We are well into December, Christmas and New Year’s are just around the corner, and we still don’t know if a major tax overhaul is going to happen by the end of the calendar year.

Last week, it seemed more likely than not that Congress would pass a new tax bill. This week … the jury’s still out. On 12/2, the House voted to take the bill passed by the Senate to conference. On 12/6 the Senate appointed their members of the tax reform conference committee. Today, President Trump signed a stopgap spending bill to avoid a government shutdown, buying Congress two more weeks to pass a budget. Now the Senate and House members can attempt to reach agreement on how to reconcile the differences in the two version of the bill.

As always, we’ll stay on top of the tax reform news as it continues to become more complicated. In the meantime, here are some articles that will give you more information on what we’re seeing and expecting.

Important Differences Between the House and Senate Bills Heading Into Conference (Tax Foundation). This is an important read because this details the hurdles facing Congress to the passing of a bill.

McConnell Announces Senate’s Republican Members of the Tax Reform Conference Committee (Senate majority leader Mitch McConnell press release)

Conference Committee Could Still Destroy Tax Reform (The Hill)

by Barlow Mann

This is a gift planning question because it goes to how different individuals make charitable gifts differently.

Most modest gifts and some large gifts are made in cash, which tend to be current, outright gifts. Givers of modest amounts aren’t looking to do anything fancy either in terms of what they give or in terms of how they give, and givers of very large amounts typically find it easiest just to write a check.

Fancy gifts such as gift annuities and CRTs tend to be established by individuals who are comfortable financially but who are not truly wealthy.

An interesting subset of fancy gifts involves multiple gift annuities established by a donor. Most often, these are round-dollar, cash gift transactions of relatively modest amount (5 figures). Individuals who give this way clearly like the gift annuity, clearly like and trust the donee organization and, as often as not, name someone else (e.g., a spouse) to receive the annuity.

People give what they have to give, which is sometimes overlooked by fundraising and administrative executives. The ways people make donations depends as much upon personality and world experience as upon tax and other legal considerations. An example here is the unmarried donor who owns a portfolio of rental houses who wants to put one of the houses into a charitable remainder annuity trust. This donor, who likes knowing what the CRAT is going to pay her, is going to make some planned giving officer earn his or her salary.

Sharpe Group Data Enhancement Service and Gift Planning Matrix^© can help you determine which of your donors is more likely to give in which way. Click here for more information.

By Jon Tidd, Esq

As promised (and mentioned in this blog), the framework for the tax reform proposal by the White House, House Ways and Means Committee, and Senate Committee on Finance, was presented on Wednesday, September 27. Since that announcement, many various media outlets and financial experts have weighed in. In particular, we find this preliminary analysis by the Tax Policy Center at the Urban Institute & Brookings Institution to be interesting. Click here to read it.

Note that we’re still very early in this process as no legislative bill has been created as of 10/5/17. The plan is for the House to draft a bill that will then go to the Senate by the end of October. Then the Senate will add their take and send back to the House to reconcile the differences. It would be very optimistic to expect all of this to happen before Thanksgiving. There are a lot of moving parts to the legislative process.

Sharpe Group will continue to monitor developments and report back in this blog and in our Give & Take publication as plans begin to cement. In the meantime, we encourage fundraisers to put a lot of focus on year-end giving this year as it’s possible that a new tax policy could change charitable giving in the near future.

By Barlow Mann

Click here to view original post, “A Gift Planning Quiz.”

Questions & Answers:

• Q. Donor uses highly appreciated stock to pay a legally enforceable pledge. Why isn’t Donor treated as selling or exchanging the stock so that Donor realizes a capital gain?
  Hint: If an individual pays a debt by transferring appreciated stock to the creditor, the individual is treated as selling or exchanging the stock and does realize gain.
• A. No, Donor doesn’t realize gain. Reason: An enforceable pledge isn’t a debt for federal income tax purposes. This is interesting and important.

