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.

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

December 2007

• Question on a gift of land and associated tax credits
  

  Hi André,

  Hope all is well and you are ready for the holidays!

  Quick question—we received a gift of land—77 acres—valued at just over $190,000. It has been in the federal and state set-aside programs and therefore is not being farmed and the donor was to receive income from the government through 2014.

  My first thought on this was the donor take a life interest in the farm and bequest it to us and continue to receive the income—which amounts to about $32,000 through 2014. Then, if he chose, he could make charitable gifts to us.

  However, he wanted to give it to us now but he also wants credit for the income each year through 2014—which my boss wants to do.

  It would seem to me—and after doing some research—that the only thing we can do is credit him this year for the future value of the income and we do this one time—which means I would need to calculate the future value of the cash for "each" year and come up with one total that we would credit to him for now. Am I on the right track?

  Missed you at NCPG this year—we are headed to CASE this weekend—are you on the schedule?

  Best wishes to you and everyone at Pentera for a Happy Holiday Season!

  Sincerely,

  Brad

  —Bradley L. Bainter
  Director of Planned Giving
  Western Illinois University

  ---

  Hi Brad:

  Your first thought, the retained life estate in the farm, is the best solution. Your second thought is OK as well under the circumstances. Considering the income stream is only for six years, I would suggest giving credit for the entire $32,000. Pretend you are in a campaign and he pledges $32,000 over six years.

  Won't be going to CASE but have a great time.

  André

• Guaranteeing gift annuities
  

  André,

  For the longest time, we use to say that gift annuities were guaranteed. However, in recent years, many of us have had it pointed out to us that the guarantee is only as good as the provider and we might be better off staying away from saying that the annuity is guaranteed. Can you comment for us as my colleagues and I consider preparing our literature and letters to prospects?

  Pete

  —Peter J. Ticconi Jr.
  Senior Director of Gift Planning
  Georgia Institute of Technology

  ---

  Pete:

  True, the guarantee is as good as the provider. Tech is about as good as it gets for a guarantee. Just consider your endowment and your real estate. Pretty good guarantee as far as I am concerned. It is also a great selling point. Now, the animal shelter down the street or some other very small organization, the guarantee becomes a serious issue and I would not use it.

  André

• How do we finalize gift of income interest in a unitrust?
  

  André,

  Could you please clarify what we need to do to finalize the gift of an income interest in a unitrust?

  Dyan

  —Dyan Sublett
  Executive Vice President
  YMCA of Metropolitan Los Angeles

  ---

  Dyan:

  There are two parts to this gift. First, the calculation of the charitable deduction for the value of the income interest which I provided to you.

  Second, since this is not a gift of cash or marketable securities, a qualified appraisal by an independent, qualified appraiser is necessary to substantiate the charitable deduction. Usually an actuary will perform this function. I merely suggested calling the planned giving office of UCLA or USC or whatever to find out who they use and recommend for you to use.

  You can go ahead with the gift now and get the appraisal done later, it must be done no later than when her income-tax return is filed.

  André

November 2007

• IRA Rollover questions
  

  Dear André:

  Hope you are having a wonderful time in France, and the euros aren't giving you indigestion!

  I met with an alumnus yesterday who wants to make a $100,000 gift to Tech using an IRA rollover. Most of his retirement assets are in a tax-deferred profit-sharing trust, and he is the plan administrator. He has rolled over assets from the trust into an IRA whenever an employee has left the company. Is it possible for him to roll over assets from the profit-sharing trust to his IRA with Paine-Weber (doesn't have $100,000 in this P-W account) or create a new IRA to accept the transfer, and then effect the charitable rollover to the GT Foundation from the IRA?

  Also, he has already taken $37,500 as the minimum distribution from the Profit Sharing Trust this year and wanted to know if he could still transfer $100,000 to the GTF. I told him yes, but the $37,500 is taxable to him, and the $100,000 is neither taxable, nor does he receive a charitable deduction … but at least he is making a major gift to Tech while reducing his position in the company's profit-sharing trust.

  My initial reaction on both of these was "yes," but I wanted to run them by you. The alum is anxious to get all the pieces together soon since year-end is fast approaching.

  Merci bien et bon appetit!

  —Ann W. Dibble
  Director of Gift Planning
  Georgia Institute of Technology

  ---

  Dear Ann:

  So good to hear from you, and, yes, it's tres, tres cher ici—but what the heck, it's Paris.

  You are right on both counts.

  1. The transfer to you has to come from one—or if not enough in it then from two—or however many it takes to get $100,000.
     
     
  2. It does not matter how much he has taken out from the IRA, he still can give you the $100,000 if he still has some left.

  Please tell Louis we went to Chez Georges yesterday and it was wonderful as always.

  A bientot,

  André

  ---

  Hi André:

  There is a lingering question in my mind about this alumnus and his transferring assets from a tax-deferred profit-sharing trust to an IRA and then affecting a charitable rollover. Are there any pitfalls where employer contributions and employee contributions should be segregated, and employer contributions not rolled over? Maybe this was a question when the legislation was first enacted, but I don't want him to have a problem down the road.

  Thanks!

  Are you back?

  Ann

  ---

  Ann:

  You are right to linger. The distribution is treated first as income to the extent of income in the IRA. See example 2 in the attached JCT explanation on page 263 of the report (it's page 273 on my computer).

  http://www.house.gov/jct/x-38-06.pdf

  I am not exactly thrilled to be back.

  André

• What portion of a gift should be included in a deceased donor's estate?
  

