Bryant - Course 6. Estate Planning. 10. Charitable Gifting

Question 1

Module Introduction

While Anne Scheiber was alive, no one paid much attention to her. After all, she was just another woman living alone in a studio apartment in Manhattan. She led a solitary existence. And the one thing she certainly did not believe in was spending extravagantly. She was not one to take off on vacations or travel. Eating out and shopping for clothes were luxuries she would never indulge in. In fact, neighbors claimed that when they saw her outside her apartment, which was rare, she always wore the same black coat and hat.

It wasn’t until her death in 1995, at 101 years of age, that she received much notice. In her will, Anne Scheiber revealed that she had a $22 million fortune, almost all of which she bequeathed to Yeshiva University, a small New York school. This gift came as a huge surprise, not only because Scheiber had seemed poor for most of her life but also because she hadn’t attended Yeshiva and, in fact, was totally unknown at the university.

Now that is “charitable gifting” at its best!

Answer 1

The Charitable Gifting module, which should take approximately three and a half hours to complete, will describe the most common reasons individuals gift property to charities and the important factors which financial planners should analyze before recommending that a client make a gift to a charity.

Upon completion of this module, you should be able to:
* List the most common reasons for gifting property to qualified charities,
* Recall important factors that the financial planner needs to analyze before recommending that the client make a gift to a charity,
* Recall the general rules for charitable contributions for different types of properties gifted,
* Identify ordinary income property and long-term capital gain property,
* Distinguish between use-related and use-unrelated tangible personal property,
* Determine the maximum amount of a charitable contribution based upon the identity of the donee, and
* Contrast the different requirements for CRAT and CRUT that the donor must comply with.

Question 2

Module Overview

Once a donor has determined that he or she can afford to make a gift, the next question to consider is, “What property is the most appropriate to gift to a qualified charity?” From an income tax perspective, the identity of the donee, whether it is a public or private charity, and the type of property gifted will affect the maximum income tax deduction that may be taken once the gift has been made.

Answer 2

There are various charitable transfer techniques. These include outright gifts; split-interest gifts, such as charitable remainder trusts and charitable lead trusts; charitable gift annuities; pooled income funds; private foundations; and donor-advised funds.

To ensure that you have an understanding of charitable gifting, the following lessons will be covered in this module:
* Charitable Giving and the Estate Plan
* Assets Appropriate for Gifting to Charity
* Types of Charitable Gifts

Question 3

Section 1 - Charitable Gifting and the Estate Plan

When considering charitable gifts within the context of an estate plan, the donor can transfer these assets to charity either during their lifetime or after death. The tax objectives which charitable gifting satisfy include the following:
* If made during the lifetime, reducing current income tax liability
* If made after death, reducing the size of the gross estate
* Reducing the size of the taxable estate, thereby reducing the estate tax.

Therefore, carefully examining both types of techniques can maximize tax savings in all three areas.

To ensure that you have an understanding of Charitable Gifting Strategies, the following topics will be covered in this lesson:
* Reasons for Gifting
* Gifting Factors

Answer 3

Upon completion of this lesson, you should be able to:
* List the most common reasons for gifting property to qualified charities, and
* Recall important factors that the financial planner needs to analyze before recommending that the client make a gift to a charity.

Practitioner Advice: Although charitable gifting can accomplish a number of attractive tax advantages, you must be certain that your client is not only charitably inclined but can afford to make the gift. It does not matter how attractive the tax advantages associated with charitable gifts are if your client has no desire to have a charity share in his or her estate.

Question 4

What are the most common reasons for gifting property to a qualified charity?

Answer 4

The most common reasons for gifting or bequeathing property to a qualified charity are:
Satisfaction of the donor,
* Reduction of the size of the taxable estate,
* Reduction of income tax liability, and
* Reduction of gift tax liability.

Question 5

Describe donor Satisfaction

Answer 5

A major reason for gifting or bequeathing property by a donor to a qualified charity is donor satisfaction.

When the donor gifts property to a charity during their lifetime, as with any gift, the donor gets the satisfaction of seeing the charity enjoy the property. Satisfaction may also be gained when, in the name of the donor, others fulfill his or her donative intentions, either while he or she is alive or after his or her death.

One could, for example, bequeath money to one’s church to purchase a new organ.

Question 6

Describe how gifting Reduces the Size of the Taxable Estate

Answer 6

Lifetime gifts of property, especially appreciating property, which is gifted to a qualified charity, remove not only the gifted asset but also the future appreciation on this asset, from the donor’s estate.
* This results in allowing the donor to exercise some control over the value of his or her estate.

Question 7

Describe how gifting Reduces the Income Tax Liability

Answer 7

Lifetime gifts of property can also reduce the donor’s income tax liability. When the donor makes a gift to a qualified charity, such a gift is allowed as a charitable deduction for income tax purposes.

Therefore, depending on the type of property gifted and the type of charity to which the gift has been made, the value of the charitable income tax deduction may be as high as 60% of the donor’s adjusted gross income. The ability to take this type of income tax deduction may be a significant reason for making lifetime gifts to the charity.

Question 8

Describe how gifting Reduces the Gift Tax Liability

Answer 8

A gift to a charity also qualifies for an unlimited charitable gift tax deduction. This means that no gift tax liability will be due on any transfer of assets made to a qualified charity during the donor’s lifetime.
* Remember that this deduction is in addition to any annual exclusion gifts the donor may make and does not reduce the donor’s $12,920,000 (2023) lifetime gift tax exclusion.

Question 9

What are Factors to consider prior to Gifting?

Answer 9

Before engaging in a charitable gifting program, the financial planner needs to analyze the client’s financial position to determine whether the donor can afford a gift to a charity.

Whether the donor can afford to make a gift to a charity depends on several factors. Ideally, during the data-gathering process, the financial planner will gather most of the data needed to assist in making this determination. Once the planner has analyzed this information, a discussion should be held with the client on the feasibility of making lifetime or testamentary gifts to charity.

A discussion of the important factors a financial planner needs to analyze before recommending that the client make a gift to charity follows.
* Donor Needs - What are the lifetime financial needs of the donor, the donor’s spouse or the donor’s beneficiaries?
* Donor Projected Needs - What are the projected needs of the donor and donor’s spouse for retirement purposes?
* Availability of Property to Gift - Does the donor have property that he or she can afford to gift or bequeath and still adequately provide for the donor’s spouse and other family members?

Keep in mind, in some states a donor cannot make an unlimited gift or bequest to a charity if a spouse and other family members survive the donor. Some states have mortmain statutes that are intended to protect family members from having the decedent bequeath a substantial amount of estate assets to charity. Any portion of a charitable bequest that generally exceeds 25% of the estate is set aside for the heirs. Another example of this is the Elective Share statutes. Therefore, if a donor wishes to make a charitable transfer, the donor should work with his or her attorney to ensure that all estate heirs have been appropriately considered.

• Reduction in Tax - Does the donor need a reduction in estate tax liability?
  To reduce the donor’s gross estate, lifetime gifts are made. However, if the donor needs lifetime access to assets, a charitable bequest may be made at death. Such a bequest would qualify for the unlimited charitable estate tax deduction. The result would be a smaller taxable estate and lower estate tax liability.
• Sufficient Liquidity - Does the donor have sufficient liquidity in his or her estate so that all taxes and administrative expenses can be paid?

If an estate is illiquid, and assets are gifted during lifetime, then the value of the estate is reduced and so will the liquidity needs. If the assets are gifted after death, the amount of expenses will also be reduced.
If there is an estate liquidity problem, ensure sufficient liquidity exists before transferring assets to charities.

• Special Reasons - The donor may have some special personal reasons to gift property to charity. For example, does the donor wish to leave property to a special organization for research or educational purposes?

Question 10

From a tax perspective, when would the donor be better off not gifting the property?

Answer 10

Not Gifting
From a tax perspective, would the donor be better off by not gifting the property?

For example, assuming that the property being considered for gifting has depreciated so that its present fair market value (FMV) is less than the donor’s basis in the property, the donor might be wise to keep the property, sell it at a loss, and take the capital losses on his or her individual income tax return.
* This would be more advantageous for the donor than making a completed gift of the property to the charity.

Giving the property to the charity would not enable the donor to take a capital loss, whereas a sale of the property at a loss would allow the donor this income tax advantage. In addition, the donor could take the proceeds of the sale and gift them to the charity.
* This would enable the donor to take the charitable deduction and the capital loss in the same tax year.

In addition to these factors, there may be other factors that need to be considered which could affect the appropriateness of making a gift.

Question 11

Section 1 - Charitable Gifting and the Estate Plan Summary

The most common reasons individuals gift property to charities are satisfaction, reduction of size of gross estate, reducing estate tax, reduction of income tax liability, and reduction of gift tax liability. Some donors may wish to gift property for special purposes such as medical research or educational purposes.