• Q. Donor, the CEO of ABC Corporation, a large and publicly traded company, owns some ABC stock that is subject to sale restrictions under S.E.C. Rule 144. Can Donor give this stock to a charity?
• A. Yes, Donor can donate the stock. Rule 144 restricts sales, not gifts, of stock. Note, however, that the donee charity may take the stock subject to the same sale restrictions that apply to Donor.

• Q. The same individual as in #2 owns incentive stock options (ISOs) that allow her to buy ABC shares from ABC at a bargain price. Can she give any of her ISOs to charity?
• A. ISOs, by definition, cannot be transferred.

• Q. Donor owns real estate subject to a mortgage, but Donor is not personally liable on the mortgage debt. If Donor uses the real estate to fund a charitable remainder unitrust, will the funding of the trust be treated as a bargain sale?
• A. Yes, it sure will. For bargain sale purposes, it doesn’t matter that Donor isn’t personally liable on the mortgage debt.

• Q. Donor promises (pledges) to create a $1 million charitable lead annuity trust that will pay $50,000 a year to Charity for 10 years. The annual payments will be used to discharge a previous pledge running from Donor to Charity for which Donor’s name was placed on a room. Will this arrangement violate the self-dealing prohibition? Note: If you get this one right you get an A+ on the quiz.
• A. Yep, using the payout from a lead trust to pay off the donor’s enforceable pledge is self-dealing, according to IRS.

• Q. Extra credit: Donor wants to create a sizable gift annuity at Charity for the express purpose of paying for a table at Charity’s upcoming gala dinner. Any tax problems here?
• A. Yep, sure are. The only things a gift annuity donor may receive in exchange for creating the annuity are [a] the annuity, [b] recognition, and [c] thanks. The benefit of the table, which has economic value, would cause the gift annuity to become both commercial insurance and a registrable security.

If you have any questions about these answers, feel free to put them into the comments section and we’ll respond. Thank you for following this blog.

by Jon Tidd, Esq

Third parties such as the donor’s grandchild, sibling, or housekeeper.

To a large extent, gift planning depends upon the age of the individual to be benefited. For example, if the individual is a newborn grandchild and the goal is to provide future college education funds, the best planning may be to set up a purely non-charitable fund (such as a 529 Plan) for the grandchild and provide entirely separately for charity.

Sure, there are charitable gift plans that can be used to provide for future education, plans such as the college tuition deferred payment gift annuity and the term-of-years flip unitrust, but these can prove tricky and unwieldy in practice. So, a full grasp of the potential risks and pitfalls is advised before presenting such a plan to a potential donor.

If the individual to be benefited is well along in years, the door to employing a panoply of charitable gift plans is typically wide open. Typically. There will be a problem, for example, if the elderly housekeeper is a non-U.S. citizen who doesn’t have a social security number. Lacking an SSN, the housekeeper can’t be provided a reportable income such as a gift annuity.

If the individual to be benefited is incapacitated, due to injury, illness, or some other cause, there can be some real challenges to fashioning a gift plan. For example, consideration may need to be given to whether a trust or gift annuity that provides an income to the individual would disqualify him or her from receiving Medicaid benefits. Planning assistance in this arena is often required from an elder care lawyer. Elder care lawyers usually are specialists, not in charitable gift planning but in planning to provide for incapacitated individuals without disqualifying the incapacitated individual for Medicaid. There are some clever ways charitable gift planners and elder care lawyers can weave together a suitable plan.

This blog merely scratches the surface of a deep topic. When dealing with third-party beneficiaries, be sure to take into account economic considerations due to age, U.S. citizenship status, capacity, Medicaid qualification and elder law issues.

To explore this issue further, consider attending one of our highly rated gift planning seminars by clicking here.

By Jon Tidd, Esq

Last time, we encountered the $14,000 (for 2017) annual gift exclusion, which shields up to $14,000 a year given to any one individual from gift tax. For example, in 2017 Tillie gives each of her six grandchildren a check for $14,000: there is no gift tax; Tillie is allowed six $14,000 annual exclusions.

