Pentera

PENTERA PIPELINE

André R. Donikian, JD
(bio) (speaking engagements)

Take advantage of the expertise of our president,
André R. Donikian, JD.

We invite you to submit a question, or call André directly at
(317) 875-0910, ext. 222.

Below is a sampling of some of the questions André has answered for our clients.

"After speaking with André for the first time, I was pleasantly surprised at how helpful and easily accessible he was, both by phone and e-mail. Whether my question was minor or more involved, André was great at helping me think things through, both the technical aspects and the more subtle nuances involved."

—Office of Gift Planning
Clarkson University

"Thank you so very much for your helpful insights this morning during our call. You distill elements down to the key parts, which is so helpful to us. I would truly benefit from the continuation of these discussions with you ... you are a great consultant ..."

—Don Martin
Colgate University

August 2010

Transfer of Stock in an IRA

André,

Quick questions for a donor:

Has the provision for the transfer of assets through an IRA distribution to a charitable organization been extended yet through the end of 2010? And, can a donor make a transfer of the stock in an IRA rather than arranging for a cash/check distribution? I can’t find this information easily.

Thanks!

Mary Kay

Mary Kay,

No, not yet as of July 23, 2010, perhaps soon.

Yes, stock can be transferred, but cash is simpler for valuation purposes.

Hope you are well,

André

Charitable Deduction Rules for Gift of Personal Property

André,

Can you refresh my memory on what the charitable deduction rules are for a gift of personal papers by a professor to a library? My guess is that this is a related-use tangible personal property gift, fully deductible at fair-market value with a qualified appraisal (assuming value is over $5,000).

Also, is this gift made through a deed of gift? If not, what mechanism is necessary to convey such a gift? Thanks.

Hope all is well.

Randy L

Randy,

Bad news, your professor's deduction is limited to the cost of the paper and ink he used to create the materials. Same as if a living artist were to donate a painting to a museum; deduction would be limited to cost of canvas and paint used to create the painting even if he could sell it for a $1,000,000 in the market.

André

Determining Value of a Bond Without a Maturity Date

André,

I have a note in front of me that says this donor is interested in funding a CGA with bonds “that don’t have a maturity date.”

I didn’t know there was such a thing. How does one determine value and liquidity?

Laird

Laird,

Perpetual bonds, often called Perps, have no maturity dates. The most famous of these are UK Consols issued in 1888 and still trading.

Today, these bonds are usually issued by banks and governments for financing purposes to raise funds without jeopardizing their capital base. They offer high interest rates and are usually callable after 10 years. If they are not called, the coupon rate goes up by one percent after 10 years.

Valuation looks simple but is not in the real world: 1/Y, interest over cash flow. Better get an expert to do this.

André

July 2010

Funding a CRUT with mortgaged real estate

André,

We have a potential donor who owns two houses—lives in one of them and leases the other one—valued at about $500,000. There is a mortgage of $90,000. He is intrigued with the idea of funding a CRUT with the houses. He would also like to continue living in his home and is willing to pay us rent. The university is interested in acquiring the houses for its expansion purposes for the long term, but there is no compelling immediate interest. Any thoughts on how we proceed with the gift?

Mindy

Mindy,

There are two immediate problems with the proposal that need to be addressed:

1. The mortgage would disqualify the trust ab initio; there goes the charitable deduction and potential gift tax problems may be created. Is it possible to pay off the mortgage, which is relatively small compared to the total value?

2. Unfortunately, the self-dealing rules prohibit a substantial contributor—in this case, the donor—from living in the house after the trust is created even if the donor pays fair rental.

May I suggest that you consider instead a deferred charitable gift annuity. This will solve the above problems: no self-dealing rules to contend with and the mortgage is treated as a bargain sale. Donor would have to recognize capital gain equal to the mortgage x appreciation/fair-market value.

A deferred gift annuity also enables the university to buy the homes from the foundation in about eight years, which is when it wishes to acquire the properties. In the meantime the rent from both houses will enable you to finance the annuity payments.

Hope this helps,

André

Registering a CGA program in California

Hi friend,

We have an alum who would consider a CGA in exchange for some undeveloped land in California. The value of this property is approximately $1 million. Also included in the gift package would be another separate piece of property on which he lives and would do a retained life estate. The market value is approximately $2 million. So, for a $70,000 annual annuity payment we would have one $1 million piece of property to be sold now and a $2 million piece to sell in the future. I'm putting together a couple of scenarios for the business office here to find their risk tolerance level. I'm discounting the $1 million by 20% and assuming two years to convert.

The college—out east—has not registered their gift annuity program in California. As you know, a prominent law firm out here has issued a legal opinion to a major university that it does not have to register in California or anywhere else. That is what we want to do. So, what do you think? Should I be raising the California registration issue? Of course I should raise the issue—but to what level of hysteria?

Cheers,

L

Hi L,

DEFCON 2. Also, you are not that major university.

André

June 2010

Donor dying before paying IRA conversion tax

André,

I have an alum who will be 93 years old by year-end and is interested in the IRA conversion. What happens if he dies after he converts but before he pays any taxes? I don’t have a full picture of the breakdown of assets in his situation, but I strongly believe his family is wealthy enough to have estate-tax issues if he survives until 2011.

Should I be steering him in a different direction?

Also, I had a good chat with our Advancement committee chair …classic opportunity for planned gifts. She is now considering more than doubling her initial commitment to $2.25 million from the $1 million deferred CGA. Some of the $2.25 will be cash. She’s sending me a snapshot of her assets in the next week or two.

Regards,

Aaron

Aaron,

The tax would have to be paid by his personal representative and reflected on his last income-tax return.

Terrific news regarding your Advancement committee chair.

André

Using stock to make a gift

André,

Quick question. One of the gift officers recently had a conversation with a donor—aged 43—who owns several hundred thousand dollars worth of stock options in the company for which he is CFO (public company). The options have been restricted but lose that restriction this summer and he wants to use the stock (or the option) to make a six-figure gift. I do not know what the details are (i.e., the option price or how long he has held them [more than a year, at least]). I have never dealt with this precise scenario, but I seem to recall that he cannot just give the options and let us exercise them—or if he does, there are adverse tax consequences to him. Is he better off just exercising the options, then giving the stock itself? If so, is his cost basis the option exercise price? Thanks for any help on this.

Bruce

Bruce,

The result is the same: bad.

Qualified stock options cannot be transferred.

Non-qualified stock options are ordinary income property. So you don't benefit from the gain. Check advanced seminar binders from '05 and before for my discussion of the same with examples.

André

April 2010

Best practices for booking gift annuities with fundraising results

André,
What is the best practice for booking gift annuities with fundraising results? Can you count the entire amount in annual results? Do you book what the donor counts as a charitable deduction? Is the amount booked based on actuarial information?

Any direction you can provide would be very helpful.

Thanks so much,

Meg

Meg,

Generally speaking, most charities book the gift at the discounted present value or charitable deduction generated by the gift. Crediting for campaign is usually the full face value of the gift annuity. Some places go with the charitable deduction value.

Hope this helps, Meg. Call if you wish to discuss further.

