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

Questions & Answers

  1. WHY DOESN’T THE DONOR REALIZE GAIN WHEN GIVING AN APPRECIATED ASSET SUCH AS APPRECIATED STOCK?

  • Gain is realized only on the sale or exchange of an appreciated asset. Note that a gift annuity funded with appreciated stock involves a sale or exchange (it’s a kind of bargain sale). Note too that a gift of mortgaged real estate is treated as a sale for an amount equal to the mortgage debt.
  1. WHY DOESN’T THE DONOR REALIZE GAIN WHEN PAYING AN ENFORCEABLE PLEDGE WITH APPRECIATED STOCK?

  • The donor would realize gain if the pledge were considered a debt for federal income tax purposes; but IRS does not consider an enforceable pledge a debt for federal income tax purposes.
  1. IS A DAF SUBJECT TO THE SAME TAX RULES AS A PRIVATE FOUNDATION?

  • No, provided the DAF is a “public charity.” A community foundation DAF, for example, is such a critter. So are the gift funds set up by the financial institutions. Public charities are not subject to a slew of “don’t-do-thats” (such as the prohibition against self-dealing) that apply to private foundations.
  1. IS IT ALL RIGHT FOR AN INDIVIDUAL AGED 70.5 YEARS OR OLDER TO TRANSFER $ FROM A 401(k) PLAN TO AN IRA AND THEN MAKE AN “IRA ROLLOVER” GIFT FROM THE IRA?

  • Not clear. The transfer from the 401(k) to the IRA is simply an end run around the tax law. It has no independent, nontax, financial purpose. The IRS might attack this maneuver using the step-transaction doctrine.
  1. WHAT IS THE STEP-TRANSACTION DOCTRINE?

  • It’s an oft-used way for the IRS to disregard the form of a series of transactions and treat the series according to their cumulative substance. It comes into play when one of more of the individual transactions lack economic substance apart from saving taxes. Only a tax expert is qualified to size up a potential step-transaction problem. Many tax scams that arguably look good on paper run afoul of the step-transaction doctrine.

If you have questions and want answers, contact your SHARPE newkirk rep.

By Jon Tidd, Esq

IRS Has Issued New Gift Substantiation Regulations

These regs are important. They deal with gift receipts and qualified appraisals, documents on which IRS auditors focus. The new regs take effect January 1, 2019.

Without a correct gift receipt, Donor will have his or her entire federal income tax charitable deduction disallowed on audit. Same result as to an appraisal that doesn’t meet the definition of a “qualified appraisal.”

Here’s just one change that’s critically important:

  • Under current regs, an appraisal must state the date of gift or the expected date of gift to be a “qualified appraisal.” The appraisal also must state the FMV of the donated asset as of the date of gift or the expected date of gift.
  • Under the new regs, the appraisal still must state the date or expected date of gift. But the new regs require the appraisal to state the “valuation effective date” and the FMV as of that date.

What is the “valuation effective date”? It’s the date of gift if the date of the appraisal is after the date of gift. If the appraisal date is before the date of gift, it’s the date of gift or a date no earlier than 60 days before the date of gift.

Wow.

The compliance rate with the new regs is going to be about zero. I believe this because the compliance rate with the current regs is about zero.

Gift officers don’t have to study and understand the new regs in depth. But gift officers do need to be mindful that important changes are coming that will, in some cases, adversely affect donors.

If you have questions about the new regs, and you may have a lot, be sure to consult with a competent advisor, and make sure to suggest that donors of noncash gifts do the same.

By Jon Tidd, Esq

Working With Life Estate Gifts

Life estate gifts involve the gift of a personal residence or farm subject to a retained life estate. The retained interest also can be an estate for a term of years.

“Estate” means the exclusive right to occupy or the right to rents (e.g., in the case of a farm leased to a tenant).

“Personal residence” means a house and accompanying land owned by the donor and used by the donor as his or her residence. It does not have to be the primary residence, but it must not be rental property.

In my experience, this sort of gift is uncommon. Which is puzzling, because it’s a good fit for many potential donors: a current charitable deduction with no current out-of-pocket outlay and no necessary change of life style.

There can be problems with this kind of gift, however:

  • The donor is going to have to get a qualified appraisal.
  • If there’s a mortgage on the property, the gift will be a bargain sale.
  • It’s possible the donor at some point will let the property fall into disrepair.
  • It’s also possible the donor will begin at some point to make demands, such as a demand to replace a broken window or a demand to remove a broken tree branch.
  • The donor may fail to make property tax payments.

A side agreement is needed to avoid donor-relation problems, but even the best side agreement is no guarantee that problems will be avoided, particularly if the donor’s mental state deteriorates.