  Hi André,

  I have a question about what portion of a gift should be included in a deceased donor's estate. Here are the facts:

  The donor established three two-life deferred-payment charitable gift annuities in 1998. In each case, he was the first annuitant and a child was the survivor annuitant (3 different children, thus the 3 contracts). Each annuity was $95,000 and the annuity payments were deferred until 2010. The donor retained the right to revoke the survivor interest in his will, but did not do so.

  The donor died 12/28/05. The accountant is asking what to include in the donor's final tax return. We asked TIAA-Cref and the figures they gave us exceeded the original gift amount. For instance, one contract has a life interest of $110,950. Can this really be the amount that has to be included in his estate-tax return?

  Thanks so much—any advice you or Frank can give me will be greatly appreciated. I really liked the donor and I want to help the accountant as much as possible. He left everything pretty much to Union except for these dpcgas.

  —Alice Marocco
  Gift Planning Advisor
  Union College

  ---

  Alice:

  Unfortunately, that seems to be the case. Note that, if this was a CRAT, the includable portion, if its value exceeded the value of the CRAT, would be limited to the value of the CRAT.

  André

• Assignment of Right to Unitrust Payments to charity
  

  André,

  Do you have any language pertaining to the Assignment of Right to Unitrust Payments to Charity?

  —Dyan Sublett
  Executive Vice-President
  YMCA of Metropolitan Los Angeles

  ---

  Dyan,
  Here you go...

  Assignment of Right to UNITRUST Payments to Charity

  I,                            , co-creator of and successor beneficiary of the right to receive unitrust distributions for my life from the Unitrust, established on (date), hereby absolutely and irrevocably relinquish and assign any and all of my rights to receive any distributions from said unitrust [to the remainder beneficiary, the YMCA - LA], from the date of this assignment. It is my intention that the remainder beneficiary, the YMCA - LA, have immediate access to and benefit from the assets of the unitrust in carrying out its exempt purposes.

  André

  ---

  This is perfect. Many thanks. And I AM jealous of Paris! I cried when I left, many years ago.

  Dyan

• Is there a charitable deduction for interest-free loans?
  

  André,

  I hope all is well there in Paris.

  Interest free loans … if we were to enter into such an arrangement with an individual, do I recall that there is no charitable deduction, just a warm and friendly helping hand? It used to be that a donor could give up to a certain amount, maybe $250,000 total with favorable tax consequences. The donor-lender obtains no charitable deduction for the loan, but the income earned from the loaned funds received by the institute is not taxed to the donor. Is this still the case? Is there a limit on the amount of time that the loan can be outstanding?

  Self-insurance question emerges again by Barrett as to whether the GTF should be telling donors that we can self-insure as an option to the donor who wants to buy a new policy as a gift plan to Tech. Barrett has heard that the University of Minnesota is doing self insurance. Have you heard of this happening? I found this info on the web … http://blog.lib.umn.edu/mpdean/blog/001792.html

  After reviewing the blog, I did not think that the self insuring applies to donors electing to be a participant. What do you think, or know about it?

  All the best.

  Pete

  —Peter J. Ticconi Jr.
  Senior Director of Gift Planning
  Georgia Institute of Technology

  ---

  Peter:

  You're right on with regard to interest free loans to charity. Maximum loan: $250,000. Demand the note so that the donor can reacquire funds at any time. There is no charitable deduction, but income earned by loan funds are not taxable to the donor.

  The best candidates for this arrangement would be those who do not itemize and those who give away the maximum allowable charitable contributions.

  Another option: Lead trust.

  Re: self insurance, I mentioned this at the seminar and the experience of the Univ. of Minnesota when Craig Wruck was there long ago. He is now at the Hazelden Foundation and can be reached at craig@wruch.com.

  André

• DCGAs and taxes to the beneficiary
  

  Here's my question:

  If a donor sets up a deferred charitable gift annuity with a child as a beneficiary, would part of the annuity payment be tax-free to the child?

  —Jason Petrovich
  Associate Director of Gift Planning
  DePauw University

  ---

  The answer is yes. Here's the scoop …

  • Donor sets up a deferred CGA for his child ($500,000 cash)
  • Donor gets charitable income-tax deduction
  • Donor reports taxable gift (which is present value—line #9—on the actuarial chart of the PG Calc report). If donor hasn't used his $1 million lifetime exemption there won't be any current taxable ramifications.
  • Child begins receiving income based on DCGA term
  • Child recognizes a portion of the annuity payment as ordinary income and tax-free income as outlined in the PG Calc summary report

  OR

  PG Calc said the donor could include revocation language in the DCGA agreement, which gives the donor the right to change or revoke the beneficiary. In this case …

  • Donor sets up a deferred CGA for his child ($500,000 cash)
  • Donor includes revocation language in DCGA agreement (with no intention of ever using it)
  • Donor gets charitable income-tax deduction
  • Child begins receiving income based on DCGA term
  • Child recognizes a portion of the annuity payment as ordinary income and tax-free income as outlined in the PG Calc summary report
  • When the beneficiary begins receiving annuity payments the donor will report a taxable gift (each year) equal to the amount of the annuity payment less the annual exclusion (currently $12,000). The taxable gift will not cause any taxable ramifications to the donor until the $1,000,000 lifetime gift exemption has been used.

  I hope this helps. Please don't hesitate to call PG Calc if you want to confirm this information. Their phone number is 617-497-4970.

  André

• Can you do a retained life estate in your will for someone else?
  

  André,

  Greetings from Saratoga!