André

Pro rata payment for an annuity from the last payment until the death of the donor

André,
I asked a question recently of our payables office about the pro rata payment for an annuity from the last payment till the death of the donor. Our CGA currently reads that the donor’s last payment is the one received prior to death but I always assumed we issued a final check on a pro rata basis (similar to a trust).

Moreover, aren’t we obligated to send the estate notification of the amount of any of the annuity’s principal that has not yet been returned so they can deduct from their estate taxes?

Regards,

Aaron

Aaron,

Good common-sense questions.

1. In all cases that I am familiar with, the charity’s obligation to make annuity payments ceases with the last payment prior to death. No pro rata distributions are either necessary or required.

2. If annuitant dies prior to life expectancy, the annuitant is entitled to a posthumous income-tax deduction on his or her final income-tax return for the amount of capital that has not been returned.

André

Gifts of tax-free muni bonds

André,
Have a question for you. We’ve got a donor who is going to fund an annuity ($1 million) with either cash or–here’s the question–with tax-free muni bonds. Does he still have a capital-gain consequence with this? Do I treat it like an appreciated security and get his cost basis for the calcs or as a cash transaction for the purposes of the calculations?

Thanks!

Mary Kay

Mary Kay,

You are right. You treat the munis as any other appreciated asset; hopefully it’s long term. Nice gift.

The inventor of the laser, a Union grad, did two CGAs for a total of 3.2 M, all munis. At 83, was able to get a much higher return.

Hope you have a great year.

André

March 2010

Best planned gift to benefit donor's children

André,
I met with a donor on Tuesday of this week. He is wanting to make a planned gift in the $2M to $3M range. He also wants to do this in a manner that will benefit his children. We initially had this discussion nearly a year ago. I had at the time suggested testamentary trusts for the kids with [this university] as beneficiary. It seemed pretty straightforward to me.

His estate counsel told the donor this wasn't a good idea as he would have tax issues. The donor could not articulate it any further to me, and I don't have the depth of view of the total estate that the attorney does. Anyway, I was scratching my head as to why the attorney wouldn't think this was a solid idea.

So, my question to you is: Donor wants to make a planned gift; donor wants kids to get something out of it; outside of testamentary trusts, what might be done?

Thanks,
Jason

Jason,

Donor could give [your university] the $2M or $3M outright at death and avoid all estate tax. By adding the children as trust beneficiaries he would be creating a taxable event on the value of the children's income interest. The question is, does he or does he not want to make a gift to [your university]?

You might also consider deferred CGAs for the children.

Perhaps the lawyer could elaborate on what he means. That would be helpful.

André

Binding estate-gift commitment

André,
Your thoughts please on the subject once again regarding binding estate-gift commitment. [This university] now has three such irrevocable future gift plans in place. Each has a special designation that is the purpose for making the future gift binding.

In loose conversation with donor-prospects, we have donors who make a request such as the following: “Can I get a sample clause of an irrevocable $ gift to [this university] to put into my will?”

As Louis just explained to me, such a binding future gift is more correctly considered to be a part of an estate plan rather than the will itself, since a will is a revocable document. Attached is the pledge agreement that Frank Minton introduced at your seminar in Saratoga. This document is a side agreement representing a "debt owed" by the estate. If I am correct in my understanding, why does Frank suggest that there be reference in the will to the pledge agreement, since this debt owed will come before specific bequests are satisfied in the estate-distribution process? Is Frank suggesting that it may be a moot point and therefore serves as a reminder that this pledge agreement must be satisfied?

How might you suggest I respond to our donor now seeking suggested wording? I plan to call him to discuss the eventual use, which I do not know as yet.

Pete

Pete,

As Louis so aptly put it, a will is a revocable document whereas an irrevocable pledge agreement outside and separate from the will is an enforceable debt against the estate if the will does not include a provision to satisfy the promise made by the donor.

Hope this clears it up.

André

André

My question then is whether there is any need for the bequest language when you already have the outside document (irrevocable pledge agreement)? See the document below. Louis suggests that such a binding estate-gift agreement needs to include the designation. This is language that you may have assisted Louis in preparing.

Pete

BINDING STATEMENT OF INTENT

In consideration of my interest in benefiting [XYZ University Foundation] and the [XYZ University], I, ______________________________ of _______________________________ (City, State), pledge and promise that, in addition to the contributions I have already made to the [XYZ University Foundation] (the Foundation) prior to the date of my execution of this agreement, I will contribute to the Foundation a total of not less than Five Million Dollars ($5,000,000). I further pledge and promise that any portion of the $5,000,000 I have not contributed to the Foundation by the date of my death shall become a debt owed by my estate to the Foundation, thereby obligating my estate to distribute such portion of the $5,000,000 to the Foundation subsequent to my death, provided, however, that the amount of such debt shall be reduced, dollar for dollar, as a result of any contributions made to the Foundation designated to be in partial or complete satisfaction of this pledge.

This agreement in no way limits my ability to make additional gifts to the Foundation for other purposes during my lifetime or by will or other instrument effective subsequent to my death.

I acknowledge that the Foundation’s promise to use the amount pledged by me and/or the Foundation’s actual use of the money pledged by me for the purposes specified above shall constitute full and adequate consideration for this pledge. In further consideration, [XYZ University] has agreed, upon satisfaction of this commitment, to name the ___________________________ in my honor and that such naming opportunity shall be reserved exclusively for me until such time as this commitment has been fulfilled. If, however, the combination of my remaining lifetime gifts and estate distributions falls below the $5,000,000 level, I acknowledge that the naming opportunity will again become available for another donor and that [XYZ University] will recognize my gifts in other ways befitting the extent of my contributions.

This pledge is to be irrevocable and a binding obligation on my estate.

This pledge shall be interpreted under the laws of the [appropriate state].

Executed this ______ day of _________________, 2009.

___________________________

Donor

APPROVED AND ACCEPTED:

[XYZ University Foundation]

_________________________________
[NAME]
President and Chief Operating Officer

[XYZ University]

_______________________________
[NAME]
[President] _______________________________
[NAME]
[Provost and Executive Vice President for Academic Affairs]

Pete,

Yes, there is. That would make the bequest a charitable gift rather than having the pledge become a debt of the estate. Donor's lawyer should decide which route to take.

André

February 2010

Treating an IRA rollover gift that was received after legislation ended

Hi André,

We have a donor who intended to make an IRA rollover gift by year-end—unfortunately the wire transfer was received from his IRA administrator on January 5—gift made from them on his behalf. Since the legislation ended December 31, are we required to issue the gift receipt to him in his name (not the IRA administrator) and treat it as an outright gift so he can take a charitable deduction for the full amount of the gift in 2010?

Thanks for your help,

Grace

Hi Grace,

You can do that because technically that is what has happened here, unintended as it may be. Tax wise it makes very little difference because the net result is basically the same either way.

Had it made a meaningful difference he could have demanded that the broker make him whole.

I hope you all have a great year.

André

Deferred gift annuity to include donor’s children

André,

Thanks for your guidance yesterday. I prepared a deferred gift annuity illustration that was presented by our VP for advancement yesterday to our potential donor. (I attached a copy for your convenience.) Again, I would not have presented a solution this early in the game, but I had to produce something for her.

During the meeting we found out a few more details about the property.