You should either have experience or have an adviser who has experience dealing with this sort of gift if you’re going to work with a prospective life estate donor.

If you want guidance on this sort of gift, be sure to check with your Sharpe Group rep.

By Jon Tidd, Esq

Finding Missing Money

When working on an estate where you are the primary beneficiary, it can be worth checking www.missingmoney.com for lost assets. This is a joint website set up by 42 (so far) state unclaimed property agencies to help find missing assets. Just plug in your or your organization’s name and see what pops up. It also offers links to the federal government for unclaimed U.S. savings bonds and links to other countries, states and Canadian provinces.

I’ve lived in the same location for 24 years. I entered in my name and found missing assets I’ll soon get back. I did the same thing for a Sharpe client that has had several physical and mailing addresses. I located 6 unclaimed assets they are now recovering.

This arose recently when our client heard from a firm offering, for a fee, to collect $74,000 from the estate of a deceased woman. For some reason, they had not located the charity and the assets were turned over to the state. This arises when the charity’s name is wrong or the executor somehow missed an asset. As long as you pay nothing until you receive the funds, this can be a smart decision. Some firms want as much as a 50% “finder’s fee,” so do negotiate the fee. Don’t agree until you have checked www.missingmoney.com to make sure that this is not something you can collect on your own. Over the years, I’ve paid this type of finder’s fees many times. It sounds odd, but these can be legitimate firms to work with.

Keep in mind that paying a finder’s fee to collect a gift already made is quite different from paying a finder’s fee to generate a gift.

By John Jensen

Working With Baby Boomers

Everyone who has worked on lots of planned gifts from Baby Boomers, hold up your hands.

Just as I thought.

Sure, there are gift plans that fit. Lead trusts in some cases. Term-of-years CRTs. Deferred payment gift annuities. Virtual endowments.

The writer hasn’t seen more than a few window shoppers and at most only a couple of buyers among Baby Boomers.

There are several reasons for this. In no particular order:

  1. Baby Boomers are dealing with their own kids. Ever read the news story about the 30-something who has moved back home?
  2. Baby Boomers as a group haven’t saved. They’ve spent.
  3. The huge wealth transfer hasn’t occurred. If and when it begins, many Baby Boomers are likely to stash their inheritances.
    • They’ve got their own retirements to fund.
    • They’re going to live long lives.
    • They’re going to be expected to pay for their grandkids’ education.

Sure, there are good planned gift prospects among Baby Boomers.

But in 2018, the oldest Baby Boomers turn age 72. That’s on the young end of the planned gift donor age spectrum. For this reason alone, Baby Boomers as a group aren’t yet in prime planned gift territory.

Consider targeting the oldest Boomers, perhaps 66 to 72, with ideas about gifts that address the concerns of people who have recently retired or are likely to be retiring.

This blog is mainly about how to direct your marketing efforts. If you’ve got a good planned gift prospect who’s a Baby Boomer, go for it. The only caution is, try not to settle for a benefit that ripens into cash on the table only at the Boomer’s death. Your organization could be waiting a long time.

By Jon Tidd, Esq

Working With Older Donors—Part 2

Older individuals who have inherited wealth are often mistrusting of others, and usually for good reason. There are lots of people who would like to get their hands on the wealth.

Such an individual typically has a few close advisers or confidantes she trusts, and that’s it. The problem often is, the wealthy individual trusts the wrong people. The loyal adviser for many years may be a predator just waiting to get his hands on a fortune.

It’s difficult, at best, for a fundraiser to get through to such a wealthy individual.

When the wealth is considerable but not great, the situation may be quite different. The individual having the wealth may be quite open to dealing with a development officer. At least until he or she becomes ill or otherwise infirm. That’s when predators often move in, encircle the infirm individual, and cut him or her off from the outside world.

Which is why it’s often good to issue a gift annuity, even just a $10,000 gift annuity, to such an individual. The gift annuity gives the issuing organization a reason to be in periodic touch with the elderly person.

Charities should be willing to send the annuity check directly to the elderly individual’s bank but should avoid automatic direct deposit. Direct deposit plays into the hands of predators.

What is there to do if it appears that a good and loyal donor who has become elderly has become encircled and cut off by predators? A good first step is to talk with a good trust and estate lawyer local to where the donor lives … a lawyer who can be trusted and who doesn’t have a dog in the fight.

Depending on the circumstances and local law, it may be possible to get protective measures put in place. Such as by getting a guardianship established. Or by getting the state attorney general to take action.

There are lots of predators in retirement venues such as Florida. And in small towns and good-sized cities that aren’t retirement venues. The predators are cunning and know that charities typically don’t fight when they’re cut out of a will, even at the last moment.