The important factors that the financial planner needs to analyze before recommending that the client make a gift to charity are: the donor’s financial position and projected financial needs.

In this lesson, we have covered the following:
* Common reasons why individuals gift property to charities are:
* Satisfaction of the donor seeing the charity enjoy the property, or of others fulfilling the donative intentions of the donor either while he or she is alive or after his or her death.
* The estate tax liability of the donor is reduced if lifetime gifts are made. The gifted property is removed from the gross estate and reduces the size of the taxable estate.
* The income tax liability of the donor is reduced if lifetime gifts of property are made to a charity.
* The gift tax liability can be avoided because of the unlimited gift tax charitable deduction for gifts made to a qualified charity.
* The donor’s donative intent to gift property for special purposes such as medical research or educational purposes.

Answer 11

The gifting factors that the financial planner needs to analyze before recommending that the client make a gift to a charity are:
* If making a gift to some charity would cause financial hardship to the donor or the donor’s family, it would be inappropriate for the donor.
* If a gift of property or cash prevents the donor and donor’s spouse from living comfortably in retirement, making it may be inappropriate.
* If a donor wishes to make a charitable gift, the donor should first adequately provide for the donor and other family members.
* If the donor does need an income tax reduction, the donor may wish to consider a gift of property to a qualified charity.
* If the projected amount of estate tax liability is high, the donor may wish to make a lifetime gift of property to a charity in order to reduce the size of the donor’s gross estate. Alternatively, if a charitable bequest is made, the unlimited charitable deduction for estate tax purposes allows the client to use the property during lifetime, but reduces the value of the estate after death.
* If the donor has a specific reason for making a gift to a charity (for example, to a church or synagogue), then the donor may wish to consider a gift to one of these charitable groups.
* From a tax perspective, if the donor is better off by not gifting the property, then he or she should not gift it to any charity.

Question 12

Doug and Lara want to gift property during their lifetime to reduce their taxable estates. They also want to avoid gift tax liability by not using any of their lifetime gift tax exclusion. They consult their financial advisor, who recommends making a split gift. Do you think the financial advisor made the right recommendation?
* Yes
* No

Answer 12

No
* Doug and Lara may elect to split a gift in order to reduce their gift tax liability.
* However, the split gift allows each of the spouses to use their own annual exclusions and lifetime gift tax exemptions.
* If these clients are interested in making lifetime gifts without using the lifetime gift tax exclusion, then Doug and Lara should consider making lifetime gifts to a qualified charity. As a result of the unlimited charitable gift tax deduction, an unlimited amount of assets may be gifted to a charity without the payment of any gift tax liability.

Question 13

Gifting assets to charity with significant appreciation potential allows for the reduction of which of the following? (Select all that apply)
* Estate tax liability
* Gift tax liability
* Income tax liability
* General tax liability

Answer 13

Estate tax liability
Income tax liability
* Lifetime gifts to a qualified charity of appreciating property remove all future appreciation of the property from the donor’s gross estate.
* As a result, the donor has the ability to exercise some control over the amount of the estate tax liability.
* Additionally, lifetime gifts of assets, whether or not appreciating assets, may qualify for the charitable income tax deduction, which allows the donor to reduce his income tax liability.

Question 14

Nicolas is thinking of gifting his old family home to a qualified charity. The family home has actually depreciated in value. Its present FMV is less than what Nicolas had paid for the home. As his financial planner, Nicolas is asking you to outline planning strategies, including gifting, which should be considered. Given these limited facts, which strategies would not apply?
* Keep the property
* Take the capital losses on his individual income tax return.
* Sell the property at a loss.
* Make a completed gift of the property to the charity.
* Take the proceeds of the sale and gift them to charity.

Answer 14

Keep the property

• If managing taxes is a concern, it may be better for Nicolas to keep the property. As his old family home (the property being considered for gifting) has depreciated in value so that its present FMV is less than his basis in the property, he might be wise to keep the property.

Question 15

Section 2 - Assets Appropriate for Gifting to Charity

Once a donor has determined that he or she can afford to make a gift, the next question that must be asked is, What property is the most appropriate to gift to a qualified charity?

The answer to this question depends on a number of factors, including the type of property owned by the donor, whether the property produces income or is non-income producing, whether the donee is a public charity or a private charity, and the donor’s adjusted gross income (AGI).

To ensure that you have a thorough understanding of assets appropriate for charitable giving, the following topics will be covered in this lesson:
* Charitable Contribution Rules
* Type of Charity

Answer 15

Upon completion of this lesson, you should be able to:
* Recall the general rules for charitable contributions of different types of properties,
* Define long-term capital gain property,
* Identify ordinary income property and long-term capital gain property,
* Identify tangible personal property,
* Distinguish between use-related and use-unrelated tangible personal property,
* Define future interest gifts,
* Determine the maximum amount of a charitable contribution based on the identity of the donee, and
* Identify qualified public charities.

Question 16

Describe Charitable Contribution Rules

Answer 16

Generally, the type of property, which is gifted to a qualified charity, is one factor used to determine the value of the charitable income tax deduction.

The general rules for the income tax deductibility of charitable contributions are discussed in the following sections.

Question 17

Gifts of Cash
What is the maximum income tax deduction that may be taken?

Answer 17

To deduct charitable contributions made by cash or checks, no matter how small, the contributions must be substantiated by receipts from the charity, or from bank records, to be eligible for the deduction. The charity’s receipt should include:
* Name of the organization.
* Amount of cash contribution.
* Description of any non-cash contribution.
* A statement that no goods or services were provided by the organization in return for the contribution, if applicable.
* Description and good faith estimate of the value of goods or services. Deductions for clothing and household goods can only be taken if the items are in “good condition” or better. For a donated item that exceeds $5,000, a qualified appraisal must be included with the donor’s income tax return.

If the donor is making a gift of cash to a public charity, the maximum income tax deduction that may be taken is 60% of the donor’s AGI.

Question 18

Gifts of Ordinary Income Property

What is the deduction limited to?

Answer 18

Ordinary income property is an asset that would have generated ordinary income (rather than capital gain) on the date of contribution had it been sold at its fair market value rather than contributed.

Ordinary income property includes:
* Capital assets held less than the requisite long-term period at the time contributed,
* Section 306 stock (that is, stock acquired in a nontaxable corporate transaction that is treated as ordinary income if sold),
* Works of art, books, letters, and musical compositions, but only if given by the person who created or prepared them or for whom they were prepared, and
* A taxpayer’s stock in trade and inventory (which would result in ordinary income if sold).

Ordinary income property given to a public charity by an individual is deductible subject to 50% of the contribution base ceiling.
* However, a taxpayer’s deduction is generally limited to the basis (cost) for the property.

Question 19

Ordinary Income Property Deduction Example:

If a famous painter donated one of his paintings, worth $25,000, to an art museum, his deduction would be limited to the cost of producing the painting. This means that only the cost for canvas, paint, etc., would be deductible. No deduction would be allowed for the value of his time and talent.

Question 20

List Charitable Contribution Deductions Limitations on Cash, LTCGs (FMV and Basis), and Ordinary Income Property to Public and Private Charities (Table)

Answer 20

Types of Assets
Cash Gifts
Public Charity 60% of AGI
Private Foundation 30% of AGI

LTCGs W/FMV Election
Public Charity 30% of AGI
Private Foundation 20% of AGI

LTCGs w/Basis Election
Public Charity 50% of AGI
Private Foundation 30% of AGI

Ordinary Income Property (STCGs, Art, Inventory)
Public Charity 50% of AGI
Private Foundation 30% of AGI

Question 21

Describe Gift of Life Insurance

Answer 21

A gift of a life insurance policy to charity is valued according to the same gift tax rules as any other gift of property (i.e., the fair market value at the date of the gift).

Fair Market Value: A donor who is the owner and the insured may deduct the policy’s fair market value as a charitable deduction on his or her income tax return, limited to 30% of AGI for a qualified public charity. The fair market value is the replacement cost of the policy.
* For a premium-paying policy, the replacement cost is the interpolated terminal reserve plus any unearned premium at the date of the gift.
* For a single premium or paid-up policy, the replacement cost is based on the single premium the same insurer would charge for a policy of the same amount at the insured’s attained age (increased by dividend credits and reduced by outstanding loans.)
* The replacement cost of a newly issued policy is the gross premium paid by the insured.

When life insurance is sold, any gain is taxed at ordinary income rates, therefore, a gift of life insurance is a gift of ordinary income property.
* As such, the charitable deduction is equal to the LESSER of the donor’s adjusted basis or the fair market value of the life insurance policy.
* If the policy’s fair market value exceeds the policyholder’s net premium payments, the charitable deduction is limited to the donor’s basis, which is the net premium payments made.
* The gift’s value is not the insurance policy’s face amount.