1. The property does have a mortgage; however, we don't know the amount yet. Does this pose any problems? I can't remember if you can accept a gift of encumbered, appreciated real estate in exchange for a deferred gift annuity. Again, keep in mind we are registered in New York.

2. The prospect asked what happens if she dies immediately after she does the gift. Obviously, the answer was that the contract ends with no further payments. There is a chance she would want to include her children somehow. They are 30, 27, and 19, which is really young. Any ideas on how to include them? I do not think that doing 3 deferred gift annuities with the mother and child as the annuitants respectfully would be in our best interest because of the young ages. One thought I had would be to do a straight-ahead bargain sale and have her set up a trust for the children with the net proceeds or just have it handled under her will.

Thanks in advance for any ideas and guidance you might have.

Regards,

Mark

Mark,

How much is the property worth? You need to decide if this is worth pursuing. But if you want the property to use for your exempt purposes I might recommend that the College just buy the property.

The mortgage creates another bargain-sale tier, and if the property is highly appreciated she will probably recognize significant capital gain.

Re 2, they are too young to be included in any charitable arrangement. And you cannot use a CRT because of the mortgage which would disqualify the trust.

A straight-ahead bargain sale would work. However, the mortgage is another bargain sale.

Hope this helps,

André

Recognizing the husband and wife as “joint donors” if the funds come solely from one account

Dear André,

Thank you so much for the manual ... you are too kind. I really wasn't fishing for a freebie, but I sincerely appreciate your generosity.

Quick question for you:

If a donor (wife) transfers funds from her personal trust account for a CGA or other instrument, can we recognize BOTH the husband and wife as "joint donors," or can we technically list only the wife as the actual donor since the funds came solely from her account?

Thanks,

Melanie

Melanie,

It’s ok if the wife is amenable since it’s her money. Enjoy the manual, but I don’t want you to stop calling.

André

January 2010

Using an IRA remainder to fund a trust?

André,

If you’re able, I seek your advice on how to proceed with the following scenario.

A prospective donor age 63 states that he’d like to make a testamentary gift to us. His idea is using his IRA remainder to fund a trust at his passing to benefit his brother, who is a few years older, with the Foundation as a charitable beneficiary when the brother passes. Should his brother predecease the prospective donor, the Foundation would receive the IRA funds, if any. The donor anticipates a significant sum being left in his IRA.

My take on this would be that the donor must first update his IRA beneficiary form with his intentions as summarized above.

Questions:

Should the donor engage with his estate attorney now to prepare any documentation?

What, if anything can we prepare or show him that makes this gift plan seem doable?

Are there other ideas for us/him to consider?

And, would a (CRUT) trust need to be established in advance?

I welcome your thoughts if you have the inclination. Thanks so much!

Tim

Tim:

You are on the right track. As you suggest, this is best done with a beneficiary designation in his IRA document. He needs to inform the IRA trustee of his intentions and ask them to designate a CRUT as a beneficiary of the IRA funds at his death with his brother as a beneficiary. You would be named as secondary beneficiary to receive remainder of CRUT at brother's death, and if brother predeceases then you would receive proceeds at donor's death. Donor should consult with IRA administrator as to how to proceed.

Hope this helps, Tim. Call if you wish to discuss further.

André

Can a donor take a deduction if a charitable remainder trust experiences a capital loss?

Hi André,

A donor who has several trusts with us has asked this question: If his trusts experience a capital loss during the year can he take that loss as a deduction? He is speaking specifically to one of the trusts he has funded exclusively with cash. My initial reaction is no, but I wanted to check with someone quicker than myself and you certainly qualify.

Thanks

Jason

Jason,

I take it these are CRTs, if so he cannot take a deduction for the capital losses.

André

December 2009

Giving an IRA rollover as stock instead of cash

Hi André,

We were on a conference call with some 50 reunion class volunteers last week, and one of them asked an oddball question which I thought you might be able to answer for us. He inquired whether an IRA rollover gift could be made in kind as a stock transfer or if gifts must be in cash—we’ve always received all our distributions as checks. I’m not sure what advantage he thought we would be getting by giving stock as a rollover instead of cash, or if it is even allowed by the legislation, but wondered if you had any insight/comment so I can follow up?

Thanks André,

Grace

Grace,

Yes, it can be made. That way you get stiffed with paying the selling cost.

André

Decreasing appraisal for a retained life estate

André,

Last year we received a retained life estate. The appraisal was $256,000. The donor passed away recently, and upon a recent appraisal we have valued the property and are selling it at $160,000. Are there are any implications to the donor’s estate considering they were eligible to receive a deduction for $171,000?

Regards,

Aaron

Aaron,

Given the state of the real estate market, I don’t think there is much to worry about from the IRS. A drop of 37.5% is not that uncommon these days. Unless there was any fraud involved with the first appraisal, your donor’s estate is OK.

André

Becoming an irrevocable remainder beneficiary

Hello André,

We are planning to write to all of the donors of record with charitable remainder trusts. The purpose in writing is to confirm or request that our organization be made an irrevocable remainder beneficiary. This will allow us to obtain a match through the Batten Leadership Challenge. See the attached draft letter.

My question to you is how do you suggest we go about doing this?

I’m thinking that we could include a form for signature by the grantor/or trustee indicating that our organization is an irrevocable remainder beneficiary. Often we have the trust document but the word “irrevocable” does not appear, thus allowing the grantor or trustee to switch beneficiaries or change the amount to be distributed.

What do you think?

Dale

Dale,

I think you need a copy of the trust document that indicates your organization is the irrevocable beneficiary of the trust.

André

November 2009

Can a donor add an additional charity as beneficiary of a CRUT?

Hi André,

Here's my question:

We are the trustee of a CRUT. The donor, in his 90s now, asked me if he could add an additional charity as beneficiary of the CRUT for a small amount, $15,000. The trust assets are about $250K. He was told by my predecessor that this was possible. He also asked if he could add more to the trust, not today, but maybe a year from now when he straightens out some finances.

I'm assuming that he can add to the trust, but I don't believe he can add/change beneficiaries. Can you walk me through this?

The trust reads,

"This trust is irrevocable and shall not be subject to amendment or modification. Notwithstanding the foregoing, however, the Trustee shall have the power, acting alone, to amend the Trust in any manner required for the sole purpose of ensuring that this Trust qualifies and continues to qualify as a charitable remainder unitrust within the meaning of section 644(d)(2) of the code."

If I'm correct in my understanding, what are some options for the donor?

Thanks in advance for your help.

Thanh

Thanh:

You can add to a unitrust if it contains a provision that permits additional contributions.

Unfortunately for your donor he may not add another charity as a beneficiary because the trust provision does not permit the addition. Such powers have to be expressly retained in the trust document.

He could exchange a portion of his unitrust income interest for a gift annuity with the other charity. However at his age the value of his income interest is rather small. Or he could leave them a bequest of $15,000 of other assets.

Basically the trust is locked up for you.

Hope this helps. Call me if you wish to discuss further.
André

Can a donor transfer a University Club bond to charity?

Hi André! I really enjoyed your seminar a few weeks ago. You and the gang do a terrific job!

