What Are the Most Common Problems in Gift Planning? Part III

Last time, we looked at credit card gifts…and some of the problems with these gifts.

There’s one more problem, a common problem, with credit card gifts, which arises when the donor wants to establish a gift annuity with a credit card.

Let’s take the case of Doris, aged 79, who wants to set up a $10,000 gift annuity with a credit card. Doris calls Charity’s PGO, makes an agreement over the phone (later to be reduced to writing), and promptly charges her card $10,000 in favor of Charity.

The problem is, Charity isn’t going to receive $10,000 for the annuity. (I know, a lot of charities eat the fee, which I don’t like.) Charity’s going to receive $10,000 less a 2.5% fee. (I know, not all CC companies charge the same fee…we’ll use 2.5% just for discussion purposes.)

This means Charity is only going to receive $9,750…a bad deal for Charity, in my opinion.

The question is: How much should Doris charge to her card so that Charity receives a net amount of  $10,000?

This is a first-year algebra problem. In algebra, the unknown amount is always X. That’s the amount Doris should charge.

A 15-year-old freshman algebra student writes:

X – .025X = $10,000

The student writes this equation because [a] she knows to convert the fee from a percentage to a decimal number, and [b] she knows that this equation produces a figure for X that allows Charity to net $10,000.

I’ll give the answer for X next time (meanwhile, solve for X yourself), and then we’ll look at some other problem assets.

by Jon Tidd, Esq

What Are the Most Common Problems in Gift Planning? Part II

Last time, we looked at some problems related to the donor.

Now we look at problems related to the asset the donor wants to use to make the gift.

The discussion here could fill a two-volume gift planning reference service. The assets range from credit card gifts, to gifts of partnership interests, to gifts of mutual fund shares — and everything in between.

Let’s take just one asset, a credit card gift. Which is common, especially at year’s end.

IRS has said a credit card gift is complete for federal income tax purposes on the date the charge is posted to the donor’s credit card statement.

This means that if the donor in late December calls the development office and supplies her credit card information, intending to make a year-end gift, the gift is likely to wind up being a January gift for federal income tax purposes.

Furthermore, the donee organization may not know for sure how to issue a correct gift receipt until and unless it sees the credit card statement on which the charge for the gift is posted.

What a mess!

This matter is probably something to address on a charity’s website. But care must be taken on the website to avoid the appearance of giving tax (i.e., legal) advice.

We’ll look at some other problem assets next time.

by Jon Tidd, Esq

What Are the Most Common Problems in Gift Planning?

The problems often fall into two categories:

  1. problems related to the donor, and
  2. problems related to the asset(s) the donor wants to use to make the gift.

Problems Related to the Donor

The first potential problem here is identifying who is the donor.

The donor is the party holding legal title to the asset proposed to be given. For example, Party A says he wants to give some land near a factory he owns.

This means Party A is the prospective donor, right? Not necessarily. Not if it turns out legal title to the land is held by “Party A Enterprises, Ltd.” And BTW, you might not learn about “Party A Enterprises, Ltd.” until after you’ve prepared and presented an elaborate gift plan. A real mess may be lurking here.

Other potential problems here include:

  • There may be a question as to the donor’s capacity to make a gift.
  • The donor may want to impose questionable conditions or restrictions on the gift.
  • You may not be dealing with the donor. Someone else in your organization may, and he or she may not be giving you all the facts correctly.
  • The donor may say, “Well, Charity X let me do it (whatever “it” is) this way.”
  • You may be dealing with a donor’s representative, who may be trying to put his or her own spin on the gift.

We’ll pick up here next time.

by Jon Tidd, Esq

Why Do Individuals Make Charitable Gifts?

One can’t raise money for a charity without having an insight into this question and its answers.

In my experience, the reasons individuals make charitable gifts include:

  • a strong desire to give back for some service the charity has provided to the donor or to a close family member or friend (a service such as an education or health care);
  • a deep commitment to the charity because of the charity’s mission and how well the charity carries out its mission;
  • an emotional need, such as the need of an elderly childless individual to make a sizable gift to a children’s hospital;
  • a sense of duty, such as the sense of duty that a member of the class of 1959 feels to make a 60th reunion gift; and
  • a sense of gratitude, as I once encountered concerning an individual who was kicked out of a college in the 1950s and who came to understand about 50 years later that that event had had a profound, positive effect on him.

This is, of course, a mere sampling, not an exhaustive list.

Gift planning takes into account why individuals make charitable gifts. But gift planning usually focuses on:

  • how the gift will be made (gift vehicle and funding asset),
  • when the gift will be made, and
  • the purpose for which the gift will be made.

