What Can a Charity Do About Bad Legal Advice Given to a Donor?

by Jon Tidd

If the gift is still in the planning stage, the situation is salvageable. What usually works best is to arrange for the charity’s planned gift attorney to talk one on one with the donor’s attorney, so that the donor’s attorney is not embarrassed in front of his or her client. Attorneys tend to very much like dealing with other attorneys, so this approach can work well.

But what if the gift arrangement was completed some time ago and the bad advice just now comes to light? Here there are two possibilities: [1] the error can be “erased;” or [2] the error can’t be erased, meaning someone’s going to take a hit.

Example [1]: Husband tells Lawyer that he wants to create a charitable remainder trust under his will for the benefit of Wife and Charity. Lawyer advises adding Husband’s elderly Brother as a secondary payout recipient. Husband says, sure, why not? Husband subsequently dies, leaving a large amount to the trust.  Whoops. It turns out that adding Brother to the trust knocks out the estate tax marital deduction for Wife’s interest in the trust (that’s the tax law). A bad deal. But the bad advice here can be erased and the marital deduction preserved. How? By Brother’s disclaiming his interest in the trust with 9 months of Husband’s death (again, just the tax law).

Example [2]: Same facts, except no one knows to tell Brother to disclaim, so no timely disclaimer is made. IRS asserts a multi-million-dollar tax deficiency against Husband’s estate, as it throws out the estate’s claim of a marital deduction with respect to the trust. Bad deal. IRS is not going to be denied. If need be, it can take the taxes owed out of the trust. That would cause the trust to be disqualified as a charitable remainder trust . . . a very, very bad deal.

These two examples are based on an actual situation to which the IRS issued a devastating private letter ruling.

Bad advice is commonplace in the gift planning arena, and it’s seldom obvious to the non-expert eye. If you think bad advice may have been given in your gift planning arena, appropriate legal counsel may be able to help you navigate.

When Should a Charity Sue?

By Jon Tidd


There’s an old refrain among development officers: “We’d never sue over a gift.” Which suggests not suing is simply a matter of policy.

In some states in some situations, however, the law may require a charity to pursue legal recourse. For example, Donor pledges a large amount to Charity for the construction of a new building. Donor and Charity agree the building shall be named for Donor. Work begins on the building. Donor makes a payment on his pledge. Then, unexpectedly, Donor dies. Donor’s son, who is named Donor’s executor, subsequently renounces the pledge and refuses to pay it, even though Donor’s estate is fully capable of paying the pledge balance.

In this situation, the state attorney general may require the charity to seek payment of the pledge, in court, if necessary. The attorney general’s view may be that [a] the pledge was enforceable and [b] the charity cannot simply give up its rights under the pledge.

The example just given is clear-cut. Other situations are murky. For example, some years ago, Donor set up a charitable remainder trust intending that the trust would provide a sizable benefit to her college. Donor died recently, and the college has just learned the trust, which had a fairly high payout rate, is basically depleted. The college also has learned that the trustee made some “questionable” investment decisions adversely affecting the trust.

In this situation, if the college cannot show with crystal clarity misbehavior on the trustee’s part, the college may have no legal recourse against the trustee, and the state attorney general may have no interest in the matter.

If your organization is facing some such situations, before it leaves money on the table, contact appropriate counsel.

Household Wealth Sets Record!

By Barlow Mann

U.S. Household wealth rose to an all-time record level of $86.8 trillion during the fourth quarter of 2015. The increase was driven by the rising value of corporate stock and real estate, according to the Federal Reserve.

03-21-16 Household Wealth Record Table









In spite of economic volatility since the beginning of 2016 both real estate and stock values have increased dramatically from the lows experienced in 2008 and 2009 during the Great Recession and Financial Crisis. Higher income tax and capital gains tax rates coupled with substantial increases in the value of both real estate and stocks create a favorable environment for gift planners as record numbers of affluent donors consider their gift, estate and financial plans for retirement.

Will the U.S. See Another Recession in 2016?

Slow Business Growth

By Barlow Mann

The likelihood of another recession is real, but the concerns may be overblown (see this CNN Money article from January 26, 2016). After the Great Recession (4th quarter 2007- spring 2009) a recovery began. It has been relatively weak and propped up by the Fed’s interest rate policy, which changed in December. Even though China and Europe may slip into a recession, the Federal Reserve is still predicting slow growth of the US GDP in the 2% range. A recession is usually described as two consecutive quarters of falling or near zero growth in the GDP. The economists usually do not announce a recession until after this has happened and often it is over when it is announced.

As it stands now the recovery since 2009 has been so tepid that it has felt almost like a recession anyway. If the housing market and a few other areas are relatively healthy a formal recession may be avoided, but few would feel that “Happy Times are Here Again” for the economy.

