Estate Planning | IX. Charitable Giving

Introduction

In 2001, a national poll indicated that 89% of American households donated money to charity.

General Issues Regarding Charitable Contributions and Taxation

Charitable deductions of any size are not subject to gift tax. Furthermore, direct gifts to charities made during life usually generate a current income tax deduction for the donor.

Qualifying Organizations

  • A state, a possession of the United States, or any political subdivision (contribution must be solely for public purposes).
  • A corporation, trust, or community chest, fund, or foundation that is organized in the U.S. and is operated exclusively for:
    • Religious, charitable, scientific, literary, or educational purposes
    • Fostering national or international amateur sports competition
    • Preventing cruelty to animals or children
  • A post or organization of war veterans organized in the United States
  • A domestic fraternal society, order, or association, operating under the lodge system, but only if the contribution is to be used for the purposes listed in 2 above.
  • A cemetery company (not deductible if the donation is limited to the maintenance of a specific cemetery plot).

Types of Charitable Organizations

Charitable organizations can be categories as public charities, private operating foundations, or private non-operating foundations.

Charitable Gifts During Life

Gifts of Cash

Gifts of Services

Examples of Deductible Out-of-Pocket Expenses

Gifts of Property

Ordinary Income Property
Capital Gain Property
- Donation to a Private Nonoperating Foundation
- Donation of Property for Unrelated Use

30 Percent Organizations

Special Rules and Carryforward of Disallowed Contributions

Charitable Contribution Deductions (Percent of Taxpayer's AGI)

Choosing the Adjusted Basis Over the Fair Market Value (Special Election)

Valuation, Record Keeping, and Reporting

Determining the fair market value of donated property can be difficult. The fair market value of any property is the price at which a fully informed, willing seller and a fully informed, willing buyer will complete a transaction.

Charitable Contributions/Reporting

Other Outright Gifts to Charity

Bargain Sales of Property to Charities

Bargain Sales of Appreciated Property to Charities

Charitable Gift Annuities

Charitable Annuity of Encumbered Properties (Mortgaged)

Calculation of the Donation
Income Tax Consequences

Gifts of Life Insurance to Charities

Group Term Life Insurance

Charitable Gifts of a Split Interest

Pooled Income Funds (PIF)

Charitable Remainder Annuity Trust (CRAT)

A charitable remainder annuity trust (CRAT) is less flexible than a CRUT. CRATs provide a fixed annuity to the donor for an amount that is at least 5% (but not more than 50% for transfers after June 18, 1997) of the initial net fair market value of the property contributed to the trust.

Charitable Remainder Unitrust (CRUT)

A charitable remainder unitrust (CRUT) provides more flexibility than a CRAT. The yearly pay out is a fixed percentage, or fraction, that is at least 5% (but not more than 50% for transfers after June 18, 1997) of the annual net fair market value of the assets.

Summary of Characteristics of Charitable Remainder Trusts

Characteristic CRAT CRUT Pooled Income Funds (PIF)
Income Tax Deduction Total value of property less present value of retained annuity payments Total value of property less present value of retained unitrust payments Total value of property less present value of retained income interest
Income Recipient Noncharitable beneficiary (usually donor) Noncharitable beneficiary (usual donor) Non-charitable beneficiary (usually donor)

Calculation of the Gift and Remainder Interest

Charitable Remainder Annuity Trust (CRAT)
The calculation of the income (the annuity payment) and remainder interest of a charitable remainder annuity is derived by multiplying the annual annuity by a factor from the IRS Valuation Table S based on the Section 7520 rate (published monthly by the IRS0 and the age of the annuitant at the date of the transfer.

Charitable Remainder Unitrust (CRUT)

CRATs vs CRUTs

Advantages:
CRATs - protect against declining balanced, provides a certain and fixed income stream
CRUTs - inflation protection and can make subsequent contributions

Disadvantages:
CRATs - No inflation protection and income stream percentage may be limited by 5% probability test
CRUTs - Require annual revaluation and have principal erosion risk

A CRT and Life Insurance for Wealth Replacement

For an inter vivos CRAT or CRUT, the disenfranchised parties, if any, would be the natural heirs of the donor (usually the donor's children).

Non-trust Split Interest Charitable Gifts

The most common forms of split interest charitable gifts are CRATs, CRUTs, and PIFs.

Charitable Lead Trusts

The charitable organization receives the income interest during the term of the trust and a non-charitable beneficiary (usually a family member) receives the remainder interest.

Testamentary Giving to Charities

A deduction is allowed from the gross estate for bequests to qualified charities. The methods of a charitable transfers at death (testamentary) include the following:
1. A specific bequest or device.
2. A general legacy of a particular percentage or dollar amount of a decedent's gross estate.
3. A residuary bequest
4. A remainder interest in property - personal residence or farm
5. A split interest in a charitable trust, income or remainder interest.

Advanced Financial and Estate Planning Topics

Tangible Property

When tangible property is donated to a charity and the charity does not use the property for a related use, the charitable deduction is generally equal to the donor's adjusted basis.

Community Property

If community property is donated to a charity and the donor, or donors, retain an interest in the property, care must be exercised to avoid unwanted taxable results.

Choosing Between the CRAT or the CRUT

If the client's primary objective is to maximize the income payments to the non-charitable beneficiaries, a CRUT is generally preferable to a CRAT, particularly if the trust assets are expected to appreciate. However, due to the guaranteed income payment from the CRAT, the non-charitable beneficiary would receive more from a CRAT than a CRUT if the value of the trust assets decline.

Reformation of Disqualified Split Interests

Section 2055(e)(3) of the Code outlines the procedure to correct the error to reduce a harsh result because a minor drafting flaw or oversight.

Transfer of an Interest in an IRA by Taxpayers Over the Age of 70 1/2

TRA 2010 revived the ability of a taxpayer over the age of 70 1/2 to donate up to $100,000 directly from an IRA to a charity without having to take the $100,000 into income.


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