171,000?

Regards,

Aaron


Aaron,

Given the state of the real estate market, I don’t think there is much to worry about from the IRS. A drop of 37.5% is not that uncommon these days. Unless there was any fraud involved with the first appraisal, your donor’s estate is OK.

André

Becoming an irrevocable remainder beneficiary

Hello André,

We are planning to write to all of the donors of record with charitable remainder trusts. The purpose in writing is to confirm or request that our organization be made an irrevocable remainder beneficiary. This will allow us to obtain a match through the Batten Leadership Challenge. See the attached draft letter.

My question to you is how do you suggest we go about doing this?

I’m thinking that we could include a form for signature by the grantor/or trustee indicating that our organization is an irrevocable remainder beneficiary. Often we have the trust document but the word “irrevocable” does not appear, thus allowing the grantor or trustee to switch beneficiaries or change the amount to be distributed.

What do you think?

Dale


Dale,

I think you need a copy of the trust document that indicates your organization is the irrevocable beneficiary of the trust.

André

Can a donor add an additional charity as beneficiary of a CRUT?

Hi André,

Here's my question:

We are the trustee of a CRUT. The donor, in his 90s now, asked me if he could add an additional charity as beneficiary of the CRUT for a small amount, $15,000. The trust assets are about $250K. He was told by my predecessor that this was possible. He also asked if he could add more to the trust, not today, but maybe a year from now when he straightens out some finances.

I'm assuming that he can add to the trust, but I don't believe he can add/change beneficiaries. Can you walk me through this?

The trust reads,

"This trust is irrevocable and shall not be subject to amendment or modification. Notwithstanding the foregoing, however, the Trustee shall have the power, acting alone, to amend the Trust in any manner required for the sole purpose of ensuring that this Trust qualifies and continues to qualify as a charitable remainder unitrust within the meaning of section 644(d)(2) of the code."

If I'm correct in my understanding, what are some options for the donor?

Thanks in advance for your help.

Thanh


Thanh:

You can add to a unitrust if it contains a provision that permits additional contributions.

Unfortunately for your donor he may not add another charity as a beneficiary because the trust provision does not permit the addition. Such powers have to be expressly retained in the trust document.

He could exchange a portion of his unitrust income interest for a gift annuity with the other charity. However at his age the value of his income interest is rather small. Or he could leave them a bequest of $15,000 of other assets.

Basically the trust is locked up for you.

Hope this helps. Call me if you wish to discuss further.

André

Can a donor transfer a University Club bond to charity?

Hi André! I really enjoyed your seminar a few weeks ago. You and the gang do a terrific job!

We have a donor who is interested in gifting a privately issued University Club of Chicago Bond. The bond was originally issued in the 1940s and has a maturity date of 2105!! The amount is $500, and he has asked us to provide a bond power form and W-9 for donation to us.

I am completely unfamiliar with these types of bonds. I am aware, I believe, of the tax advantages of gifting savings bonds at death by will or trust via specific bequest and that a charity cannot be co-owner or death beneficiary. I am not aware of any other way that a donor can transfer a bond to charity.

Is there an opportunity here? Or should we just instruct the donor to cash in the bond and give the proceeds to charity? I believe the latter would be my normal response ... please let me know if I'm missing something. Obviously the amount is minimal in this case, but I'm curious and would like to know in case we run across this again.

Thanks!

Melanie


Melanie,

Thanks for your kind words about the seminar.

This is not a savings bond as in an EE or HH bond that can be issued only by the U.S. government. This is a private bond issued by the University Club. For you, it would be a lot simpler if he cashes it in and gives you the proceeds. Or you could call your broker/bank and ask what would be the easiest way to dispose of the bond if he were to give it to you.

André

May a donor retain ownership of a life insurance policy after making us the beneficiary?

Hi André,

An alumnus is taking out a life insurance policy and is making us the beneficiary. Is there a way for him to retain ownership, make us the irrevocable beneficiary, and receive a deduction each year for the premium payments? He understands that normally the donor makes the charity the owner and beneficiary but for some reason wishes to retain ownership. I’m not familiar with any language or way to accommodate his request.

Any help would be great.

Thanks,
Jackie


Jackie,

No, there is not. As owner he has power to borrow against policy, surrender policy for its cash value, etc. Not different than an irrevocable bequest designation and there is nothing left to go to your organization. He has to relinquish ownership to get a deduction.

André

How is the donor’s charitable deduction affected with property put into a NICRUT or FLIPCRUT?

André,

If property put into a NICRUT or FLIPCRUT is not "related"—(assuming the trustee wants to sell the property asap in order to produce income)—how is the donor's charitable deduction affected?

Don


Don,

If a CRT is funded with tangible personal property it is assumed it will be sold to produce income and therefore it is unrelated use. The deduction will be available when the trustee sells the property, but it will be based on the cost basis of the property and not its fair-market value.

