Latest COVID Relief Bill Signed

Last night, President Trump signed the latest relief package attached to the Consolidated Appropriations Act to fund the federal government. The relief portion of the legislative package was estimated at approximately $900 billion and includes extended unemployment benefits for millions of people who lost jobs this year, as well as $600 one-time relief payments to most Americans. There are ongoing discussions and interest in increasing the amount of relief payments.

Of particular interest to gift planners were the extension and expansion of the charitable provisions from the CARES Act passed earlier this year.

The primary provisions extended affecting individuals making charitable gifts included the CARES Act benefits for the “above-the-line” deduction for nonitemizers, which was expanded to $600 for couples, and the waiver of the AGI limitation for cash contributions for 2021. Additionally, the law extends the increased deduction limit of 25% for corporate contributions of cash and food inventory.

These extensions should be good news for individuals and corporations that make charitable contributions in 2021.

By Barlow Mann

The Better Testamentary Response to the SECURE Act: Charitable Remainder Trust or Gift Annuity? Part 2

Many commentators believe funding a testamentary charitable gift annuity with an income in respect of a decedent (IRD) item, like an IRA, means the annuity will be taxed in full immediately, with no recovery in basis. But is that, in fact, the correct result given the purpose of the IRD rules?

When this IRD item passes to the charity, the payments consist of ordinary income. However, since the charity is tax-exempt, it pays no income taxes on it. It almost certainly converts the IRA into cash to be the source of funds to pay the annuitant. From this perspective, the annuitant should receive a tax-free return of principal for their payment received during their life expectancy.

If this is the correct interpretation of the taxation of annuity payments, then the charitable gift annuity would be superior to a charitable remainder trust because of the partial tax-free nature of the payments. Contrast the taxability of payments coming from the charitable remainder trust, which will almost certainly be taxed in full as ordinary income under the tier accounting rules.

If this is not the correct interpretation, then the taxation of the gift annuity is at least as favorable as a charitable remainder trust.

Furthermore, there are additional advantages of the testamentary gift annuity over the remainder trust. The gift annuity has much more flexibility for deferral planning than a testamentary remainder trust. The gift annuity may be structured as a deferred or even a flexible gift annuity.

Coupled with the much smaller amounts required to fund and the avoidance of the expense of drafting and administering a trust, the gift annuity will be more appealing to the majority of donors not exposed to the federal estate tax.

The one complication occurs for those anticipating exposure to the federal estate tax. My future blog post will identify them and their solutions.
 

By Professor Christopher P. Woehrle
 

Click here to read Part 1 of this series.

 

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Gift Ideas for Those Who Don’t Itemize

There was a lot of charitable giving in the U.S. before the federal income tax (1913) and a federal income tax charitable deduction (1917) came along.

Example: As a young person, I made great use of a public library in Aurora, Illinois—one of the many such libraries funded by Andrew Carnegie. Carnegie funded these libraries because he believed in public education. There was no federal income tax when Carnegie made these charitable gifts.

In some ways, the charitable deduction has corrupted and distorted charitable giving.

How? It has caused many tax professionals (i.e., advisors to donors) to believe the only good charitable gift is a gift that qualifies for a charitable deduction. In fact, there are lots of worthy gifts that qualify for little or no charitable deduction.

Here are some examples:

  • A gift of highly appreciated stock held short-term. The income tax charitable deduction is limited to cost basis.
  • A gift of a partial interest, such as a gift of office space. No charitable deduction.
  • A gift of professional services. No federal income tax charitable deduction.

Recommendation: The new world of non-itemization that many donors inhabit needs to be understood well by gift planning officers and advisors to donors.

This world opens the door to gift planning possibilities that formerly were considered poorchoices from a tax standpoint but that now can be quite worthwhile.
 

By Jon Tidd, J.D.
 

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Working With Financial and Estate Planning Advisors

Getting donors to say “yes” often involves working with their professional advisors—attorneys, accountants, financial planners, trust officers, insurance agents, bankers, etc. Planned giving officers may be more knowledgeable about sophisticated charitable planning than professionals who only occasionally encounter charitable remainder trusts, charitable gift annuities or the use of charitable techniques in estate and generation-skipping transfers.

Many gift officers know that providing the latest information about legislation, court cases and IRS rulings makes them a go-to source for allied professionals. This can take several forms, including regular print or electronic updates, informative presentations offering continuing education credits and membership on the charity’s advisory committee. The goal is two-fold: generate goodwill and familiarize advisors who might otherwise dissuade a client from using a particular charitable technique. There may even be circumstances where a client with no affinity to a particular organization might benefit by including a charitable vehicle in his or her plans. The advisor can be in the position of recommending one or more organizations, based on the advisor’s experience with the planned gift officer.

