The Updating of the Decennial Actuarial Tables: 2 Years Late and 10 Years Out of Date?

Sec. 7520(c)(2) of the Internal Revenue Code requires the updating of the actuarial tables every 10 years. In August 2020, the National Center for Health Statistics and the Centers for Disease Control and Prevention released updated tables for the 2009-2011 period. This report shows the continual improvement in longevity.

Almost 6,300 more people out of 100,000 survive to age 80 than under the current tables. Almost 7,000 more people out of 100,000 survive to age 85 than under the current tables.

There has been a dramatic increase from 22.5% to 28% in the probability of survival to 90 from age 65.

And remember, the new tables, once finalized, will be 10 years out of date thereby understating longevity.

For life income gifts with charitable remaindermen, such as gift annuities, remainder trusts and life estates, the charitable deduction will be smaller than under the current tables. For charitable lead trusts running for a life or lives, the charitable deduction will be greater and the taxable gift of the noncharitable remaindermen smaller.

Although the tables are still required to be incorporated into proposed regulations yet to be issued, history tells us they are likely to be similar to the official tables. This first peek at the longevity tables should prompt the charity to assess whether or not to raise the minimum age for a charitable gift annuitant.

 
By Professor Christopher P. Woehrle

 
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Gift Receipts … Continued

Last time, I suggested this language for a year-end cash gift receipt:

Thank you for your cash gift of $5,000 made by your Chase Bank check number 2651, dated December 31, 2020, which [our charity] received in the mail on January 4, 2021.

[Our charity] provided no goods or services to you in consideration of this gift.

This language isn’t warm and friendly for a good reason. A gift receipt is a tax law document. On audit, the donor stands to lose his or her charitable deduction if he or she can’t produce a satisfactory gift receipt. Warm and friendly language should be presented in a separate communication.

What is a satisfactory gift receipt? The answer depends on the gift transaction. For any gift, the receipt must be received before the tax return due date (or filing date, if earlier) for the year the gift is made. For an outright gift of cash, the receipt must:

  • Contain a statement of the amount of cash donated.
  • Contain the “no goods or services” statement if the amount given was $250 or more.
  • State the date of gift.

The date-of-gift requirement can be a problem for a check that is mailed. According to IRS regs, the date of gift for a check that’s mailed to a charity is the date of mailing. The postmark date on the envelope containing the check is not necessarily the mailing date, but it is the last possible mailing date. Typically, the donee organization doesn’t know the mailing date.

In my view, which is not presented here as a legal opinion, a statement as to the date the check was received arguably satisfies the date-of-gift requirement.

It’s a pertinent fact. A more salient pertinent fact would be the postmark date. But most charities today don’t know the postmark date because they don’t keep or scan envelopes containing checks.

 
By Jon Tidd, J.D.

 
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The Better Testamentary Response to the SECURE Act: Charitable Remainder Trust or Gift Annuity? Part 3

In establishing a testamentary charitable gift annuity that qualifies for the federal estate tax charitable deduction, all the variables must be discernible at the date of the donor’s passing.

These variables could be described either in (1) the beneficiary designation document itself such as the will or trust or (2) a stand-alone agreement on file with the charity. Three of the variables are easily determinable, namely, the amount as well as commencement and frequency of payments.

The payout rate should reference the maximum rates of either (1) the American Council on Gift Annuities (ACGA) or (2) those offered by the sponsoring charity. In this era of perpetually and historically low Section 7520 interest rates, the language should require reduction of the annuity payout to such rate satisfying the greater than 10% remainder interest to avoid unrelated debt-financed income under Section 514(c)(5) of the Code.

The other challenge is estimating the age of the annuitant at the time of death of the donor. For funders providing income for their children, there is the risk the proposed annuitant(s) will be younger than the minimum required age mandated by the charity’s gift acceptance policy. A contingent issuer of the charitable gift annuity can address this risk should the other charity decline.

The last risk is how to cope with the variance between the fair market value of the asset at death and date of funding. This is an issue not only with appreciated assets like stock and land but also an IRA. Remember the date of death valuation is needed for the estate tax charitable deduction. For an estate not subject to the federal estate tax, it would be permissible to use the date of funding value.