We have a donor who is interested in gifting a privately issued University Club of Chicago Bond. The bond was originally issued in the 1940s and has a maturity date of 2105!! The amount is $500, and he has asked us to provide a bond power form and W-9 for donation to us.

I am completely unfamiliar with these types of bonds. I am aware, I believe, of the tax advantages of gifting savings bonds at death by will or trust via specific bequest and that a charity cannot be co-owner or death beneficiary. I am not aware of any other way that a donor can transfer a bond to charity.

Is there an opportunity here? Or should we just instruct the donor to cash in the bond and give the proceeds to charity? I believe the latter would be my normal response ... please let me know if I'm missing something. Obviously the amount is minimal in this case, but I'm curious and would like to know in case we run across this again.

Thanks!

Melanie

Melanie,

Thanks for your kind words about the seminar.

This is not a savings bond as in an EE or HH bond that can be issued only by the U.S. government. This is a private bond issued by the University Club. For you, it would be a lot simpler if he cashes it in and gives you the proceeds. Or you could call your broker/bank and ask what would be the easiest way to dispose of the bond if he were to give it to you.

André

May a donor retain ownership of a life insurance policy after making us the beneficiary?

Hi André,

An alumnus is taking out a life insurance policy and is making us the beneficiary. Is there a way for him to retain ownership, make us the irrevocable beneficiary, and receive a deduction each year for the premium payments? He understands that normally the donor makes the charity the owner and beneficiary but for some reason wishes to retain ownership. I’m not familiar with any language or way to accommodate his request.

Any help would be great.

Thanks,
Jackie

Jackie,

No, there is not. As owner he has power to borrow against policy, surrender policy for its cash value, etc. Not different than an irrevocable bequest designation and there is nothing left to go to your organization. He has to relinquish ownership to get a deduction.

André

How is the donor’s charitable deduction affected with property put into a NICRUT or FLIPCRUT?

André,

If property put into a NICRUT or FLIPCRUT is not "related"—(assuming the trustee wants to sell the property asap in order to produce income)—how is the donor's charitable deduction affected?

Don

Don,

If a CRT is funded with tangible personal property it is assumed it will be sold to produce income and therefore it is unrelated use. The deduction will be available when the trustee sells the property, but it will be based on the cost basis of the property and not its fair-market value.

Call me if you wish to discuss.

Great to see you last month.

André

October 2009

How should our donor characterize payments from a trust?

Dear André,

Thanks very much for another great conference in Saratoga. More important than the great substantive content, the Pentera seminar experience reminds me that I am part of a noble profession led by people who really care about doing the right thing. I am already looking forward to the next edition.

You’re kind to invite my questions. I have one already. A donor plans to contribute publicly traded limited-partnership shares to a charitable remainder unitrust (we will sell them immediately and invest in our regular trust portfolio). When I asked for the cost basis of the LP shares, the donor explained that when he has received distributions from the LP the tax laws allow him to apply them to reduce the cost basis of his partnership shares rather than report them as ordinary income like dividends. For purposes of determining how to characterize the payments that he will receive from the trust, should we use the original cost basis or this adjusted cost basis? The donor’s accountant told the donor to give us the original cost basis.

Many thanks,

Ted

Dear Ted,

Thanks for your kind words about the seminar. We all appreciate it very much.

I disagree with the accountant and believe that you have to use the adjusted cost basis. Otherwise, all of the untaxed gain on the distributions that reduced his cost basis would escape tax permanently, not what the IRS envisions.

Regards to Ron, and please keep in touch.

André

Is there any reason why S-corp stock should not be used to fund a gift annuity?
André,

Is there any reason why S-corp stock should not be used to fund a gift annuity, IF:
1. GT can sell the stock to other shareholders in the near term—to be defined and clearly understood or
2. While holding the stock would GT be receiving income as a shareholder? Such income might be UBIT income, I believe…
What do you think?

Pete

Pete,

The sale of S stock by GA Tech will trigger UBIT.

Any income attributable to the S stock while GA Tech holds it is considered UBIT as well.

Other than that, no problems.

André

P.S. Best not to base annuity rate on the value of the stock since you'll be paying a 35% tax on the sale proceeds and have only 65% left. And if they don't buy it back you still have to make the payments.

Are there any inflation-beating gift vehicles?
Hi Claudine – Robin and I would like to challenge the fine minds at Pentera to think about some questions about the comparative advantages of various planned giving vehicles in a potential future political/economic environment where both taxes and inflation are higher. For example, are there any gift vehicles that could be viewed as “inflation beating”?

A couple questions and thoughts to get the ball rolling:
- Robin was working on some figures for a lead trust, and it seems as if high inflation will tend to reduce the value of the remainder interest for the heirs. She realizes that would be true without the lead trust, as well. But, at least, the donor will have minimized estate taxes.
- Thinking about the tax-free income and/or capital-gain rate income associated with annuities, won’t that tax-free/reduced-taxed status be even more valuable in a higher tax-rate environment? (Sort of like having tax-free Roth income is proportionally more advantageous for people in higher income brackets.)
- I’ve read a good bit about the idea that laddering annuities could tend to offset inflation by bringing additional payments online over time to match rising costs. But does laddering annuities actually result in more total payments to a typical donor over their average life expectancy? And if it’s the same or a similar total sum, then isn’t laddering more of a convenience than a tool to increase returns? Would someone do better by giving an immediate-payment annuity, spending less than the total payments so that they could save/invest the balance, and then taking from that extra savings account later on?
It would be great to hear from you, André, or Frank Minton on these topics. Thanks!

Richard

Richard and Claudine:

Good questions without definite answers. For example, the unitrust ostensibly was designed to be an inflation fighter but hardly did the job in the market crash of 2000 to 2002 or last 18 months. It works only when markets go up in a steady manner, which they never do. Success is a matter of timing when the unitrust is created: at the beginning of a market crash you're dead; at the end of the crash you look like a genius.

Gift annuities are wonderful at all times especially for older folks: great returns, great tax benefits, and the risk is shifted completely to the charity. And as you note, the tax-free treatment of much of the payout amplifies the benefits significantly. The older you are the less of a factor inflation is because of the limited time horizon.

Your observation regarding lead trusts is also cogent. But keep in mind at the current exemption rate only a handful of people are affected by transfer taxes, especially after the recent massive loss of wealth.

Laddering annuities is the antidote to the prohibition against including a cost of living adjustment in a gift annuity. But I believe you are right, it's smoke and mirrors. If you are going to do a gift annuity go ahead and do an immediate one with what you plan to invest or a deferred one if you are young. When you have more to invest in the future, do another one. I personally have four deferred ones, and I am trying to catch up to my friend, Emmett Watson at MOMA, who has 12. I never used to give them another thought, but now I am so glad that I have them.

I look forward to meeting you, Richard. Robin is an old friend, and please give her my warm regards.
André

September 2009

Suggestion for a donor's situation

André,

I am working with a retired faculty member age 71 and his wife age 70. He is interested in supporting the University with a life-income gift. He is not concerned with his children’s welfare as they are all doing very well. Between he and his wife they have three retirement accounts totaling about $1.5 million. They own two residences with a combined value of close to $1 million. They are also collecting Social Security. I suspect they have more assets, but this is what I know for sure. To my knowledge all the retirement accounts are tax deferred.