  Question: Is it possible for someone to do a "retained life estate" gift by will? That is, can our alumna leave a ranch to the College in her will, but with retained life use by her 60-year-old nephew?

  And, what if the nephew got tired of running the ranch, say, ten years after our alumna's death? Would it be legal for us to then pay him for the then value of his remaining life estate? (Or, some other agreed upon amount?) You will argue that we already own the property so why would we want to pay anything for it. But—the donor would want to know that her nephew got some $$ out of it.

  It's a complicated situation … but it involves a beautiful cattle ranch valued at $10 million!

  Thanks,

  Don

  —Donald L. Blunk
  Director of Gift Planning
  Skidmore College

  ---

  Hi Don:

  The answer is yes to both of your questions.

  Re: 2, you only own the right to receive the property after the nephew dies. He owns the life estate or the right to live on and enjoy all rights to the property until he dies. Whenever he decides to move, he can either sell the life estate to you—or someone else—or make a gift of the life estate to you, in which case he will get an income-tax deduction for its value based on the FMV of the ranch at that time and his age at that time.

  Hope this helps, Don. Call me if you have questions.

  André

  P.S. Nice gift!

• Is this considered a donor-advised fund?
  

  Hi, André,

  The IRA distributions have been a good thing for us this year with three in just the last week contacting me to state they were sending the distribution from their IRA to WIU.

  I know the answer to this question, but I have one donor that I am working with that has an advisor that is concerned that by directing $50,000 from her IRA to the WIU Foundation for a scholarship she is actually establishing a donor-advised fund with us. I have assured her this is not the case. However, she is insisting that I run this by our planned giving counsel for the answer for her advisor.

  So, I am contacting you for the answer so that she will move ahead with this distribution!

  Thanks for your help and best wishes to you and all those at Pentera for a Happy Thanksgiving!

  Sincerely,

  Brad

  —Bradley L. Bainter
  Director of Planned Giving
  Western Illinois University

  ---

  Hi Brad:

  Good to hear from you.

  Please let your donor know that a direct transfer of IRA assets to WIU is not considered a transfer to a DAF because WIU is not a DAF.

  Hope this helps,

  André

October 2007

• Question about retained life estate in a co-op
  

  André:

  The prospect lives on the fifth floor of a co-op apartment building in Washington, D.C. He has his medical practice in a space on the first floor that will become an apartment after he leaves his practice. The co-op would not let a business continue in the building.

  1. Can a co-op apartment be given in a life estate?
  2. Can he give his practice space in a life estate?
  3. The practice space is worth $1 million and his apartment $2 million. If number 2 isn't possible, how difficult would it be to give an undivided partial interest in a co-op for a retained life estate?

  Laird

  —Laird Yock
  Director of Gift Planning
  Mayo Foundation

  ---

  1. A co-op can be given in a life estate if the co-op board agrees to it.
  2. No, only personal residences qualify.
  3. Not hard—see number 1.

  André

• Can a family foundation be named as the remainder beneficiary of a CRUT?
  

  André:

  The Saratoga Seminar was outstanding as usual.

  Can a family be named as the remainder beneficiary of a CRUT? If so, what language is needed to accomplish it? Do specific code sections need to be specified?

  I'd appreciate your answer on this one as I'm doing an estate plan in Boston where the donor wants his retirement assets to go into CRTs for three sons and then the family foundation.

  HELP!
  Tom

  —Thomas B. Hunt, JD, CFP
  Charitable Gift Planning Consultant

  ---

  Tom:

  Yes, you can do that, no problem. You just name the PF as the remainder beneficiary in the CRT document with its tax ID # and legal name, location, etc.

  Thank you for the nice job you did with your presentation, several people said they enjoyed it...

  André

• Can you reduce payout rate on a CRUT?
  

  Dear André,

  We have a parishioner who has established a charitable remainder unitrust for the eventual benefit of the Cathedral. His current payout is 8%, and he would like to reduce that payout to 6 or 7 %. Is this possible? If not, can we accomplish the same goal via another method?

  Many thanks,

  David
  —David Rocchio
  Director of Stewardship
  Cathedral of St. Philip

  ---

  Dear David:

  No, it is not possible to reduce the unitrust payout.

  However, many trust beneficiaries in similar circumstances have elected to exchange the value of their income interest in the unitrust for a gift annuity.

  Regards,

  André

August 2007

• Crediting a donor for a deferred gift
  

  Hi André,

  Greetings on a hot summer's day in Indiana.

  Could you give me a little advice in the area of crediting a donor for a deferred gift? I know we have walked this way before.

  Below is a set of e-mails concerning a gift "intention" by a 55-year-old donor. His e-mail is the only documentation we have, which is rather vague.

  He said: We are committing to a $1 million deferred gift to Culver. This gift will be made by one or more of the following: naming Culver as beneficiary of a charitable remainder or charitable lead trust, naming Culver as beneficiary of one or more life insurance policies or testamentary gifts to Culver. We will inform the School of the specific approach when we have finalized our family's charitable planning.

  We are wondering if we should credit it at the full million, discounted by 75% because of his age, or wait until we have a document in writing that could stand up as a legitimate pledge in case he did pass away before the family's charitable planning is finalized.

  What would your advice be?

  Thanks,
  Dale

  —Dale Spenner
  Director of Planned Giving
  Culver Academies

  ---

  Good to hear from you old friend.

  At his age of 55, the chances of his dying before they finalize their charitable plans are fairly remote so you can wait.