While much study of the charitable remainder trust (CRT) to achieve stretch taxation of a non-spousal beneficiary is merited, remember the testamentary gift annuity may be more appropriate for reasons I noted in this and my previous two blog posts on this subject Although there are traps for the unwary for those exposed to the federal estate tax, they can be managed.
 

By Professor Christopher P. Woehrle
 
Read Part 1 and Part 2 of this series.

 
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Getting Ready for January 2021

In a lot of years, January has been hectic for me. Why? Because my phone has rung ceaselessly about year-end gift problems.

What sorts of problems? These have been typical phone calls:

  • Donor wired stock to us in late December, but we didn’t receive the stock until January. Our business office says we keep our December books open until January 23. What should we do?
  • Donor made a credit card gift to us in December, but we didn’t get the money until January 17. What should we do?
  • Donor mailed a check to us that we didn’t get until January. The check is dated December 31. What should we do?

The question in each situation is “What should we do?”. The answer is, issue a correct gift receipt.

The prescription for a correct gift receipt is [a] stick to the known facts and [b] adhere to the tax law.

Here’s the body text of a specimen gift receipt for the donor who mailed a check in late December.

Thank you for your cash gift of $5,000 made by your Chase Bank check number 2651, dated December 31, 2020, which [our charity] received in the mail on January 4, 2021.

[Our charity] provided no goods or services to you in consideration of this gift.

We should examine the reasons for using this text, which we’ll do next time. Meantime, keep this in mind:

What should a gift officer not do? The answer is, don’t give the donor legal advice. Instead recommend that the donor check with his or her own lawyer or other tax advisor.

By Jon Tidd, J.D.
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Latest COVID Relief Bill Signed

Last night, President Trump signed the latest relief package attached to the Consolidated Appropriations Act to fund the federal government. The relief portion of the legislative package was estimated at approximately $900 billion and includes extended unemployment benefits for millions of people who lost jobs this year, as well as $600 one-time relief payments to most Americans. There are ongoing discussions and interest in increasing the amount of relief payments.

Of particular interest to gift planners were the extension and expansion of the charitable provisions from the CARES Act passed earlier this year.

The primary provisions extended affecting individuals making charitable gifts included the CARES Act benefits for the “above-the-line” deduction for nonitemizers, which was expanded to $600 for couples, and the waiver of the AGI limitation for cash contributions for 2021. Additionally, the law extends the increased deduction limit of 25% for corporate contributions of cash and food inventory.

These extensions should be good news for individuals and corporations that make charitable contributions in 2021.

By Barlow Mann

The Better Testamentary Response to the SECURE Act: Charitable Remainder Trust or Gift Annuity? Part 2

Many commentators believe funding a testamentary charitable gift annuity with an income in respect of a decedent (IRD) item, like an IRA, means the annuity will be taxed in full immediately, with no recovery in basis. But is that, in fact, the correct result given the purpose of the IRD rules?

When this IRD item passes to the charity, the payments consist of ordinary income. However, since the charity is tax-exempt, it pays no income taxes on it. It almost certainly converts the IRA into cash to be the source of funds to pay the annuitant. From this perspective, the annuitant should receive a tax-free return of principal for their payment received during their life expectancy.

If this is the correct interpretation of the taxation of annuity payments, then the charitable gift annuity would be superior to a charitable remainder trust because of the partial tax-free nature of the payments. Contrast the taxability of payments coming from the charitable remainder trust, which will almost certainly be taxed in full as ordinary income under the tier accounting rules.

If this is not the correct interpretation, then the taxation of the gift annuity is at least as favorable as a charitable remainder trust.

Furthermore, there are additional advantages of the testamentary gift annuity over the remainder trust. The gift annuity has much more flexibility for deferral planning than a testamentary remainder trust. The gift annuity may be structured as a deferred or even a flexible gift annuity.

