A lot of “planned” gifts are partial interest gifts that are deductible because of exceptions to the general rule of non-deductibility. For example, the gift of a remainder interest in a qualified charitable remainder trust is deductible.
What about gift annuities? These are not partial interest gift plans. A gift annuity simply involves the transfer of an asset by the donor in exchange for the donee organization’s promise to pay an annuity. The annuity is purchased for tax purposes with the transferred asset.
Two more points, and we’ll call it quits on partial interests:
- The gift of an undivided portion of the donor’s entire interest in an asset is generally deductible.
- A non-deductible gift of a partial interest can cause the donor a gift tax problem.
A little elaboration:
- An example of a gift of an undivided portion of the donor’s entire interest is the gift of a 25-percent undivided portion of the donor’s ownership of real estate. This type of gift is generally deductible (subject to appraisal and gift receipt requirements). An “undivided portion” can be thought of this way: donor, who’s holding a handful of uncooked spaghetti strands, breaks off the top 25 percent of the strands evenly and gives the broken off portion of strands to charity … a deductible gift.
- Why a gift tax problem? A gift of a partial interest is a gift for purposes of both the federal income tax and the federal gift tax. In gift planning, one tends to focus on the income tax and the income tax charitable deduction. It turns out there is also a gift tax charitable deduction, which operates quietly in the background to shield most charitable gifts from gift tax. If the income tax charitable deduction is denied for a partial interest gift (e.g., the gift of a remainder interest in an unqualified charitable remainder trust), the gift tax charitable deduction also will be denied. .. exposing the flawed gift to gift tax.
Think of things this way: the income tax charitable deduction operates as a carrot; the gift tax charitable deduction, if denied, can operate as a stick.
By: Jon Tidd