  The lead trust is tantamount to an outright gift and that would be in your best interest. The bequest is the most problematic in terms of crediting the gift given his age. The trust could be counted at either full value or charitable deduction, my preference, again, given his age.

  I think it is best to wait until their plans gel.

  I hope you are well; it's going to be 102° on Thursday.

  André

  PS. Life insurance: premiums paid over duration of campaign.

July 2007

• Gift annuities and medicaid for seniors
  

  Hi André

  Several months ago, I think it was you that shared—at a PGGI lunch—how gift annuities for seniors may potentially negatively impact Medicaid qualifications. I think you said something about an attorney from North Dakota who said that issuers of CGAs should halt issuing them due to some new law enacted that might cause a reduction in Medicaid benefits. I'm working on a gift annuity with one of our retired professors and want to make sure I'm not missing anything. I've been unable to link these two topics in an Internet search and would be grateful for any light you can shed.

  Thank you,

  David
  —David Troutman
  Senior Major and Planned Gifts Officer
  Wabash College

  ---

  David:

  Let me answer by way of example. Suppose an 82-year-old person transfers $100,000 for a gift annuity. A few months later he has a stroke. His medical expenses consume the rest of his assets over the next several years and he ends up with less than $2,000. He shows up at the nursing home and applies for Medicaid.

  If the transfer took place within five years of his application, he'll be facing a period of ineligibility for Medicaid benefits. If the average cost of nursing home expenses is $5,000 in his region, his ineligibility will stretch for 20 months: $100,000 over $5,000.

  Hope this helps,

  André

• Questions about NIMCRUT
  

  André,

  Hi! Our last issue of Children's in Mind has had a wonderful impact to date … three new bequest prospects, with one specific intention received of $250K, and now a potential real estate gift to fund a CRUT. I hope you can help me work through this one, because it is new territory for me.

  The donor is a very interesting guy with a family partnership which holds millions in property. He is interested in giving the hospital 70 undeveloped acres valued at $1.5 million. He is interested in the best tax benefits but also wants a high payout (he mentioned an 8% CRT he has with another charity which is also the trustee). We will recommend that a bank with a good trust dept. serve as trustee.

  I've attached a summary of my thoughts and would appreciate it if you could advise me, specifically with regard to the payout rate and the possibility of a 20% cash gift to the hospital from the sale of the property, using 80% to fund the NIMCRUT.

  Some of the odd comments in the talking points refer to questions the donor asked me by phone today. He also asked me to meet with him on Monday July 27, so I would appreciate a quick response, if you can.

  THANKS!
  Laura

  —Laura L. Fike, MA, CFRE
  Director of Gift Planning
  The Children's Medical Center

  ---

  Laura:

  You have summarized it very well. My only comment would be to gift the 20% of the land as an outright gift; then you and the trust can jointly sell the property.

  I am concerned about retaining the right to change the charitable beneficiaries. This renders the gift revocable until they die.

  As to an 8% payout, there is not much you can do about it. It's his trust and you have an independent trustee. You have no control or an option to say yes or no.

  Hope this helps. Call me if you wish to talk. 317.875.0910 x222

  André

• Gifting complicated property
  

  André:

  I just got a referral for a very wealthy lady. Her family has a private foundation ($92 million), and she works with foundations on their investments. She lacks information and knowledge on CRTs.

  Her question: She has a very philanthropic client who purchased property in South America for development. He is a U.S. citizen. The development is both residential and commercial. He wishes half of the property to ultimately go to a nonprofit, which is an international agency on which he serves on the board. He wants to avoid UBTI from this if possible.

  Questions:

  1) I presume that if he gifts the residential property that will be subdivided and sold as lots directly to the charity—it would be subject to UBTI. Right? Wrong?;
  2) if he put the property into a CRUT, the CRUT could divide and sell without UBTI. No mortgage is involved; a cash deal;
  3) if #2 works, can he still serve as the trustee?

  Look forward to seeing you in Sept. in Saratoga.

  Tom
  —Thomas B. Hunt, JD, CFP
  Charitable Gift Planning Consultant

  ---

  Tom:

  Take a look at item 12 of recent developments of the 2005 advanced seminar. Also, look at PLR 200532057. They provide a road map of how to do this without getting into trouble. Also, Google the plr site for further articles.

  Let me know if this helps.

  André

June 2007

• Can two children fund a single CGA agreement?
  

  Hi Claudia:

  Nancy relayed your question to me regarding whether two children can fund a single CGA agreement with separate transfers of cash gifts for the benefit of their parents.

  I think it is possible. Of course, one could not do so with a CRT.

  Though it is possible, however, I would recommend two CGA agreements because the documentation is simpler when claiming the deduction by the children. Also, if the daughters want to avoid making taxable gifts to the parents, which they could do by reserving an inter vivos right of revocation, it gets really complicated to try to reserve this right for each daughter in a single agreement.

  UHHS probably would be willing to send a single check—if that would make it easier for the parents.

  Warm personal regards,

  André

  ---

  Thanks so much André. Great to hear from you. We are doing separate $50,000 gift annuities for each daughter—for all the reasons you mentioned. Thanks again.

  Claudia

  —Claudia A. Lozano
  Manager, Planned Giving
  Institutional Relations and Development
  University Hospitals Case Medical Center

• Who should sign for an 8283 for a CRT?
  

  Hi André,

  A donor's accountant called us and requested that we sign an 8283 for his client's CRT. However, we are not the trustee—a bank in Ohio is. Do we have to sign the 8283?

  Thanks!