Coupled with the much smaller amounts required to fund and the avoidance of the expense of drafting and administering a trust, the gift annuity will be more appealing to the majority of donors not exposed to the federal estate tax.

The one complication occurs for those anticipating exposure to the federal estate tax. My future blog post will identify them and their solutions.
 

By Professor Christopher P. Woehrle
 

Click here to read Part 1 of this series.

 

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Gift Ideas for Those Who Don’t Itemize

There was a lot of charitable giving in the U.S. before the federal income tax (1913) and a federal income tax charitable deduction (1917) came along.

Example: As a young person, I made great use of a public library in Aurora, Illinois—one of the many such libraries funded by Andrew Carnegie. Carnegie funded these libraries because he believed in public education. There was no federal income tax when Carnegie made these charitable gifts.

In some ways, the charitable deduction has corrupted and distorted charitable giving.

How? It has caused many tax professionals (i.e., advisors to donors) to believe the only good charitable gift is a gift that qualifies for a charitable deduction. In fact, there are lots of worthy gifts that qualify for little or no charitable deduction.

Here are some examples:

  • A gift of highly appreciated stock held short-term. The income tax charitable deduction is limited to cost basis.
  • A gift of a partial interest, such as a gift of office space. No charitable deduction.
  • A gift of professional services. No federal income tax charitable deduction.

Recommendation: The new world of non-itemization that many donors inhabit needs to be understood well by gift planning officers and advisors to donors.

This world opens the door to gift planning possibilities that formerly were considered poorchoices from a tax standpoint but that now can be quite worthwhile.
 

By Jon Tidd, J.D.
 

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Working With Financial and Estate Planning Advisors

Getting donors to say “yes” often involves working with their professional advisors—attorneys, accountants, financial planners, trust officers, insurance agents, bankers, etc. Planned giving officers may be more knowledgeable about sophisticated charitable planning than professionals who only occasionally encounter charitable remainder trusts, charitable gift annuities or the use of charitable techniques in estate and generation-skipping transfers.

Many gift officers know that providing the latest information about legislation, court cases and IRS rulings makes them a go-to source for allied professionals. This can take several forms, including regular print or electronic updates, informative presentations offering continuing education credits and membership on the charity’s advisory committee. The goal is two-fold: generate goodwill and familiarize advisors who might otherwise dissuade a client from using a particular charitable technique. There may even be circumstances where a client with no affinity to a particular organization might benefit by including a charitable vehicle in his or her plans. The advisor can be in the position of recommending one or more organizations, based on the advisor’s experience with the planned gift officer.

National organizations and those with donors in all regions of the country (e.g., colleges) might cast a wider net when amassing a list of advisors to whom they will send regular communication. Charities with a more localized donor base might concentrate their outreach to advisors within a certain geographic area but also add opportunities to meet personally.

A law school might consider sending information on charitable planning to its own alumni who specialize in estate planning and taxes, as both a service to the professional and a reminder of the lawyer’s ties to his or her alma mater.

A regular program of educating advisors about the latest trends in the field can make a planned giving officer and the organization an invaluable resource.

 
By Kathy Sperlak, J.D.

 

The Advisor eNewsletter

Sharpe Group has developed a digital newsletter written specifically for financial advisors and tax experts to provide them with information on how charitable giving can fit into their clients’ overall estate planning. This annual service includes an electronic survey and analytics with each issue. For an added fee, we can provide the email service to send each issue for you.

The Advisor is published six times a year, every other month, and includes relevant IRS rulings and court cases, tables and charts and the Philanthropy Puzzler.

Branded with your organization’s logo, advisors will receive timely and valuable information to share with their clients who have charitable intent. You will receive your own custom url that will be linked in each issue’s email. Recipients will be directed to your customized website containing the latest content from your subscripition to The Advisor.

Click here to learn more about this new service.

Gifts of LLC Units

If an individual wants to give LLC units to your organization, be careful! Potential problems lie ahead for both the donor and your organization.

Here’s why, by way of an example. Suppose the gift is of 10% of all the outstanding LLC units. It’s necessary to analyze the gift on two levels.