The donor is not interested in having TIAA or AXA annuitize their plans because he rightly guesses that they will receive a good remainder should they not exceed this life expectancy.

I am familiar with naming a CRUT (to pay the spouse till death) as a beneficiary of a retirement plan, but I’m not sure this is the right call here. I don’t think the homes are in play for a gift. Any thoughts on a model to create a income vehicle from this situation to benefit him and/or his wife?

Regards,

Aaron

Aaron,

I think the best route for an immediate transfer is a gift of a remainder interest in one of their personal residences with a retained life estate.

The retirement plans are best deployed at death, either outright or in trust for spouse. He could do a tax-free rollover up to $100,000 for the rest of 2009.

Hope this helps; call if you wish to discuss.

André

Are DAFs hampered by excess business holding issues?

André,

I don't have enough info to ask a complete question, but I'm preparing for a donor visit this afternoon to discuss a DAF.

Question:
If he funds the DAF with shares of his LLC, do those shares have to be converted or can they stay in the DAF? I suspect he is the primary in the LLC—does that make a difference (excess business holdings)? Do I remember something about having 5 years to convert the asset?

What if the donor did an FF instead of a DAF? Bigger issues or lesser issues on the same situation?

Laird

Laird,

DAFs are not hampered by excess business holding or other similar issues. It's like an outright gift.

André

Conversing with an IBM Retiree

Hi André,

Question … is IBM likely one of those companies (like Lilly) whose employees may have been given Qualified Employee Stock, which offers an attractive option when used to create a CRT? I think we’re talking about companies openly traded on the NYSE who issue stock to their employees as part of their compensation through Incentive Stock Options, right? Specifically, I’m recalling the example you cited during our training last September and am trying to give one of my colleagues a tip on conversing with an IBM retiree.

Thanks!

David

David,

More than likely the employee's 401(k) is full of IBM stock—common occurrence in publicly traded companies.

All the best,

André

August 2009

Can a family foundation be converted to a DAF?

André,

I’m assuming it is possible to convert a DAF to a family foundation but that it is not possible to go from a family foundation to a DAF. Right?

Laird

Laird,

Wrong. It’s the other way around.

André

Gift of Time-Share

Hi André,

A donor would like to give a gift of a time-share. We do not have a gift acceptance policy in place that addresses this type of gift. Other than the annual fees, which we would ask him to pay until the time-share is sold, are there other concerns we should be thinking about? Is his tax deduction calculated the same way that other gifts of real estate are handled, i.e., appraised value less basis?

Thanks for your help.

Linda

Linda:

Assume the fair-market value of the time-share is $10,000, then the donor’s deduction would be the same and not reduced by his or her cost basis. A qualified appraisal is required to sustain the deduction if it’s $5,000 or over.

If the donor agrees to continue to pay the annual fees, then Deerfield should have no other concerns other than how to dispose of the asset in this difficult market. If you do fund-raising auctions then you could offer the time-share as one of the items. Just a thought.

Please let me know if you have any other questions.

André

Can a commuted annuity be used?

Frank

Donor 84, spouse 62. Is it possible to establish a CGA that pays donor annuity rate for an 82-year-old and at his death continue for surviving spouse at whatever the rate is at that time for her age? Can a commuted annuity be used? I don’t think so but wanted to double check.

André

André,

This is not possible. IRC Sec. 514(c)(5)(CF)(ii) defines a qualified gift annuity as one that does not allow for any adjustment in the amount of the annuity payments.

Besides, calculation of the actuarial value would be impossible because one would not know in advance the rate for the wife’s age at the time of her husband’s death.

Frank

Disadvantages to giving a variable annuity and setting up a CGA?

André

We have a donor interested in gifting a variable annuity and possibly setting up a CGA. His annuity is worth $170,000, with a basis of $50,000. The annuity has not yet started paying out. His tax bracket is 15%.

Birth dates are as follows:

Husband 10/30/33

Wife 07/16/33

Son 08/06/67 (currently contingent beneficiary)

Am I correct in assuming there are no disadvantages from a tax perspective to gifting the annuity to us and setting up a CGA?

Regards,

Aaron

Aaron,

The donor’s charitable deduction will be based on his cost basis of $50,000 and not the fair-market value of $170,000. This is because a variable annuity is considered to be ordinary income property and thus you have to reduce the fair-market value of $170,000 by the ordinary gain element of $120,000 to arrive at the amount ($50,000) on which the deduction is computed.

The annuity however is based on the fair-market value of $170,000.

André

July 2009

Can CRT donor acting as trustee retain stock voting rights?

André,

My question of the moment has to do with a CRT with the donor acting as trustee. The stock to fund the trust is anticipated to grow. Donor currently has voting rights and wants to be able to retain these voting rights. As self-trustee, I presume that he can do so? Can you comment please. Also, what issues if any might there be if the stock is privately held, which I think it is. I will be on a conference call tomorrow to learn more.

Pete

Pete:
He cannot retain voting rights in the stock; this would make it a partial-interest gift and so no deduction. But in his capacity as trustee he can control the stock and vote as he sees fit in exercising his fiduciary duty to the trust.

Let me know if you want to talk more about your conference call tomorrow.

Take care,
André

Which state law should govern?

Rick,

On paragraph #9 I think the governing law is supposed to be Indiana if there is a contest. We are subject to the laws of Oregon regulating gift annuities in that state because that is where the donor is resident, but we are governed by the laws of Indiana if there is a dispute because that is where Culver is located.

Thanks,

Dale

Thanks Dale, then I think the Mr. Price annuity that Mary Kay was working on recently should also be reviewed using this same concept.

Rick

Hi André,

I just want to double check. Regarding the Gift Annuity Contract there are two spots where state laws are mentioned.

Is my understanding correct?

“On paragraph #9 I think the governing law is supposed to be Indiana if there is a contest. We are subject to the laws of Oregon regulating gift annuities in that state because that is where the donor-beneficiary is resident, but we are governed by the laws of Indiana if there is a dispute because that is where Culver is located.”

Dale

Dale:
There are six states (Alaska, Calif., Md., N.J., N.Y., and Wash.) that require their law be named as governing in agreements entered into with their residents. Generally, it is advisable to name the donor's state law as governing, but a charity does not have to do so unless required as in above states.

André

Change payments from "Joe Donor" to "Joe Donor Revocable Trust"

Hi André! I have a trust question for you. We have a trust donor who is likely nearing end of life, and his attorney had him draft a living trust and new will so his daughter would not have to deal with probate (this is the same case I mentioned previously).

The donor asked me what information we need from him in order to deposit his current quarterly CRT earnings into the new living trust account. Other than the technical form I need for our administrator, I understand our original trust document needs to give us some leeway to change the beneficiary payments from "Joe Donor" to the "Joe Donor Revocable Trust."

As I interpret the document we have on file, there is no such provision under the "payment of unitrust amount" section. However, item 9 states the following:

"Irrevocability and Limited Power of Amendment. The Trust is irrevocable. The Trustee, however, shall have the power, acting alone, to amend the Trust in any manner required for the sole purpose of ensuring that the Trust qualifies and continues to qualify as a charitable remainder unitrust within the meaning of section 664(d)(2) of the Code."