National organizations and those with donors in all regions of the country (e.g., colleges) might cast a wider net when amassing a list of advisors to whom they will send regular communication. Charities with a more localized donor base might concentrate their outreach to advisors within a certain geographic area but also add opportunities to meet personally.

A law school might consider sending information on charitable planning to its own alumni who specialize in estate planning and taxes, as both a service to the professional and a reminder of the lawyer’s ties to his or her alma mater.

A regular program of educating advisors about the latest trends in the field can make a planned giving officer and the organization an invaluable resource.

 
By Kathy Sperlak, J.D.

 

The Advisor eNewsletter

Sharpe Group has developed a digital newsletter written specifically for financial advisors and tax experts to provide them with information on how charitable giving can fit into their clients’ overall estate planning. This annual service includes an electronic survey and analytics with each issue. For an added fee, we can provide the email service to send each issue for you.

The Advisor is published six times a year, every other month, and includes relevant IRS rulings and court cases, tables and charts and the Philanthropy Puzzler.

Branded with your organization’s logo, advisors will receive timely and valuable information to share with their clients who have charitable intent. You will receive your own custom url that will be linked in each issue’s email. Recipients will be directed to your customized website containing the latest content from your subscripition to The Advisor.

Click here to learn more about this new service.

Gifts of LLC Units

If an individual wants to give LLC units to your organization, be careful! Potential problems lie ahead for both the donor and your organization.

Here’s why, by way of an example. Suppose the gift is of 10% of all the outstanding LLC units. It’s necessary to analyze the gift on two levels.

First level: Donor will be deemed to give the LLC units. If the donor claims the units have a value of more than $5,000, the donor will need to get a qualified appraisal.

Second level: Here’s where things get tricky. The donor may need to adjust the charitable deduction the donor claims for this gift. That’s because the gift will be deemed to consist of 10% of each and every LLC asset.1

  • If one of the assets is a fully depreciated computer, the donor will need to ratchet the charitable deduction downward to take the depreciation into account.
  • If one of the assets is land and a building, depreciation again may have to be taken into account.
  • Furthermore, if one of the assets is debt-encumbered, the bargain sale rules will need to be applied with respect to that asset.

“Ugh!” is right. This gift may be a tax-reporting mess for the donor. But that’s not all. This gift may produce unrelated business income (UBI) for your organization.2

By the way, don’t expect the donor’s tax advisor to know all this. Chances are the tax advisor has never dealt with this kind of situation.

Chances are, also, that when all the facts concerning the LLC and its assets are laid on the table, either the donor or your organization will walk away from the gift.
 

By Jon Tidd, J.D.
 

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1.The asset-by-asset approach needs to be taken if the LLC has elected to be taxed as a partnership. LLCs routinely are taxed as partnerships.

2. UBI can arise from asset-encumbered debt or from the LLC’s business operations.

Last Call for Giving in 2020

Thanksgiving celebrations and GivingTuesday are over, but the most generous time of year is just beginning! That’s right, the month of December is traditionally a time for giving to friends, family and favorite charitable organizations. Giving this time of year is embedded in many cultures and religions, and according to scientific studies, charitable giving makes people feel better by stimulating the natural release of endorphins in the human brain.

2020 has been a challenging year in so many ways with the emergence of a global pandemic, economic recession and stock market crash in the first quarter, but it appears that collectively there is much to be grateful for as the year draws to a close. In the second and third quarters, the economy, GDP, employment figures and charitable giving saw a substantial rebound. It appears that COVID-19 vaccines and treatments will begin to be available soon, and in a few weeks, we will start a new year. In the meantime, there is much to do to ensure the best possible year-end giving results.

Who CARES?

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was passed earlier this year to provide assistance to individuals, business and nonprofits impacted by the economic challenges caused by the pandemic. The new law included a number of provisions designed to encourage charitable giving, including a new $300 above-the-line charitable deduction for cash contributions to qualified nonprofits for non-itemizers and the waiver of AGI limitations for cash gifts to most charitable organizations. For those who itemize deductions, additional provisions increased the amounts corporations could give from 10% to 25% of their taxable income.

Ideas for Giving Wisely in 2020

  • Non-itemizers can receive a $300 above-the-line deduction for gifts of cash.
  • Itemizers can give cash gifts up to 100% of AGI.
  • Those age 70½ or older with an IRA can make qualified charitable distributions (QCDs) of up to $100,000 per year.
  • Gifts of appreciated stock and other appropriate noncash assets like real estate can qualify for an itemized charitable deduction and also bypass capital gains tax.
  • “Bunching” itemized deductions, including cash and noncash contributions, can allow nonitemizers to become itemizers in some years. For example, tax savings may be achieved by paying a pledge early or making a contribution to a donor advised fund in order to exceed the standard deduction in some years.

