There appears to be a significant change coming in how appraisals must be done for certain charitable gifts. Here’s an example:
Donor 1 sets up a charitable remainder unitrust that is to make payments to Donor 1 for life. Donor 1 funds the unitrust with undeveloped land.
Donor 2 does the same thing, only she funds her unitrust with highly appreciated Apple stock.
Under the old way of doing things (the “old” way applies until January 1, 2019), Donor 1 needs to get a qualified appraisal (of the undeveloped land) but Donor 2 doesn’t.
The new gift substantiation regs issued by IRS at the end of July 2018 appear to make a big change to the appraisal requirements for both Donor 1 and Donor 2 if they set up their unitrusts after 2018.
How so? The new Regs provide that if the donor contributes a partial interest to charity, the partial interest itself must be valued by means of a qualified appraisal.
Which forces us to ask: What exactly do Donor 1 and Donor 2 contribute to charity?
A quick but incorrect answer is: undeveloped land and Apple stock. Incorrect because the charity in each case does not take legal title to these assets; the unitrust does. The more thoughtful and correct answer is that Donor 1 and Donor 2 each give a remainder interest in a unitrust to charity. A remainder interest is a partial interest.
What does all this mean? Apparently it means that Donor 1 needs to get a qualified appraisal and so does Donor 2. And that the appraisal in each case is not of the asset transferred to the unitrust but rather of the remainder interest in each unitrust.
If I’m correct about all this, charitable gift planners, advisers, and donors need to make major adjustments to their thinking about how to substantiate gifts via CRTs, lead trusts, PIFs, and remainder interests in personal residences and farms. If I’m correct about all this, a whole new category of appraisers needs to come into existence.
PS – Gift annuities are unaffected, because a gift annuity transaction doesn’t involve a gift of a partial interest.
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by Jon Tidd, Esq