Would this give us the wiggle room we need? Are there other options I should be considering?

Or perhaps we have to continue to pay the income to Joe Donor and he is responsible for transferring it into his living trust account?

I just want to make sure we proceed as necessary and don't endanger the qualification of the trust. Thanks for your thoughts!

Melanie

Melanie:

A revocable living trust has no separate legal identity from the donor. All trust income is passed through to the donor and is taxable to him. However, if he transfers a car, house, or bank account to the trust he has to reregister the title in the name of the trust. So his lawyer can reregister the income payments from donor to the trust; advise to do so and you'll be all set.

Hope this helps.

André

Effect of CGA on Medicare

Hi André,

I’ve got a potential CGA in the $300K range with a retired physician and his wife, who are moving from Ill. to Fla. They are 75 and 70 years old, respectively. I’m concerned about the issues relating to the 3- or 5-year “reach back” and the effect that creating a CGA could have on their Medicare/Medicaid qualifications. I remember you talking about that one time, perhaps at a PGGI lunch, and I can’t recall what the effect is. Is there anything I need to be concerned about here? He is partially disabled, and I’m heading out to see them in Peoria before their move to the Bradenton area.

Thanks,

David

David,

It's five-year look back. So if within five years of CGA he or she applies for Medicaid, there will be a penalty period of ineligibility equal to CGA transfer over monthly average nursing home cost for their area.

André

June 2009

Is tax-free portion of annuity in income?

Hi André,

Do you know if the tax-free portion of an annuity is included in income for AMT calculation?

Thanks,

Jason

Jason,

It can't be income because it is considered to be return of principal. So the answer is no.

André

Donor wants to make gift of home—but doesn't want to leave until he is carried out?

André,

In regard to a 79-year-old with an estate-plan "partnership" with his daughters, we've asked for the document but don't know if we will see it. His biggest asset outside of the partnership is his $14M to $16M house in Rancho Santa Fe, Calif. He would like advice on how he could give most of that value to us, but he doesn't want to leave the house until he is carried out. How do we make an irrevocable commitment now? Is there such a thing as a partial interest in a life estate? Or something that would have a similar result? I'm back in the office on Monday and need to have some idea(s) by then as we are having a strategy session. I've asked the DO to gather more info—if I hear anything I'll pass it on.

Thanks,

Laird

Laird,

Donor can make a gift of a fractional or percentage interest in the remainder interest of a personal residence or farm.

This may affect the charitable deduction because you have to account for the discount because of the dual ownership of the property. The discount is generally limited to the estimated cost of a partition of the property. See PLR9336002.

Thanks,

André

Is it possible to fund a CGA with commodities? I'm suspecting UBI is a problem...

André,

Is it possible to fund a CGA with commodities? I'm suspecting UBI is a problem...

Thanks,

Laird

Laird,

Yes, but it is considered ordinary income property.

Thanks,

André

Is it ok to leave the stock in DAF as only asset?

André,

I think I understand the question I've gotten from a development officer. A donor prospect wants to create a DAF funded with closely held stock. And he wants to leave the stock in the DAF as the fund’s only asset. He will use the returns generated by the stock to fund his charitable activities. Is it ok to leave the stock as the only asset?

Laird

Laird,

Unlike a trust or CRT, a DAF is not subject to prudent investor-diversification requirements.

But keep in mind that DAF assets belong to the sponsoring charity, so the more important question is how does the charity feel about holding on to the stock.

Thanks,

André

May 2009

Help! Will our CRAT run dry?

Hi André,

In June 2000 the former powers-that-be accepted a CRAT in excess of $300,000 for a donor, with her daughter named as 100% income beneficiary. The CRAT's payout is a whopping 9.8%. I don't know why we did this, but we did.

The annual payout to the beneficiary is $32,004. With current investment losses in that account, the FMV of the CRAT is now at $151,000. The CRAT's horizon is another 30 years. Even in good times this one was always in danger of running dry. With an effective payout rate of 22%, it is now even more bleak that this one will avert disaster.

We've never had a CRAT "run dry" at [our charity]. Is there a way to reform this trust to try and avoid this situation or are we out of luck.

Many thanks,
Jason

Jason,

No, it cannot be reformed to change the payout rate. She can give up her income interest to [your charity]. Best bet is to exchange the present value of her income interest for a CGA.

This will lower her income, but at least it will probably not run dry.Let me know what happens.

You could also buy out her income interest for a lump sum.

André

Two gifts from one farm—Can one end and one continue?
André,

Good afternoon! I’ve attached a summary from the points we discussed last week on the two gifts from one farm with mineral rights. Can the CGA terminate at the deaths of Howard and Estelle, but the life estate continue for the daughter?

Laura Executive Summary:
Prospective Gifts from Estelle and Howard

Possible NIMCRUT remainder value: $1,195,215
Possible retained life estate value: $1,053,624
Updated: February 2, 2009

Howard, 88, and Estelle, 83, own 169 acres with a residence and outbuildings in Ohio. The land is enriched with two million tons of gravel, which increases the value of the acreage significantly. They want to use their property to create a legacy to [our charity] and to provide for the residence needs of their single, 57-year-old daughter, Gayle. Estelle was a volunteer in our gift shop many years ago.

They wish to create two gift plans: an outright gift of 129 acres to create life income for all three family members (a net income charitable remainder unitrust with a make-up provision) and a retained life estate on 40 acres and the house plus outbuildings to house all three family members.

At the point when the land is given to create a NIMCRUT, Howard and Estelle will give up $9,200 in annual income from leasing some acreage to a farmer. The trustee will receive the income and subtract the fees for a realtor and trust management from this amount. At the same time, the couple needs immediate income in order to cover the property’s costs—maintenance, insurance, and taxes—and the living costs currently covered by the rental income. Both gifts will also require upfront costs including current appraisals and Phase I environmental surveys of two parcels. [Our charity] can cover these costs and issue a 1099 to the owners. Their gift will offset any personal taxes owed.

According to experts [we have] consulted, there are acceptable practices we can employ to help Howard and Estelle make these gifts and gain two valuable planned gifts; they merit our careful consideration.
1. At the time the retained life estate is created, [our charity] can exchange the remainder interest in the property for a charitable gift annuity on two lives—Howard’s and Estelle’s—at an interest rate that is reduced by 30%–40% from the ACGA rates. This strategy will create a negative cash flow for a few years, and it will lower the value of the gift to [the hospital], but it makes the gift feasible. At their deaths, the CGA terminates, but the daughter retains the right to live in the home for her lifetime.
2. The gift of 129 acres will be exchanged for a trust—NIMCRUT—to benefit all three family members. The trust will receive the rental income to pay fees; excess income will be distributed to the family. When the land sells, the trust will begin to pay income to the three recipients. As each recipient passes, one-third of the trust income will be distributed to the hospital. (Gayle will use this income to pay the maintenance, insurance, and taxes on the retained life estate property that were previously covered by the CGA.)
Variables to consider:
- Life expectancy—Howard, 88, is gravely ill, and Estelle, 83, is a cancer survivor.
- Gayle may give up the retained life estate in the future; if that is the case, the property can be sold and the gift will be realized earlier.
Laura:

Have not seen it done or come across it before. Very interesting. I think it would work and see nothing that would trip it out. But there is no authority that I can hang my hat on.

