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