A Gift Planning Problem… and its Solution

Dora, aged 80, wants to provide her disabled niece, Fredda, with a fixed life income, maybe an income that will increase by a certain amount if Fredda lives to a certain age.

Fredda is aged 50 and has a shortened projected lifespan because of her disability. Nonetheless, Fredda’s doctor says Fredda could live to age 90 or older, just as she could live to age 60.

Dora has been advised by her lawyer to set up a charitable remainder annuity trust for Fredda’s life. Dora likes this idea. Except, it doesn’t take into account that Fredda may live a long time; and inflation, even low inflation, may wear away the financial value of the CRAT payout over that time.

What to do? Something Dora’s lawyer, who is unfamiliar with gift annuities, hasn’t considered is for Dora to:

  • set up a term-of-years CRAT for Fredda, say a 10-year CRAT;
  • and to couple the CRAT with a deferred payment gift annuity that will kick in at the end of the CRAT term.

This plan can be tailored to meet Dora’s objectives. For example, when the CRAT ends and the DGA commences, there could be a bump-up in the payments going to Fredda.

If Dora is tax conscious, she’ll likely appreciate that this plan can provide her better income tax benefits than a single CRAT for Fredda’s life.

Furthermore, if yours is the charity Dora wants to benefit, your organization possibly stands to fare much better financially under this plan than under a single CRAT for Fredda’s life.

For details, check with your SHARPE newkirk consultant.

Footnote to the Previous Blog

Last time we looked at the IRS’s new regs on qualified appraisals.

This time we look at an exception to the qualified appraisal rules that existed under the old regs that is erased from the new regs.

It’s the reasonable cause exception. The reasonable cause exception allowed a flawed appraisal, even a badly flawed appraisal, to pass muster if the donor truly believed the appraisal was OK based on reasonable business care and prudence.

For example, in one case (the 2013 Crimi Tax Court case) the donor had a badly flawed appraisal that his tax accountant of 20 years advised was good for tax purposes. The donor had no reason to doubt the CPA’s advice; and the CPA was a partner in a good regional CPA firm. The Tax Court excused the appraisal’s flaws, finding that the donor had reasonable cause to believe the appraisal was OK. (Talk about rewarding ignorance of the tax law and professional malpractice!)

The Crimi case is important, because the facts of the case (donor doesn’t have an appraisal that measures up, and donor’s tax adviser is clueless) represent the rule, not the exception.

In its new regs, the IRS announces that the regs do not contain a reasonable cause exception…because of the Crimi case.

It’s hard to say whether the IRS and the courts will follow the Crimi case now that the qualified appraisal regs don’t contain an express reasonable cause exception.

Donors and their tax advisers beware. Charitable gift planners too.


by Jon Tidd, Esq

A Big Change Appears to be Coming

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.

Stay tuned.

PS – Gift annuities are unaffected, because a gift annuity transaction doesn’t involve a gift of a partial interest.

Click here to read the footnote.

by Jon Tidd, Esq

Inflation Adjustments for 2019

Inflation adjustments for 2019, released recently by the IRS, are slightly lower than they might otherwise have been, due to a new calculation method.  Increases are now determined using the chained consumer price index (C-CPI), which recognizes that when certain prices rise, consumers find cheaper alternatives.  Among this year’s adjustments:

Income tax brackets

Capital gains rates

0% bracket                          Taxpayers in the 10% and 20% income tax brackets

15% bracket                       Taxpayers in the 22%, 24%, 32% and 35% income tax brackets

20% bracket                       Taxpayers in the 37% income tax bracket

The 3.8% tax on net-investment income, which applies to taxpayers with modified adjusted gross income in excess of $200,000 for single filers and $250,000 for joint filers, is not adjusted for inflation.

Standard deductions

Estate, gift and generation-skipping transfer tax exemption equivalent

A credit of $4,505,800 shelters transfers up to $11,400,000 in 2019.

Annual gift tax exclusion

The $15,000 exclusion remains the same as in 2018.

Insubstantial benefits for charitable fund raising

“Low cost articles” in 2019 are those costing $11.10 or less.  Insubstantial benefits may be received by a donor in return for a contribution, without causing the contribution to fail to be fully deductible, provided (1) the fair market value of all benefits received by the donor is not more than 2% of the payment or $111, whichever is less, or (2) the contribution is $55.50 or more and the only benefits received in return are token items costing the charity no more than $11.10.