Question 22

Long-term Capital Gain Property

Answer 22

Generally, a long-term capital gain asset is capital gain property that has been held for more than one year.

If the donor makes a gift of property that is a long-term capital gain asset, the value of the gift to the charity is the FMV of the asset on the date of the gift.
* However, for income tax deduction purposes, the value of the charitable income tax deduction for a long-term capital asset is 30% of the donor’s AGI.

Therefore, the donor will be able to carry forward the remaining $12,000 deduction, applying it according to the same 30% AGI rules, for the next 5 years. In other words, the 5-year carry-forward allows the donor to use the unused portion of the charitable deduction in each of the next 5 tax years until the deduction has been fully utilized.

There is an opportunity for the donor to make an election to have the 50% AGI rule apply to gifts of property, which are long-term capital assets.
* This election may be made if the donor is willing to reduce the value of the charitable gift by the gain he or she has in the property.
* In other words, willing to reduce the value of the gift to the donor’s basis in the asset.

Question 23

Basis Reduction When Donating LTCG Assets Example:

Assume the donor has corporate stock, satisfying the long-term capital gains rules, which has a basis of $900 and an FMV on the date of the gift of $950. The donor may receive the benefit of the 50% AGI rule if the value of the charitable gift is reduced by the gain in the asset, in other words, by $50.
* Therefore, in exchange for a higher deduction limit, a small amount of the value is lost.
* It is strongly recommended that a careful analysis of the client’s income tax situation be made prior to making this election.

Question 24

Describe Tangible Personal Property Gifts

Answer 24

If the gift is a gift of tangible personal property that may be sold at a capital gain, for charitable income tax deduction purposes it will be treated as long-term capital gain property.

Examples of such tangible personal property include:
* Jewelry
* Automobiles
* Artworks and stamp collections, but only if created or produced by someone other than the grantor
* Books (all of these tangibles would be considered capital property if created by someone else)

When dealing with this type of asset, it is important to determine whether the asset gifted to the charity is use or non-use related to the exempt purposes of the charitable organization.

The general rule regarding donations of use-related property to a qualified public charity is that the donor may utilize the FMV of the use-related property, subject to the 30% AGI rule, for charitable income tax deduction purposes, as well as the 5-year carry-forward rule. Or, the donor can elect to use the 50% of AGI limits by using the basis.

Question 25

Use-Related Property Example:

The contribution of a stamp collection to an educational institution can be considered use-related. Suppose the stamp collection is placed in the donee organization’s library for display and studied by students. In that case, the use of the donated property is related to the educational purposes constituting the basis of the charitable organization’s tax exemption. Therefore, the donor could elect either the FMV or the basis of the donated property.

Answer 25

If the donated property is use-unrelated, meaning that the asset is unrelated to the function of the charity, this poduces a deduction only for the lesser of the cost basis or fair market value.

Question 26

Use-Unrelated Property Example:

If the donated property is a gift of jewelry to a religious organization, the donor’s charitable deduction is limited to the LOWER of the FMV or basis in the asset, subject to either the 50% of AGI or 30% of AGI thresholds, depending on which one was selected.

Answer 26

If the donated property is use-unrelated, meaning that the asset is unrelated to the function of the charity, this poduces a deduction only for the lesser of the cost basis or fair market value.

Question 27

What’s Use-related or Use-unrelated?

Answer 27

• The distinction between use-related and use-unrelated tangible personal property depends on the charitable organization’s purpose. Therefore, if a donor makes a gift of a gun and rifle collection to a state historical museum, the donation would be deemed to be use-related (the property donated to the charitable organization could be used directly by the charity itself).

If the property donated to the charity is not related to the purpose of the charitable organization (such as a donation of a painting to a church that does not plan to exhibit the painting but intends, instead, to sell it and use the sale proceeds), then the donation is classified as use-unrelated.

The maximum charitable income deduction on use-related property is based on the FMV of the property, subject to 30% of the donor’s AGI, while the maximum charitable deduction on use-unrelated property is based on the donor’s basis in the property, subject to 50% of the donor’s AGI.

For use-related property that is valued at more than $5,000, if the charity disposes of the donated property within one year, the income tax deduction is reduced from FMV to the property’s cost basis.
* If the charity disposes of the property from one to three years after receiving the gift, the donor must recognize income on the difference between the FMV deduction and the cost basis, unless the charity’s explanations satisfy IRS requirements.

Question 28

Describe Future Interest Gifts

Answer 28

Future interest gifts of property to a charity ordinarily do not qualify for the charitable income tax deduction.

By definition, a future interest gift is any gift in which the right to use or enjoy the property is deferred until some time in the future. Since the donee has no immediate right to use, possess, own, or enjoy the property, the donee has not received the benefits of the gift in the year of the transfer. Therefore, any gift of a future interest to a charity, such as a gift of an original Miro painting to an art museum with a stipulation that allows the donor to keep the painting until the donor’s death, is a gift of a future interest that does not qualify for an immediate charitable income tax deduction.

Practitioner Advice: However, certain split-interest gifts, in which the charity has a remainder interest in the gifted property, will allow the donor to take advantage of a charitable income tax deduction on the date the gift is made.
* Deductions for fractional interests cannot be taken unless the donor (or the donor and the charity) own the property immediately before the gift is made, and the charity receives complete possession of the property within 10 years of the initial contribution or the donor’s death, whichever is sooner.
* At the donor’s death, the estate cannot take account of any appreciation in the property, meaning the remainder interest is valued at its initial value rather than at FMV at the date of death.
* Therefore, the bequest to charity may not be fully deductible, and the appreciation may trigger an estate tax.

Question 29

Practitioner Advice:

Practitioner Advice: However, certain split-interest gifts, in which the charity has a remainder interest in the gifted property, will allow the donor to take advantage of a charitable income tax deduction on the date the gift is made.
* Deductions for fractional interests cannot be taken unless the donor (or the donor and the charity) own the property immediately before the gift is made, and the charity receives complete possession of the property within 10 years of the initial contribution or the donor’s death, whichever is sooner.
* At the donor’s death, the estate cannot take account of any appreciation in the property, meaning the remainder interest is valued at its initial value rather than at FMV at the date of death.
* Therefore, the bequest to charity may not be fully deductible, and the appreciation may trigger an estate tax.

Question 30

If the donee is a public charity (i.e., 50% Limit Organization), then the maximum annual charitable income tax deduction is:

Answer 30

Property Type
Donation Amount
Limit

Cash
Cash Amount
60% AGI

Capital Gain Property
FMV
30% AGI

Tangible use-unrelated personal property
Lower of FMV or Adj. Basis
50% AGI

Tangible use-related personal property
FMV
30% AGI

Elect to reduce property to the adjusted basis
Lower of FMV or Adj. Basis
50% AGI

Ordinary Income Property
Lower of FMV or Adj. Basis
50% AGI

Unreimbursed expenses
50% AGI

Question 31

How do income tax deductions for gifts to private charities vary?

Answer 31

The income tax deductions for gifts to private charities are significantly lower than those to public charities. Examples of private charities include private foundations.
The amount of the income tax deduction for a gift of appreciated assets to or for the use of a private charity, whether the gift is tangible or intangible, is limited to the donor’s basis in the property.
However, certain gifts of qualified appreciated stock may be deductible at their full FMV.

Question 32

Qualified Appreciated Stock Donation to Public Charity Example:

Qualified appreciated stock is publicly traded stock (with certain exceptions) which, if sold on the date of the gift, would result in a long-term capital gain.
If a gift of an asset other than a long-term capital asset is made to a private charity, the income tax deduction is the lesser of 30% of the donor’s AGI or 50% of the donor’s AGI less the amount of charitable deductions taken for public charities.

Question 33

Qualified Appreciated Stock Donation to Private Charity Example:

The AGI limitation for contributions of long-term capital assets to private charities is the lesser of 20% of the donor’s AGI or 30% of the donor’s AGI less the amount of charitable deductions allowed for public charities.

Question 34

Define Public Charity

Answer 34

Under IRC Section 170, the charitable deductions we have already discussed, 30%/50% of AGI, are only allowed for contributions to qualified public charities. Examples of these charities include:
* Nonprofit schools,
* Universities,
* Institutions of higher learning,
* Churches,
* Synagogues,
* The Young Men’s Christian Association (YMCA),
* The Young Women’s Christian Association (YWCA),
* The United Fund,
* The United Way,
* The American Red Cross, and
* The Boy Scouts and Girl Scouts of America.

Qualified organizations also include groups whose primary purpose is to assist in the discovery of a cure for a disease, such as:
* The Heart Association,
* The American Cancer Society,
* The American Diabetes Association,
* The Arthritis Foundation, and
* The Society for the Prevention of Blindness.