  David

  —David Troutman
  Senior Major & Planned Gifts Officer
  Wabash College

  ---

  David:

  No, the trustee of the CRT, in this case the bank, has to sign it. The responsible party here is the trustee.

  André

May 2007

• Tax-deferred commercial annuity triggers AMT; 1035 exchange
  

  Note from our donor:

  Thanks for your note. I am working on the mechanics of the contribution. As these things go, it is somewhat complicated. My trust lawyer and tax accountant both think the tax-deferred commercial annuity investment is ordinary income; and if I cashed it in, I would be hit with the alternative minimum tax. They are suggesting an 11-year pledge of $15,000 per year from my IRA for the Peace and Justice Endowment. This level of payout from my IRA would not bump me up too much. It also may turn out, they think, that the one-year 70½ contribution rule may be extended, and we could complete the pledge earlier. If I take that route, I could (1) keep Earlham School of Religion as the beneficiary on the policy or 2) amend my trust agreement to include Earlham School of Religion as a beneficiary.

  Another possibility, which we can explore with your development department, is a 1035 transfer to another annuity at Earlham. I read IRS Bulletin 2003-33 (August 18, 2003) Rev. Rul. 2003-76 on the tax treatment of exchanges of annuities under 1.1035-1 of the Income-Tax Regulations without recognition of gain or loss. As I understand the bulletin, the oblige (me) of Contract A must be the obligee of the exchange contract B. We would then set up an annual distribution amount to Earlham School of Religion from the annuity, with Earlham School of Religion as the beneficiary at my death. If that is a possibility with regard to Earlham's various gift instruments, I can run it by my tax person.

  The investment firm representative sent a fax to the annuity people at the issuing company asking for the basis, which should be forwarded to me very soon.

  —Jim McKey
  Vice President for Institutional Advancement
  Earlham College

  ---

  Hi Jim:

  Her lawyer is correct, it is an ordinary income asset and surrendering will trigger either ordinary income-tax or AMT.

  Not knowing what the future holds, she should take advantage of the tax-free rollover from her IRA this year up to $100,000 and do annual withdrawals and contributions in following years.

  The second option does not work. 1035 exchanges are available only between insurance companies—Earlham is not an insurance company.

  Hope this helps. Let me know if I can assist in any way.

  Regards,

  André

April 2007

• Nontraditional assets
  

  Hi André,

  A potential donor wants to give to Culver but taxes are important to him. Is there any tax advantage to him in making a gift to Culver—outright or perhaps something like a CRT or CLT—in the year of the sale?

  Is it possible to prepare a specific proposal which details the tax savings on a $50,000 cash gift to the Culver Annual Fund and a $1,000,000 capital campaign gift?

  Let's assume that the capital gift is paid from the proceeds of the sale of his restaurant and the annual fund is from appreciated securities.

  He also has:

  • annuities (which we are told are only "partially deductible")
  • life insurance (which he has a loan against on one and is still paying premiums on another), and
  • IRAs (although he is not yet 70.5 years old)

  All of the above instruments could work, but would not be as beneficial—tax-wise—for him. Correct me if I'm wrong.

  Jim mentioned a charitable lead trust. Would that allow the donor to avoid capital-gain tax on the restaurant and then allow him to return the corpus to his heirs after Culver uses the proceeds for his lifetime?

  Sorry to make you work on your vacation.

  Thanks,
  Dale

  —Dale Spenner
  Director of Planned Giving
  The Culver Academies

  ---

  Dear Dale:

  A nongrantor lead trust will not produce an income-tax deduction, only potential gift and estate-tax savings. While a grantor lead trust does produce an income-tax deduction for the present value of Culver's income stream from the trust, the donor will be taxed on the annual income from the trust—including all distributions to Culver.

  Also, a lead trust will not allow any escape from built-in capital gain in the restaurant.

  The restaurant is most likely organized as an S corporation. A gift of S stock to a CRT will disqualify the S status with unpleasant tax consequences. It can go into a grantor lead trust, but it would not make much sense.

  An outright gift produces the best tax benefits. Assuming he is in the 40% federal and state income-tax bracket, a $50,000 gift to the annual fund will produce a $20,000 income-tax savings, partially offsetting any income-tax liability incurred from the sale of a restaurant.

  Along the same line, a $1,000,000 gift to the campaign would be deductible and produce a $400,000 income-tax savings. However, a cash gift is deductible up to 50% of adjusted gross income and appreciated property up to 30% of AGI with a 5-year carryover.

  He could give S stock to Culver, but such a gift would be subject to a minority and a lack of marketability discount. So a gift of $1,000,000 of S stock would be subject to about a 30% discount, thus reducing the donor's deduction to $700,000. When Culver sells the S stock later, it would have to pay an unrelated business taxable income of 35% on the proceeds of the sale.

  Annuities: Only the donor's cost basis is deductible, it's ordinary income property.

  Life insurance: The debt would be recognized as a bargain sale to him. And his deduction would be limited to his cost basis in the policy.

  IRAs: Whatever he withdraws would be included in his gross income, which would be offset by a charitable deduction. A wash and no tax savings.

  I don't know what else he owns, but the above assets are not ideally suited to fund a planned gift—either outright or deferred. Does he have any other appreciated assets like stocks or real estate not subject to a mortgage? Or, cash as discussed above?

  André

• CRT borrowing
  

  André,

  Can a charity borrow from a CRUT if it's the sole, irrevocably beneficiary as well as the trustee? I don't think the self-dealing rules apply but what about normal fiduciary limitations? Have you done this before? Thanks for your comments.