Call me if you wish to discuss.

Great to see you last month.

André

Is there any reason why S-corp stock should not be used to fund a gift annuity?

André,

Is there any reason why S-corp stock should not be used to fund a gift annuity, IF:

  1. GT can sell the stock to other shareholders in the near term—to be defined and clearly understood or
  2. While holding the stock would GT be receiving income as a shareholder? Such income might be UBIT income, I believe…

What do you think?

Pete


Pete,

The sale of S stock by GA Tech will trigger UBIT.

Any income attributable to the S stock while GA Tech holds it is considered UBIT as well.

Other than that, no problems.

André

P.S. Best not to base annuity rate on the value of the stock since you'll be paying a 35% tax on the sale proceeds and have only 65% left. And if they don't buy it back you still have to make the payments.

How should our donor characterize payments from a trust?

Dear André,

Thanks very much for another great conference in Saratoga. More important than the great substantive content, the Pentera seminar experience reminds me that I am part of a noble profession led by people who really care about doing the right thing. I am already looking forward to the next edition.

You’re kind to invite my questions. I have one already. A donor plans to contribute publicly traded limited-partnership shares to a charitable remainder unitrust (we will sell them immediately and invest in our regular trust portfolio). When I asked for the cost basis of the LP shares, the donor explained that when he has received distributions from the LP the tax laws allow him to apply them to reduce the cost basis of his partnership shares rather than report them as ordinary income like dividends. For purposes of determining how to characterize the payments that he will receive from the trust, should we use the original cost basis or this adjusted cost basis? The donor’s accountant told the donor to give us the original cost basis.

Many thanks,

Ted


Dear Ted,

Thanks for your kind words about the seminar. We all appreciate it very much.

I disagree with the accountant and believe that you have to use the adjusted cost basis. Otherwise, all of the untaxed gain on the distributions that reduced his cost basis would escape tax permanently, not what the IRS envisions.

Regards to Ron, and please keep in touch.

André

Are there any inflation-beating gift vehicles?

Hi Claudine – Robin and I would like to challenge the fine minds at Pentera to think about some questions about the comparative advantages of various planned giving vehicles in a potential future political/economic environment where both taxes and inflation are higher. For example, are there any gift vehicles that could be viewed as “inflation beating”?

A couple questions and thoughts to get the ball rolling:

  • Robin was working on some figures for a lead trust, and it seems as if high inflation will tend to reduce the value of the remainder interest for the heirs. She realizes that would be true without the lead trust, as well. But, at least, the donor will have minimized estate taxes.
  • Thinking about the tax-free income and/or capital-gain rate income associated with annuities, won’t that tax-free/reduced-taxed status be even more valuable in a higher tax-rate environment? (Sort of like having tax-free Roth income is proportionally more advantageous for people in higher income brackets.)
  • I’ve read a good bit about the idea that laddering annuities could tend to offset inflation by bringing additional payments online over time to match rising costs. But does laddering annuities actually result in more total payments to a typical donor over their average life expectancy? And if it’s the same or a similar total sum, then isn’t laddering more of a convenience than a tool to increase returns? Would someone do better by giving an immediate-payment annuity, spending less than the total payments so that they could save/invest the balance, and then taking from that extra savings account later on?

It would be great to hear from you, André, or Frank Minton on these topics. Thanks!

Richard


Richard and Claudine:

Good questions without definite answers. For example, the unitrust ostensibly was designed to be an inflation fighter but hardly did the job in the market crash of 2000 to 2002 or last 18 months. It works only when markets go up in a steady manner, which they never do. Success is a matter of timing when the unitrust is created: at the beginning of a market crash you're dead; at the end of the crash you look like a genius.

Gift annuities are wonderful at all times especially for older folks: great returns, great tax benefits, and the risk is shifted completely to the charity. And as you note, the tax-free treatment of much of the payout amplifies the benefits significantly. The older you are the less of a factor inflation is because of the limited time horizon.

Your observation regarding lead trusts is also cogent. But keep in mind at the current exemption rate only a handful of people are affected by transfer taxes, especially after the recent massive loss of wealth.

Laddering annuities is the antidote to the prohibition against including a cost of living adjustment in a gift annuity. But I believe you are right, it's smoke and mirrors. If you are going to do a gift annuity go ahead and do an immediate one with what you plan to invest or a deferred one if you are young. When you have more to invest in the future, do another one. I personally have four deferred ones, and I am trying to catch up to my friend, Emmett Watson at MOMA, who has 12. I never used to give them another thought, but now I am so glad that I have them.

I look forward to meeting you, Richard. Robin is an old friend, and please give her my warm regards.

