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

A CRT Paying Into a Second Trust

Sometimes in charitable gift planning it’s necessary to design a gift plan to meet complex donor objectives.

For example: Donor wants to benefit CHARITY A and also provide an income for his son. The problem is that the son is only 49 years old and is severely disabled with a birth defect.

If Donor is thinking of a six-figure or larger gift, a charitable remainder trust (CRT) may make sense. But the CRT can’t, as a practical matter, pay directly to the son.

Let’s assume the son’s physician doesn’t expect the son to live more than another 20 years. In the real world, this simplifying diagnosis may not exist very often, but it does simplify our planning somewhat.

It leads to the idea of creating a 20-year term-certain CRT that will make its payout to a second trust. The second trust will be fashioned as a special needs trust to provide for the son. Great latitude will be allowed in designing the second trust; and its design will require an expert — perhaps an elder care lawyer steeped in designing special needs trusts.

There are several things to consider here:

  • The second trust will be a taxable trust. The waters here can run fairly deep; and the services of a lawyer who is an expert in taxable trusts may be needed.
  • The CRT can be designed to terminate on the son’s death if the son dies before the end of the 20-year term.
  • The remainder interest in both the CRT and the second trust can be given to CHARITY A.

There’s more to consider in dealing with the situation presented.

We’ll continue with this situation next time.

Click here to read Part II.

by Jon Tidd, Esq

A Real Estate Matter

Lots of individuals have used real estate to make charitable gifts. The question for today is, when is the gift deemed made?

To keep things simple, let’s assume:

  • the real estate is environmentally clean undeveloped land;
  • the donor holds legal title to the land (i.e., the land isn’t held in a corporation, LLC, or other entity);
  • there’s no mortgage or other debt;
  • there is no wetlands problem, no spotted owls, etc.; and
  • the land is readily marketable.

Let’s assume further that the individual holding legal title to the land wants to use it to create a flip unitrust.

Basically, to create the trust, what the donor needs to do is execute a flip unitrust agreement and then deed the real estate to the trustee of the unitrust.

Simple, right? Well, yes, but what if the deed conveying legal title to the trustee is never recorded?

The question becomes, at what point in time is the land transferred into the trust? Transferred for federal income tax purposes. This point in time is when the charitable gift is made.

The answer is, it’s not clear…at least to me. Here’s why. At common law, title to real estate is transferred when the deed is delivered to the grantee (the grantee is the purchaser, the donee, whoever is the intended new title holder). The argument under common law, therefore, is that the transfer of title to the trustee of the flip unitrust occurs when the deed is delivered to the trustee.

The problem with this argument from a federal tax standpoint is that until and unless the deed is recorded, the trustee’s title can be defeated by someone who pays to buy the same land from the same donor if the buyer has no actual knowledge of the prior delivery of the deed to the trustee.

The situation here is a mess. If you get involved in a situation like this, be sure to contact your SHARPE newkirk consultant and competent legal counsel.

by Jon Tidd, Esq

What to Do When the Donor Dies

Planned giving officers must at some point deal with death and the emotional, legal and financial issues that arise when a donor passes away. The March/April 2019 issue of Give & Take features a panel discussion with me and my colleagues, Laura Knitt and John Jensen, on some of the most commonly asked questions we get regarding estate settlement. For more detailed coverage of this issue, here are links to each article from a six-part series I wrote for Give & Take in 2012.

Part One: What to Do When a Donor Dies

Part Two: Memorial Gifts

Part Three: Understanding Estate Administration Rights and Responsibilities of Charitable Beneficiaries

Part Four: Check the Numbers

Part Five: Collecting Gifts From Retirement Plans, Insurance, Pay-on-Death Accounts and Life Income Arrangements

Part Six: Sticky Issues

If you have estate settlement questions you’d us to address on this blog, please email info@SHARPEnet.com with “estate settlement” in the subject line. We may address your concern in a future blog post.

By Aviva Shiff Boedecker, SHARPE newkirk Senior Consultant