Why Do Individuals Make Charitable Gifts?

One can’t raise money for a charity without having an insight into this question and its answers.

In my experience, the reasons individuals make charitable gifts include:

  • a strong desire to give back for some service the charity has provided to the donor or to a close family member or friend (a service such as an education or health care);
  • a deep commitment to the charity because of the charity’s mission and how well the charity carries out its mission;
  • an emotional need, such as the need of an elderly childless individual to make a sizable gift to a children’s hospital;
  • a sense of duty, such as the sense of duty that a member of the class of 1959 feels to make a 60th reunion gift; and
  • a sense of gratitude, as I once encountered concerning an individual who was kicked out of a college in the 1950s and who came to understand about 50 years later that that event had had a profound, positive effect on him.

This is, of course, a mere sampling, not an exhaustive list.

Gift planning takes into account why individuals make charitable gifts. But gift planning usually focuses on:

  • how the gift will be made (gift vehicle and funding asset),
  • when the gift will be made, and
  • the purpose for which the gift will be made.

Recognition and crediting are sometimes important. These two items are frequently a matter of back-and-forth.

All very interesting — a confluence of human desire, the law, and the donee organization’s wishes and needs.

by Jon Tidd, Esq

What is an “Estate Note”?

I don’t know.

I’m a lawyer, and try as I may, I cannot, in any law library, find a definition of “estate note”.

It’s a made-up, meaningless term.

There are, however, two instruments wrongfully called “estate notes”:

  1. an enforceable pledge, and
  2. a contract to make a will.

The garden variety enforceable pledge is a naming pledge (always for a sizable amount of $$). The pledge agreement provides that to the extent the pledge is unpaid upon the pledgor’s death, the unpaid balance is an obligation of the pledgor’s estate.

A contract to make a will is a contract. Donor promises to make and keep in force a will that leaves $X to CHARITY. In return, CHARITY provides consideration to Donor, such as a promise to put Donor’s name on an endowment fund.

In most if not all states, a contract to make a will must be executed with the same formalities as a will. Meaning it must be witnessed.

Use of the term “estate note” won’t confuse donors.  But it surely may confuse their lawyers.

It’s far better to think in correct terms and, of course, to employ the correct instruments — an enforceable pledge or a contract to make a will. Either can bear any name. The name I prefer is simply “Gift Agreement”.

BTW, neither an enforceable pledge nor a contract to make a will guarantees that your organization will get a single dime from the donor’s estate. The donor may die broke, for example.

by Jon Tidd, Esq

Three Key Gift Acceptance Policy Provisions: Part III

We left off last time with the fact that the qualified appraisal (Q.A.) rules were revised substantially as of January 1, 2019.

Yes, the Q.A. rules are the donor’s problem. But they become the donee’s problem if the donee receives a copy of the donor’s appraisal and doesn’t send the donor a letter stating that [1] the donee cannot advise the donor as to whether the appraisal is a “Qualified Appraisal” for federal income tax purposes, and [2] as to this matter, the donor needs to check with his or her own tax adviser.

BTW, donors and their advisers think the appraisal is a valuation document. That’s flat-out wrong. It’s a tax law document. Don’t you forget that.

Gift Receipts

Gift receipts are simple, right? Wrong! They are tax law documents. There’s a whole bunch of law on gift receipts in the federal income tax regulations. Lacking the proper form of gift receipt, the donor stands to lose his or her federal income tax charitable deduction on audit.

It gets even worse. For an IRA rollover gift the donor needs a gift receipt. Even though the donor isn’t going to claim a charitable deduction for the gift.

For setting up a gift annuity, the donor needs a receipt stating whether the donor received any goods or services in addition to the annuity. Often, this sort of receipt states that the donor received no goods or services. Wrong! The annuity is goods or services.

Finally

Far too many charities utterly fail, at their own peril, to understand that pledges, appraisals, and gift receipts are exquisite tax law documess.

A charity that pays close attention to pledges, appraisals, and gift receipts is a well-run charity. In my experience, few charities fully meet this standard.

by Jon Tidd, Esq

Three Key Gift Acceptance Policy Provisions: Part II

Last time, we looked at pledges.

A gift acceptance policy should require that all pledge agreements be vetted by the development office before being executed. A gift acceptance policy also should state:

  • that the donor must state up-front, in writing, the source or sources of assets that will be used to pay the pledge; and
  • how noncash assets will be valued for purposes of paying the pledge.

Let’s turn to gift receipts.

Gift receipts are tax law documents. They’re not thank-you letters. Without a correct gift receipt, the donor’s claim of a charitable deduction will be disallowed on audit. The entire burden of obtaining a correct gift receipt is placed, by the tax law, on the donor.

