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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
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.
- 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.
- 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
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
December 2008
- Is there a minimal funding amount to set up essentially a dry trust?
Hi André,
I understand you are at Earlham today on a speaking engagement.
I met with a donor last week and our conversation covered his setting up four CRTs during his lifetime as “dry” trusts with minimal assets. He has four kids, so one CRT for each. The bulk of the funding would be at death, with about $500,000 distributed to each CRT (DePauw as trustee).
His primary goals are to provide steady income for his kids well into the future and to avoid paying any estate tax. With the future of the FET being a question mark, who knows on that front.
My questions are these:
1. Is there a minimal funding amount to set up essentially a dry trust?
2. Is there a better way to do this?
Many thanks.
Jason
Jason G. Petrovich ’93
Executive Director of Development
DePauw University
Hi Jason:
Re your questions:
1. Usually you attach a $10 bill to the trust document to minimally fund the trust. In some states you don’t need the $10. He should check with his lawyer in his home state.
2. He could set up four testamentary CRTs under the terms of his will or revocable living trust.
Hope you are well.
André
November 2008
- Does high income, straight gift bypass limitations?
Chip,
I just received the Financial Planner in the mail. It looks great and has some powerful testimonials. However, I think there might be a problem with the first example (Joe and Donna T). With taxable income that high ($250,000), a straight gift to the University reported on Schedule A would be subject to limitations on Total Itemized Deductions when income exceeds $156,400* (2008 limits) reported on Form 1040, Line 38. Or is there a way for direct gifts like this to bypass this limitation for high-income donors?
Ralph
Ralph Blanchard
Cornell University alumnus
André,
We’ve got a question about one of the “Seven Ways” from a donor. André, do you have some insight for our friend?
John
John McKain
Assoc. Dir. Gift Planning for Mkting, PR & Training
Cornell University
John,
He does have a point, but it does not apply in this example.
Itemized deductions for 2008 are reduced by 1% of adjusted gross income in excess of $159,950. So if AGI was $250,000, then the charitable deduction would be reduced by 1% of $250,000 less $159,950, or $900.50.
But to avoid this complication, the example says taxable income that already factors in the 1% reduction by other itemized deductions. So the charitable contribution of $20,000 stands on its own unfettered by the 1% adjustment.
Hope this helps.
André
* The correct amount for 2008 is $159,950.
- Tax benefits of a CRUT funded by qualified employee stock
Hi Andre, (I can never figure out how to get that tilde on top of the “e” in your name),
I have a question (no surprise to you, I’m sure) …
You covered a topic that I’m having a hard time recalling, and I can’t seem to find it in my notes, your notebook, or in my Crescendo software helpnotes. Could I trouble you to just speak for a moment to the benefit and value of someone who received qualified employee stock (such as the Lilly corp. exec. example you cited) and used it to create a CRUT and what those tax-advantages are? Maybe there’s an article you wrote on this or something you can point me to on the web at NCPG, PGDC, or some other source.
I hope all is going well for you. Perhaps you’re sipping a fine wine somewhere in the Rockies right about now … ☺
Thanks!
David
David Troutman,
Sr. Major & Planned Gifts Officer
Wabash College
David:
I am not sipping wine in the Rockies, I am drinking McDonald's coffee in my office. Bummer. Actually we were supposed to be in Paris now, but Molly hurt her knee so we had to cancel. Just as well considering the economy.
As to your question, let me answer by way of an example:
Let's say Bob retires from Lilly with $1,100,000 in Lilly stock in his 401(k) with a cost basis of $100,000 (the non-taxed contributions to the plan). He can either:
1. Do a tax-free rollover of the entire amount to his IRA. Any subsequent withdrawals from the plan will be taxed as ordinary income to him and to his designated beneficiaries.
2.Take out the entire $1,100,000 as a lump-sum distribution from the plan. The $100,000 cost amount will be immediately taxed to him as ordinary income. The remaining $1,000,000 is “net unrealized appreciation” (NUA), a capital asset with 0 basis. When it is sold, but not before, it will be taxed as capital gain. When Bob dies, there is no step up and his heir will pay capital gain when he later sells.