André

Suggestion for a donor’s situation

André,

I am working with a retired faculty member age 71 and his wife age 70. He is interested in supporting the University with a life-income gift. He is not concerned with his children’s welfare as they are all doing very well. Between he and his wife they have three retirement accounts totaling about $1.5 million. They own two residences with a combined value of close to $1 million. They are also collecting Social Security. I suspect they have more assets, but this is what I know for sure. To my knowledge all the retirement accounts are tax deferred.

The donor is not interested in having TIAA or AXA annuitize their plans because he rightly guesses that they will receive a good remainder should they not exceed this life expectancy.

I am familiar with naming a CRUT (to pay the spouse till death) as a beneficiary of a retirement plan, but I’m not sure this is the right call here. I don’t think the homes are in play for a gift. Any thoughts on a model to create a income vehicle from this situation to benefit him and/or his wife?

Regards,

Aaron


Aaron,

I think the best route for an immediate transfer is a gift of a remainder interest in one of their personal residences with a retained life estate.

The retirement plans are best deployed at death, either outright or in trust for spouse. He could do a tax-free rollover up to $100,000 for the rest of 2009.

Hope this helps; call if you wish to discuss.

André

Are DAFs hampered by excess business holding issues?

André,

I don't have enough info to ask a complete question, but I'm preparing for a donor visit this afternoon to discuss a DAF.

Question:
If he funds the DAF with shares of his LLC, do those shares have to be converted or can they stay in the DAF? I suspect he is the primary in the LLC—does that make a difference (excess business holdings)? Do I remember something about having 5 years to convert the asset?

What if the donor did an FF instead of a DAF? Bigger issues or lesser issues on the same situation?

Laird


Laird,

DAFs are not hampered by excess business holding or other similar issues. It's like an outright gift.

André

Conversing with an IBM Retiree

Hi André,

Question … is IBM likely one of those companies (like Lilly) whose employees may have been given Qualified Employee Stock, which offers an attractive option when used to create a CRT? I think we’re talking about companies openly traded on the NYSE who issue stock to their employees as part of their compensation through Incentive Stock Options, right? Specifically, I’m recalling the example you cited during our training last September and am trying to give one of my colleagues a tip on conversing with an IBM retiree.

Thanks!

David


David,

More than likely the employee's 401(k) is full of IBM stock—common occurrence in publicly traded companies.

All the best,

André

Can a family foundation be converted to a DAF?

André,

I’m assuming it is possible to convert a DAF to a family foundation but that it is not possible to go from a family foundation to a DAF. Right?

Laird


Laird,

Wrong. It’s the other way around.

André

Gift of Time-Share

Hi André,

A donor would like to give a gift of a time-share. We do not have a gift acceptance policy in place that addresses this type of gift. Other than the annual fees, which we would ask him to pay until the time-share is sold, are there other concerns we should be thinking about? Is his tax deduction calculated the same way that other gifts of real estate are handled, i.e., appraised value less basis?

Thanks for your help.

Linda


Linda:

Assume the fair-market value of the time-share is $10,000, then the donor’s deduction would be the same and not reduced by his or her cost basis. A qualified appraisal is required to sustain the deduction if it’s $5,000 or over.

If the donor agrees to continue to pay the annual fees, then Deerfield should have no other concerns other than how to dispose of the asset in this difficult market. If you do fund-raising auctions then you could offer the time-share as one of the items. Just a thought.

Please let me know if you have any other questions.

André

Can a commuted annuity be used?

Frank

Donor 84, spouse 62. Is it possible to establish a CGA that pays donor annuity rate for an 82-year-old and at his death continue for surviving spouse at whatever the rate is at that time for her age? Can a commuted annuity be used? I don’t think so but wanted to double check.

André


André,

This is not possible. IRC Sec. 514(c)(5)(CF)(ii) defines a qualified gift annuity as one that does not allow for any adjustment in the amount of the annuity payments.

Besides, calculation of the actuarial value would be impossible because one would not know in advance the rate for the wife’s age at the time of her husband’s death.

Frank

Disadvantages to giving a variable annuity and setting up a CGA?

André

We have a donor interested in gifting a variable annuity and possibly setting up a CGA. His annuity is worth $170,000, with a basis of $50,000. The annuity has not yet started paying out. His tax bracket is 15%.

Birth dates are as follows:

Husband 10/30/33

Wife 07/16/33

Son 08/06/67 (currently contingent beneficiary)

Am I correct in assuming there are no disadvantages from a tax perspective to gifting the annuity to us and setting up a CGA?

Regards,

Aaron


Aaron,

The donor’s charitable deduction will be based on his cost basis of $50,000 and not the fair-market value of $170,000. This is because a variable annuity is considered to be ordinary income property and thus you have to reduce the fair-market value of $170,000 by the ordinary gain element of $120,000 to arrive at the amount ($50,000) on which the deduction is computed.