For example, let’s take the gift receipt for a charitable gift annuity. Lots of major-league charities issue gift receipts stating that the donor received no goods or services. Wrong! The receipt should state that the donor received no goods or services in addition to the annuity.

A gift acceptance policy should address, in detail, how the charity shall fashion gift receipts. Gift receipts are part of gift acceptance.

Now let’s look at donor-obtained appraisals.

Wow. I’ve not seen one, not one, donor-obtained appraisal that meets the definition of a “qualified appraisal”. Not one. In more than 34 years. To me, this means there’s total non-compliance with the qualified appraisal rules.

Now for the bad news. The qualified appraisal rules were substantially revised as of January 1, 2019. Now they’re even more complex, more tricky, more confusing.

We’ll pick up here next time.

by Jon Tidd, Esq

Three Key Gift Acceptance Policy Provisions

The purpose of a gift acceptance policy is to keep a charity, especially its president and its development officers, out of trouble in dealing with donors.

Three problem areas that are major problem areas for charities but which are seldom addressed in gift acceptance polices are [1] appraisals, [2] gift receipts, and [3] pledges. Let’s look at these matters in reverse order.

Pledges: Especially big pledges. Why pledges. Why big pledges? Because big pledges tend to be negotiated by the president or other top officials of the charity. These officials will hardly if ever know the legal rules that apply to pledges. The result can be a tax law nightmare.

It turns out that most big pledges -– say, pledges of $100,000 or more — are enforceable as contracts, as are some smaller pledges. Not because the charity would ever sue to enforce (although that has happened). But because the law of contracts that applies to pledges always operates regardless of whether the parties to the pledge know the local contract law as to pledges.

For example, there’s a fairly recent appellate decision from New Jersey involving a mere spoken pledge for $25,000, as to which the pledgor received a complaint and summons from the charity when he reneged on the pledge. The New Jersey court HELD the pledge was enforceable. In New York and most other states, on the other hand, a pledge doesn’t become enforceable unless the donor receives consideration from the charity, such as the charity’s agreement to place the donor’s name on an endowed fund or on a building or a college. But that typically does occur with big pledges.

So what if the pledge is enforceable? It turns out that if Ms. Scarlett makes an enforceable pledge, neither her private foundation nor the private foundation of her husband, her child, or her parents can pay a single penny on the pledge, because of the tax law prohibition against self-dealing.

It also happens that individuals who make big pledges typically are wealthy and often do have their own family foundations.

We’ll continue this discussion and then turn to gift receipts next time.

by Jon Tidd, Esq

What is an IRA? Part IV

How do charities named as IRA beneficiaries deal with the problem of getting their beneficiary distributions from the IRA custodians?

Charities deal with this problem in different ways.

Some deep-pocket charities devote personnel to filling out the paperwork and are willing (meaning individuals who are employed by the charity are willing) to provide SSNs, home addresses, financial information, and whatever else the the IRA custodian demands.

Some charities refuse to fill out the paperwork and stand up to to the IRA custodians.  Stand up with success in some cases. Stand up because the information demanded by the IRA custodian is too intrusive for the business officer, the board members, whomever.

In my opinion – and it’s just my opinion, nothing else – charities should stand up and refuse to fill out the paperwork. What the IRA custodians demand is wrong. Wrong as a matter of law.  Charities, again in my opinion, should not go along.

I understand that often there’s a lot of money at stake.

Usually, however, the charity doesn’t know how much money is at stake, because the IRA custodian won’t tell the charity the amount of its beneficiary distribution.

So charities can waste time and resources to get a pittance. The amount in one actual situation was $0.97.

It’s a gross breach of fiduciary duties for the IRA custodian not to tell the charity how much money the charity is to receive.

Well, as I write this, things are beginning to change.

A few major financial institutions have seen the light of day and are changing their IRA beneficiary distribution procedures.  Eventually, all IRA custodians will follow suit.

That will be a good day for charities.

Click here to read Part III.

by Jon Tidd, Esq

What is an IRA? Part III

Let’s now look at the situation in which Donor names Charity as beneficiary of her IRA.

This is a common situation. Common in large part because charities have promoted heavily the idea of leaving IRA assets to a charitable organization.

When Donor dies, her IRA becomes an inherited IRA, and Charity becomes beneficiary of the IRA.

The IRA custodian should make a prompt distribution from the inherited IRA to Charity. But it doesn’t and refuses to do so. Why? Because its tax reporting software would report the distribution as a distribution to Donor, which would cause problems.

Why would the tax reporting software do this? Because it’s designed to report all distributions from an IRA to the named owner of the IRA. Donor, though dead, is still the named owner of the inherited IRA.

