Let’s Take a Look at Charitable Bequest Planning, Part 3

Read Part 2 here

Charitable bequests fall into three categories:

  1. a bequest of a specific dollar amount
  2. a bequest of a portion of the donor’s residuary estate
  3. a bequest of a specific asset

The specific dollar bequest should be paid by the executor relatively early in the settling of the donor’s estate. So should the bequest of a specific asset. These two types of bequest take priority over residuary bequests and are inferior only to debts, expenses and taxes.

Residuary bequests are usually paid in installments by the executor. The final installment is often eaten into by legal and accounting fees.

What causes a delay in estate distribution? There can be any number of reasons. Some of the more common reasons are:

  • There’s a lawsuit involving the estate, which is hanging things up.
  • The executor is having difficulty disposing of a major asset, typically real estate.
  • The executor is a no-show.
  • The executor is wrangling with the charity over the terms of an endowment agreement.
  • Some asset (e.g., an IRA payable to the estate) is causing the executor to sit tight because of tax or other legal uncertainty.

Executors always want the charity the sign a receipt, release and re-funding agreement in connection with an estate distribution to the charity. These agreements are commonplace, but a charity should not agree to refund more than the charity receives from the estate.

If you have a question about your estate settlement process or would like to arrange a review, contact Sharpe Group by clicking here.

by Jon Tidd, Esq

 

Sharpe Group has several donor communication tools to help you inform your constituency about giving through wills, including booklets and brochures: How to Make a Will That WorksGiving Through Your WillHow to Protect Your Rights With a Will37 Things People “Know” About Wills That Aren’t Really SoQuestions & Answers About Wills and BequestsHow a Will Works for YouThe State Has Made Your Will, Has Congress Changed Your Will? and You Never Need to Change Your Will Unless …

In addition, Sharpe Group experts can tailor articles for Newsletters and Gift Planning Website clients.

Let’s Take a Look at Charitable Bequest Planning, Part 2

Read Part 1 here.

Charitable bequests by the wealthy are often made not only to carry out a philanthropic objective but also to save taxes and maybe also to achieve some other purpose. For example, wealthy individuals often leave wealth to a private family foundation both to avoid estate taxes and to provide downstream heirs who sit on the foundation board with the opportunity to learn about philanthropy.

The federal estate tax generally allows for an unlimited charitable deduction, which in a sense makes the federal estate tax voluntary. To the writer’s knowledge, states that impose an estate or inheritance tax also allow unlimited “death tax” charitable deductions.

But the federal estate tax charitable deduction can be lost through faulty planning. Some examples:

The charitable deduction is allowed for leaving a specified amount to qualified charities to be selected by the donor’s executor but not for allowing the executor to determine how much shall go to charity.

The charitable deduction can be lost if the bequest to a charity is so restricted that there’s a real possibility, as of the date of death, that the charity will reject the bequest. Even if down the road the charity’s board votes to accept the bequest as restricted.

The charitable deduction can be lost when the bequest is to a trust intended to be a charitable remainder trust (CRT) if the language creating the trust fails to meet the requirements of a CRT.

These are just a few of many examples that could be given. Which means the lawyer who drafts the donor’s will should know at least the basics of the estate tax charitable deduction.

Something important to know about the estate tax charitable deduction is that it’s not subject to some of the major rules applicable to the income tax charitable deduction. These major rules include [a] the rules requiring a “qualified appraisal”; [b] the rules applicable to gift receipts for lifetime donations; and [c] the unrelated use rule, which applies to lifetime donations of tangible personal property.

We’ll continue drilling down into the important subject of charitable bequests next time.

By Jon Tidd, Esq

Read Part 3 here

Let’s Take a Look at Charitable Bequest Planning, Part 1

Lots of questions. Here are a few:

Is the federal estate tax a concern?

  • Is state law a planning consideration?
  • Does the donor want to bequeath a specific dollar amount or a specific asset or a percentage of his or her residuary estate?
  • Does the donor want to create a restricted endowment?
  • Does the donor want to provide an income to a survivor, such as his or her spouse?

The writer of this blog is a traditionalist who uses the term “bequest” to mean a gift by will. Which potentially raises another important question:

Is there anyone in the picture (son or daughter, for example) who may well challenge the validity of the donor’s will?

If there is, great care needs to be taken, depending on the likely nature of a challenge. For example, if capacity is likely to be an issue, the donor may want to be examined by a physician before making his or her will. In this area—where a will contest may loom—a key player is the donor’s lawyer, and the donor must rely on his or her lawyer to establish a bulwark against a challenge to the will.