The annuity however is based on the fair-market value of $170,000.

André

Can CRT donor acting as trustee retain stock voting rights?

André,

My question of the moment has to do with a CRT with the donor acting as trustee. The stock to fund the trust is anticipated to grow. Donor currently has voting rights and wants to be able to retain these voting rights. As self-trustee, I presume that he can do so? Can you comment please. Also, what issues if any might there be if the stock is privately held, which I think it is. I will be on a conference call tomorrow to learn more.

Pete


Pete:

He cannot retain voting rights in the stock; this would make it a partial-interest gift and so no deduction. But in his capacity as trustee he can control the stock and vote as he sees fit in exercising his fiduciary duty to the trust.

Let me know if you want to talk more about your conference call tomorrow.

Take care,
André

Which state law should govern?

Rick,

On paragraph #9 I think the governing law is supposed to be Indiana if there is a contest. We are subject to the laws of Oregon regulating gift annuities in that state because that is where the donor is resident, but we are governed by the laws of Indiana if there is a dispute because that is where Culver is located.

Thanks,

Dale


Thanks Dale, then I think the Mr. Price annuity that Mary Kay was working on recently should also be reviewed using this same concept.

Rick


Hi André,

I just want to double check. Regarding the Gift Annuity Contract there are two spots where state laws are mentioned.

Is my understanding correct?

“On paragraph #9 I think the governing law is supposed to be Indiana if there is a contest. We are subject to the laws of Oregon regulating gift annuities in that state because that is where the donor-beneficiary is resident, but we are governed by the laws of Indiana if there is a dispute because that is where Culver is located.”

Dale


Dale:

There are six states (Alaska, Calif., Md., N.J., N.Y., and Wash.) that require their law be named as governing in agreements entered into with their residents. Generally, it is advisable to name the donor's state law as governing, but a charity does not have to do so unless required as in above states.

André

Change payments from "Joe Donor" to "Joe Donor Revocable Trust"

Hi André! I have a trust question for you. We have a trust donor who is likely nearing end of life, and his attorney had him draft a living trust and new will so his daughter would not have to deal with probate (this is the same case I mentioned previously).

The donor asked me what information we need from him in order to deposit his current quarterly CRT earnings into the new living trust account. Other than the technical form I need for our administrator, I understand our original trust document needs to give us some leeway to change the beneficiary payments from "Joe Donor" to the "Joe Donor Revocable Trust."

As I interpret the document we have on file, there is no such provision under the "payment of unitrust amount" section. However, item 9 states the following:

"Irrevocability and Limited Power of Amendment. The Trust is irrevocable. The Trustee, however, shall have the power, acting alone, to amend the Trust in any manner required for the sole purpose of ensuring that the Trust qualifies and continues to qualify as a charitable remainder unitrust within the meaning of section 664(d)(2) of the Code."

Would this give us the wiggle room we need? Are there other options I should be considering?

Or perhaps we have to continue to pay the income to Joe Donor and he is responsible for transferring it into his living trust account?

I just want to make sure we proceed as necessary and don't endanger the qualification of the trust. Thanks for your thoughts!

Melanie


Melanie:

A revocable living trust has no separate legal identity from the donor. All trust income is passed through to the donor and is taxable to him. However, if he transfers a car, house, or bank account to the trust he has to reregister the title in the name of the trust. So his lawyer can reregister the income payments from donor to the trust; advise to do so and you'll be all set.

Hope this helps.

André

Effect of CGA on Medicare

Hi André,

I’ve got a potential CGA in the $300K range with a retired physician and his wife, who are moving from Ill. to Fla. They are 75 and 70 years old, respectively. I’m concerned about the issues relating to the 3- or 5-year “reach back” and the effect that creating a CGA could have on their Medicare/Medicaid qualifications. I remember you talking about that one time, perhaps at a PGGI lunch, and I can’t recall what the effect is. Is there anything I need to be concerned about here? He is partially disabled, and I’m heading out to see them in Peoria before their move to the Bradenton area.

Thanks,

David


David,

It's five-year look back. So if within five years of CGA he or she applies for Medicaid, there will be a penalty period of ineligibility equal to CGA transfer over monthly average nursing home cost for their area.

André

Is it ok to leave the stock in DAF as only asset?

André,

I think I understand the question I've gotten from a development officer. A donor prospect wants to create a DAF 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?

Laird


Laird,

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

Is tax-free portion of annuity in income?

Hi André,

Do you know if the tax-free portion of an annuity is included in income for AMT calculation?

Thanks,

Jason


Jason,

It can't be income because it is considered to be return of principal. So the answer is no.

André

Donor wants to make gift of home—but doesn’t want to leave until he is carried out?

