Tax Rules in Charitable Gift Planning

Donor wants to establish a gift annuity with appreciated stock but doesn’t know her cost basis in the stock. – The rule here is simple. If a taxpayer doesn’t know the basis of an asset he or she owns, the basis is zero for federal tax purposes.

Donor wants to contribute a life insurance policy on which there is a policy loan. – The rule here is that the contribution will be a bargain sale. Donor will be deemed to be paid an amount equal to the policy loan. That will (almost assuredly) cause Donor to realize ordinary income under the bargain sale rules.

Donor wants to contribute timber that is growing on land Donor owns…just the timber. – The rule here is that if the growing timber is a separately conveyable asset under local law, Donor can get a federal income tax charitable deduction for his gift. No deduction will be allowed if the growing timber is considered under local law to be part of the land on which it’s growing and is not separately conveyable. “Local law” means the law of the state where the land is located.

Donor wants to transfer a valuable musical instrument to a charitable remainder annuity trust. – There are two rules here. The first is that Donor’s federal income tax charitable deduction will be postponed until the CRAT sells the musical instrument.  The second is that the sale by the CRAT will be an unrelated use of the musical instrument, which means that Donor’s charitable deduction will be figured on her basis in the instrument.

Donor wants to make a gift to a university that will benefit members of a particular religion. – The rule here is that to be safe, Donor should express in the gift agreement a preference and not a command. A preference allows the donee organization to select a member of the religion from a group of otherwise equally qualified candidates. A preference also allows the donee organization to make an award to a member of the candidate group who does not belong to the particular religion if the group does not contain any members of the religion.

There are lots of other tax rules that can come into play in charitable gift planning. The rule here is, proceed with caution.

by Jon Tidd, Esq

Posted in blog.

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