3. Bob can do a combination of 1 and 2.
4. NUA can be used as any long-term appreciated property to fund a CRT, avoid the capital gain on initial transfer, and receive a charitable deduction.
Hope this helps. Please call if you have questions.
Warm regards,
André
- “Help—I need a calculation on this retained-life estate!”
André,
Here’s the deal:
Birth dates:
4/12/1931
9/30/1931
Date of gift: 21/1/2008
Value of property: $1.3MM
Cost basis: $700K
Building value: $700k-62 years (years are per appraisal)
Mortgage: $200K
AFRL: 3.8%
What I am looking for, and I don’t know how to figure the deduction for:
Example 1: use birth dates and mortgage
Example 2. use 7-year term of years and mortgage
Example 3. assume no mortgage for 7-year term
I need this by end of day on Friday (17th)—can you help me out?
Laird
Laird Yock
Director of Gift Planning
Mayo Clinic
Laird,
1. Charitable deduction would be based on: $1,300,000 - $200,000 = $1,100,000, then PGCalc RLE calculation.
2. Recognized portion of the mortgage as capital gain would be $61,538:
$200,000 x $400,000
$1,300,000
André
October 2008
- Can a charitable gift annuity be restricted to a specific branch?
André,
Our finance department is questioning our ability to allow a donor to restrict his/her CGA gift to a specific branch. “From what I know from the AICPA Accounting and Audit Guide—the ‘remainder’ of a CGA is unrestricted because it is for the organization’s use and donors do not restrict that piece. If donors wish to restrict any ‘remainder’ values, they set up other types of split-interest agreements.” Any insight?
Thank you,
Lisa
Lisa Sifre
Director, Planned Giving
YMCA New York City
Frank,
Is this a valid interpretation of the AICPA? I really do not know much about it, but I would not think so.
Thanks,
André
André
That is incorrect. Donors establish gift annuities for restricted purposes all of the time. It is common for a national organization, such as the Presbyterian Foundation, to allow donors to designate the residuum of a gift annuity for a related Presbyterian entity.
Frank
Frank Minton
Senior Advisor
PG Calc Incorporated
Lisa,
Pretty strong confirmation, wouldn’t you say? It was good to talk with you, Lisa. Take good care,
André
- Gift annuity and gift tax, non-spouse beneficiary
André,
I believe there are gift-tax consequences when someone (in N.Y. state) funds a charitable gift annuity and names another person, NOT a spouse, to be the sole income beneficiary. But—when would the gift tax have to be paid? At the time the CGA is funded? Or, is it deferred until death when a lifetime gift-tax credit might apply?
Regards from the northeast,
Don
Don Blunk
Director of Gift Planning
Skidmore College
Don:
There are two issues here:
1. If appreciated assets are used, the realized capital gain is not amortized and has to be paid up-front for the year the gift is made.
2. If there is any gift tax on the present value of the beneficiary’s annuity interest, it is payable when the gift-tax return is filed, usually the year after the year the gift is made. Of course, the donor can apply his or her $1,000,000 gift-tax exemption or any portion thereof to offset the gift tax. Unless the gift is very large this will usually take care of it.
André
September 2008
- Charitable Giving for IRA Owners
Frank,
What do you think of PLR 200741016?
André
André,
I think this offers a planning opportunity for people with an IRA who would like to help a charity, like a church, that needs money for a building, etc.
Presumably, it must be a reasonable market rate of interest that is charged. I doubt that the IRS would approve a no-interest or very low-interest loan.
Also, if the IRA owner wanted to forgive the loan, I assume this would be treated as a taxable distribution followed by a contribution.
Suppose the church defaults. Would it be treated any differently than buying a publicly traded bond where the bond issuer defaults?
Frank
Frank Minton
Senior Advisor
PG Calc Incorporated
Frank,
I agree with all of your conclusions. What do you think of the life insurance angle?