By Kathy Sperlak

Let’s Look at Compound Interest—Part 3

Last time, we left off with a homework problem.

Now a homework problem, the solution to which will be given next time. Here’s the problem: Your VP for development asks you to determine the present value of a $1 million bequest to be received under the will of a living individual aged 79.

Question: What two assumptions do you need to make to determine the present value?

Answer: You need to assume [1] a discount rate (i), and [2] the number of years (n) your organization has to wait to receive the bequest.

These assumptions are key.

I’ll assume three discount rates (.04, .05, .06) and three waiting times (5, 10, and 15 years). These assumptions are arbitrary and are made simply for sake of illustration.

Here’s TABLE I, showing the compound interest factor corresponding to each pair of assumptions:



WAIT TIME 5 Years 10 Years 15 Years
.04 1.2167 1.4802 1.8009
.05 1.2763 1.6289 2.0789
.06 1.3382 1.7908 2.3966


Here’s TABLE II, showing the corresponding present values:



WAIT TIME 5 Years 10 Years 15 Years
.04 821,927 675,564 555,265
.05 783,526 613,913 481,017
.06 747,258 558,395 417,265


These tables are useful, because there’s no single “correct answer” here. It’s apparent, though, that the shorter the projected wait time and the lower the assumed discount rate, the higher the present value.

by Jon Tidd, Esq

Let’s Look at Compound Interest—Part 2

Last time, we looked at two concepts: compound interest and present value.

Turns out they’re two sides of the same coin. If you grasp the idea of compound interest, you also grasp the idea of present value, maybe without realizing you do.

Compound interest tells us what $1 (or $1 million) will grow to after n years if invested at a given interest rate i. $1 will grow to $(1 + i)n.  $1 million will grow to:  $1,000,000(1 + i)n.

Present value tells us what $X to be received in n years is worth today, in today’s dollars, if we assume money can be invested at a given interest rate i, which is routinely called the discount rate when talking about present value (PV).

The PV of $X dollars to be received in n years, assuming a discount rate of i, is:   $x/(1 + i)n.  The quantity (1 + i)n is called the compound interest factor.

Note what is obvious: PV is equal to the amount of money to be received at the end of n years divided by the compound interest factor corresponding to n years and i rate of interest.

This is why compound interest and present value are two sides of the same coin.

Now a homework problem the solution to which will be given next time. Here’s the problem: Your VP for development asks you to determine the present value of a $1 million bequest to be received under the will of a living individual aged 79. Question: What two assumptions do you need to make to determine the present value?

Hint: Answer the question asked, not some other question.

Click here to read part three.

by Jon Tidd, Esq

Let’s Look at Compound Interest

Compound interest theory is at the center of financial analysis.

What is compound interest? It’s the interest earned on money invested over time. Invested at some fixed interest rate.

Let’s assume $1 is invested at 6% interest (.06 mathematically) for exactly one year. At the end of the year, the $1 has grown to $1 + $1(.06), or $1.06.

Now, let’s assume the $1.06 is left invested at 6% interest for a second year. At the end of the second year, the $1.06 has grown to $1.06 + $1.06(.06).

This sum can be re-written as: ($1.06)(1 + .06).  Which can be re-written as: ($1.06)(1.06). Which equals $(1.06)2.

So now we see the pattern. If $1 is invested at 6% interest for n years, the $1 will grow to $(1.06)n. More generally, we can say that if $1 is invested at some interest rate i for n years, the $1 will grow to $(1 + i)n.

If i = 4% (.04) per year, and n = 50 years, $1 will grow to $(1.04)50, which equals $7.11, rounded to the nearest whole cent. I calculated the $7.11 amount using Microsoft Excel.

We’ve just gotten the key to solving half of compound interest problems. What is the other half? The other half are present value problems.

A present value (PV) problem is stated this way mathematically, for example: What is the value today (PV) of $7.11 to be received in 50 years assuming 4% interest?

The answer to the question is:  PV = $7.11/(1.04)50.

What is $7.11/(1.04)50?  It’s $7.11/7.11, which equals $1.

Chew on all this for the next week, and then we’ll dig a little deeper and gain a deeper understanding of compound interest.

Click here to read part two.

by Jon Tidd, Esq

Time to Simplify Charitable IRA Beneficiary Distributions?

The process of receiving fund left through IRA designations is often time consuming, complex, expensive and, in some cases, in violation of the custodian’s fiduciary duties and federal tax law.