Now, to put a finer point on the discussion, we need to recognize that there are some limits on allowance of the annual exclusion. The chief one is that the exclusion is allowed only with respect to what are called “present interests.” What is a present interest? It’s a benefit that commences in enjoyment immediately upon the making of the gift.

Example: Tillie sets up a trust (a charitable lead trust) that is to make payments to Charity for 15 years. At the end of the 15-year term, all trust assets are to be distributed equally to Tillie’s six grandchildren (or their survivors). Tillie is deemed, on creation of the trust, to make a gift to each of her grandchildren. Because each gift is of a future interest, not a present interest, no annual exclusion is allowed with respect to the six gifts.

So, what happens? Does Tillie wind up having to pay gift tax? Maybe, maybe not. It all depends on how much of her exemption against gift and estate taxes she has left … and also on how large the gifts are to the grandchildren. The exemption, which is inflation-adjusted each year, is $5.49 million for 2017, or less if Tillie has used part of the exemption in prior years to shield gifts from gift tax. If, for example, the total of gifts to the grandchildren is $1 million, and Tillie has $4.9 million of exemption remaining, Tillie will use up $1 million of her remaining exemption and pay no gift tax.

Please note that to the extent the annual exclusion is allowed, the gift and estate tax exemption is not “consumed” (reduced). So, for example, if Tillie gives $15,000 in checks to each of her six grandchildren in 2017, her exemption is reduced by $6,000 (6 x $1,000), not by $90,000 (6 x $15,000).

Consider attending a Sharpe Group Gift Planning Seminar to hone your gift planning skills. Click here for more information.

by: Jon Tidd

The federal gift tax doesn’t raise much revenue (less than 2% of the total federal revenue). Like the estate tax, it is retained today for political, not revenue-raising, purposes.

It’s a complex and tricky tax. There’s no reason for a gift officer to try to grasp the whole of it; but gift planners do need to know a few things about it.

The most important is that a gift to charity is a gift for federal gift tax purposes. To see what this means, let’s consider a $20,000 charitable gift (stock or cash). The way the gift tax deals with this gift is:

• The first $14,000 of the gift is disregarded for gift tax purposes because of the $14,000 annual gift exclusion (unchanged for 2017).
• The $6,000 balance of the gift is shielded from the gift tax by the unlimited gift tax charitable deduction.
• No gift tax return is required to be filed for this outright, current gift.
• In a sense, the gift tax functions out of sight, in the background, here.

Things quickly get more complicated when we turn to deferred gift arrangements, such as the charitable remainder trust (CRT). The remainder interest given to charity via a CRT is supposed to be reported on a federal gift tax return (Form 709), even though it qualifies for the gift tax charitable deduction.

If individual A sets up a CRT and gives individual B a payout interest in the trust, A is generally regarded as making a gift to B for gift tax purposes. But the waters here can run deep. If B is A’s spouse, the gift may qualify for the gift tax marital deduction, depending on the exact payout arrangement (it will qualify, for example, if B is the only payout recipient).

One big question is whether if A sets up a gift annuity or a CRT to pay just to B, A’s gift to B qualifies for the $14,000 annual gift exclusion. For some complex reasons, this writer doesn’t think so; but others do think so. That’s part of what makes the gift tax complex—differing opinions on key issues.

We’ll consider a few other gift tax matters next time.

by Jon Tidd

Read Pt. 1 of “Partial Interest” Rule by clicking here.

Last time, we developed an analogy to grasp the concept of a partial interest and also learned that a charitable gift of a partial interest is generally not deductible. The analogy was a handful of uncooked spaghetti strands. The handful represents full and complete ownership of some asset (real estate, a painting, etc.). Each strand represents a right to or an interest in the asset.

Here are some examples of partial interest gifts:

• the loan of a painting to a museum (non-deductible)
• rent-free use of office space (non-deductible)
• allowing a hospital to use medical equipment at no cost (non-deductible).