As far as philanthropy goes, slow growth is better than no growth, and with modest wage improvements and low unemployment, the broad giving base should be steady. At the highest end, wealth reached record levels last year, but some have experienced adjustments due to the falling stock market; others are doing just fine, but uncertainty and fear remains, which could put a damper on giving.

Overall we would expect total giving in America to be approximately 2% of GDP, so overall giving could be relatively flat for 2016.

How to Modify an Endowment: A Real-World Case


About 10 years ago, Donor set up a 10-year term charitable remainder annuity trust (CRAT) that was to make payments to Donor’s son.

The payout period of the trust has just run its course, and the CRAT is about to distribute its assets to Charity.

The trust agreement provides that the assets distributed to Charity are to be held as an endowment for Purpose X.

Donor’s son now calls Charity’s planned giving director and says he wants the assets to be held as an endowment for Purpose Y. Son represents that Donor is agreeable to this change of purpose.


Given that the purpose is embedded in the CRAT agreement, can the purpose now be changed?


Yes. Endowments are governed by UPMIFA, which is discussed in a prior blog post. UPMIFA provides that the terms of an endowment can be changed by written agreement between the donor and the charity. The donor, of course, has to be living, which is the case here, so there’s no problem.

Click here to download our free white paper “Everything You  Need to Know About UPMIFA” for more information.

Endowment agreements can present various questions. For answers, contact a Sharpe Group representative.

by Jon Tidd


Some Gift Annuity Questions – Part 3

Here we look at some gift annuity situations that went awry. Beginning with an important case that involved a flawed gift receipt.

Case # 1: Donor transfers $25,000 to Charity to establish a gift annuity. Charity prepares a gift annuity agreement, which Donor signs, and subsequently begins making annuity payments to Donor. In due course, Charity sends Donor a gift receipt. The receipt states that:

  • Donor gave $25,000 to Charity on such-and-such a date for a charitable gift annuity, the charitable deduction for which was so many dollars and cents; and that
  • Charity provided no goods or services in consideration of Donor’s gift.

About two years later, IRS in the course of auditing Donor examines the gift annuity transaction and throws out Donor’s claim of a federal income tax charitable deduction for Donor’s gift.

Why? Because Donor didn’t have a satisfactory gift receipt.

Why not? Because Charity’s gift receipt stated Donor received no goods or services in consideration of his gift, which was incorrect. Donor did receive goods or services in the form of the annuity.


Double ouch.

But that’s the way IRS plays the game.

Case #2: This one involves a happier outcome. Donor, on a Friday, sends a certificate for highly appreciated stock together with a stock power to Charity to establish a gift annuity for Donor and his wife. Charity receives the stock on Monday. Donor unfortunately died over the weekend. In Charity’s and Donor’s state, a very particular form of gift annuity agreement is required to be signed by the annuity donor. That couldn’t happen here, so Donor’s attempt to establish a gift annuity failed.

Here’s the happy outcome: Charity returned the stock to Donor’s estate. The stock then passed to Donor’s wife, who took a stepped-up basis in the stock, and Donor’s wife used the stock to set up her own one-life annuity.

A happy ending.

Gift annuities and gift annuity programs can involve all kinds of issues. In the gift annuity arena, close enough isn’t good enough. Gift annuity programs need to be airtight from a tax and regulatory standpoint. For more information, contact a Sharpe Group representative.

by Jon Tidd

Some Gift Annuity Questions — Part 2

Gift annuities are simple except when they’re not. Some more questions:

Can a commercial annuity be swapped tax-free for a charitable gift annuity? Some donors and advisers think so, but the answer is no. The question arises because there’s a tax-free “1035 exchange,” which allows one commercial annuity to be swapped tax-free for another commercial annuity. But a 1035 exchange isn’t possible for a gift annuity because a gift annuity is completely different from a commercial annuity. The two aren’t “like-kind.”

Can a gift annuity be established for a term of years? No. A gift annuity must be payable for either one life or two lives (to avoid intolerable tax problems). But in a 1984 private letter ruling, the IRS essentially gave the green light to gift annuity that was payable for 10 years or life, whichever was shorter (Letter Ruling 8429075). Note, however, that one may not rely on another’s private letter ruling.

If Charity in State A issues a gift annuity to Donor residing in State B, can State B impose its charitable gift annuity regulatory laws on the transaction? Clearly yes if Charity has a “presence” in or is “doing business” in State B. For example, if Charity is sending written gift annuity promotional material into State B, it is subject to State B’s gift annuity regulatory laws. The issue here is one of Constitutional law; and there are a number of U.S. Supreme Court decisions that support the ability of State B to impose its laws on Charity in the example presented.

