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

Charitable Gift Planning Q&A

1.  Must the books kept by the development office and by the business office be identical?

No, and they shouldn’t be. Business office accounting is governed by FASB. FASB has nothing to do with development office counting, crediting, and recognition.

2.  Is it OK to provide in a naming-gift pledge agreement that the pledge is not legally enforceable?

Generally speaking, yes. But be sure to check applicable state law. Naming-gift pledges are ordinarily enforceable as contracts. Negating the contract may be desirable, for example, if the donor might want to use her private foundation to pay part of the pledge.

3.  Are DAFs subject to the same tax rules as private foundations?

No, but there are some similarities. For example, the self dealing prohibition applies to private foundations but not to DAFs. Nonetheless, a DAF can get into trouble with the IRS if it uses its assets for the benefit of its creator, such as tickets to a banquet or special event.

4.  Can a CRT be set up to run for the life of a pet?

Strictly speaking, no. But there’s a way to do it. The CRT is set up to run for a term of years (or a human life); and the trust agreement contains a qualified contingency…causing the trust to terminate earlier than normal upon the death of the pet.

5.  Can an individual who creates a CRT give some third party (say, his daughter) the power to shift the CRT remainder from one university department to another?

Yes, through a provision in the CRT agreement. The power can be made exercisable upon the donor’s death, for example.

6.  Can a charity receive part of the payout from a newly established CRT?

Yes. The charity is named as a payout recipient. It can’t receive the entire payout; and no charitable deduction is allowed for naming a charity to receive part of the payout.

7.  Are old U.S. coins given to charity money or tangible personal property?

Tangible personal property if the donor claims a value in excess of face amount.

by Jon Tidd, Esq

Let’s Talk About Worthless Gifts

For example, a charitable remainder unitrust set up to run for the life of an individual aged 50.

Some charities have gift acceptance policies that are questionable when it comes to minimum ages for certain “life income” gift plans. Age 50 is way too young for a CRUT other than a term-of-years CRUT. Age 60, in my opinion, is way too young for a gift annuity.

The 50-year-old’s unitrust is worth less to the remainder beneficiary because the present value of the right to receive assets upon the death of an individual currently aged 50 is negligible.

But we’ve got to be careful. There might be extenuating circumstances. For example, the payment recipient may be an individual of special needs, whose projected future life span is truncated. Or the donor — let’s say the recipient’s elderly parent — may have included the charitable donee for a generous bequest under his or her will. In this second situation, it may be important to accommodate the elderly donor.

Worthless (or at best, speculative) gifts often crop up in the context of a capital campaign. For example, CHARITY is doing everything it can to reach its campaign goal; the campaign has two years to run. DONOR approaches CHARITY with this proposition: Donor and others plan to construct an income-producing building. After 12 years, Donor says, Donor will “give the building” to CHARITY.

Perhaps this is a pretty tempting offer from a campaign-counting standpoint (it’s a great opportunity to fudge some numbers). But what’s the real worth today of a building that may, or may not, wind up in CHARITY’s hands 12 years from now? Your guess is as good as mine.

Keep in mind here that it appears the building will be held by a partnership (or some other entity), of which various investors will be owners. Donor only can give what he owns, which well may be a small slice of the pie.

If you’re dealing with a potentially worthless gift, your SHARPE newkirk consultant can help you consider the pros and cons of a particular gift situation.

by Jon Tidd, Esq

Who is a “Qualified Appraiser”?

 A Qualified Appraiser is an individual who is qualified to prepare a qualified appraisal of a given asset that is donated.

The starting point in thinking about all this is the asset.

The appraiser needs to meet certain education and experience requirements with respect to the particular type of asset. Lots of time, there’s no problem. For example, a licensed real estate appraiser ordinarily will meet the necessary education and experience requirements to appraise donated real estate by virtue of his or her license.

That’s because, in the language of IRS’s new regs on qualified appraisals, it’s customary for licensed real estate appraisers to appraise real estate.

But what if the property in question is, say, an operating vineyard?  The issue here is whether it’s customary for appraisers holding the particular license to appraise vineyards.  If it isn’t customary, the license holder must have at least two years of actual experience in appraising vineyards.

Who came up with the two-year rule? The IRS.

Now, there’s a related new requirement that pertains to the contents of the appraisal.

The appraiser needs to state, in the appraisal, not only his or her education and experience relative to appraising but also that because of this education and experience, he or she is qualified to appraise the donated asset.

There’s a lot, including a lot more, to IRS’s new regs on qualified appraisals.

For details, check with your SHARPE newkirk consultant.

by Jon Tidd, Esq

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