As long as the organization has, as its primary purpose, some religious, educational, philanthropic, scientific, or literary purpose, and is intended to benefit the public at large, it will be a public charity.

Question 35

Section Two Summary

Charitable contributions can be classified according to the type of property contributed, the identity of the donee, and the AGI of the donor.
* Type of property contributed includes cash, ordinary income property, long-term capital gain property (stock, real estate), use-related and use-unrelated tangible personal property, and future interests.
* The identity of donee could be a public charity or private charity.
* AGI of the donor as affecting the maximum charitable deduction are 50% of AGI deduction (60% for cash to a public charity), 30% of AGI deduction, and 20% of AGI. A gift of cash has a 60% AGI deduction limit.

In this lesson, we have covered the following:
* Ordinary income property- includes:
* Assets generally held for less than one year,
* Stock acquired in a corporate nontaxable transaction,
* Works of art, compositions, books, and other creations given by the individual who created them, and
* Stock in trade and inventory that would have resulted in ordinary income if sold.

• Long-term capital gain property is property that has generally been held for more than one year.

Answer 35

Tangible personal property includes:
* Jewelry,
* Automobiles,
* Artworks and stamp collections, but only if created by someone other than the grantor, and
* Books (all of these tangibles would be considered capital property if created by someone else.).

• Future interest gifts of property to a qualified public charity generally do not qualify for the charitable income tax deduction.

If the donee is a public charity, the maximum annual charitable deduction is:
* 60% of the donor’s AGI for gifts of cash,
* 50% of the donor’s AGI for gifts of ordinary income property, limited to the donor’s basis in the property,
* 30% of the donor’s AGI for long-term capital gain property, based upon the FMV of the property (unless the donor elects to use the basis in the property to determine the value of the deduction, at which point the value of the deduction is 50% of the donor’s AGI),
* 30% of the donor’s AGI for contributions of tangible personal property to a public charity, where the donated property is use-related, based upon the FMV of the use-related asset, and
* For use-unrelated assets, 50% of the donor’s AGI based upon the donor’s basis in the property.

• If the donee is a private charity, depending on the type of property gifted, ordinary income property, or long-term capital gain property, the charitable deduction is either 30% or 20% of AGI based upon the donor’s basis in the property.

Question 36

Gibson makes gifts of the following:
Gift A: Original works of Monet to the National Museum.
Gift B: A collection of original works of Monet to the local orphanage.
Identify the correct categorization of these gifts.
* Both gifts A and B are use-related donations of tangible personal property.
* Both gift A and B are use-unrelated donations of tangible personal property.
* Gift A is a use-related donation of tangible personal property while Gift B is a use-unrelated donation of tangible personal property.
* Gift A is a use-unrelated donation of tangible personal property while Gift B is a use-related donation of tangible personal property.

Answer 36

Gift A is a use-related donation of tangible personal property while Gift B is a use-unrelated donation of tangible personal property.
* The distinction between use-related and use-unrelated tangible personal property depends on the purpose of the charitable organization.
* As the property donated (original works of Monet) to the National Museum could be used directly by the charity itself, the donation is use-related.
* The same original works of Monet, if donated to an orphanage, are not related to the orphanage’s purpose. Since the purpose of the orphanage is not to exhibit the works of art, it will sell the art and use the proceeds from the sale for its own purposes. As a result, this gift to the orphanage would be classified as use-unrelated.

Question 37

If the donor is making a gift of cash to a public charity, the maximum income tax deduction that may be taken is 60% of the donor’s AGI. State True or False.
* False
* True

Answer 37

True
* If the donor is making a gift of cash to a public charity, the maximum income tax deduction that may be taken is 60% of the donor’s AGI. Keep in mind that the AGI rules must be satisfied in each year a charitable deduction will be taken, even if the deduction is being carried forward..

Question 38

Match the term with the correct description.
Gifts of long-term capital gain property
Future interest gifts of property
Gifts of cash
Gifts of ordinary income property
* Maximum annual charitable income tax deduction is 60% of the donor’s AGI.
* Limited to basis in the property.
* Maximum annual charitable deduction is 30% of the donor’s AGI. When the donor deducts only the basis, he is eligible for a 50% of AGI deduction.
* In general do not qualify for the charitable contribution deduction.

Answer 38

• Gifts of cash - Maximum annual charitable income tax deduction is 60% of the donor’s AGI.
• Gifts of ordinary income property - Limited to basis in the property.
• Gifts of long-term capital gain property - Maximum annual charitable deduction is 30% of the donor’s AGI. When the donor deducts only the basis, he is eligible for a 50% of AGI deduction.
• Future interest gifts of property - In general do not qualify for the charitable contribution deduction.

Question 39

Section 3 - Types of Charitable Gifts

There are several methods by which a donor may transfer assets to a charity. These include outright charitable gifting or split-interest transfers, using either a charitable remainder annuity trust (CRAT) or charitable remainder unitrust (CRUT).

The various methods of making charitable gifts are designed to accomplish any number of objectives that a donor may have. It is the financial planner’s goal to analyze each of the available charitable alternatives and based upon the donor’s objectives, make the most appropriate recommendation.

Answer 39

For example, with a split-interest transfer, a charitable or noncharitable beneficiary may receive income. Additionally, either a charitable or noncharitable beneficiary may receive the remainder interest. The most important thing to remember about split-interest transfers is that two property interests are being transferred: the income and the remainder interest. The interest, which the charity is entitled to receive if the split-interest vehicle is properly created, is the portion eligible for the charitable income, gift, and estate tax deductions.

To ensure that you have an understanding of the types of charitable gifts, the following topics will be covered in this lesson:
* Gifting Strategies
* Tax Implications of Charitable Gifting

Upon completion of this lesson, you should be able to:
* Determine whether a particular condition is suitable for a particular type of charitable transfer technique, and
* Contrast the different requirements for CRAT and CRUT that the donor must comply with.

Question 40

What are the most commonly used types of charitable transfer techniques?

Answer 40

Gifting Strategies
The most commonly used types of charitable transfer techniques are:
* Outright charitable gift
* Charitable stock bailout
* Charitable remainder annuity trust
* Charitable remainder unitrust
* Charitable lead trust
* Charitable gift annuities
* Pooled-income funds
* Private foundations
* Donor-advised funds
* Traditional IRAs

Question 41

Describe an Outright Charitable Gift

Answer 41

This involves an irrevocable transfer of property from the donor to a qualified charity. For the transfer to be considered effective, the donor must irrevocably part with all ownership or control of the property. If there are “strings attached” or conditions specified by the donor, that is, how the property may be used or enjoyed by the donee, then a completed gift has not occurred.

Conditions Specified by Donor Example:
* An example of a condition would be if a donor makes a gift of an original Grant Wood painting to an art museum only if the museum endorses a certain method by which to acquire additional paintings by Wood. Such a gift is not a completed gift, therefore not eligible for the tax benefits associated with making a charitable gift. In order to receive all of the tax benefits associated with charitable gifts, the requirements for a completed gift must be satisfied. These requirements are the same as those for gifts made to noncharitable donees and are as follows: donor must intend to make the gift; donor must deliver the gift; donee must accept the gift.

Let’s remember all of the tax benefits associated with a completed gift to a charity:
* Income Tax: The donor is entitled to an income tax deduction based upon the limits we have already discussed.
* Gift Tax: A gift to a charity qualifies for the unlimited charitable gift tax deduction. In other words, the donor does not need to use an annual exclusion or lifetime gift tax exclusion.
* Estate Tax: A charitable gift made during a lifetime reduces the value of the estate. Given the unlimited charitable deduction for estate tax purposes, a bequest or a transfer of assets to a charity after death reduces the taxable estate, and therefore the estate tax liability.

Question 42

What are all of the tax benefits associated with a completed gift to a charity?

Answer 42

Let’s remember all of the tax benefits associated with a completed gift to a charity:
* Income Tax: The donor is entitled to an income tax deduction based upon the limits we have already discussed.
* Gift Tax: A gift to a charity qualifies for the unlimited charitable gift tax deduction. In other words, the donor does not need to use an annual exclusion or lifetime gift tax exclusion.
* Estate Tax: A charitable gift made during a lifetime reduces the value of the estate. Given the unlimited charitable deduction for estate tax purposes, a bequest or a transfer of assets to a charity after death reduces the taxable estate, and therefore the estate tax liability.

Question 43

Describe Charitable Stock Bailout

Answer 43

In situations where the owner of closely held stock wishes to make a gift of property to a qualified charity, the charitable stock bailout may be an appropriate charitable transfer technique.