André,

In regard to a 79-year-old with an estate-plan "partnership" with his daughters, we've asked for the document but don't know if we will see it. His biggest asset outside of the partnership is his $14M to $16M house in Rancho Santa Fe, Calif. He would like advice on how he could give most of that value to us, but he doesn't want to leave the house until he is carried out. How do we make an irrevocable commitment now? Is there such a thing as a partial interest in a life estate? Or something that would have a similar result? I'm back in the office on Monday and need to have some idea(s) by then as we are having a strategy session. I've asked the DO to gather more info—if I hear anything I'll pass it on.

Thanks,

Laird


Laird,

Donor can make a gift of a fractional or percentage interest in the remainder interest of a personal residence or farm.

This may affect the charitable deduction because you have to account for the discount because of the dual ownership of the property. The discount is generally limited to the estimated cost of a partition of the property. See PLR9336002.

Thanks,

André

Is it possible to fund a CGA with commodities? I’m suspecting UBI is a problem...

André,

Is it possible to fund a CGA with commodities? I'm suspecting UBI is a problem...

Thanks,

Laird


Laird,

Yes, but it is considered ordinary income property.

Thanks,

André

Help! Will our CRAT run dry?

Hi André,

In June 2000 the former powers-that-be accepted a CRAT in excess of $300,000 for a donor, with her daughter named as 100% income beneficiary. The CRAT's payout is a whopping 9.8%. I don't know why we did this, but we did.

The annual payout to the beneficiary is $32,004. With current investment losses in that account, the FMV of the CRAT is now at $151,000. The CRAT's horizon is another 30 years. Even in good times this one was always in danger of running dry. With an effective payout rate of 22%, it is now even more bleak that this one will avert disaster.

We've never had a CRAT "run dry" at [our charity]. Is there a way to reform this trust to try and avoid this situation or are we out of luck.

Many thanks,
Jason


Jason,

No, it cannot be reformed to change the payout rate. She can give up her income interest to [your charity]. Best bet is to exchange the present value of her income interest for a CGA.

This will lower her income, but at least it will probably not run dry.Let me know what happens.

You could also buy out her income interest for a lump sum.

André

Two gifts from one farm - Can one end and one continue?

André,

Good afternoon! I’ve attached a summary from the points we discussed last week on the two gifts from one farm with mineral rights. Can the CGA terminate at the deaths of Howard and Estelle, but the life estate continue for the daughter?

Laura Executive Summary:
Prospective Gifts from Estelle and Howard

Possible NIMCRUT remainder value: $1,195,215
Possible retained life estate value: $1,053,624
Updated: February 2, 2009

Howard, 88, and Estelle, 83, own 169 acres with a residence and outbuildings in Ohio. The land is enriched with two million tons of gravel, which increases the value of the acreage significantly. They want to use their property to create a legacy to [our charity] and to provide for the residence needs of their single, 57-year-old daughter, Gayle. Estelle was a volunteer in our gift shop many years ago.

They wish to create two gift plans: an outright gift of 129 acres to create life income for all three family members (a net income charitable remainder unitrust with a make-up provision) and a retained life estate on 40 acres and the house plus outbuildings to house all three family members.

At the point when the land is given to create a NIMCRUT, Howard and Estelle will give up $9,200 in annual income from leasing some acreage to a farmer. The trustee will receive the income and subtract the fees for a realtor and trust management from this amount. At the same time, the couple needs immediate income in order to cover the property’s costs—maintenance, insurance, and taxes—and the living costs currently covered by the rental income. Both gifts will also require upfront costs including current appraisals and Phase I environmental surveys of two parcels. [Our charity] can cover these costs and issue a 1099 to the owners. Their gift will offset any personal taxes owed.

According to experts [we have] consulted, there are acceptable practices we can employ to help Howard and Estelle make these gifts and gain two valuable planned gifts; they merit our careful consideration.

  1. At the time the retained life estate is created, [our charity] can exchange the remainder interest in the property for a charitable gift annuity on two lives—Howard’s and Estelle’s—at an interest rate that is reduced by 30%–40% from the ACGA rates. This strategy will create a negative cash flow for a few years, and it will lower the value of the gift to [the hospital], but it makes the gift feasible. At their deaths, the CGA terminates, but the daughter retains the right to live in the home for her lifetime.
  2. The gift of 129 acres will be exchanged for a trust—NIMCRUT—to benefit all three family members. The trust will receive the rental income to pay fees; excess income will be distributed to the family. When the land sells, the trust will begin to pay income to the three recipients. As each recipient passes, one-third of the trust income will be distributed to the hospital. (Gayle will use this income to pay the maintenance, insurance, and taxes on the retained life estate property that were previously covered by the CGA.)

Variables to consider:

  • Life expectancy—Howard, 88, is gravely ill, and Estelle, 83, is a cancer survivor.
  • Gayle may give up the retained life estate in the future; if that is the case, the property can be sold and the gift will be realized earlier.