  —Nelson Wittenmyer, Esq.
  Executive Director
  Cleveland Clinic Foundation

  ---

  Nelson:

  Greetings, from freezing Paris.

  Yes, it can buy the asset from the CRT in exchange for a secured demand note with a definite timetable for repayments and interest at market rates. No self dealing, charity is not a substantial contributor to the trust.

  My understanding is that if an investment firm is the trustee, it may let the charity borrow up to 80% of value of the CRT—but to be safe, get an independent co-trustee to authorize the loan.

  André

March 2007

• Inheriting an IRA, Deferred CGA Taxes
  

  Hello André:

  I've got two questions:

  1. If a person inherits an IRA and they are 70½ or older, can they make a qualified charitable distribution? I thought they could, but the IRA administrator says no because it is inherited.

  2. A husband funds a deferred cga for sole benefit of his wife. As far as I know, the funds are from the husband. Does the gift qualify for the annual gift-tax exclusion or the marital deduction? I don't believe so because it is a deferred-interest gift—is that correct?

  —Marv Kelley
  Senior Gift Planning Advisor
  Northfield Mount Hermon

  ---

  Hi Marv:

  1. You are correct, if the beneficiary is 70½ or older.

  2. Correct again. The right to payments is a future, not a present interest. Also, if appreciated assets are used, then capital gain is reportable immediately.

  Take good care.

  André

February 2007

• Issues regarding receiving gifts of stock from closely held company …
  

  André:

  A prospective donor from Florida just called my office to ask how to make a donation of privately held stock to Culver. He wants to donate 150 shares of a bank. He advised me that the bank's president is his cousin. I contacted the bank president and confirmed that the bank's holding company will be willing to buy back the shares at $70.00 per share. The prospective donor will gift the shares to Culver Educational Foundation and Culver can sell them back to the bank. The proceeds from this gift will be $10,500. I gave the potential donor the name and address of our gifts manager. He will send the certificates directly to her.

  Are there any tax or legal issues about receiving a gift of stock from a closely held company and then selling it back to the company?

  Just wondering,

  Dale

  —Dale Spenner
  Director of Planned Giving
  The Culver Academies

  ---

  Dale:

  This transaction is OK if Culver is not under an obligation imposed by the donor at the time the gift is made to sell the shares back to the bank; if it is, it would be considered a step transaction and the donor would have to recognize the capital gain.

  By the way, is the bank a C or S corporation?

  Since it's over $10,000, he will need a qualified appraisal to obtain a deduction.

  Regards

  André

• André asks Frank Minton about flexible CGA
  

  André asks Frank:

  If a father establishes a flexible gift annuity for a disabled son, can he retain control over the trigger date for starting payments?

  Thank you

  —André

  ---

  André:

  I think so. The only risk would be that the taxable portion of payments might be taxed to the father—if he can control the flow of income. This would be true if it were a trust, but I don't think this rule (Sec. 674) applies to gift annuities. I think it is low risk.

  —Frank Minton
  President
  Planned Giving Services

• Feasibility of donor advised funds
  

  Hi André,

  Quick (I hope) question for you. Are you finding many colleges and universities promoting and using donor advised funds? Your thoughts!

  —Bradley Bainter
  Director of Planned Giving
  Western Illinois University

  ---

  Bradley:

  Re. my thoughts on DAFs, it's an attractive marketing device but fraught with administrative headaches.

  André

  ---

  Thanks, André—that is what I am coming to the conclusion on as well. We have a donor that wants to establish one with a gift of $400,000, but only $200,000 would be for use by WIU, $100,000 for use by another university, and the other $100,000 to be used to support 3 other community ventures. My personal view is that this is going to be a headache for many years to come and not worth it just to be able to count another $200,000—but the bottom line (instead of the future) is what drives some people. I think with a little work we could talk this donor into $300,000 for us, set up in a CRT, and he could/would deal with other entities on his own. Thanks for your input. I will give Saratoga some thought.

  Brad

• Funding a CRT
  

  André,

  We have an alumnus who wants to transfer a partial-ownership stake in a Sub-chapter S Corp. to establish a CRT for two lives (his own and a spouse).

  The stake in the Sub-chapter S Corp. generates a substantial annual income of approx. $120,000 on assets worth approx. $1 to $1.5 million. This person's stake is also encumbered by a 4 percent note on a portion of the asset, approx. $650,000. How can we help this fellow create an irrevocable charitable-trust vehicle that generates enough to pay the annual note payment (approx. $40,000), earn approx. $50,000 for annual personal income, and possibly avoid the annual $30,000 paid in income tax on the asset? A big question probably with a very simple answer—not possible—but worth asking what the options are.

  —Ellen Granda
  Director of External Relations
  Lake Forest Academy

  ---

  Ellen:

  Funding a CRT with S corporation stock will terminate the S status and the corporation will revert to a C corporation. Not a desirable result.

  The S corporation can establish a term CRT for 20 years or less and fund the trust with the appreciated asset. However, the debt on the property will disqualify the trust ab initio. If there is someway to remove or shift the debt, then something could be worked out.

  André

• CLT beneficiaries on public record
  

  Hi André,

  Are charitable lead trusts required to provide the IRS with a list of their beneficiaries each year, in the same way that foundations do?

  —Jane Kolson
  Associate VP for Advancement
  The George Washington University

  ---

  Jane:

  I spoke to André today. He referred me to IRS form 1041, schedule K-1 (a copy of which is attached).