The charitable stock bailout functions as follows:
Assume the owner of a closely held corporation wishes to make a gift to a charity. However, the only asset available to gift is closely held stock. The owner’s objective is to obtain a sizeable charitable income tax deduction without taking an income taxable distribution from the corporation. The stockholder can achieve this result by use of the charitable stock bailout. In the charitable stock bailout, the stockholder gifts the closely held stock to the charity. The owner then receives a charitable deduction based upon the value of the stock gifted to the charity.
* Since the charity would prefer cash instead of stock, the corporation can redeem the stock from the charity only if the corporation is totally unrelated to the charitable gift.
* Otherwise, the IRS would view the gift and resulting redemption as a step transaction, which would incur all of the tax advantages one is attempting to avoid.
* The charity gets the cash, the donor gets the charitable deduction, and the corporation gets the stock in exchange for its accumulated cash.

When structuring the transaction for a charitable stock bailout, several considerations need to be addressed to avoid adverse tax consequences:
* To qualify for a charitable contribution deduction, the stockholder and the charity cannot agree to the time or certainty of the redemption. In other words, when the stock is gifted to the charity, there cannot be an understanding or contract (formal or informal) to redeem the stock at a specified time.
* If the redemption takes on the characteristics of a prearranged transaction, it tends to lose its charitable traits and may be construed as a contract to redeem, thereby disqualifying the donor from taking a charitable deduction.
* In addition, the donor should gift the stock to the charity and have the charity redeem the stock back through the corporation. If the corporation does not redeem the stock, a redemption of the stock directly to the shareholder would result in dividend treatment of the redeemed stock. It could result in taxable income to the donor.

To preserve the estate, income, and gift tax advantages of the charitable stock bailout for the donor of such stock, the recommendations listed should be followed closely if the client chooses this type of technique.

Question 44

Describe a Charitable Remainder Annuity Trust (CRAT)

Answer 44

A Charitable Remainder Annuity Trust (CRAT) is used when the donor wishes to make a charitable contribution yet retain a string to the gifted property.
* With a charitable remainder annuity trust, the trust is established to provide a noncharitable beneficiary the right to receive income for a period of time (either life expectancy or a set period not to exceed 20 years).
* Upon the expiration of the income-paying period, the charity receives whatever is left within the trust. This is known as the remainder interest.

If a term of years is used, the period cannot exceed 20 years. This is also true of a charitable remainder unitrust (CRUT). At the termination of the period during which the beneficiary receives income, the remainder interest in the property passes to the charity.
* Upon the creation of the trust, the donor receives a charitable income tax deduction based upon the remainder interest, which will transfer to the charity.
* This remainder interest is calculated on the day the transfer is made into the trust.

A CRAT may be created during the donor’s lifetime and after the donor’s death.
* In the event the provisions for a CRAT are incorporated within the donor’s will or revocable trust, the value of the remainder interest, which will transfer to the charity, is a charitable estate tax deduction.
* In addition to structuring the CRAT to take effect during the life of the donor, such a trust can also be structured to take effect after the donor’s death as a postmortem transaction. When structured as a postmortem transaction, the decedent’s estate receives a valuable estate tax deduction based on the present value of the remainder interest eventually passing to the charity.

Question 45

CRAT Structured as a Postmortem Transaction Example:

A donor structures a CRAT so that the donor’s spouse receives a life income interest that takes effect when the donor dies, the donor’s estate is entitled to receive an estate tax charitable deduction for the present value of the remainder interest that the charity will eventually receive.
Although the donor has made a terminable interest gift to the spouse of the life income interest, a gift of a life income interest is an exception to the terminable interest rule.
Therefore, the donor does not need to elect Q-TIP treatment to receive a marital deduction for the income interest passing to a spouse.

Question 46

What requirements must the donor comply with to successfully use the CRAT?

Answer 46

To successfully use the CRAT, the donor must comply with the following requirements:
* The donor must make an irrevocable transfer of the property to the trust.
* The donor can make only one initial transfer of property to the corpus; there can be no additions or increases to the trust in later years.
* Once the trust is established, the trust must pay out a specified amount of income (a sum certain) each year based on the initial transfer to the trust - in a CRAT, the trust must pay a minimal amount of at least 5% and not more than 50% of the initial value of the corpus. If the trust does not generate at least enough income to meet this 5% requirement, the corpus must be invaded to supplement the difference. The income must be distributed to the beneficiary.
* The amount of income payable to the trust beneficiary remains fixed once the initial payments are calculated. Therefore, the amount of income payable by the trust to the beneficiary remains fixed and does not increase or decrease in succeeding years.
* The amount of the charitable deduction that the donor can receive depends on the value of the remainder interest passing to the charity as calculated when the assets are transferred into the trust. As the charity will eventually receive the corpus of the trust, the donor is entitled to an immediate income tax deduction for the present lifetime transfer of the property that passes to the charity. If the trust is structured to take effect upon the death of the donor, so that the donor’s spouse or some other beneficiary receives the income, then the donor’s estate receives an estate tax charitable deduction that is based upon the present value of the charity’s right to receive the property eventually.
* Under Internal Revenue Code Section 7520, the rate to be used for valuing annuities, life interests, or interests for terms of years, and remainder or reversionary interests is based upon an interest rate determined by reference to the midterm applicable federal rate for the month in which the valuation date occurs. Implementing regulations prescribe that the pertinent rate is 120% of the midterm applicable federal rate, using annual compounding, rounded to the nearest two-tenths of one percent.
* The value of the charitable remainder interest must equal at least 10% of the value of the assets valued when transferred into the trust.
If the donor complies with these requirements, he will be able to take advantage of all tax benefits associated with the use of the CRAT.

Another tax benefit is available when the donor transfers an appreciated asset to the trust with a low adjusted basis. The trust can sell the asset without incurring an income tax liability or capital gains tax since charitable trusts CRATs and CRUTs are exempt from income taxes.
* Consequently, the donor will receive a greater income stream that is not reduced by capital gains taxes when the asset is sold and reinvested, than if the donor had sold the asset outside of the trust.

Question 47

Highly Appreciated, Low-Basis Stock Treatment Examples:

You own low-yielding, low-basis stock in a highly appreciated company. The FMV of the stock is $300,000, and the basis is $50,000. The dividends are too low to meet your income needs, and you prefer to diversify your holdings and receive more income.

If you sold your stock, your after-tax proceeds would be $262,500. ($300,000 - $50,000 = $250,000 × 0.15 capital gains rate = 37,500)
You invest the proceeds in bonds yielding 6% to receive an income stream of $15,750 annually.
However, if you transferred the stock into a CRAT, there is no capital gains tax when the trust sells the stock. The trust can reinvest the $300,000 proceeds into bonds yielding 6% to provide you with an income payout of $18,000 annually.

Question 48

What are the requirements of the Charitable Remainder Unitrust (CRUT)?

Answer 48

The CRUT operates in the same fashion as the CRAT, except that it has the following requirements:
* The donor must make an irrevocable transfer of the property to the trust.
* The donor may make more than one transfer of property to the trust; multiple transfers or deposits of property into the corpus of the trust are possible.
* Once the trust is established, the trust must pay out a specified amount of income (a fixed percentage) each year based upon the annual balance in the Trust; in a CRUT, the trust must pay out a minimal amount of at least 5% and not more than 50% of the annually reappraised value of the corpus.
* Example: If in year one, $100,000 is placed in the corpus of the trust and the terms of the trust specify that 8% of the earnings must be distributed, then $8,000 would be distributed to the trust beneficiary. However, if the trust had actually earned $12,000 in year one, then the remaining undistributed $4,000 would be added to the corpus of the trust, and in year two, 8% of $104,000, or $8,320, would be distributed to the trust beneficiary. Therefore, if the assets in the trust are appreciating in value, this can generate an increase in income that is distributed to the trust beneficiary. As long as the undistributed earnings are added to the corpus of the trust and reappraised annually, the amount of income distributable to the beneficiary increases with each succeeding year. Of course, if the value of the trust decreases, then the income stream to the non-charitable income beneficiary will decrease as well.

• The amount of income produced by the trust increases with each year that the value of the corpus increases. This can be valuable to a trust beneficiary whose income needs to increase with each succeeding year. This also provides inflation protection for the beneficiary.
• The amount of the charitable deduction that the donor receives depends on the value of the remainder interest passing to the charity. As the charity will eventually receive the corpus of the trust, the donor is entitled to an immediate income tax deduction for the present value of the remainder interest in the property that passes to the charity. If the trust is structured to take effect upon the death of the donor, so that the donor’s spouse or some other beneficiary receives the income, then the donor’s estate receives an estate tax charitable deduction that is based on the present value of the charity’s right to eventually receive the property: the charity’s remainder interest.
• The value of the charitable remainder interest must equal at least 10% of the value of the assets transferred into the trust when funded. Remember that with a unitrust, additional transfers may be made to the trust. Each time a new transfer is made, the 10% rule must be satisfied.