Some partial interest gifts are deductible for federal income tax purposes. They fit within exceptions carved out in the tax law. Here are some common examples:

• gift of the remainder interest in a qualified charitable remainder trust (deductible)
• gift of a remainder interest in a pooled income fund (deductible)
• gift of the payout interest in a qualified charitable lead trust (deductible subject to certain grantor trust requirements)
• gift of a remainder interest, subject to a life estate, in a personal residence or farm (deductible)

Note that these represent exceptions to the general rule of non-deductibility. So, for example, no charitable deduction is allowed for giving to charity a remainder interest in a trust that isn’t a qualified charitable remainder trust. No exception to the general rule of non-deductibility is carved out for such a gift.

Last time, we saw that an important exception to the general rule of non-deductibility is carved out for a gift of a partial interest that is the donor’s entire interest. It turns out there is an exception to this exception, which is that if the donor created the partial interest with the intent of giving it to charity, no charitable deduction will be allowed for the gift. Example: Donor creates a charitable remainder trust, intending to give his or her payout interest in the trust (a partial interest) to charity some time down the road. No charitable deduction will be allowed for the gift made down the road.

We’ve got some more, important work to do with the partial interest rule. We’ll get to it next time.

by: Jon Tidd

The partial interest rule denies a charitable deduction for many different kinds of charitable gifts, including some that are valuable.

The key to understanding this rule is to grasp the concept of a partial interest. An analogy helps. Imagine you’re holding a handful of uncooked spaghetti. This is analogous, for example, to holding legal title to a piece of real estate. Each spaghetti strand represents a right to or interest in the real estate. One strand represents the right to harvest fruit from trees growing on the land. Another strand represents the right to lease the land to a third party. A third strand might represent the right to extract water flowing beneath the surface of the land. And so on.

Let’s suppose the owner of real estate gives to charity the right to harvest fruit on the property. This is a partial interest gift for federal tax purposes. It’s a partial interest as opposed to the owner’s entire interest in the real estate. It’s one strand of spaghetti as opposed to the whole handful of strands.

The tax law generally denies a charitable deduction for a partial interest gift. For example, no charitable deduction would be allowed for giving to charity just the right to harvest fruit on land owned by the donor, even though this right might be quite valuable.

There are some important exceptions to the rule denying deductibility. One of these is that a charitable deduction is allowed for giving to charity a partial interest that is the donor’s entire interest. For example, donor acquired some years ago the right to harvest fruit on property owned by a third party. If this is the donor’s only interest in the property, the donor can get a charitable deduction for giving this interest to charity.

We’ll continue this discussion next time. Click here to read part two.

By Jon Tidd

A bargain sale is the sale of an asset to charity for a price less than the asset’s fair market value (FMV). For example, a donor sells stock or real estate having an FMV of $100,000 to ABC Charity for $60,000 (selling price, or SP). Remember the meanings of “FMV” and “SP.”

This situation is more common than generally recognized. Why? Because a gift annuity funded with stock, for example, is a bargain sale of the stock. The stock is sold to charity for a price equal to the initial present value of the annuity (which is called the “investment in the contract”). It is this amount that is recovered tax-free over the “life expectancy” of the donor/annuity recipient.

In a simple bargain sale, in which the charity simply pays the donor an up-front lump sum, there are two tax consequences: [1] The donor is deemed to make a charitable gift equal in amount to FMV – SP. [2] The donor realizes a capital gain if the donor’s basis in the asset (B) is less than FMV; that is, if the asset is appreciated, which is typically the case.

The realized capital gain is equal in amount to SP – B(SP/FMV). So, if the bargain sale consists of a $100,000 asset having a cost basis of $40,000 that is sold to charity for $60,000, the donor-seller realizes a gain of $60,000 – $40,000($60,000/$100,000), which is $60,000 – $24,000, or $26,000. The donor-seller is also deemed to make a charitable gift equal in amount to $100,000(FMV) – $60,000(SP), or $40,000.

Bargain sales of the sort just illustrated usually make most sense when the asset in question is an asset the charity really wants for carrying out its mission.

by Jon Tidd