  In the instructions from the form, it states the following:

  • Part II. Information About the Beneficiary
  • Complete a Schedule K-1 for each beneficiary. On each Schedule K-1, enter the beneficiary's name, address, and identifying number.

  This does apply to income beneficiaries of a nongrantor charitable lead trust.

  Complete instructions can be found at www.irs.gov—enter search term "1041 K-1"

  Thanks,

  Doug

  ---

  Thanks so much, Doug, but I have a follow-up question. Is this reported information on lead trust beneficiaries available to the public somehow?

  Thank you and André for your help!

  —Jane

  ---

  Jane:

  Yes, this information is supposed to be available. According to Tax Economics of Charitable Giving, Warren, Gorham & Lamont, Paragraph 34.19, section (3) Public Access:

  "A trustee of a charitable trust should be aware that virtually all trustee actions are, by law, open to public scrutiny. Copies of annual tax returns must be made available to the public on request. In many states, reports filed with the attorney general must also be made available for inspection. Many of these documents are already accessible on the Internet (at such sites as Guidestar and The Foundation Center). Proposed legislation would expand the amount of information required on the annual tax return (Forms 990 and 990PF), require electronic filing of the return, and provide more timely electronic access."

  These Web sites would be the best place to start.

  I hope this helps,

  Doug

  ---

  It does indeed, Doug. Thank you so much.

  —Jane

• Minimum age for CGAs
  

  Hi André

  I'm currently doing a little research on minimum age of annuitants at some of my sister institutions in NYC. We moved our minimum up to 65 in '03, and I'm suddenly besieged with interest from people in their late 50s. (Or, more accurately, people who wish to create them for people in their late 50s.) Any opinion on minimum age for CGA's?

  All best,

  —Pamela Butler
  Deputy Chief Development Officer
  The Metropolitan Museum of Art

  ---

  Hi Pamela:

  Re. minimum ages: One way is to have the donor use a deferred to 65 CGA. Or, keep your policy at 65, but if asked if you would accept for mid-to-late 50s, say you'll make an exception for them and take it.

  Remember, the earlier they start their annuities the more opportunities they'll have to make future ones. I think 50 is OK.

  You may wish to ask Frank, the Greenspan of CGAs.

  Take good care,

  André

January 2007

• Converting insurance policy to a CGA
  
  André
  
  Happy New Year! I hope this finds you well.
  
  We have a single life insurance policy, and the amount is now $150,000. I believe the cost basis is the full amount of $150,000. The donor is especially interested in the tax benefits to herself.
  
  Is it a problem to turn an insurance policy that had already been gifted to us into a CGA? Obviously, she can't get double the tax deduction if she has already received one.
  
  Thanks,
  
  —Kim
  
  Kimberly Tanner '90
  Associate Vice President for Institutional Advancement
  Earlham College
  
  

  ---

  
  Hi Kim:
  
  Happy New Year!
  
  When was the policy gifted initially? And was a deduction claimed?
  
  Life insurance is considered to be ordinary-income property, therefore the deduction, either for an outright gift or gift annuity, is limited to or based on the lesser of the fair-market value (obtained from the life insurance company), or the cost of the policy (the total premiums paid less total dividends received).
  
  If the gift was made a while back I don't think Earlham can legally convert the outright gift to a gift annuity.
  
  Warm regards and may you have a wonderful year.
  
  André

• Acknowledgement of IRA gifts
  
  Hi André,
  
  Sorry to write you again so soon, but we are getting some responses to our PPA 2006 postcard that Pentera created for us—which is great!
  
  Our understanding for gifts coming directly from donor's IRAs is that they do not receive tax receipts for these gifts. This is what we have been told. So we will send them gift acknowledgments, but without the tax-deductible language.
  
  Does this sound appropriate to you?
  
  Thanks again and best wishes,
  
  Sharon
  
  —Sharon Gibson
  Director of Major & Planned Gifts
  Sidwell School
  
  

  ---

  
  Hi Sharon:
  
  You can call me as often as you wish.
  
  Most charities I work with continue to receipt or acknowledge IRA gifts just like any other gifts—including no goods or services language. And it's best to send copies to both the donor and the custodian, just to be safe.
  
  Warm regards and happy New Year,
  
  André

• When to account for CGA gifts
  
  André,
  
  First, the good news. The latest issue of our Children's in Mind newsletter has resulted in several inquiries about rolling over IRA funds, and one new gift resulted today. So, in addition to several CGAs that came from the last issue, CIM continues to be a viable tool for us. Thank you for the excellent customer service and quality!
  
  The interesting news is that we are having an internal debate with our CFO about booking CGA gifts. He wants us to ignore the value of the property transferred when booking them in our Raiser's Edge system. I give him the calculations for the present value of the gifts when the contracts are signed for the purpose of the hospital's records, but I believe that our development office should be able to book—and count in our fund-raising totals—the full value of the gift when the asset is transferred to us. Could you please share your opinion/best practice information with me? Thanks and happy holidays!
  
  Laura
  
  —Laura L. Fike, CFRE
  Principal Gifts Officer
  The Children's Medical Center
  
  

  ---

  
  Laura:
  
  I agree with the NCPG's method.
  
  Thank you for the compliments.
  
  Happy New Year,
  
  André

December 2006

• Language for estate provision
  
  Happy Holidays!
  
  Do you have any language you would recommend using for a letter confirming an estate provision granting a 25% stake in a family foundation once it is dissolved on the occasion of the second person's death? Thanks for considering.
  