If the donor complies with these requirements, the donor will be able to take advantage of the tax benefits associated with using the CRUT.

Question 49

Describe Net Income with Makeup Charitable Remainder Unitrust (NIMCRUT)

Answer 49

The Charitable Remainder Unitrust (CRUT) may also provide that the beneficiary may receive the lesser of the specified percentage of the trust assets or the trust income for the year, plus any excess trust income to the extent previous years were deficient.
* This is known as the Net Income with Makeup Charitable Remainder Unitrust (NIMCRUT).
* NIMCRUTs can be used as an alternative to qualified pension plans by investing in assets that produce little or no income in the early years (while the donor’s income is high) and then converting to high-income investments in later years after the donor’s retirement.
* Final regulations treat the value of the entire asset transferred to a NIMCRUT as the value of the gift if the grantor and/or the grantor’s spouse (who is a citizen of the United States) are the only non-charitable beneficiaries.

Question 50

NIMCRUT Planning Application Example:

A NIMCRUT keeps track of the deficiency between the income actually distributed and the percentage value since the deficiency may be “made up” in future years from excess income in a subsequent year. When the income exceeds the fixed percentage amount, the “make-up” amounts from previous years may be added to the fixed percentage amount, not to exceed the income for that year.

YR FMV 5 % FMV Income Distribution MU (ann.) MU (total)
Yr. 1 $1,000,000 $50,000 $40,000 $40,000 $10,000 $10,000
Yr. 2 $1,200,000 $60,000 $50,000 $50,000 $10,000 $20,000
Yr. 3 $1,300,000 $65,000 $90,000 $85,000 $0 $0

In year 3, add the $20,000 MU total to $65,000 (5% FMV) for a distribution of $85,000.

Question 51

Describe Charitable Lead Trusts (CLT)

Answer 51

The donor can gift property such as cash or income-producing assets to an irrevocable Charitable Lead Trust (CLT), and provide the charity (or charities) with an income stream for a specified period. When the charity’s interest ends, the trust property reverts back to the donor or the donor’s spouse, or can be transferred to other beneficiaries.

• The donor as the grantor and the remainder beneficiary is entitled to a charitable income tax deduction for the present value of the income payments gifted to charity.
• The donor is also taxed on the charity’s income because the donor retains a reversionary interest in the property.
• This is an example of a grantor CLT.

The income to charity is paid as a guaranteed annuity, a CLAT, or a fixed percentage of the trust assets revalued annually, known as a CLUT.
* Trust principal is invaded if income is insufficient to make payments to charity, which ultimately leaves less for the trust beneficiaries.
* The donor can transfer more assets into a CLUT to ensure the trust corpus is not reduced, and to take a further income tax deduction in the year the transfer is made as long as the CLUT is a grantor trust.
* A CLAT is a better choice when interest rates are lower, since smaller annuity payments to charity result in a greater value of the trust corpus for the remaindermen.

The donor may choose to designate a non-spousal beneficiary to receive the remainder interest in the trust, when the charity’s income interest has ended. This is an example of a non-grantor CLT. In this case, the donor is not entitled to an income tax deduction for the charity’s income interest, and the donor will not pay tax on the income the charity receives as long as the trust is a non-grantor trust. The donor has also made a gift of the remainder interest to the non-spousal beneficiaries, and the annual exclusion cannot be used to offset this future interest gift. However, the trust corpus will not be included in the donor’s estate at death, as it would have if the donor had retained a reversionary interest.

Be aware that grandchildren are not ideal beneficiaries of a non-grantor CLAT since the grantor’s GST exemption cannot be allocated to the trust when it is created, only when the charity’s income interest ends.
* However, with a CLUT the grantor can allocate the GST exemption when the trust is initially funded.

Question 52

Describe Charitable Gift Annuities

Answer 52

Charitable gift annuities are arrangements made by qualified charities to obtain contributions from donors and provide them with annual fixed-income payments for life.

The donor irrevocably transfers a gift of cash or property to charity in exchange for a lifetime income stream.
* The property gifted to charity has a greater value than the total income that will be paid to the donor. Therefore, the donor will receive an income tax deduction for the gift because the property’s value is greater than the present value of the total annuity payments.
* The income tax deduction amount is based on how many annuitants will receive the income, their ages and life expectancies, the interest rate used, and when the payments will begin.

The annuity payments from the charity are unsecured and are taxed to the donor partly as a tax-free return of principal, unrealized capital gains, and ordinary income on the interest received.
* A donor who outlives their life expectancy, which is used to calculate the annuity payments, will report their remaining payments as ordinary income.

A donor who gifts the annuity payments to their spouse or who establishes a joint and survivor annuity with their spouse may receive a gift tax marital deduction.
* A donor is subject to gift taxes if a non-spouse is designated an income beneficiary.
* The gift tax is calculated on the present value of the income stream.
* An annual exclusion can be taken for an immediate annuity, which is a present interest gift, but not for a deferred annuity, which is a future interest gift.

A gift tax charitable deduction is available for the charitable contribution, based on the value of the property given to charity, minus the actuarial value of the annuity.

Question 53

Describe Pooled Income Funds

Answer 53

Pooled income funds are trusts established by qualified charities to receive charitable donations from many donors, whose funds are commingled together. The charity manages the fund’s pool of investments, but they cannot invest in tax-exempt securities.
* When donors make charitable donations to these funds they are purchasing units that will pay them an annual income stream for life.
* Donors irrevocably gift assets that will give them a pro-rata share of income, based upon the rate of return earned by the fund.
* If this income is not sufficient, donors can make future contributions to the fund to increase their pooled income shares.

Donors making charitable donations receive an income tax deduction for the present value of the charity’s remainder interest in the property that passes to the charity at the donor’s death.
* Donors will pay income taxes on the annual income distributions they receive from the charity.
* Since the donor is receiving income for life, the PV of the remainder interest given to charity is included in the donor’s gross estate at death but is offset by the estate tax charitable deduction.

The donor may choose to distribute the income to their spouse instead.
* Donors should elect Q-TIP treatment on their gift tax return to receive a marital deduction for the income interest gifted since this is terminable interest property.
* Donors may also gift the income portion to non-spousal beneficiaries as well. In this case, the donor is subject to a potential gift tax for the present value of the income interest, but there is no gift tax for the remaining interest gifted to charity.

At death, the decedent’s will may transfer assets to the pooled income fund, naming the spouse as the income beneficiary.
* The donor’s executor should make a Q-TIP election to give the decedent’s estate a marital deduction for this terminable interest transfer.
* When the surviving spouse dies, the present value of the remainder interest to charity will be included in the spouse’s estate but will receive an offsetting charitable deduction.

If the decedent’s Will names other beneficiaries to receive a lifetime income interest from the fund, then the present value of the income interest is included in the decedent’s gross estate.
* The estate will receive a charitable deduction for the present value of the charity’s remainder interest.

Question 54

Describe Private Foundations

Answer 54

Private foundations or family foundations are separate legal entities, which are either not-for-profit corporations or tax-exempt trusts. They are legally complex and expensive to establish since the IRS must first issue a tax-exempt status as a private foundation and set up and maintenance fees are high. The founder has total legal control over the entity during his lifetime and can transfer that control to his heirs at his death.

Most private foundations are funded, controlled, and managed by wealthy family members who make tax-deductible gifts to the foundation.
* The foundation must distribute a minimum of 5% of its assets to public charities each year.
* All contributions made to the foundation during life or at death are free of gift, estate, and generation-skipping transfer taxes.
* Income tax deductions are limited to 30% of AGI for cash and 20% of AGI for long-term capital gains property.
* Foundation directors can invest and manage the assets or have them managed professionally. The income earned by the foundation is not subject to income tax, but an excise tax of 1% to 2% is levied on net investment income.

Private foundations establish a public legacy through the types of charitable organizations they choose to support. Family members can decide which charities to make donations to, how much to donate, when to make those donations, and be paid for their work. The involvement of family members in the foundation is an excellent way of instilling and perpetuating philanthropic family values, and for evaluating children’s effectiveness as foundation directors, for succession planning purposes.

Question 55

Describe Donor-Advised Funds

Answer 55

Donors who wish to actively manage their charitable donations are turning to donor-advised funds with their charitable contributions. Many mutual fund companies and brokerage firms market and manage these funds, which can be established quickly and easily at the end of the tax year.

Donors can contribute cash or property to their account, however, it’s best to use appreciated securities that are owned for more than one year, to avoid paying capital gains on the appreciation. Contributions to qualified charities result in income tax deductions subject to adjusted gross income (AGI) limitations, and they reduce the size of the donor’s gross estate.

Donors lose control over the assets when they transfer them to a donor-advised fund, but they can determine when and where their charitable gifts will go, and how the proceeds should be reinvested.
* This flexibility lets donors decide at a later time which charities they choose to make grants to while receiving a current year income tax deduction.