Recognition and crediting are sometimes important. These two items are frequently a matter of back-and-forth.

All very interesting — a confluence of human desire, the law, and the donee organization’s wishes and needs.

by Jon Tidd, Esq

What is an “Estate Note”?

I don’t know.

I’m a lawyer, and try as I may, I cannot, in any law library, find a definition of “estate note”.

It’s a made-up, meaningless term.

There are, however, two instruments wrongfully called “estate notes”:

  1. an enforceable pledge, and
  2. a contract to make a will.

The garden variety enforceable pledge is a naming pledge (always for a sizable amount of $$). The pledge agreement provides that to the extent the pledge is unpaid upon the pledgor’s death, the unpaid balance is an obligation of the pledgor’s estate.

A contract to make a will is a contract. Donor promises to make and keep in force a will that leaves $X to CHARITY. In return, CHARITY provides consideration to Donor, such as a promise to put Donor’s name on an endowment fund.

In most if not all states, a contract to make a will must be executed with the same formalities as a will. Meaning it must be witnessed.

Use of the term “estate note” won’t confuse donors.  But it surely may confuse their lawyers.

It’s far better to think in correct terms and, of course, to employ the correct instruments — an enforceable pledge or a contract to make a will. Either can bear any name. The name I prefer is simply “Gift Agreement”.

BTW, neither an enforceable pledge nor a contract to make a will guarantees that your organization will get a single dime from the donor’s estate. The donor may die broke, for example.

by Jon Tidd, Esq

Three Key Gift Acceptance Policy Provisions: Part III

We left off last time with the fact that the qualified appraisal (Q.A.) rules were revised substantially as of January 1, 2019.

Yes, the Q.A. rules are the donor’s problem. But they become the donee’s problem if the donee receives a copy of the donor’s appraisal and doesn’t send the donor a letter stating that [1] the donee cannot advise the donor as to whether the appraisal is a “Qualified Appraisal” for federal income tax purposes, and [2] as to this matter, the donor needs to check with his or her own tax adviser.

BTW, donors and their advisers think the appraisal is a valuation document. That’s flat-out wrong. It’s a tax law document. Don’t you forget that.

Gift Receipts

Gift receipts are simple, right? Wrong! They are tax law documents. There’s a whole bunch of law on gift receipts in the federal income tax regulations. Lacking the proper form of gift receipt, the donor stands to lose his or her federal income tax charitable deduction on audit.

It gets even worse. For an IRA rollover gift the donor needs a gift receipt. Even though the donor isn’t going to claim a charitable deduction for the gift.

For setting up a gift annuity, the donor needs a receipt stating whether the donor received any goods or services in addition to the annuity. Often, this sort of receipt states that the donor received no goods or services. Wrong! The annuity is goods or services.

Finally

Far too many charities utterly fail, at their own peril, to understand that pledges, appraisals, and gift receipts are exquisite tax law documess.

A charity that pays close attention to pledges, appraisals, and gift receipts is a well-run charity. In my experience, few charities fully meet this standard.

by Jon Tidd, Esq

Three Key Gift Acceptance Policy Provisions: Part II

Last time, we looked at pledges.

A gift acceptance policy should require that all pledge agreements be vetted by the development office before being executed. A gift acceptance policy also should state:

  • that the donor must state up-front, in writing, the source or sources of assets that will be used to pay the pledge; and
  • how noncash assets will be valued for purposes of paying the pledge.

Let’s turn to gift receipts.

Gift receipts are tax law documents. They’re not thank-you letters. Without a correct gift receipt, the donor’s claim of a charitable deduction will be disallowed on audit. The entire burden of obtaining a correct gift receipt is placed, by the tax law, on the donor.

For example, let’s take the gift receipt for a charitable gift annuity. Lots of major-league charities issue gift receipts stating that the donor received no goods or services. Wrong! The receipt should state that the donor received no goods or services in addition to the annuity.

A gift acceptance policy should address, in detail, how the charity shall fashion gift receipts. Gift receipts are part of gift acceptance.

Now let’s look at donor-obtained appraisals.

Wow. I’ve not seen one, not one, donor-obtained appraisal that meets the definition of a “qualified appraisal”. Not one. In more than 34 years. To me, this means there’s total non-compliance with the qualified appraisal rules.

Now for the bad news. The qualified appraisal rules were substantially revised as of January 1, 2019. Now they’re even more complex, more tricky, more confusing.

We’ll pick up here next time.

by Jon Tidd, Esq

Three Key Gift Acceptance Policy Provisions

The purpose of a gift acceptance policy is to keep a charity, especially its president and its development officers, out of trouble in dealing with donors.