One thing’s for sure: a charity should be very careful about suggesting language for the donor’s will, out of fear that a future challenger of the will may use the suggested language as evidence of undue influence. Any such suggested language should be provided with the caveat that the language is merely suggested and is provided for the independent consideration of the donor’s lawyer.

There’s a flip side to this discussion of will contests that’s important to mention. It’s that in some situations, charitable beneficiaries may wish to challenge a deceased donor’s will. This can happen when predators got to a vulnerable donor late in life and got him or her to make a last-minute will change in favor of the predators and to the charitable beneficiary’s detriment.

More about bequests and bequest planning next time.

By Jon Tidd, Esq

Read Part 2 here. 

Sharpe Group has several donor communication tools to help you inform your constituency about giving through wills, including booklets and brochures: How to Make a Will That WorksGiving Through Your WillHow to Protect Your Rights With a Will37 Things People “Know” About Wills That Aren’t Really SoQuestions & Answers About Wills and BequestsHow a Will Works for YouThe State Has Made Your Will, Has Congress Changed Your Will? and You Never Need to Change Your Will Unless …

In addition, Sharpe Group experts can tailor articles for Newsletters and Gift Planning Website clients.

Let’s Take a Look at Gift Annuities, Part 3

There’s one more gift annuity topic we need to consider: the application of federal securities laws to a gift annuity program. This is a two-part discussion.

Part 1 is the fact that the 1995 Philanthropy Protection Act (“PPA”), which grew out of a Texas gift annuity transaction, applies federal securities laws to certain planned gift arrangements, including gift annuities. Specifically, the 1995 PPA provides that a charity’s “reserve fund” for gift annuities must be described to gift annuity donors in a disclosure statement. The 1995 act does not prescribe the contents of the disclosure statement; and charities are all over the lot in terms of their CGA disclosure statements.

Part 2 is potentially a much bigger deal. Part 2 is the fact that, in 2009, the Ninth Circuit Court of Appeals held in Warfield v. Bestgen that gift annuities being marketed by a certain charity were “investment contracts” for federal securities law purposes. This meant each and every gift annuity issued by the charity was a registrable security. This holding goes far beyond and has far greater implications for gift annuity programs than the 1995 PPA.

Why did the Ninth Circuit hold this? The holding is based on how the gift annuities were being marketed. The marketing brochures did discuss how the “residue” remaining when annuity payments terminated would be devoted to the donor’s charitable purposes. This was no problem, of course.

The marketing brochures also played up the gift annuity payment rates, income tax savings and capital gains tax benefits in investment-oriented language. The Ninth Circuit said these tax and financial inducements appealed to the investment “appetite” (my word) within the prospective donor.

Appealing to such “appetite,” according to the Court, is largely what makes a security a security. [The other elements of a security are (a) the pooling of assets for investment purposes, which occurs within a CGA reserve fund; and (b) the expectation of profit, which can and sometimes does come to fruition when gift annuity recipients live beyond “life expectancy.”]

So, there we have it … so far. If you are unsure about the approach your organization is taking to market gift annuities, check with your Sharpe Group rep. It might be a good reality check.

by: Jon Tidd

Let’s Take a Look at Gift Annuities, Part 2

Read part one here.

Donors and others often believe charitable gift annuities are like commercial annuities, but the two are different. A commercial annuity is a product that can only be purchased with cash. A charitable gift annuity, on the other hand as discussed last time, is a contractual arrangement that may be funded with various assets, depending on state law.

If a gift annuity is funded with an appreciated asset, the donor is deemed to have sold the asset to the issuing charity and realizes gain under the bargain sale rules. If the donor is the only annuitant, the gain gets spread over the donor’s “life expectancy.” The same is true if the annuity is payable [a] to the donor for life and then to a second person for life, or [b] jointly to the donor and a second person while both are living and then to the survivor for life.

If the gift annuity is funded with an appreciated asset and the annuity is payable to someone other than the donor, the donor recognizes the realized gain up-front—there is no gain spreading. This is true even if the annuity recipient is the donor’s spouse. This is why when dealing with a married individual who says he or she wants to establish a gift annuity it’s critically important to determine who holds legal title to the asset that will be used to fund the annuity.

If the individual holding legal title isn’t the prospective annuity recipient, the asset should be given to the annuity recipient, and he or she should establish the annuity. Such a gift qualifies for the unlimited gift tax marital deduction, except if the prospective annuity recipient is not a U.S. citizen, which is a whole other story.

Who said gift annuities are simple? Gift annuities can be dreadfully complex from a legal standpoint.

Speaking of complexity, let’s consider how state law applies to gift annuities. This is a big topic, so let’s just consider the threshold question, which state’s law applies to the gift annuity? Even this question has a complex answer, so let’s take a concrete example. New York Charity issues a gift annuity to California resident. It turns out both California and New York law apply to the gift annuity. New York’s position is that to the extant the laws of the two states differ as to the annuity, the issuing organization must follow the stricter law.