Question 56

Describe Traditional IRAs

Answer 56

The Pension Protection Act of 2006 (PPA) permits traditional IRA owners to make tax-free distributions up to $100,000 from their IRA to a qualified public charity through 2009, this change was made permanent in 2015.
* The owner of a traditional IRA must take required minimum distributions after they attain age 73.
* By making Qualified Charitable Distributions (QCDs) after age 73, the requirement to take mandatory distributions is met, and the owner is not taxed on the income.

As a result, this gift to charity will not affect the taxability of Social Security benefits, or have any bearing on itemized deductions or the alternative minimum tax.
* However, the owner will not receive an income tax deduction for the amount given to charity.

It is actually more advantageous for the owner to gift the IRA dollars than to write a check to charity because the owner would not be subject to AGI limitations that could reduce the value of the charitable gift.
* Also, the contribution won’t count towards the annual cap of cash gifts for the year, which is 60% of AGI.

Qualified Charitable Distributions must be made directly from the IRA to a qualified public charity, rather than from a donor-advised fund or a private foundation. Donors must obtain a receipt from the charity that confirms the amount of the gift and the date the gift was made, which includes a statement that the charity provided no goods or services in return for the contribution.

Question 57

Describe the Tax Implications of Charitable Gifting

Answer 57

There can be significant estate, gift, and income tax implications resulting from a lifetime gift of property to a qualified charity:
* For a donor who gifts property that is appreciating in value, the lifetime gift removes the property and all further appreciation of it from the donor’s gross estate. This can effectively control the estate tax liability of the donor’s estate so as to prevent it from increasing, or it can also reduce the estate tax liability because the FMV of the asset on the date of the gift is removed from the donor’s gross estate. An appreciated asset may be transferred into these charitable vehicles without requiring the donor to recognize that asset’s gain.
* A gift of property to a qualified charity may also provide the donor with significant income tax savings in the form of charitable deductions. The deductions can be used to offset the donor’s income tax liability.
* In addition, if the gifted property is income-producing, the donor acquires additional income tax savings, since the donor no longer receives the income.
* If appreciated property is transferred to a GRAT, GRUT, or QPRT, the tax on any gain will eventually be paid by the grantor, or the trust, or the beneficiaries. Having taxes paid by the grantor may not, however, be a disadvantage, since the purpose of the trust is to “defund” the grantor’s estate and shift as much wealth as possible to the remainder person with minimal gift taxes.
* Finally, the gift of property to a qualified charity can produce significant gift tax savings for the donor. For clients who are charitably inclined, a gift to a qualified charity is in addition to the annual exclusion and lifetime gift tax exclusion.

Therefore, for a donor seeking to reduce estate, income, and gift taxes, a gift to a qualified charity may satisfy all of these objectives.

Question 58

What are the itemized charitable deductions for regular tax purposes that are added back (disallowed) as an adjustment for alternative minimum taxable income purposes?

Answer 58

There is a limitation on itemized deductions for income tax purposes when calculating alternative minimum taxable income.

The following are itemized deductions for regular tax purposes that are added back (disallowed) as an adjustment for alternative minimum taxable income purposes:
* Medical itemized deductions in excess of 7.5% of AGI.
* State income taxes and local property taxes.
* Difference between home mortgage and qualified-residence interest.

Question 59

Describe how Charitable Giving affects Estate

Answer 59

For a donor who gifts property that is appreciating in value, the lifetime gift removes the property and all further appreciation of it from the donor’s gross estate.
* This can effectively “freeze” the estate tax liability in the donor’s estate to prevent it from increasing.
* It can also reduce the estate tax liability because the FMV of the asset on the date of the gift is removed from the donor’s gross estate.

Question 60

Section 3 - Types of Charitable Gifts Summary

If the selected charitable transfer technique is implemented correctly, the transfer will accomplish income tax savings for the donor through the charitable income tax deduction, provide the use of the gift tax charitable deduction for the value of the property received by the charity, generate gift tax savings for the donor by qualifying for the unlimited charitable gift tax deduction, reduce the donor’s estate tax liability (because a transfer of a sizeable amount of property during the donor’s lifetime reduces the size of the donor’s gross estate and prevents further appreciation in the size of the estate), and reduce the size of the donor’s taxable estate if postmortem transfers of property to a qualified charity are eligible for the estate tax charitable deduction.

In this lesson, we have covered the following:
* Outright charitable gift involves an irrevocable transfer of property from the donor to the qualified charity, which receives an income tax charitable deduction.
* Charitable stock bailout: a closely held corporation can gift stock to charity to receive an income tax deduction, then redeem the stock back from the charity at a later date.
* Charitable remainder annuity trust donors transfer appreciated property to the trust to avoid capital gains tax, receive an income tax deduction for the PV of the remainder interest to charity, and receive annual, fixed income annuity payments for a term of years or life.
* Charitable remainder unitrust donors transfer appreciated property to the trust to avoid capital gains tax, receive an income tax deduction for the PV of the remainder interest to charity, and receive income payments that are fixed percentages revalued annually. Donors can make additional contributions to obtain greater payments.

Answer 60

Valuation of the remainder interest depends on:
* The life expectancy of the lifetime income recipient,
* The value of the property contributed, and
* The section 7520 interest rate used.

• Charitable lead trust (CLT) is essentially the reverse of a charitable remainder trust since the charity receives an income stream for a period of time, and the grantor or spouse receives the remainder interest. It is an income tax device that enables a taxpayer to reduce the tax burden of an unusually high-income year if the CLAT or CLUT is a grantor trust.
• Charitable gift annuities are contracts with qualified charities that provide donors with an annual fixed income payment for life. The charity keeps the gifted assets, which are greater than the value of the income stream paid to the donor.
• Pooled-income funds are contributions made to qualified charities that provide donors with a pro-rata share of income each year, based on the amounts they contributed and the fund’s investment performance.
• Private foundations are charitable entities established by wealthy individuals who contribute to the foundation, then select the charities they wish to donate to.
• Donor-advised funds donors can establish an account with a mutual fund or brokerage firm that offers these funds to receive a charitable income tax deduction and to select the charities they wish to support.

Question 61

If George makes a gift of an original Da Vinci painting to the Boy Scouts of America, but specifies that he is allowed to keep the painting if the charity fails to use it for the Army Welfare Fund, will the gift qualify for a gift tax charitable deduction?
* Yes
* No

Answer 61

No
* George did not make an irrevocable transfer of property to the Boy Scouts of America (qualified charity).
* In order for the transfer to be considered effective, George must irrevocably part with all ownership or control of the property.
* If there are “strings attached” or conditions specified by the donor under which the property may be used or enjoyed by the donee, then a completed gift has not occurred.
* Therefore, the gift will not qualify for a charitable gift tax deduction, nor will it qualify for an income tax deduction in the form of the charitable contribution deduction.

Question 62

Match the terms with the correct descriptions:
Pooled income funds
Charitable stock bailout
CRAT
CRUT
* Used when the donor wishes to have a variable amount of income distributed to the income beneficiary.
* Used in situations where the owner of closely held stock wishes to make a gift of property to a qualified charity.
* A trust generally created and maintained by a public charity rather than a private donor.
* Used in situations where the donor wishes to provide a noncharitable beneficiary with a stream of income to last for a stated term of years.

Answer 62

• Charitable stock bailout - Used in situations where the owner of closely held stock wishes to make a gift of property to a qualified charity.
• Pooled income funds - A trust generally created and maintained by a public charity rather than a private donor.
• CRAT - Used in situations where the donor wishes to provide a noncharitable beneficiary with a stream of income to last for a stated term of years.

Question 63

Module Summary

The various charitable transfer techniques are outright charitable gifting; charitable stock bailout; the split interest techniques, including charitable remainder annuity trust (CRAT) or charitable remainder unitrust (CRUT); charitable lead trusts (CLAT) and (CLUT); charitable gift annuities; pooled income funds; private foundations; and donor advised funds.