Laura:

Have not seen it done or come across it before. Very interesting. I think it would work and see nothing that would trip it out. But there is no authority that I can hang my hat on.

Re trust: Usually at the death of parents the portion of the trust itself is distributed to [charity]—not the income, although that would work as well.

Very nicely done, stars for creativity.

Call me if you wish to discuss.

André

What happens to a charitable deduction if the donor dies?

André,

If the donor dies before using all the charitable deduction, what happens to the portion that remains and was not used?

Laird


Laird,

Gone, bye bye.

André

Aggressive planning with lead trusts

André,

I just read an article in the WSJ about charitable lead trusts and there is a paragraph in the article that I was very surprised to read (see below). Is this really an option? Unless this is his way of describing a grantor lead trust without using that terminology?

When establishing either trust (he is referring to a charitable lead unitrust or annuity trust), the donor can opt to take an upfront income-tax deduction based on the trust's payments to charity. Many opt to forgo that deduction, though, because taking it requires that the donor pay taxes on the trust's investment gain.

The link to the article is http://online.wsj.com/article/SB123422865113365925.html

Thanks for clarifying this point for me.

Take care,
Alice


Dear Alice:

It's true if very carefully arranged. A right is retained in the trust to make it an intentionally defective nongrantor lead trust such as the power invested in someone other than the grantor to substitute assets with the trust. The power is sufficient to make it a grantor trust for income-tax purposes but not strong enough to make the trust includible in the grantor's gross estate for FET purposes. By paying the income tax on trust income the donor is in a sense making a further nontaxable gift to his or her heirs.

The issue is far from settled as the IRS keeps batting down what powers can be retained to effectuate the defective status. Very aggressive planning.

I hope you are well, Alice.

André

What is the right gift for my donor to make?

I, along with David Wilber, have so enjoyed working with Nancy and Claudine at Pentera during the past six months. I am sending this e-mail to you because I would like your advice on a wonderful gift for IFAW that I have been working on with a lady in Wellington, Fla.

She is 67 years old, recently widowed, no heirs, and has real estate holdings in the Wellington/Palm Beach area in the $5 million range.

I had lunch with her in October in Palm Beach and in Wellington last month. We had a thorough discussion about IFAW and our animal welfare/habitat preservation work worldwide. At the first lunch visit, we discussed planned giving, specifically a CGA. She told me that she was selling property in Ocala, Fla., this spring and wanted to offset capital gain on the sale with a $100K gift for a CGA.

When we had lunch in January, she said, “Bob I want to make my gift on or around March 17th for $350K.” She repeated that figure three times and I asked if it would be cash—to which she said yes. She also shared with me that she currently has a CRT-CRUT ( I do not know what organization it will benefit, but she said she receives 11% annually—rather high I think.) I told her that I would look at several options for her and she added, “I hate to have IFAW wait for all the money as I would like to have some of the money go to program work right away.”

We agreed we would meet next week when I am back in Palm Beach, and she wanted to have her accountant there too. In an e-mail this morning she confirmed that the three of us will have lunch with the accountant next Tuesday. In the e-mail she told me that she totally trusts me and IFAW, but handling her finances in this economy and the fallout from the Madoff situation, she wants him/her there.

With this background in this current economic climate, André, could I call you this week to discuss your thoughts/ideas about the best options for me to discuss at that lunch—part outright cash gift, a CGA, a CRUT (which is favorable now with IRS Index Rate dropping to 2% in February)? However, creating the trust document takes time, I believe.

Would you please e-mail me a convenient time to call you or call me on my cell phone and let me know when we can talk. I will call your office later this afternoon as you may be traveling.

Best regards,
Bob MacColl


Bob,

Indeed, please feel free to call me at 317.875.0910 x222 tomorrow, Thursday, between 10 and 12 at your convenience.

Your kind comments about my colleagues are greatly appreciated. Thank you for sharing your thoughts.

André

Receiving variable annuity funds and an office building as gifts

André,

Good morning! We are exploring a couple of gifts on a short timeline. I'd appreciate your feedback on the tax issues raised under both.

Life is good … and interesting! Thanks!

Laura

1. Gift of variable annuity funds

I am working with a retired physician, 86, and his wife, 80, on two gifts. One is already pledged with partial payment made—$250K over five years for our Pediatric Trauma and Emergency Center (PTEC) capital project. The other is either a unitrust or charitable gift annuity, using another $250K. The source of funds for both gifts is a commercial variable annuity. He has used the payments from the annuity to make two pledge payments on the five-year pledge. The physician is now terminally ill. He wanted to use the annuity to guarantee payment of the balance of his five-year pledge. In discussing this with his advisor, the advisor suggested he create a CRAT or CRUT with $250K in the variable annuity to provide life income to his wife and split the rest out to pay off his pledge. I thought a simple CGA would also work for the $250K. However, before I can provide illustrations to discuss with him, I need to resolve conflicting information I received from two sources—Crescendo and one of the members of our PG Advisory Committee. One said the donor would have to sell the variable annuity and pay capital-gain tax on the growth of the annuity before making the gift. The other source said that there is no capital-gain tax on a variable annuity. Both said there would be savings in estate and probate taxes. How do I handle this?