There is no end to gift annuity questions. Next time, we’ll look at some real-world examples of gift annuities that went wrong and why they went wrong.

by Jon Tidd

Some Gift Annuity Questions — Part 1

Gift annuities are simple, right? Right, except when certain questions arise. Questions such as:

  1. Is it all right to use a gift annuity transaction to satisfy an enforceable pledge previously made? – The IRS hasn’t said. Caution is warranted. Why? Because the only consideration a charity may furnish to the donor in a gift annuity transaction is the annuity. No gala dinner table in addition, for example. Naming a building or a scholarship fund is OK, however. IRS has said naming has no economic value for tax purposes.
  1. What amount is used to create a gift annuity when the annuity is established with a credit card? – The amount charged to the card (say, $10,000)? Or the amount the donee organization receives net of the fee (say, $9,750)? The IRS hasn’t said. The amount used to create the annuity is important. It determines the donor’s charitable deduction and also how the annuity payments are taxed. It’s possible, by the way, to calculate how much must be charged to the card so that the donee organization receives $10,000 net of the fee. By way of example, if the fee is 2.5% of the amount charged, and the amount charged is X, the equation to find X is:  X – .025X = $10,000, which means X = $10,257, rounded to the next nearest dollar.
  1. Is the tax-free portion of a gift annuity payment tax-free income? – No, which is good. It’s a tax-free return of investment. If it were tax-free income, it could adversely affect the taxation of social security . . . something that would be not good.

More gift annuity questions next time. Meanwhile, if you think your organization’s gift annuity program needs a refresh, contact a Sharpe Group representative.

by Jon Tidd

A Prescription for Gift Receipts

prescription(When Is a Gift Complete for Tax Purposes? Part II)

The prescription is simple in principle, sometimes not so simple in practice:

Stick to the facts.

That’s it. It applies to all gift situations, and no one (especially a strong-willed donor) can argue rationally against it. Let’s look at some gift situations and see how to apply this prescription.

SITUATION 1: An organization receives in an envelope on January 4, a Monday, a $500 check dated December 31, a Thursday. The envelope is postmarked January 2, a Saturday.

The tax law provides a gift made by a check deposited in the mail is complete on the date of mailing, not the postmark date, provided the check clears in due course. What is the date of mailing here? It’s impossible to tell from the facts. The check could have been deposited in the mail on December 31 (after hours), January 1 or January 2.

Not to worry; simply state the basic facts on the gift receipt. What are the basic facts? They are: [1] check was received by USPS on January 4; [2] check amount is $500; [3] check is dated December 31; [4] envelope containing check is postmarked January 2. Those are the facts. (Also state, by the way, whether the donor received any goods or services in consideration of her gift.) Leave it to the donor to claim when the gift was made on her tax return. If the donor insists the gift was made in December, it’s OK to write on the gift receipt, “. . . which you have stated you mailed in December. . . .”

SITUATION 2:  An organization receives in its account on January 4, a Monday, 1,000 shares of MMM stock. The organization is able to verify the stock was wired out of the donor’s account on December 31.

We don’t know the date of gift for tax purposes; the law is unclear. But we know these facts: [1] 1,000 shares of MMM were received on January 4; [2] the shares were wired out of the donor’s account on December 31. Although the gift receipt here need not state a value for the stock, the mean values of a MMM share on 12/31 and 1/4 are facts. It’s OK, but unnecessary, to state those values on the gift receipt.

Gift receipting is important. If you think your organization’s gift receipting practice is in need of review, contact a Sharpe Group representative. It’s also good to have a clear gift acceptance policy in place. Click here to read more about gift acceptance policies.

By Jon Tidd

The President Has Signed the Tax Extenders Bill

12/18/15, 5:33pm EST

We have received word that the President has signed into law the funding and tax deal that extends the charitable IRA rollover permanently. For details, click here.

Below is some suggested donor language:

Special tax-free IRA gifts

For those aged 70½ or older, it is once again possible to make tax-favored charitable gifts from traditional and Roth IRA accounts.

On December 18, 2015 Congress passed legislation that retroactively extended the charitable IRA rollover for 2015 and made this provision permanent for future years. A total of up to $100,000 can be transferred directly from traditional or Roth IRAs to one or more qualified charities such as [CHARITY NAME] free from federal income tax each year. There may also be state income tax savings. Amounts given in this way count toward required IRA minimum withdrawal amounts for the year of the gift.

To make such gifts, it is important to not withdraw funds prior to a gift, but have the gift amount distributed directly from an IRA to one or more qualified charities. For those with check writing privileges on their accounts, this may be the most efficient way to make gifts directly from an IRA.

Check with us, your IRA administrator or your tax advisor for more information.