André
André,
The question is whether the church has an insurable interest in the IRA owner. I have some reservations about that, but it would have to be decided under state law. I suppose the IRA owner could take out the policy, pay one month’s premium to put it in force, and then transfer ownership to the church. There would be a risk if he dies within three years. What do you think?
Frank
Frank Minton
Senior Advisor
PG Calc Incorporated
- Tax Considerations for Retirement-Plan Beneficiaries
André,
Two questions in your area of expertise:
- When an individual beneficiary receives distributions from the retirement plan of a deceased participant, an income-tax deduction is allowed for the federal estate tax attributable to the retirement funds.
My question is how this works mechanically. Is the deduction reported ratably over the period distributions are made? Or is the deduction claimed up front so that distributions are tax-free until the deduction is fully used?
- When an employee who is terminating employment receives a lump-sum distribution (LSD) of company stock from his 401(k), the basis in that stock is taxed as ordinary income and the gain as capital gain. My understanding is that the basis would have to be added into income the year of the distribution rather than when the stock is subsequently sold. Is this correct?
Frank
Frank Minton
Senior Advisor
PG Calc Incorporated
Frank:
- The deduction is claimed with each distribution received by the beneficiary. The second method would make life easier.
- You are right, the basis is recognized as income in the year the LSD is received.
Warm regards,
André
- Trick Question
André,
If someone gifts $1 million, 35-year, 5% bond to us either today or in 10 years, what's the value for income-tax deduction purposes? Isn't it always $1 million?
Nelson Wittenmyer, Esq.
Executive Director
Cleveland Clinic Foundation
Nelson,
Is this a trick question, Nelson? If it's worth $1 million whenever you give it to charity, then your deduction is $1 million at that time.
André
André,
That's what I told the donor's advisor. They insist the charitable deduction is the face value of the bond plus the future income stream (at face value).
Nelson
Nelson,
Would that be like saying I pledge $1 million to the campaign today, and I'll give you $1 million today, but I will claim a charitable deduction today for the value of what becomes of the $1 million at the end of the campaign in 5 years? Or, I’ll wait and claim a deduction in 5 years for whatever the $1 million is worth at that time.
André
André,
We're on the same side. The advisor is trying to tell me that a bond that cost $1 million today that will pay 5% for 20 years and then be redeemed for $1 million in year 20 is worth a $2 million charitable deduction if her client gifts that bond to us today. I told her no but she didn't believe me and that caused the donor to not make the gift.
Nelson
Nelson,
Tell her she needs a new advisor because this one is going to get her into serious trouble.
Hope you are well.
André
André,
You are absolutely right! I'm surviving. I'll have to update you on the results of the bond deal and what's been happening. Just let me get through these two big donor events tonight and tomorrow.
Nelson
- Partnership to Partner CGA Taxation
Frank,
Can a partnership set up a gift annuity for one of its partners?
It seems to me that the present value of the annuity payments would be current compensation to the partner and he would continue to be taxed on the annuity distributions.
Thanks,
André
André:
You are correct. He would be taxed on the present value of the payments when the annuity is established. Since he will already have been taxed on the "investment in the contract," the taxation of payments will be the same as a cash contribution: payments that are partly a tax-free return of capital and partly taxable as ordinary income. The deduction would be shared by the partners in proportion to their respective interests.
Frank
Frank Minton
President, Planned Giving Services
A division of PG Calc Incorporated
August 2008
- One Nonprofit Donates Sculptures to Another
Hi André,
I remember from last year's conference the sticky situation where a 501(c)(3) accepted a thoroughbred horse and then turned around and sold it within 24 or 36 months, potentially causing an issue for the donor who provided the horse and took a deduction.
Our situation is different than that one, as we have some works of sculpture that were donated to DePauw more than three years ago. The pieces are not a good fit for our collection, according to our curator, and we are thinking of giving (not selling) them to the Putnam County Museum, as the artist was from Putnam County. They are also a 501(c)(3).