We’ll delve deeper into gift annuities next time.

by Jon Tidd

To learn more about gift annuities in gift planning, attend one of our popular gift planning seminars. Click here for more information. Sharpe Group also has a booklet and brochure to help you educate your donors on how gift annuities can work for them. Click here to request samples of these publications. 

Let’s Take a Look at Gift Annuities, Part 1

A gift annuity is a contract between a donor (or married couple) and a charity, whereby the charity promises to pay an annuity for either one life or two lives.

The underlined terms bear consideration. The fact a gift annuity is a contract means a gift annuity is formed by offer and acceptance. The charity offers to make specified annuity payments; the donor accepts by transferring cash or securities (or maybe some other asset) to the charity.

gift annuity diagramSometimes the offer isn’t specific enough. For example:  if the donor is going to wire shares of stock to the charity, the charity should make clear up-front which date it will use to value the stock for purposes of determining the annuity amount—the date the shares are wired out of the donor’s account or the date the charity receives the shares. Often, charities fail to make this clear up-front, and disputes occur.

 

The fact the charity promises to pay the annuity means the charity makes a financial commitment. The financial commitment is specific—for example, to pay the donor a life annuity of $4,000 a year in equal quarterly installments of $1,000 at the end of each calendar quarter. This specific financial commitment has a certain value for federal tax purposes. This value is technically called “the investment in the contract” and is the amount the donor recovers tax-free over his or her “life expectancy.”

More on gift annuities next time. Read part two here.

by Jon Tidd

To learn more about gift annuities in gift planning, attend one of our popular gift planning seminars. Click here for more information. Sharpe Group also has a booklet and brochure to help you educate your donors on how gift annuities can work for them. Click here to request samples of these publications. 

Let’s Take a Look at the Estate Tax Charitable Deduction

Estate tax returnThe estate tax charitable deduction is different from the income tax charitable deduction in several important ways.

First, the estate tax charitable deduction is allowed for a gift (bequest) to a foreign charity, such as a university in England. The income tax charitable deduction is allowed only for gifts to U.S. charities. That’s why some foreign charities have U.S. “Friends of” charitable affiliates.

Second, the estate tax charitable deduction is unlimited for qualified gifts (bequests). This makes the federal estate tax, in a sense, voluntary. The federal income tax charitable deduction is, of course, subject to various limitations. The income tax can’t be “voluntary”; it raises too much of the federal revenue (around 95%); the estate tax raises only about 1% – 2% of the federal revenue.

Third, the estate tax handles certain pledge payments differently from the income tax, specifically the payment of enforceable pledges. Any pledge payment made during life can qualify, generally speaking, for a federal income tax charitable deduction. On the other hand, payment by will of a legally enforceable pledge qualifies for an estate tax debt deduction, not an estate tax charitable deduction. The estate tax debt deduction is perfectly fine, however.

Fourth, the estate tax charitable deduction is allowed only for assets included in the “gross estate.” On the other hand, one can get an income tax charitable deduction for giving an asset not included in income (e.g., appreciated stock). What is an example of assets passing to charity at one’s death that is not included in one’s gross estate? One such example is assets passing to charity from certain types of trusts (e.g., a non-marital deduction trust created by one’s deceased spouse).

There are some other twists and turns to the estate tax charitable deduction. One, for instance, is the requirement that the assets passing to charity at death pass from the decedent. Thus, a will provision that leaves $X to qualified charities to be selected by the decedent’s executor does qualify for an estate tax charitable deduction, while a will provision that allows the executor to determine how much shall pass to charity does not.

Drafting a charitable provision for a will can require sophisticated tax-related knowledge on the drafting lawyer’s part. That’s one of several reasons why it can be good for a charity to get a peek at such a provision while the donor is living.

by Jon Tidd

It’s Important to Know About the “Partial Interest” Rule: Part 3

Chef's hands cooking spaghetti

A lot of “planned” gifts are partial interest gifts that are deductible because of exceptions to the general rule of non-deductibility. For example, the gift of a remainder interest in a qualified charitable remainder trust is deductible.

What about gift annuities? These are not partial interest gift plans. A gift annuity simply involves the transfer of an asset by the donor in exchange for the donee organization’s promise to pay an annuity. The annuity is purchased for tax purposes with the transferred asset.

Two more points, and we’ll call it quits on partial interests:

  1. The gift of an undivided portion of the donor’s entire interest in an asset is generally deductible.
  1. A non-deductible gift of a partial interest can cause the donor a gift tax problem.

