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. 

Gift Substantiation: The Tail That Wags the Dog

Gift box with money

The year 1984 is significant for several reasons. There’s George Orwell’s 1949 novel, 1984. The same year also saw the unveiling of the Apple Macintosh computer. And to the point of this blog, the “Qualified Appraisal” (Q.A.) rules were introduced in the 1984 Tax Act.

The Q.A. rules represent the opening salvo in modern tax legislation aimed at gift substantiation for charitable deductions. Absent required gift substantiation, an individual can lose his or her entire federal income tax charitable deduction for a perfectly good, perfectly valid gift.  Unfortunately:

  • Donors are often clueless about this.
  • So are their advisers often enough.
  • So are many charitable organizations.

The elements of gift substantiation are (a) good record keeping on the donor’s part; (b) good gift receipt practice on the part of the donee organization; and (c) when required of the donor, substantial compliance with the Q.A. rules.

Some examples:

[1] Donor obtains an appraisal, but the appraisal fails to state the date of gift. Held, donor’s appraisal fails to meet the definition of a Q.A. Charitable deduction denied.

[2] Donor obtains a gift receipt for a gift of more than $249. The receipt fails to state whether the donee organization provided any goods or services to donor in consideration of the gift. Held, charitable deduction denied, even though donor, in fact, received no goods or services.


There’s a lot more, a lot more that’s important. Check back soon for more details on gift substantiation.

An article in the October 2015 Give & Take has some more information on claiming token donor gifts. Read it here.

Click here to download our free white paper “Gift Substantiation in a Nutshell” for more information about gift substantiation.

by Jon Tidd