Re trust: Usually at the death of parents the portion of the trust itself is distributed to [charity]—not the income, although that would work as well.

Very nicely done, stars for creativity.

Call me if you wish to discuss.

André

What happens to a charitable deduction if the donor dies?

André,

If the donor dies before using all the charitable deduction, what happens to the portion that remains and was not used?

Laird

Laird,

Gone, bye bye.

André

April 2009

Aggressive planning with lead trusts

André,

I just read an article in the WSJ about charitable lead trusts and there is a paragraph in the article that I was very surprised to read (see below). Is this really an option? Unless this is his way of describing a grantor lead trust without using that terminology?

When establishing either trust (he is referring to a charitable lead unitrust or annuity trust), the donor can opt to take an upfront income-tax deduction based on the trust's payments to charity. Many opt to forgo that deduction, though, because taking it requires that the donor pay taxes on the trust's investment gain.

The link to the article is http://online.wsj.com/article/SB123422865113365925.html

Thanks for clarifying this point for me.

Take care,
Alice

Dear Alice:

It's true if very carefully arranged. A right is retained in the trust to make it an intentionally defective nongrantor lead trust such as the power invested in someone other than the grantor to substitute assets with the trust. The power is sufficient to make it a grantor trust for income-tax purposes but not strong enough to make the trust includible in the grantor's gross estate for FET purposes. By paying the income tax on trust income the donor is in a sense making a further nontaxable gift to his or her heirs.

The issue is far from settled as the IRS keeps batting down what powers can be retained to effectuate the defective status. Very aggressive planning.

I hope you are well, Alice.

André

What is the right gift for my donor to make?

André,

I, along with David Wilber, have so enjoyed working with Nancy and Claudine at Pentera during the past six months. I am sending this e-mail to you because I would like your advice on a wonderful gift for IFAW that I have been working on with a lady in Wellington, Fla.

She is 67 years old, recently widowed, no heirs, and has real estate holdings in the Wellington/Palm Beach area in the $5 million range.

I had lunch with her in October in Palm Beach and in Wellington last month. We had a thorough discussion about IFAW and our animal welfare/habitat preservation work worldwide. At the first lunch visit, we discussed planned giving, specifically a CGA. She told me that she was selling property in Ocala, Fla., this spring and wanted to offset capital gain on the sale with a $100K gift for a CGA.

When we had lunch in January, she said, “Bob I want to make my gift on or around March 17th for $350K.” She repeated that figure three times and I asked if it would be cash—to which she said yes. She also shared with me that she currently has a CRT-CRUT ( I do not know what organization it will benefit, but she said she receives 11% annually—rather high I think.) I told her that I would look at several options for her and she added, “I hate to have IFAW wait for all the money as I would like to have some of the money go to program work right away.”

We agreed we would meet next week when I am back in Palm Beach, and she wanted to have her accountant there too. In an e-mail this morning she confirmed that the three of us will have lunch with the accountant next Tuesday. In the e-mail she told me that she totally trusts me and IFAW, but handling her finances in this economy and the fallout from the Madoff situation, she wants him/her there.

With this background in this current economic climate, André, could I call you this week to discuss your thoughts/ideas about the best options for me to discuss at that lunch—part outright cash gift, a CGA, a CRUT (which is favorable now with IRS Index Rate dropping to 2% in February)? However, creating the trust document takes time, I believe.

Would you please e-mail me a convenient time to call you or call me on my cell phone and let me know when we can talk. I will call your office later this afternoon as you may be traveling.

Best regards,
Bob MacColl

Bob,

Indeed, please feel free to call me at 317.875.0910 x222 tomorrow, Thursday, between 10 and 12 at your convenience.

Your kind comments about my colleagues are greatly appreciated. Thank you for sharing your thoughts.

André

March 2009

Receiving variable annuity funds and an office building as gifts
André,

Good morning! We are exploring a couple of gifts on a short timeline. I'd appreciate your feedback on the tax issues raised under both.

Life is good … and interesting! Thanks!

Laura

1. Gift of variable annuity funds

I am working with a retired physician, 86, and his wife, 80, on two gifts. One is already pledged with partial payment made—$250K over five years for our Pediatric Trauma and Emergency Center (PTEC) capital project. The other is either a unitrust or charitable gift annuity, using another $250K. The source of funds for both gifts is a commercial variable annuity. He has used the payments from the annuity to make two pledge payments on the five-year pledge. The physician is now terminally ill. He wanted to use the annuity to guarantee payment of the balance of his five-year pledge. In discussing this with his advisor, the advisor suggested he create a CRAT or CRUT with $250K in the variable annuity to provide life income to his wife and split the rest out to pay off his pledge. I thought a simple CGA would also work for the $250K. However, before I can provide illustrations to discuss with him, I need to resolve conflicting information I received from two sources—Crescendo and one of the members of our PG Advisory Committee. One said the donor would have to sell the variable annuity and pay capital-gain tax on the growth of the annuity before making the gift. The other source said that there is no capital-gain tax on a variable annuity. Both said there would be savings in estate and probate taxes. How do I handle this?

2. Gift of office building

Another donor wants to give us an office building, in the hope that we would use it to provide testing or urgent care or physician office space. He may also be open to our selling the building if we can't use it … and we can't. Before we go back to him, I need to have my ducks in a row concerning the process and tax benefit to him … especially since the building could sell below the appraised value in this market. I consulted GiftLaw Pro within our Crescendo software to date, but don't feel I had a firm position on the issue of selling below the appraised value we accept as the value of the gift. ...

The value of the charitable gift would be based upon a qualified appraisal by a commercial real estate appraiser, completed not less than 60 days prior to the date the gift is made, accompanied by IRS form 8283.
- Dayton Children's may request a Phase I environmental survey.
- The appraisal and the environmental survey fees are typically paid by the donor.
- If Dayton Children's accepts the property and sells the property at less than the appraised value, that does not affect the value of the charitable gift; however, there are civil penalties on the appraiser for substantial and gross valuation misstatement.
- The charity must file IRS form 8282 if there is a disposition of the property within three years of the date of the gift (what does this do to the value of the gift to the donor?).
Here are also some notes from our VP who handles property for us. … I need your feedback on this as well.

The building is listed with a commercial realtor, who says it is a saleable building. It does have a couple of issues, but they can be resolved with price. He has shown it a couple times in the past few months. As you know it is listed at $405K. If the donor sold the building, he would take $350K. The realtor is pretty sure he can sell it for $300–$325K. If we accept the building as a gift, we should either do some due diligence (phase I environmental, title search, etc.) or have the donor indemnify us should something come up when we sell it. (Probably the former.) My understanding is that if we re-sell it within two years the price we get is what the donor can use as a charitable donation, so he would have to be comfortable with a number as low as $300K or so.

I look forward to hearing from you as soon as possible on either all or parts of these questions. Thank you very much!

Laura:

1. Both are wrong. Sale, actually surrender, of the variable annuity will result in ordinary income and not capital gain on the appreciation. And also check to see if there are any surrender charges involved. You are right that a gift annuity works just as well—and no lawyer fees to create the trust or trustee fees to manage the same.