The key concepts to remember are:
Common reasons why individuals gift property to charities:
* Satisfaction of the donor seeing the charity enjoy the property; or others fulfilling the donative intentions of the donor either while he or she is alive or after his or her death.
* The estate tax liability of the donor may be reduced by making a lifetime gift, since the gifted property and all future appreciation is removed from the gross estate. If the charitable transfer takes effect after death, the transfer qualifies for the unlimited charitable estate tax deduction, which reduces the value of the taxable estate.
* The income tax liability may be reduced due to the charitable income tax deduction.
* The gift tax liability can be avoided because of the gift tax charitable deduction for gifts made to a qualified charity.
* The donor’s donative intent may carry a special meaning for the donor. The donor may wish to gift property for special purposes, such as medical research or educational purposes.
* Public charity: The maximum annual charitable deduction if the donee is a public charity is:
* 60% of the donor’s AGI for gifts of cash.
* 50% of the donor’s AGI for gifts of ordinary income property (except where the donor is limited to the donor’s basis in the property).
* 30% of the donor’s AGI for long-term capital gain property (except where the donor may elect to deduct only the cost and become eligible for a 50% percent deduction of the donor’s AGI).
* 30% of the donor’s AGI for contributions of tangible personal property to a public charity where the donated property is use-related.
* The donor’s basis in the property if the property is tangible personal property and is use-unrelated, with the ability to carry over any amount of the property in excess of 50% of the donor’s AGI that is needed to match the donor’s basis.
* Private charity: The maximum charitable contribution that can be taken in the year of the contribution, if the donee is a private charity, is limited to the donor’s basis in the property, if the property has appreciated in value since the date of its acquisition, and the donee is a private, non-operating foundation, such as a grant-making institution.
* Charitable stock bailout: Considerations that need to be addressed in order to avoid adverse tax consequences when structuring the transaction for a charitable stock bailout are:
* To qualify for a charitable contribution deduction, the stockholder and the charity cannot agree to the time or certainty of the redemption. In other words, at the time the stock is gifted to the charity, there cannot be an understanding or contract (formal or informal) to redeem the stock at a specified time.
* If the redemption takes on the characteristics of a prearranged transaction, it tends to lose its charitable traits and may be construed as a contract to redeem, thereby disqualifying the donor from taking a charitable income tax deduction.
* In addition, the donor should gift the stock to the charity and have the charity redeem the stock back through the corporation. If the corporation does not redeem the stock, a redemption of the stock directly to the shareholder would result in dividend treatment of the redeemed stock, and could result in taxable income to the donor.

Answer 63

Comparison of CRAT and CRUT: It is done with respect to donor requirements:
* In both trusts, the donor must make an irrevocable transfer of the property.
* In the case of CRAT, the donor can make only one initial transfer of property to the trust, whereas in the case of CRUT, the donor can make more than one transfer of property to the trust.
* In a CRAT, the trust must pay at least 5% of the initial value of the corpus. In a CRUT, the trust must pay at least 5% of the annually reappraised value of the corpus.
* The income payable to trust beneficiaries in a CRAT remains fixed once the initial payments are calculated, while it increases with each year in a CRUT as the value of the corpus increases in value. But can decrease as-well depending on what the asset value is within the trust on an annual basis.
* In both types of trust, the donor is entitled to an immediate income tax deduction for the present value of the property that passes to the charity.
* In both types of trust, if the trust is structured to take effect upon the death of the donor, so that some beneficiary receives the income, then the donor’s estate receives an estate tax charitable deduction. But if the non-charitable income beneficiary is someone other than the donor or the donor spouse, the present value of the income stream is either a gift or a part of the taxable estate.
* Charitable lead trust is essentially the reverse of a charitable remainder trust. It is an income tax device that enables a taxpayer to reduce the tax burden of an unusually high-income year as long as the CLAT or CLUT is a grantor trust for income tax purposes.
* Charitable gift annuities are contracts with qualified charities that provide donors with an annual fixed income payment for life. The charity keeps the gifted assets, which are greater than the value of the income stream paid to the donor.
* Pooled income funds are contributions made to qualified charities that provide donors with a pro rate share of income each year, based on the amounts they contributed and the fund’s investment performance.
* Private foundations are charitable entities established by wealthy individuals who make contributions to the foundation, then select the charities they wish to donate to.
* Donor advised funds: Donors can establish an account with a mutual fund or brokerage firm that offers these funds, to receive a charitable income tax deduction, and to select the charities they wish to support.
* Traditional IRAs required minimum distributions can be given to charity and the IRA owner will not pay taxes on the income. Must pass directly from the IRA to charity.

Question 64

Choose items that are categorized as ordinary income property for charitable giving purposes. (Select all that apply)
* Long-Term Capital Assets
* Short-Term Capital Assets
* Musical Compositions (purchased from an estate sale)
* Inventory

Answer 64

Short-Term Capital Assets
Inventory
* Ordinary income property includes:
* Capital assets held less than the requisite long-term period at the time contributed,
* Section 306 stock (that is, stock acquired in a nontaxable corporate transaction that is treated as ordinary income if sold),
* Works of art, books, letters, and musical compositions, but only if given by the person who created or prepared them or for whom they were prepared, and
* A taxpayer’s stock in trade and inventory (which would result in ordinary income if sold).

Long-term capital assets are not considered ordinary income property.

Question 65

__ ____??____ __ are trusts established by qualified charities to receive charitable donations from many donors, whose funds are commingled together.
* Pooled income funds
* Donor advised funds
* Private foundations
* Charitable gift annuities

Answer 65

Pooled income funds

• Pooled income funds are trusts established by qualified charities to receive charitable donations from many donors, whose funds are commingled together.
• The charity manages the fund’s pool of investments, but they cannot invest in tax-exempt securities.

Question 66

When a taxpayer makes a charitable contribution of a painting to a baseball stadium, the donation would be best categorized as __ ____??____ __.
* use-related
* void
* use-unrelated
* fully deductible

Answer 66

use-unrelated

• If the property donated to the charity is not related to the purpose of the charitable organization (such as a donation of a painting to a church that does not plan to exhibit the painting but intends, instead, to sell it and use the sale proceeds), then the donation is classified as use-unrelated.

Question 67

If a taxpayer donates a highly appreciated long-term capital asset to a public charity and chooses to use the current fair market value, the maximum deduction is __ ____??____ __ of the donor’s AGI.
* 20%
* 60%
* 50%
* 30%

Answer 67

30%
* If the donor makes a gift of property that is a long-term capital gain asset, the value of the gift to the charity is the FMV of the asset on the date of the gift.
* However, for income tax deduction purposes, the value of the charitable income tax deduction for a long-term capital asset is 30% of the donor’s AGI.

Question 68

If the donor is making a gift of cash to a public charity, the maximum income tax deduction that may be taken is __ ____??____ __ of the donor’s AGI.
* 60%
* 50%
* 30%
* 20%

Answer 68

60%

• If the donor is making a gift of cash to a public charity, the maximum income tax deduction that may be taken is 60% of the donor’s AGI.

Question 69

Contributions to qualified charities through a donor advised fund provide the donor with __ ____??____ __.
I. income tax deductions subject to (AGI) limitations
II. reduce the size of the gross estate
* I only
* Neither I nor II
* Both I and II
* II only

Answer 69

Both I and II

• Contributions to qualified charities through donor advised funds result in income tax deductions subject to adjusted gross income (AGI) limitations, and they reduce the size of the donor’s gross estate.

Question 70

To deduct charitable contributions made by cash or checks, contributions must be substantiated by receipts from the charity that include each of the following EXCEPT:
A qualified appraisal for a donated item valued below $5,000
Name of the organization.
Amount of cash contribution.
Description of any non-cash contribution.

Answer 70

A qualified appraisal for a donated item valued below $5,000

The charity’s receipt should include:
* Name of the organization.
* Amount of cash contribution.
* Description of any non-cash contribution.
* A statement that no goods or services were provided by the organization in return for the contribution, if applicable.
* Description and good faith estimate of the value of goods or services. Deductions for clothing and household goods can only be taken if the items are in “good condition” or better.
* For a donated item that exceeds $5,000, a qualified appraisal must be included with the donor’s income tax return.

Question 71

To qualify for the charitable income tax deduction, the donation must involve a __ ____??____ __ gift.
* deferred interest
* present interest
* future interest
* retained interest

Answer 71

present interest

• To qualify for the charitable income tax deduction, the donation must involve a present interest gift.
• Future interest gifts of property to a charity ordinarily do not qualify for the charitable income tax deduction.

Question 72

If a taxpayer donates a highly appreciated long-term capital asset to a public charity and chooses to use the basis, the maximum deduction is __ ____??____ __ of the donor’s AGI.
* 60%
* 30%
* 50%
* 20%

Answer 72

50%

• A 50% of AGI maximum deduction on LTCG property may be made if the donor is willing to reduce the value of the gift to their basis in the asset.

Question 73

Identify the reason(s) for gifting property to a qualified charity. (Select all that apply)
* Reduction of gift tax liability
* Satisfaction of the donor
* Reduction of income tax liability
* Reduction of the size of the taxable estate

Answer 73

Reduction of gift tax liability
Satisfaction of the donor
Reduction of income tax liability
Reduction of the size of the taxable estate

The most common reasons for gifting or bequeathing property to a qualified charity are:
* Satisfaction of the donor,
* Reduction of the size of the taxable estate,
* Reduction of income tax liability, and
* Reduction of gift tax liability.