Are there any bear traps in doing so? I wouldn't think so, but I remembered the horse story and thought it best to check!
Jason
Jason G. Petrovich '93
Executive Director of Development
DePauw University
Jason:
Not that I can think of. I think you are good to go.
André
- Value of Life Estate at Death?
Hi André,
A question about the value of a life estate. I purchased a property from a lady for $500/month paid over 110 months. She deeded the property to me and gave me a mortgage. I have made 76 payments to her totaling $37,500. At her death, the mortgage is paid off. The house is worth about $100,000. She died at 87 yrs old. At the time of her death, what is the value of her life estate?
Ted
Ted:
At the time of her death the value of her life estate is zero.
André
- Combination Real Estate Gift Raises Questions
André,
Good evening! Our office received a call from a couple, aged 88 and 82, who own a 169-acre farm. They want to give 129 acres to fund a life-income arrangement (NIMCRUT, I assume) and give 40 acres that will be a life estate for the use of their daughter for her lifetime. Age of daughter is unknown, but may be 50-60 plus. They are in a rush to determine the charitable gifts they want to make by the time they see their attorney on Tuesday July 29. The husband has cancer, is on oxygen—therefore the hurry. The couple has never made a gift to our hospital, so this is quite interesting.
I assume this is two gifts—a NIMCRUT for the 129 acres and a life estate for the 40 acres. The latter gift will have greatly reduced tax benefits for the donors, right? What if the surviving spouse AND the daughter both live in the house on the 40 acres for a period of years?
Any thoughts you have would be appreciated! I am actually missing the pages from my class notebook [Pentera's Comprehensive Planned Giving Seminar] on retained life estate—poor filing or a loan with consequences I suspect.
Best,
Laura
Laura:
Yes, indeed these are two separate gifts. The life estate gift for the daughter will produce lower tax benefits because of her relatively young age.
If the wife continues to live on the 40 acres, she should make fair-market rental payments to the daughter.
André
July 2008
- Unsuccessful twist on a home with a retained life estate
Hi André,
Here is a question for you.
Donor owns a condo in his revocable trust. The bank, located in another state, is the successor trustee and said that it does not want the responsibility to manage the property. So he is wondering what to do. I suggested a gift with retained life estate. Brilliant, I thought.
Then he said, What if I wanted to trade houses after I gave the house to Culver? I thought for a minute and said it might be a problem since Culver would own the property.
So, André, what would you have said to him?
Dale
—Dale Spenner
Director of Planned Giving
Culver Academies
Dale,
Tell him that he cannot trade a house he no longer owns.
André
June 2008
- Five-year carryover—over mechanics
André,
Help me to recall how the accounting works for the charitable deduction … year of the gift up to 50% or 30%, depending on cash or stock given, then up to five years to carry forward any unused portion of the gift. Why not deduct the carryovers first? Can you help resolve?
Pete
—Peter Ticconi
Senior Director of Gift Planning
Georgia Institute of Technology
Peter:
It's not logic, it's the law.
AGI $100,000.
Cash gift in 2007, $300,000 cash. Max. ded. $50,000 a year. In 6 years you exhaust the total ded.
But, if in year 6, you give a new $50,000 to Tech, that will be your deduction for year 6, but you lose the carryover ded. for year 6, cannot carry it over to year 7.
André
Yes, got it. Louis is looking over my shoulder … we just researched it in Teitell and understand.
We both agree with your opening explanation … it's not logic, it's the law.
Thanks. Have a good weekend.
Cheers,
Pete
- Gold to fund a charitable gift
André,
Explain to me the transfer of Krugerands to a charitable gift annuity. What are the issues?
—Laird Yock
Director of Gift Planning
Mayo Foundation
Laird,
According to the IRS, Krugs are more akin to money than to collectible coins, they have no numismatic value, and therefore are not tangible personal property. So you treat it as appreciated property for purposes of funding a charitable gift annuity. (Rev. Rul. 69-63.)
André
May 2008
- Question on five-year carryover deduction
André,
I wasn't sure on this.