2. If donor obtains a qualified appraisal for the value of the building then it should hold for purposes of substantiating his charitable deduction. A good appraisal should reflect the current abysmal market for real estate. Better yet, get two appraisals and use the lower value.

Is there a mortgage on the building? Will you be able to sell it if you cannot use it?

Be well, Laura, and have a good 2009.

André

Divorce and a DGA

André,

Please see the e-mail below. ...

John B has a DGA (not a CRT as he has stated) where he is primary annuitant, and his then-wife (now ex-wife) was surviving annuitant ... payments to begin 1/1/2013. Funded with $25,000.

I've asked that he send any divorce papers pertaining to the DGA.

Sounds like a mess to me—and I'm wondering what, if anything, can be done about this after the fact.

Hope all is well with you!

Thanks,
Ann

Hi Ann,

My concern is this: when my divorce was settled, part of the equitable distribution of assets was that I paid her cash for any future right she would have to proceeds from the trust.

So the total ownership of the CRT should now be in my name alone.

What document do you need from me to verify this?

Thanks,
John

Dear Ann,

You need a copy of the divorce decree that spells out the terms of the new arrangement.

May 2009 smile upon you.

Warm regards,
André

"Help—Should we accept a gift from a defunct PAC?"

André,

We have been approached by a defunct PAC that is required to direct the money they have left ($30,000) to a 501(c)3, and they have chosen Hospice. Any reason that you can think of that we shouldn't accept the gift? Although I'm not totally comfortable with this, I can't see any reason for us to say no. What say you?

Thanks,
Dennis

Dennis,

What did it lobby for? And do they have legal authority to give you the money? The decision to accept or not is up to your board.

André

February 2009

Can I fund a CGA with tax-free municipal bonds?

Louis,
Got your message re: funding a CGA with municipal bonds. The bonds in question are tax-free municipals (Iowa Tobacco Settlement Bonds).
The value is approximately $80,000 and cost basis around $72,000. Purchased in 2002; one due in 2025, the other in 2035.
Question is whether there would be negative tax implications for the donor if these are given.
I'm copying André since you mentioned that you'd be out of the office the rest of the afternoon. I have the broker/donor on hold for now, but donor (age 102!!) is going on a cruise and wanted to get this resolved before he departs.
Thanks to both of you!
Ann

Ann:
There is no problem with funding a CGA with tax-free municipals. Downside is you lose the benefit of totally tax-free income, but would be more than compensated for by the huge return.
Going on a cruise at 102, imagine that! God bless him.
Hope you are well, Ann. So good to hear from you.
André

How are taxes handled when someone dies with commercial annuities, but makes charity the benefactor?

Hi André,
Hope you had a nice Thanksgiving ... just sitting here in my office late on this fine Friday evening trying to hammer out some call reports. I have a question for you ... .
I had a question last week from a prospective donor who wanted to know how taxes are handled if someone dies with commercial annuities in their estate but makes charity the beneficiary. I welcome your answer if you care to comment.
Cheers,
David Troutman

Hi, David:
Actually, it's a great gift because it avoids both estate tax and income tax. Smart planning.
André

Can a donor make an IRA rollover gift and direct proceeds to be used to pay the premium?

André,
If the charitable organization is the owner and beneficiary of a policy, can the donor make an IRA rollover gift and direct proceeds to be used to pay the premium?
How is this any different from the donor sending a check to charity directing that proceeds be used to pay the premium?
Thanks,
Louis

Louis:
I believe it's OK. You do have the issue of whether such a directive would render the gift for the use of instead of to the institution, but since there is no charitable deduction this would not be a problem.
André

January 2009

"Help I need clarification on CGA termination!"

André,
I hope all is well.
Times being what they are, we are about to launch a “soft” campaign for CGA termination targeted at annuitants 75+ who purchased contracts ten years ago or more.
When I looked in PG Calc’s help topics for a reminder on how to calculate the charitable deduction, it provided different instructions for gift annuities as compared to other life-income gifts. Specifically, it notes that “in the case of a gift annuity only, the charitable deduction available for the contribution of an annuity interest equals the unrecovered investment in contract rather than the value of the income interest.” We have always been advised by counsel, perhaps erroneously, that when a CGA is terminated the deduction approximates the PV of the future income stream and an appraisal is necessary. When we brought this issue to counsel yesterday, however, her guidance was inconclusive.
In the case of a small annuity about to be terminated, the difference in the charitable deduction upon severance is $512.08 if calculated as unrecovered investment in contract vs. $1,902.20 if calculated as value of income interest.
I have attached the sections from PG Calc that discuss the topic.
The Canaras Group seems to favor the unrecovered investment in contract approach, but not unequivocally. Can you clarify? Thanks.
Regards,
Jack

Jack,
I wish I could clarify, but I have no definitive legal authority to come down on one side or the other. Consensus opinion seems to favor the PG Calc view, (this also includes Frank Minton in his manual). One, albeit expensive, way to resolve it is to seek a PLR.
Please note that it is up to your donor's counsel to be the final decider of the issue, especially where the answer is murky.
Merry Christmas,
André

Receiving a house as a gift, contract changes and options

André,
The Y is receiving 25% of this house (565K). We agreed to sell the house to a relative of the deceased at the appraised value and also agreed to pay no more than $2,000 in closing costs ($500 for us). [Another charity] is receiving 75%. What are your thoughts on the request below? I’ll need to discuss this with [the other charity] since they are a larger stakeholder, but I’d like your opinion before I connect with them.
Thanh and Pam,
The home inspection for the buyer revealed numerous major faults in the property (heating, plumbing, electrical, among others). The house is really in disrepair. The buyers requested that we contribute $19,000 toward the repairs. Ross Wells, in our trust real estate group, told the buyers this was an "as-is" deal and offered them $2,000 in good faith. They have now come back with a request for $8,000. We felt we should run this past the two of you since it changes the terms of the contract you agreed to a few weeks ago.
We have a couple of options: We could hold to the $2,000 and hope they don't walk away. We could agree to the $8,000 and get rid of this house. Or, we could counteroffer at something between $2,000 and $8,000.
Please e-mail me back (and copy Ross) with your thoughts.
Thanks,
Erin

Thanks,
Thanh

Thanh:
How much earnest money, if any, would the buyers forfeit if they walk away? That would be your bargaining chip.
In any event, for the Y there is not much difference between $500 and $2,000 if you decide to meet their request. In this day and age it’s not good to be stuck with a dilapidated house when there is such a glut in the market.
André

Can a non-qualified deferred compensation plan be signed over by a donor and then used to fund a gift annuity for them?

André,
Quick question... .We have an alum who wants to sign over to us their NQDC plan (non-qualified deferred compensation ... we think). Can this plan be signed over to us and then we use the fund that we would ask to be dispersed to us for funding a gift annuity for them? He is a doctor, and this is a plan through his practice ... all funds went in tax-free.
Thanks,
Kim

Kim:
It's simpler to cash in the account and fund the gift annuity. Either way the tax result is the same: it's all taxable income offset by the deduction generated by the gift annuity.
André

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