2. Gift of office building

Another donor wants to give us an office building, in the hope that we would use it to provide testing or urgent care or physician office space. He may also be open to our selling the building if we can't use it … and we can't. Before we go back to him, I need to have my ducks in a row concerning the process and tax benefit to him … especially since the building could sell below the appraised value in this market. I consulted GiftLaw Pro within our Crescendo software to date, but don't feel I had a firm position on the issue of selling below the appraised value we accept as the value of the gift. ...

The value of the charitable gift would be based upon a qualified appraisal by a commercial real estate appraiser, completed not less than 60 days prior to the date the gift is made, accompanied by IRS form 8283.

  • Dayton Children's may request a Phase I environmental survey.
  • The appraisal and the environmental survey fees are typically paid by the donor.
  • If Dayton Children's accepts the property and sells the property at less than the appraised value, that does not affect the value of the charitable gift; however, there are civil penalties on the appraiser for substantial and gross valuation misstatement.
  • The charity must file IRS form 8282 if there is a disposition of the property within three years of the date of the gift (what does this do to the value of the gift to the donor?).

Here are also some notes from our VP who handles property for us. … I need your feedback on this as well.

The building is listed with a commercial realtor, who says it is a saleable building. It does have a couple of issues, but they can be resolved with price. He has shown it a couple times in the past few months. As you know it is listed at $405K. If the donor sold the building, he would take $350K. The realtor is pretty sure he can sell it for $300–$325K. If we accept the building as a gift, we should either do some due diligence (phase I environmental, title search, etc.) or have the donor indemnify us should something come up when we sell it. (Probably the former.) My understanding is that if we re-sell it within two years the price we get is what the donor can use as a charitable donation, so he would have to be comfortable with a number as low as $300K or so.

I look forward to hearing from you as soon as possible on either all or parts of these questions. Thank you very much!


Laura:

1. Both are wrong. Sale, actually surrender, of the variable annuity will result in ordinary income and not capital gain on the appreciation. And also check to see if there are any surrender charges involved. You are right that a gift annuity works just as well—and no lawyer fees to create the trust or trustee fees to manage the same.

2. If donor obtains a qualified appraisal for the value of the building then it should hold for purposes of substantiating his charitable deduction. A good appraisal should reflect the current abysmal market for real estate. Better yet, get two appraisals and use the lower value.

Is there a mortgage on the building? Will you be able to sell it if you cannot use it?

Be well, Laura, and have a good 2009.

André

Divorce and a DGA

André,

Please see the e-mail below. ...

John B has a DGA (not a CRT as he has stated) where he is primary annuitant, and his then-wife (now ex-wife) was surviving annuitant ... payments to begin 1/1/2013. Funded with $25,000.

I've asked that he send any divorce papers pertaining to the DGA.

Sounds like a mess to me—and I'm wondering what, if anything, can be done about this after the fact.

Hope all is well with you!

Thanks,
Ann


Hi Ann,

My concern is this: when my divorce was settled, part of the equitable distribution of assets was that I paid her cash for any future right she would have to proceeds from the trust.

So the total ownership of the CRT should now be in my name alone.

What document do you need from me to verify this?

Thanks,
John

Dear Ann,

You need a copy of the divorce decree that spells out the terms of the new arrangement.

May 2009 smile upon you.

Warm regards,
André

"Help - Should we accept a gift from a defunct PAC?"

André,

We have been approached by a defunct PAC that is required to direct the money they have left ($30,000) to a 501(c)3, and they have chosen Hospice. Any reason that you can think of that we shouldn't accept the gift? Although I'm not totally comfortable with this, I can't see any reason for us to say no. What say you?

Thanks,
Dennis


Dennis,

What did it lobby for? And do they have legal authority to give you the money? The decision to accept or not is up to your board.

André

Can I fund a CGA with tax-free municipal bonds?

Louis,

Got your message re: funding a CGA with municipal bonds. The bonds in question are tax-free municipals (Iowa Tobacco Settlement Bonds).

The value is approximately $80,000 and cost basis around $72,000. Purchased in 2002; one due in 2025, the other in 2035.

Question is whether there would be negative tax implications for the donor if these are given.

I'm copying André since you mentioned that you'd be out of the office the rest of the afternoon. I have the broker/donor on hold for now, but donor (age 102!!) is going on a cruise and wanted to get this resolved before he departs.

