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Posted September 19th, 2017

Answers to “A Gift Planning Quiz”

Click here to view original post, “A Gift Planning Quiz.”

Let’s see how you did.

  1. Donor uses highly appreciated stock to pay a legally enforceable pledge. Why isn’t Donor treated as selling or exchanging the stock, so that Donor realizes a capital gain?
    Hint: If an individual pays a debt by transferring appreciated stock to the creditor, the individual is treated as selling or exchanging the stock and does realize gain.
    No, Donor doesn’t realize gain. Reason: An enforceable pledge isn’t a debt for federal income tax purposes. This is interesting and important.
  2. Donor, the CEO of ABC Corporation, a large and publicly traded company, owns some ABC stock that is subject to sale restrictions under S.E.C. Rule 144. Can Donor give this stock to a charity?
    Yes, Donor can donate the stock. Rule 144 restricts sales, not gifts, of stock. Note, however, that the donee charity may take the stock subject to the same sale restrictions that apply to Donor.
  3. The same individual as in #2 owns incentive stock options (ISOs) that allow her to buy ABC shares from ABC at a bargain price. Can she give any of her ISOs to charity?
    ISOs, by definition, cannot be transferred.
  4. Donor owns real estate subject to a mortgage, but Donor is not personally liable on the mortgage debt. If Donor uses the real estate to fund a charitable remainder unitrust, will the funding of the trust be treated as a bargain sale?
    Yes, it sure will. For bargain sale purposes, it doesn’t matter that Donor isn’t personally liable on the mortgage debt.
  5. Donor promises (pledges) to create a $1 million charitable lead annuity trust that will pay $50,000 a year to Charity for 10 years. The annual payments will be used to discharge a previous pledge running from Donor to Charity for which Donor’s name was placed on a room. Will this arrangement violate the self-dealing prohibition? Note: If you get this one right you get an A+ on the quiz.
    Yep, using the payout from a lead trust to pay off the donor’s enforceable pledge is self-dealing, according to IRS.
  6. Extra credit: Donor wants to create a sizable gift annuity at Charity for the express purpose of paying for a table at Charity’s upcoming gala dinner. Any tax problems here?
    Yep, sure are. The only things a gift annuity donor may receive in exchange for creating the annuity are [a] the annuity, [b] recognition, and [c] thanks. The benefit of the table, which has economic value, would cause the gift annuity to become both commercial insurance and a registrable security.

If you have any questions about these answers, feel free to put them into the comments section and we’ll respond. Thank you for following this blog.

by Jon Tidd, Esq

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