First level: Donor will be deemed to give the LLC units. If the donor claims the units have a value of more than $5,000, the donor will need to get a qualified appraisal.

Second level: Here’s where things get tricky. The donor may need to adjust the charitable deduction the donor claims for this gift. That’s because the gift will be deemed to consist of 10% of each and every LLC asset.1

  • If one of the assets is a fully depreciated computer, the donor will need to ratchet the charitable deduction downward to take the depreciation into account.
  • If one of the assets is land and a building, depreciation again may have to be taken into account.
  • Furthermore, if one of the assets is debt-encumbered, the bargain sale rules will need to be applied with respect to that asset.

“Ugh!” is right. This gift may be a tax-reporting mess for the donor. But that’s not all. This gift may produce unrelated business income (UBI) for your organization.2

By the way, don’t expect the donor’s tax advisor to know all this. Chances are the tax advisor has never dealt with this kind of situation.

Chances are, also, that when all the facts concerning the LLC and its assets are laid on the table, either the donor or your organization will walk away from the gift.
 

By Jon Tidd, J.D.
 

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1.The asset-by-asset approach needs to be taken if the LLC has elected to be taxed as a partnership. LLCs routinely are taxed as partnerships.

2. UBI can arise from asset-encumbered debt or from the LLC’s business operations.

Last Call for Giving in 2020

Thanksgiving celebrations and GivingTuesday are over, but the most generous time of year is just beginning! That’s right, the month of December is traditionally a time for giving to friends, family and favorite charitable organizations. Giving this time of year is embedded in many cultures and religions, and according to scientific studies, charitable giving makes people feel better by stimulating the natural release of endorphins in the human brain.

2020 has been a challenging year in so many ways with the emergence of a global pandemic, economic recession and stock market crash in the first quarter, but it appears that collectively there is much to be grateful for as the year draws to a close. In the second and third quarters, the economy, GDP, employment figures and charitable giving saw a substantial rebound. It appears that COVID-19 vaccines and treatments will begin to be available soon, and in a few weeks, we will start a new year. In the meantime, there is much to do to ensure the best possible year-end giving results.

Who CARES?

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was passed earlier this year to provide assistance to individuals, business and nonprofits impacted by the economic challenges caused by the pandemic. The new law included a number of provisions designed to encourage charitable giving, including a new $300 above-the-line charitable deduction for cash contributions to qualified nonprofits for non-itemizers and the waiver of AGI limitations for cash gifts to most charitable organizations. For those who itemize deductions, additional provisions increased the amounts corporations could give from 10% to 25% of their taxable income.

Ideas for Giving Wisely in 2020

  • Non-itemizers can receive a $300 above-the-line deduction for gifts of cash.
  • Itemizers can give cash gifts up to 100% of AGI.
  • Those age 70½ or older with an IRA can make qualified charitable distributions (QCDs) of up to $100,000 per year.
  • Gifts of appreciated stock and other appropriate noncash assets like real estate can qualify for an itemized charitable deduction and also bypass capital gains tax.
  • “Bunching” itemized deductions, including cash and noncash contributions, can allow nonitemizers to become itemizers in some years. For example, tax savings may be achieved by paying a pledge early or making a contribution to a donor advised fund in order to exceed the standard deduction in some years.

The End Is Near, but It Is Not Here Yet.

Sharpe Group is pleased to provide some downloadable resources to assist our clients and friends to make the most of the last few weeks of 2020. Please feel free to adapt these communications for your use.

Additionally, take a few minutes to review your gift development plans for December and make sure contact emails, phone numbers, giving totals and mailing addresses are all correct. Have email messages with information on IRA QCDs, stock transfers and other items prepared in advance. Consider calling and thanking donors for their prior support and to see how they are faring. Another group may be targeted for thank-you letters and cards, pledge reminders or a personal note as appropriate.

Finally, with 2021 right around the corner, you may want to review the links for a variety of publications, communications and training opportunities to help you work with donors and their advisors.
 
By Barlow T. Mann, General Counsel
 

Click here to download sample copy for year-end giving communications.

 
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