Three problem areas that are major problem areas for charities but which are seldom addressed in gift acceptance polices are [1] appraisals, [2] gift receipts, and [3] pledges. Let’s look at these matters in reverse order.

Pledges: Especially big pledges. Why pledges. Why big pledges? Because big pledges tend to be negotiated by the president or other top officials of the charity. These officials will hardly if ever know the legal rules that apply to pledges. The result can be a tax law nightmare.

It turns out that most big pledges -– say, pledges of $100,000 or more — are enforceable as contracts, as are some smaller pledges. Not because the charity would ever sue to enforce (although that has happened). But because the law of contracts that applies to pledges always operates regardless of whether the parties to the pledge know the local contract law as to pledges.

For example, there’s a fairly recent appellate decision from New Jersey involving a mere spoken pledge for $25,000, as to which the pledgor received a complaint and summons from the charity when he reneged on the pledge. The New Jersey court HELD the pledge was enforceable. In New York and most other states, on the other hand, a pledge doesn’t become enforceable unless the donor receives consideration from the charity, such as the charity’s agreement to place the donor’s name on an endowed fund or on a building or a college. But that typically does occur with big pledges.

So what if the pledge is enforceable? It turns out that if Ms. Scarlett makes an enforceable pledge, neither her private foundation nor the private foundation of her husband, her child, or her parents can pay a single penny on the pledge, because of the tax law prohibition against self-dealing.

It also happens that individuals who make big pledges typically are wealthy and often do have their own family foundations.

We’ll continue this discussion and then turn to gift receipts next time.

by Jon Tidd, Esq

What is an IRA? Part IV

How do charities named as IRA beneficiaries deal with the problem of getting their beneficiary distributions from the IRA custodians?

Charities deal with this problem in different ways.

Some deep-pocket charities devote personnel to filling out the paperwork and are willing (meaning individuals who are employed by the charity are willing) to provide SSNs, home addresses, financial information, and whatever else the the IRA custodian demands.

Some charities refuse to fill out the paperwork and stand up to to the IRA custodians.  Stand up with success in some cases. Stand up because the information demanded by the IRA custodian is too intrusive for the business officer, the board members, whomever.

In my opinion – and it’s just my opinion, nothing else – charities should stand up and refuse to fill out the paperwork. What the IRA custodians demand is wrong. Wrong as a matter of law.  Charities, again in my opinion, should not go along.

I understand that often there’s a lot of money at stake.

Usually, however, the charity doesn’t know how much money is at stake, because the IRA custodian won’t tell the charity the amount of its beneficiary distribution.

So charities can waste time and resources to get a pittance. The amount in one actual situation was $0.97.

It’s a gross breach of fiduciary duties for the IRA custodian not to tell the charity how much money the charity is to receive.

Well, as I write this, things are beginning to change.

A few major financial institutions have seen the light of day and are changing their IRA beneficiary distribution procedures.  Eventually, all IRA custodians will follow suit.

That will be a good day for charities.

Click here to read Part III.

by Jon Tidd, Esq

What is an IRA? Part III

Let’s now look at the situation in which Donor names Charity as beneficiary of her IRA.

This is a common situation. Common in large part because charities have promoted heavily the idea of leaving IRA assets to a charitable organization.

When Donor dies, her IRA becomes an inherited IRA, and Charity becomes beneficiary of the IRA.

The IRA custodian should make a prompt distribution from the inherited IRA to Charity. But it doesn’t and refuses to do so. Why? Because its tax reporting software would report the distribution as a distribution to Donor, which would cause problems.

Why would the tax reporting software do this? Because it’s designed to report all distributions from an IRA to the named owner of the IRA. Donor, though dead, is still the named owner of the inherited IRA.

So the custodian demands that Charity set up an IRA in its own name (which the custodian wrongfully calls an “Inherited IRA”).

The problem is that a charitable organization cannot set up and be the named owner of an IRA.  It can’t do so because (a) it doesn’t have earned income (that’s the only thing that a brand new IRA can receive), and (b) as we’ve seen, a charity is not on the list of parties that can establish a brand new IRA.

The real problem for Charity is that in filling out and submitting the paperwork to set up what the IRA custodian calls an “Inherited IRA”, Charity becomes a customer of the custodian that is setting up a new account. That makes Charity subject to the know-your-customer rules of the Patriot Act. And that introduces delay and all kinds of bad things into Charity’s attempt to get its beneficiary distribution.

Next time we’ll look at how charities deal with all these problems.

Click here to read Part II.

by Jon Tidd, Esq