A gift of appreciated assets allows a five-year carry forward for the tax deduction to meet the 30% of AGI limit.
Does that mean the deduction can be taken during the year of the gift—plus five more years—or four more years after the year of the gift?
Question 2: If he gives another gift the next year, do the two gifts combine to meet the 30% of AGI for the current gift and the gift carried forward?
Thanks,
Dale
—Dale Spenner
Director of Planned Giving
Culver Academies
David:
Greetings from beautiful Paris!
Q 1: The deduction must be taken for the year of the gift—plus an additional five years—for a total of six years.
Q 2: Yes, they do for purposes of the second year only. Technically speaking, in year two you must first use up the gift from year one, if any is left, then start using up the gift from year two.
Let me know if this is clear.
It's a beautiful day here. We are here another 10 days and I am already depressed at the prospect of going back.
Warm regards,
André
April 2008
- Are shipping costs for a gift deductible?
Hi André,
Here's one for you. Transportation costs to ship a horse to Culver. Can it be included in the value of the gift?
Please read full question. I would appreciate your sage wisdom. It's okay to throw in a little oregano and splash of garlic too.
You can tell I'm hungry.
Talk soon
Dale,
P.S. Everyone is pleased with the progress of the Culver Web site.
—Dale Spenner
Director of Planned Giving
Culver Academies
Dale:
We have received gifts in kind (horses, boxes of music, etc.) from donors where a shipping cost to the donor is involved. At a CASE conference, we learned shipping costs are not deductible and should not be considered part of the gift value. I have since talked with Mike and he would like this confirmed. Mike thinks if a donor pays $1,000 for shipping a horse, the shipping cost should be included in the gift value. We also discussed vet check fees and if they are deductible by the donor. I think the vet fees—if paid by the donor—are not deductible by the donor because the vet check is done on a horse, which is not currently in the possession of Culver. Would you send this question on to Andre?
Respectfully,
Jacqueline L. Smith
Development Department, Gifts
Culver Educational Foundation
Dale:
No, it's not deductible.
You can go pick up the horse or arrange for its shipment and pay for it. It's your horse after all.
Donor, if he or she wishes, can make a separate cash gift to your annual fund to cover your expenses.
Please let Mike know that his position makes a lot of sense, but then tax law is not based on common sense.
Hope you enjoyed your lunch.
Do you know which herb is beloved by most great chefs?
Mike,
Our well paid, but most beloved retained counsel claims that transportation and vet expenses are not tax deductible since they are the donor's expenses if he owns the property and our expenses if we own the property. Solution: Culver pays the transportation and the donor gives us a check for an equal amount.
Dale
André
- Question about S-corp's
André,
If someone is part owner of an S-corp and wants to fund a life-income gift with company stock, is it better to sell and contribute the cash, or to contribute the stock directly to the charity?
David
—David Troutman
Sr. Major & Planned Gifts Office
Wabash College
David:
From charity's standpoint, it would be better if the donor sells the stock and contributes the proceeds either outright or for a life-income plan. There would be no need to incur an expensive appraisal for the stock and more important, a sale of the S stock by charity would mean the charity would pay UBIT on the sale proceeds of the stock.
André
- Question about charitable foundations
Hi André,
I know you like to answer odd little philanthropy questions so here's one for you.
Several donors who direct family foundations have stated that they cannot make multi-year pledges because of the constraints placed on Family Foundations.
My question is this:
Are Charitable Foundations restrained from making multi-year pledges because of some legal restriction, state law, IRS statute, or is it simply a policy within its own by-laws?
Thanks in advance for your usual thoughtful, thorough, timely, elucidating, and often entertaining response.
Your admiring client often prone to annoying alliteration,
Dale
—Dale Spenner
Director of Planned Giving
Culver Academies
Hi Dale:
There are no such legal restrictions on Foundations and I double checked with other sources just to be sure. There are perhaps imaginary and self-serving restrictions but not legal.
Hope you are doing well,
André
Thanks for your research on this.
All is well.
Dale
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