The End Is Near, but It Is Not Here Yet.

Sharpe Group is pleased to provide some downloadable resources to assist our clients and friends to make the most of the last few weeks of 2020. Please feel free to adapt these communications for your use.

Additionally, take a few minutes to review your gift development plans for December and make sure contact emails, phone numbers, giving totals and mailing addresses are all correct. Have email messages with information on IRA QCDs, stock transfers and other items prepared in advance. Consider calling and thanking donors for their prior support and to see how they are faring. Another group may be targeted for thank-you letters and cards, pledge reminders or a personal note as appropriate.

Finally, with 2021 right around the corner, you may want to review the links for a variety of publications, communications and training opportunities to help you work with donors and their advisors.
 
By Barlow T. Mann, General Counsel
 

Click here to download sample copy for year-end giving communications.

 
Sharpe Group will continue to post helpful information for you here on our blog and on our social media sites. If this blog was shared with you and you wish to sign up, you can do so at www.SHARPEnet.com/blog.

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The Better Testamentary Response to the SECURE Act: Charitable Remainder Trust or Gift Annuity? Part 1

The SECURE Act dramatically reduced the deferral period of retirement plan benefits for a non-spousal beneficiary from their lifetime to 10 years. All benefits must be paid at the end of 10 years from the date of death of the account owner. However, no distributions are required until the 10th year; therefore, the beneficiary, if so inclined, could continue deferral for 10 years less a day.

For a donor with meaningful charitable intent, a testamentary charitable remainder trust (CRT) might make sense as a deferral mechanism. There will be a federal estate tax charitable deduction for the value of the remainder interest. Payments from the CRT to the non-charitable recipient most likely will be taxed as ordinary income under the tier accounting rules because the IRA is considered income in respect of a decedent (IRD).

Another option could be a testamentary charitable gift annuity. The estate tax charitable deduction is allowed for the charitable gift annuity if the decedent’s will defines the amount of the annuity to be paid*.

Most testamentary charitable gift annuities will be funded with cash or assets that have received a stepped-up basis to fair market value at date of death. What would be the income tax consequences to the charity, estate and annuitant if funded with an IRD item, like an IRA or qualified plan benefit? Interestingly, a private letter ruling left the question unanswered as to whether a portion of the annuity payments would be considered a tax-free principal.

In Private Letter Ruling 200230018 (April 22, 2002), the IRS approved an arrangement where the taxpayer would fund a charitable gift annuity by naming the charity as the beneficiary of her IRA. The charity would pay a third party an annuity over his life, beginning at the death of the taxpayer. The IRS made the following determinations:

  • The charity’s exempt status would not be adversely affected by the arrangement, and the charity would not recognize unrelated business taxable income.
  • The value of the IRA at the taxpayer’s death would be includable in the taxpayer’s gross estate.
  • An estate tax charitable deduction would be allowed, equal to the value of the IRA on the taxpayer’s date of death less the present value of the annuity as of the taxpayer’s date of death.
  • The proceeds of the IRA would be considered income in respect of a decedent to the charity and not to the taxpayer’s estate.

The taxpayer also sought a determination that the annuity payments should have a tax-free basis. Specifically, it requested the IRS to determine that annuitant’s “investment in the contract” equals to the IRA proceeds transferred to the charity in exchange for the annuity less the estate tax charitable contribution deduction. The IRS refused to answer since the taxpayer and annuitant were both alive.

What is the result? Read my upcoming blog to find out! I will also discuss the comparative merits and disadvantages of the testamentary charitable remainder trust and gift annuity as a way of creating a charitable-stretch IRA.

By Professor Chris Woehrle, Chair & Professor of Tax & Estate Planning Department, College for Financial Planning, Centennial, Colorado
 

Sharpe Group will continue to post helpful information for you here on our blog and on our social media sites. If this blog was shared with you and you wish to sign up, you can do so at www.SHARPEnet.com/blog.

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* See IRC 2055(e)(2)(A); Reg. 2055-2(e)(1).

 

A Heartfelt Thank-You

If you’ve followed our blog or read our newsletter, Give & Take, you know we stress the importance of thanking your donors. As our founder Robert F. Sharpe Sr. often taught clients, when a donor puts you in their estate plan, they are elevating you to the status of family, and they should be treated as such.

We want to take this time to express our appreciation for all of you … our family.

It’s been a very challenging year, yet we have seen the nonprofit community step up to the plate and focus on their missions and their donors and continue to serve our world during a difficult year.

Thank you for pushing on and pushing through. The world is a better place because of your work.