Some charities have a policy of not litigating. Sad to say, but such a policy amounts to erecting a big sign that says, “Predators are welcome to exploit our alums and other donors.”

Don’t let the predators win.

For more information on this topic, read Part 1. You can also read “Avoiding the Dark Side: The Ethics of Gift Planning” from the February 2016 issue of Give & Take and “Dos and Don’ts of Detecting Diminished Capacity” from the January 2017 issue of Give & Take.

By Jon Tidd, Esq

Working With Older Donors—Part 1

A major area of planned gift fundraising is working with elderly individuals. 

Here some problems to anticipate:

The donor repeatedly over time asks the same question or asks for information you’ve already provided. It’s probably best to provide this individual with a postage-paid envelope addressed to you and ask that he or she communicate with you in writing. Your communications of information to the individual also should be in writing.

The donor, you’ve observed, has been speaking or acting somewhat erratically. If you are going to visit this individual, consider taking along a suitable colleague from your office. You may need a witness, for example, to verify that you didn’t make off with the donor’s will or diamond bracelet.

The donor wants you to be her friend. Maybe she even wants to make gifts to you personally. Be careful here not to do anything that can be painted (say, by the grandson’s lawyer) as undue influence. Being friendly to a donor is of course OK. Being friends with a donor can involve major risks.

The donor wants your organization to give him legal advice or to serve as his executor. Nope.

The donor has one or more bizarre ideas or beliefs but otherwise appears rational. Everyone has weird ideas or beliefs. That doesn’t incapacitate an individual from making a current donation or making a will. If you have any concern on this score, try to make sure, as best you can, that a disinterested and competent lawyer is looking out for the donor’s interests.

More thoughts on all this next time.

For more information, read Part 2.

By Jon Tidd, Esq

The Role of State Law in Charitable Gift Planning

Good charitable gift planning often requires an understanding of applicable state law.

Pledges: The enforceability of a pledge depends on the law of the state whose laws govern the pledge. For example, Donor lives in New Jersey and makes a spoken (non-written) promise to give $X to a charity located in Kentucky. If New Jersey law governs the pledge, it’s likely enforceable, because of a fairly recent New Jersey appellate court decision. In any event, there should be a written pledge agreement that should state explicitly whether New Jersey law or Kentucky law governs the pledge.

Gift Annuities: Gift annuities are subject to extensive state regulation. A charity is badly advised to ignore these state laws.

Trusts: Whether a trust, such as a charitable remainder trust, is valid depends on the law of the state whose laws govern the trust.

Bequests: When a charity in State X receives notice that it is a beneficiary under the will of a donor who died in State Y, there may be any number of issues that turn on the laws of State X or State Y.

Document formalities: Document formalities, such as notarization provisions, depend on applicable state law. That’s why, for example, it can be dangerous for a charity in State X to send a written deed of gift to a donor living in State Y.

Local lawyers need to deal with matters of local law.

And by the way, in this arena, what one doesn’t know can hurt one and one’s organization.

By Jon Tidd, Esq

Anticipating and Avoiding Problems

The world of charitable gift planning is a world of well-meaning donors who do a world of good across an incredible spectrum of needs, wants and aspirations.

It’s too bad, but it must not be ignored by gift planners, that the most well-meaning donor can be tripped up by the tax law, be given faulty legal advice, have his or her gift intentions frustrated or otherwise fail to achieve his or her goals in making a donation.

Here, in the writer’s experience, are some of the most common gift planning problems to be anticipated and avoided:

  1. Flawed gift receipts: A huge problem across the board found lurking in charities both large and small. The IRS is aware of this problem area … it represents low-hanging fruit for the IRS.
  2. Flawed appraisals: Another huge problem area for donors who need to obtain a “qualified appraisal.” The probability the appraisal the donor obtains will be a “qualified appraisal” is about zero.
  3. IRA gifts: A cluster of problems here, ranging from tax law uncertainty as to the date of gift for certain IRA distributions to obstacles thrown up to charitable IRA beneficiaries by IRA custodians. Click here to read another IRA gift reporting mistake to help your donors avoid.
  4. Mishandling of trusts and estates: It is truly amazing how donors’ charitable gift intentions get thwarted by fiduciaries (executors, trustees, lawyers, etc.) who mis- or under-perform.
  5. Bad tax advice: You have to see it to believe it.

Keep in mind this prescription: It’s vastly better to anticipate and avoid a problem than to try to solve a problem once it’s arisen.

Also keep this in mind: The best donors often have less than the best advisors.

Click here to read this Give & Take article on tax traps.

We also have an informative white paper you can download, “Gift Substantiation in a Nutshell.” Click here to access it.

by Jon Tidd, Esq