So the custodian demands that Charity set up an IRA in its own name (which the custodian wrongfully calls an “Inherited IRA”).

The problem is that a charitable organization cannot set up and be the named owner of an IRA.  It can’t do so because (a) it doesn’t have earned income (that’s the only thing that a brand new IRA can receive), and (b) as we’ve seen, a charity is not on the list of parties that can establish a brand new IRA.

The real problem for Charity is that in filling out and submitting the paperwork to set up what the IRA custodian calls an “Inherited IRA”, Charity becomes a customer of the custodian that is setting up a new account. That makes Charity subject to the know-your-customer rules of the Patriot Act. And that introduces delay and all kinds of bad things into Charity’s attempt to get its beneficiary distribution.

Next time we’ll look at how charities deal with all these problems.

Click here to read Part II.

by Jon Tidd, Esq

What is an IRA? Part II

Last time, we looked at how the term IRA is defined; who can establish a brand new IRA; and the definition of the term “inherited IRA”.

Now we dig deeper into the concept of an inherited IRA. We’ll do this using a real-life example of an individual beneficiary. Later we’ll look at a real-life example of a charity beneficiary.

Dad dies, having named Daughter as beneficiary of his IRA. Daughter becomes an IRA beneficiary upon Dad’s demise. Daughter has inherited Dad’s IRA. Dad’s IRA is now an inherited IRA. Dad is still the named owner of the IRA, and the IRA bears Dad’s name.

The custodian (= trustee) of Dad’s IRA is financial institution A. Daughter handles all of her financial business at financial institution B. Daughter wants to get the money Dad left to her housed in an IRA (which is exempt from tax) at B.

Daughter does this by setting up at B what the IRS calls a “beneficiary IRA”. The beneficiary IRA is set up in Dad’s name for the benefit of Daughter. It bears Daughter’s tax ID #. Now, a tax-free trustee-to-trustee transfer is made from the inherited IRA at A to the beneficiary IRA at B.

This series of moves is not spelled out in the tax law. The IRS has simply said, but not in a way that constitutes tax law, that this series of moves is permitted. Odd, huh?

There’s a lot more to say next time. Before we stop for now, however, note that once Daughter attains 70.5 years, she can begin making IRA rollover gifts to charity out of her beneficiary IRA. That’s pretty cool.

Click here to read Part III.

by Jon Tidd, Esq

What is an IRA?

It’s good to know what an IRA is, given that so much money comes to charities from IRAs.

An IRA is defined in the Tax Code as:

  • a trust
  • established in the U.S.
  • for the benefit of an individual or his/her beneficiaries
  • that meets certain requirements (e.g., is prohibited from investing in life insurance).

That’s pretty straightforward, but the waters run deep here.

For example, who can establish a brand new IRA? The answer is:

  • an individual,
  • an employer (for the benefit of its employees), or
  • an association of employees (for the benefit of its members.

The type of IRA encountered in gift planning is almost always (if not always) an IRA that has been established by an individual.

What happens if the individual who has established an IRA dies?

If there is no named IRA beneficiary, the individual’s estate becomes the beneficiary…not a good situation, because the individual’s estate generally will owe income tax on the IRA money it receives.

If there are one or more named beneficiaries, they are said to inherit the IRA, and the IRA is now an “inherited IRA”. Both individuals and charities can inherit an IRA.

We should stop here and pick up next time. We’re about to enter some very interesting territory, which will involve some fairly deep digging.

Click here to read Part II.

by Jon Tidd, Esq

A CRT Paying Into a Second Trust — Part II

Last time, we looked at the idea of a CRT paying into a second trust. We focused on an example of a charitably motivated parent who wants to provide support for his 49-year-old disabled son.

The plan we examined was a 20-year term-certain CRT paying into a second trust that was to provide for the son, who we assumed has a diminished future lifespan.

Let’s now assume the son has a normal future lifespan, expected to be another 30 to 35 years.  Now the idea of a 20-year CRT doesn’t work.

What about a CRT paying into a second trust for the son’s life?

We need to consider several things:

  • This CRT may not provide a great benefit to the charitable remainder beneficiary, because of the son’s young age.
  • Depending on the IRS discount rate, a CRAT may not work, because of the 5%-probability test. A CRUT may have to be employed.
  • The idea of a CRT paying to a second trust for the life of the son works only if the son is truly incapacitated. There’s an IRS ruling on this point.
  • If a CRT pays to a second trust for the life of an individual, any assets remaining in the second trust at the death of the individual must be paid to the individual’s estate.

That’s a bunch of complex planning considerations.

If you run into this sort of situation, you and the donor are going to need expert advice. The donor will need to have expert legal counsel.

by Jon Tidd, Esq