Thanks to both of you!

Ann


Ann:

There is no problem with funding a CGA with tax-free municipals. Downside is you lose the benefit of totally tax-free income, but would be more than compensated for by the huge return.

Going on a cruise at 102, imagine that! God bless him.

Hope you are well, Ann. So good to hear from you.

André

How are taxes handled when someone dies with commercial annuities, but makes charity the benefactor?

Hi André,

Hope you had a nice Thanksgiving ... just sitting here in my office late on this fine Friday evening trying to hammer out some call reports. I have a question for you ... .

I had a question last week from a prospective donor who wanted to know how taxes are handled if someone dies with commercial annuities in their estate but makes charity the beneficiary. I welcome your answer if you care to comment.

Cheers,

David Troutman


Hi, David:

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

André

Can a donor make an IRA rollover gift and direct proceeds to be used to pay the premium?

André,

If the charitable organization is the owner and beneficiary of a policy, can the donor make an IRA rollover gift and direct proceeds to be used to pay the premium?

How is this any different from the donor sending a check to charity directing that proceeds be used to pay the premium?

Thanks,

Louis


Louis:

I believe it's OK. You do have the issue of whether such a directive would render the gift for the use of instead of to the institution, but since there is no charitable deduction this would not be a problem.

André

"Help I need clarification on CGA termination!"

André,

I hope all is well.

Times being what they are, we are about to launch a “soft” campaign for CGA termination targeted at annuitants 75+ who purchased contracts ten years ago or more.

When I looked in PG Calc’s help topics for a reminder on how to calculate the charitable deduction, it provided different instructions for gift annuities as compared to other life-income gifts. Specifically, it notes that “in the case of a gift annuity only, the charitable deduction available for the contribution of an annuity interest equals the unrecovered investment in contract rather than the value of the income interest.” We have always been advised by counsel, perhaps erroneously, that when a CGA is terminated the deduction approximates the PV of the future income stream and an appraisal is necessary. When we brought this issue to counsel yesterday, however, her guidance was inconclusive.

In the case of a small annuity about to be terminated, the difference in the charitable deduction upon severance is $512.08 if calculated as unrecovered investment in contract vs. $1,902.20 if calculated as value of income interest.

I have attached the sections from PG Calc that discuss the topic.

The Canaras Group seems to favor the unrecovered investment in contract approach, but not unequivocally. Can you clarify? Thanks.

Regards,

Jack


Jack,

I wish I could clarify, but I have no definitive legal authority to come down on one side or the other. Consensus opinion seems to favor the PG Calc view, (this also includes Frank Minton in his manual). One, albeit expensive, way to resolve it is to seek a PLR.

Please note that it is up to your donor's counsel to be the final decider of the issue, especially where the answer is murky.

Merry Christmas,

André

Receiving a house as a gift, contract changes and options

André,

The Y is receiving 25% of this house (565K). We agreed to sell the house to a relative of the deceased at the appraised value and also agreed to pay no more than $2,000 in closing costs ($500 for us). [Another charity] is receiving 75%. What are your thoughts on the request below? I’ll need to discuss this with [the other charity] since they are a larger stakeholder, but I’d like your opinion before I connect with them.

Thanh and Pam,
The home inspection for the buyer revealed numerous major faults in the property (heating, plumbing, electrical, among others). The house is really in disrepair. The buyers requested that we contribute $19,000 toward the repairs. Ross Wells, in our trust real estate group, told the buyers this was an "as-is" deal and offered them $2,000 in good faith. They have now come back with a request for $8,000. We felt we should run this past the two of you since it changes the terms of the contract you agreed to a few weeks ago.
We have a couple of options: We could hold to the $2,000 and hope they don't walk away. We could agree to the $8,000 and get rid of this house. Or, we could counteroffer at something between $2,000 and $8,000.
Please e-mail me back (and copy Ross) with your thoughts.
Thanks,
Erin

Thanks,

Thanh


Thanh:

How much earnest money, if any, would the buyers forfeit if they walk away? That would be your bargaining chip.

In any event, for the Y there is not much difference between $500 and $2,000 if you decide to meet their request. In this day and age it’s not good to be stuck with a dilapidated house when there is such a glut in the market.

André

Can a non-qualified deferred compensation plan be signed over by a donor and then used to fund a gift annuity for them?

André,

Quick question... .We have an alum who wants to sign over to us their NQDC plan (non-qualified deferred compensation ... we think). Can this plan be signed over to us and then we use the fund that we would ask to be dispersed to us for funding a gift annuity for them? He is a doctor, and this is a plan through his practice ... all funds went in tax-free.

Thanks,

Kim


Kim:

It's simpler to cash in the account and fund the gift annuity. Either way the tax result is the same: it's all taxable income offset by the deduction generated by the gift annuity.

André