For example, many IRA custodians or administrators have adopted a process that requires charities to establish an “inherited IRA” in order to receive their charitable IRA beneficiary distributions as intended by the IRA account owner. Unfortunately, this procedure was not designed with charitable beneficiaries in mind and places an unreasonable burden on qualified charities to collect IRA gifts from deceased donors. The IRA custodians apparently developed this administrative process in response to tax reporting requirements.

The rank-and-file employees of the IRA custodians often have little or no knowledge of the applicable law regarding charitable beneficiaries and often take the position that the standard process must be followed in order to receive a charitable IRA gift.

As a result, there are now several grassroots efforts underway in the charitable sector to address this situation. The most recent effort involves seeking an IRS Private Letter Ruling to clarify the process and a judicial proceeding to provide legal precedent. In addition to myself, the effort is being organized by Jeff Comfort at Oregon State University Foundation, Lisa Smith at Hadassah and Michael Kenyon, President and CEO of the National Association of Charitable Gift Planners.

You can download the prepared letters from me and the National Association of Charitable Gift Planners for more information about this effort and how charitable organizations can help by clicking here.

by Jon Tidd, Esq

Charitable Remainder Trusts Have Three Life Stages

three stages of tree growth

The three stages are

1. the drafting of the trust instrument

2. the funding of the trust and

3. the administration of the trust

The drafting stage: IRS has provided specimen agreements for annuity trusts and unitrusts, which makes the drafting of CRAT and CRUT documents relatively easy. But there are some cautions here.

  • Some lawyers who draft such documents work from 20-year-old or older agreements they’ve got archived on their computers. These old agreements sometimes are not quite right
  • Some lawyers who draft CRAT and CRUT agreements are over their heads because of the gift transaction—such as a CRAT to be funded with multiple assets.

The funding stage: The funding stage is usually taken as a given. But it can be tricky, especially if the donor is going to use multiple assets to fund the trust. The key to avoiding problems in the funding stage is for the donor’s lawyer to monitor the funding. I’ve seen spectacular instances in which the donor’s lawyer did not monitor the funding, and things went spectacularly wrong.

The administrative stage: One rarely finds errors (problems) in the administrative stage if the trustee has been a professional trustee deeply experienced in managing CRUTs and CRATs. The situation can be quite different if the trustee has lacked such experience or the donor has been the trustee.

Consequences of errors: Pure drafting errors are often fixable. They are the easiest type of errors to fix.

Funding errors are sometimes fixable, sometimes not, depending on the error. A fix is likely to ring up the cash register in lawyer’s fees.

Administrative errors typically are not fixable and often disqualify the trust as a CRAT or a CRUT, which can be disastrous. A classic example here is the donor who, as trustee of her CRAT, decided not to take a payout for some years.

The devil is in the details, and qualified legal counsel and administration is critical to avoid potential problems at all three stages of CRT.


By Jon Tidd, Esq

Gifts for Which There Are No Tax Benefits

Gift planning has focused traditionally on squeezing maximum tax benefits out of a gift arrangement.

There are, however, some good gift arrangements for which little or no tax benefits are available. “Good” here means good for the donee organization.

Let’s consider some specific examples.

Donor contributes a valuable painting she painted: Donor’s income tax charitable deduction is limited to her cost basis in the painting (usually, cost of materials), which may be negligible. But the value to the donee may be immense. Same goes for a royalty-producing copyright, such as a copyright to a popular song.

Donor contributes a patent on one of his inventions: Donor gets a federal income tax charitable deduction for a declining percentage of the patent royalties the donee receives over the next 10 years. The more royalties, the better the outcome for the donee and the better the tax outcome for the donor.

Donor gives Charity rent-free use of space in a building Donor owns: This gift may be valuable to the donee, but it is tricky from a tax standpoint.

  • Donor gets no federal income tax charitable deduction for this gift (because of the partial interest rule).
  • But Donor has made a taxable gift for federal gift tax purposes. This may or may not be a problem for Donor, depending on her overall gift and estate tax situation.

Donor sets up a non-charitable remainder trust that is to provide for himself and his immediate family: When the trust terminates years in the future, whatever remains in the trust will go to Charity.

  • This may or may not be a great gift arrangement from Charity’s standpoint, in terms of gift counting.
  • But it’s better than nothing.

For more information on these types of gifts, check with your SHARPE newkirk rep.

By Jon Tidd, Esq