Stay safe and healthy this Thanksgiving.


 

Articles About Thanking Your Donors

What Is an LLC?

LLC means “limited liability company.” So what?

LLCs play an important role in charitable gift planning.

  1. A charity may want to establish an LLC to receive gifts of real estate, for example.
  2. A donor may want to follow Mark Zuckerberg’s lead and create an LLC as a vehicle for making charitable gifts.
  3. An individual may want to donate units (as they’re sometimes called) in an LLC.

Why a charity may wish to create an LLC. For a charity, accepting a gift of real estate may be beneficial, but it also may be risky. To deflect risk, a charity can establish a single-member LLC of which the charity is the single member. Real estate donated to the LLC is deemed given to the charity for federal tax purposes, meaning the donor can get a charitable deduction. The LLC, however, shields the charity from liability associated with the real estate while allowing the charity complete control over the LLC.

A “charitable LLC.” Mark Zuckerberg transferred billions of $$ to an LLC he created. This did not generate a charitable deduction. Gifts by the LLC to charities will generate charitable deductions for Mr. Zuckerberg, however. So there’s no magic here. After all, Mr. Zuckerberg could make those gifts himself.

Mr. Zuckerberg did get to say he had transferred billions of $$ for charitable purposes (or some such thing). Mr. Zuckerberg also retained control over the transferred billions of $$ for investment and other purposes, which was better for him than giving to a DAF.

A charitable gift of LLC units may cause tax problems. Why? Because such gifts are ordinarily treated for tax purposes as gifts of partnership interests, and that type of gift can be extraordinarily complex, messy and unfavorable for both the donor and the donee.

The details here are potentially immense … too great to discuss in what remains of this blog. We’ll look at the salient details next time.
 

By Jon Tidd, J.D.
 

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Jon Dickinson: No Pyrrhic Victory for Donors And DAFs

Notwithstanding the possible disruption to the world of donor advised funds from a potential trial in Fairbairn v. Fidelity Charitable Fund,1 a recently decided tax court case affirmed the longstanding rules governing gifts of appreciated stock to donor advised funds.

In Jon Dickinson, Et Ux (2020) TC Memo 2020-18, the Dickinsons donated shares of their business to a charitable gift fund. The IRS argued, despite decades of unsuccessful litigation, that the economic substance of the gift of the closely held stock followed by a redemption is in effect a taxable stock sale and gift of the proceeds. The tax court ruled for the Dickinson respecting the form of the transaction with written records confirming the donee’s undisputed ownership prior to its subsequent sale.

This result is consistent with a long line of precedent from case law, revenue rulings and other Treasury pronouncements.

In the Palmer case,2 the court held where a shareholder transfers stock to a charity and the stock is then redeemed, the form of the transaction will be respected (i.e., the transaction will be treated as a gift of stock followed by a redemption of the stock, rather than as a distribution of cash to the shareholder followed by a gift of the cash) so long as the charity is legally bound and can be compelled by the corporation to surrender the donated shares for redemption.2 The tax court in Rauenhorst says that IRS is bound to follow Rev Rul 78-197 and may not litigate against the position it took in that ruling.3

Other cases acknowledge the reality of discussions between donor and donee which do not trigger a deemed sale. A line of cases have held that notwithstanding the gift being made with an “understanding” between the contributor and charity, the stock being redeemed did not result in the gift being treated as a cash gift.4 Additionally, the transaction will be treated as a gift of stock, notwithstanding the taxpayer’s inquiry about the charity’s policy regarding the sale of contributed stock before he made the contribution.5

Final Thoughts

Gifts of appreciated securities remain the only deduction available to an individual taxpayer in an amount greater than its original basis. As long as the donor and donee avoid a prearranged sale or a transfer before the contribution, then a deduction will be allowed for the full fair market value. Let’s hope 2021 continues to be another year for the availability of these benefits.

By Professor Chris Woehrle, Chair & Professor of Tax & Estate Planning Department, College for Financial Planning, Centennial, Colorado

 

Sharpe Group will continue to post helpful information for you here on our blog and on our social media sites. If this blog was shared with you and you wish to sign up, you can do so at www.SHARPEnet.com/blog.

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1. See my blog post The Looming Pyrrhic Victory for Contributors and Sponsors of Donor Advised Funds?

2. Palmer, Daniel D., (1974) 62 TC 684 , acq (1974) 1978-2 CB 2, 1974 WL 36301

3. Rauenhorst, Gerald A., (2002) 119 TC 157

4. Grove, Philip (1972) TC Memo 1972-98; Makoff, Richard P. (1967) TC Memo 1967-13

5. DeWitt, Clinton v. US (1974 Ct Cl), 204 Ct Cl 274