A little elaboration:

  1. An example of a gift of an undivided portion of the donor’s entire interest is the gift of a 25-percent undivided portion of the donor’s ownership of real estate. This type of gift is generally deductible (subject to appraisal and gift receipt requirements). An “undivided portion” can be thought of this way: donor, who’s holding a handful of uncooked spaghetti strands, breaks off the top 25 percent of the strands evenly and gives the broken off portion of strands to charity … a deductible gift.
  1. Why a gift tax problem? A gift of a partial interest is a gift for purposes of both the federal income tax and the federal gift tax. In gift planning, one tends to focus on the income tax and the income tax charitable deduction. It turns out there is also a gift tax charitable deduction, which operates quietly in the background to shield most charitable gifts from gift tax. If the income tax charitable deduction is denied for a partial interest gift (e.g., the gift of a remainder interest in an unqualified charitable remainder trust), the gift tax charitable deduction also will be denied. .. exposing the flawed gift to gift tax.

Think of things this way: the income tax charitable deduction operates as a carrot; the gift tax charitable deduction, if denied, can operate as a stick.

By: Jon Tidd

The Importance of Proper Gift Receipts

receipt-122582501Let’s take a look at the Durden Case, which case involves $25,171 in cash contributions made by the Durdens to their church in 2007. This is a Tax Court case. The Durdens went to court because the IRS threw out their claimed charitable deduction for these gifts.

Let’s be clear. There was no dispute over the amount of cash the Durdens gave, when they made their gifts or whether the church was a qualified charity; it was.

So why did the IRS disallow the Durdens’ claimed charitable deduction? This is where things get interesting and a valuable lesson is taught.

It turns out all but $317 of the contributions consisted of gifts each in an amount greater than $250. For any charitable gift of $250 or more, the donor must substantiate the gift with a contemporary written acknowledgment from the donee that states, among other things, whether the donee provided any goods or services to the donor in consideration of the gift.

The Durdens did get a “contemporary” gift receipt from the church on January 10, 2008. It was contemporary because the Durdens got it way before the due date of their 2007 tax return (and way before they filed their 2007 return). But it was a worthless receipt for tax purposes, because it didn’t state whether the Durdens had received any goods or services from the church in consideration of their gifts. In fact, the Durdens received no goods or services from the church.

The Tax Court agreed with the IRS that the Durdens had failed to substantiate their 2007 cash contributions to the church and were therefore not entitled to any charitable deduction for these gifts (except as to the $317 of gifts mentioned above).

Oh, by the way, the Durdens got a second, “corrected” gift receipt from the church in 2009, shortly after the IRS had audited them for 2007. But the Tax Court held that this receipt also was worthless, because although it contained the no-goods-or-services language, it was issued to the Durdens way after the date they filed their 2007 tax return and therefore was not “contemporaneous.”

The Durden case was decided by the Tax Court on May 17, 2012. Read more about the case by clicking here. It’s a good idea to review and have for reference IRS Publication 1771 for details on substantiation and disclosure requirements for charitable contributions.

by Jon Tidd

Finally! The Charitable IRA Provision Is Permanent

check-76800210 (1)Finally Congress has made the charitable IRA provision permanent. Now the fun begins. What fun? Dealing with all the questions to which there are no clear answers.

For example, a donor’s IRA custodian mails to the donor a charitable IRA contribution check payable to a charitable organization. The check is mailed to the donor on December 29. The donor receives the check on December 31. The donor then mails the check to the charity on January 4. The charity receives the check on January 7. This is from an actual fact pattern.

Question: When is the gift complete for tax purposes? December or January?

IRS hasn’t answered this and other important charitable IRA questions. Why not? Because up until now, the IRA donation has been a temporary provision of the tax law; and IRS does not issue regulations on temporary tax law provisions.

IRS has issued some guidance on charitable IRA contributions in past years. The IRS has said, for example, it’s OK for the IRA custodian to send the check directly to the donor; but it hasn’t said when the distribution is deemed to be made in this situation.

IRS also has said an IRA gift may be used to pay a pledge, even an enforceable pledge. This is interesting given that a donor may not use his or her private foundation to pay an enforceable pledge (the foundation’s payment would be self-dealing).

Charities should have a policy and procedure for dealing with IRA gifts, including a policy for acknowledging such gifts. It’s also a good idea to develop a one-page “fact sheet” for IRA donors. The fact sheet should say, for example, that an individual may not use an IRA gift to pay for a gala dinner table.

If you need help dealing with IRA contributions (and if you do, you’ve got lots of company), reach out to a Sharpe Group representative.

by Jon Tidd

Sharpe has free postcards available for download as PDFs immediately that you can use to announce this provision news to your donors. Click here to download the PDFs.