  Ellen
  
  —Ellen C. Granda
  Director of External Relations
  Lake Forest Academy
  
  

  ---

  
  Ellen:
  
  It would seem to me that this kind of provision would need to be incorporated into the provisions governing the operation of the family foundation. Several years ago the Krannert Trust in Indianapolis had a planned winding down of its operations and a disbursement of its remaining assets to charities.
  
  If the foundation is being created in testamentary documents, I would suggest that the language creating the foundation include something like this:
  
  It is my (our) intention that this foundation shall continue in existence for the purposes set out herein, until the death of the survivor of (husband and wife), at which time the remaining assets of the foundation shall be distributed to organizations described in IRC Sec. 170(c) and 2055(a). Division of the assets shall be determined by the directors of the foundation, except a minimum of 25% shall be distributed to XYZ charity, provided XYZ charity is an organization described in IRC Sec. 170(c) and 2055(a) at the time such distribution is to be made.
  
  If the foundation is already in existence, then I would think that an amendment to the incorporating documents that included language to that above would be needed.
  
  I hope this is helpful.
  
  André
  
  

  ---

  
  Many thanks, André. This information is extremely useful!
  
  Ellen

November 2006

• Flip-CRUT
  
  André,
  
  How much flexibility does one have in structuring a flip-CRUT?
  
  Specifically, can one flip from an income only (with no capital-gain provision), to a NIMCRUT with a provision that "post-trust funding realized capital gain" shall be considered as income for distribution purposes?
  
  And, for any net-income trust (make-up or no make-up), if you have the capital-gain provision in the trust instrument, must the trustee treat such gain as income in every year, or can the trustee choose not to treat realized gain as distributable income in some years?
  
  Thanks,
  Bob
  
  —Robert M. Tuttle
  Director of Major Gifts
  Allegheny College
  
  

  ---

  
  Bob,
  
  The answer to the first scenario is no. You can only flip from NICRUT or NIMCRUT to a flip-CRUT.
  
  The IRS seems to be saying that the trustee cannot have such discretion. I seem to remember that has also been the case under Ohio state law, which the IRS seems to have adopted at the federal level. Indiana does give the trustee discretion. I think this will eventually be contested.
  
  Regards,
  
  André

• Changing management of irrevocable trust
  
  André,
  
  Hi! I don't do a lot with trusts, but I have been notified by a donor that he is dissatisfied with the management of an irrevocable trust that benefits our hospital. We are not the trustee. Can he move the trust assets to other management?
  
  Laura
  
  —Laura L. Fike, CFRE
  Principal Gifts Officer
  The Children's Medical Center
  
  

  ---

  
  Laura,
  
  Yes, he can if the trust document gives him the power to change trustees. Or, if it does not, if the current trustee agrees to relinquish its trusteeship.
  
  Warm regards and Happy Thanksgiving.
  
  André

• Filing IRS forms for charitable contributions
  
  Hi André!
  
  Can you weigh in on how much initiative we should take in filing IRS 8282 forms when generous donors give us items to auction off at our Parent's Weekend Auction?
  
  I realize that donors are responsible for completing the 8383 themselves, but should we send out the 8282's on everyone who gives us a gift-in-kind over $500 to sell at the auction, or only special cases like expensive artwork. We have tried to read the IRS instructions and are a little confused.
  
  Thanks again for all of your help with this question and the dozens of others over the years,
  
  Dale
  
  —Dale Spenner
  Director of Planned Giving
  Culver Educational Foundation
  
  

  ---

  
  Dale,
  
  Under IRC sec. 6050L, an 8282 is required when a charity sells, exchanges, or otherwise disposes of "charitable contribution property" (i.e., charitable income-tax deduction claimed was for more than $5,000) within three (was two) years of receiving the gift. Gifts of publicly traded securities are not subject to this requirement.
  
  Regards,
  
  André
  
  

  ---

  
  André,
  
  Thank you VERY much. That is the information we were looking for.
  
  We must send 8282s in on every gift in kind over $5,000 sold within three years of the gift.
  
  Happy Thanksgiving to you, your family, and that great staff of yours,
  
  Dale
  
  

  ---

  
  You're welcome, kind sir. Happy Thanksgiving and hope to talk with you soon.
  
  

  ---

  
  We have much to be thankful for …
  
  Thank you for all of your help in making the Culver planned giving program successful:
  
  

  • Culver Website
  • Culver Perspectives
  • PPA '06 Postcard
  • Eppley Club Recognition talk, April 12, 2007
  • Culver Alumni Reunion, Planned Giving Workshop, May 19, 2007
  • On-going Ask André Q&A
  • Ever-present good will and good humor

  
  
  Thanks for everything you do for us in your inimitable style!
  
  Dale

• Two questions related to our recent exchange …
  
  André,
  
  Two questions related to our recent exchange …
  
  

  1. Does one avoid tax on embedded gain in a commercial annuity when gifted? And, if it's taxed, is it taxed at capital-gain rates or at ordinary income rates?
     
     
  2. I've been told that if a donor funds a CRAT for his child, the present value of the life interest gift to the child is not offsettable by annual exclusion provision. Rather, only the actual first-year payments to the child from the trust are available for exclusion. Do you agree, and if so, is the first-year trust payment subtracted from the value of the life interest to determine the amount subject to gift tax?
     
     

  Many thanks,
  Bob
  
  —Robert Tuttle
  Director of Major Gifts
  Allegheny College
  
  

  ---

  
  Bob:
  
  The gain is included in the income of the owner and subject to ordinary income tax.
  
  The present value of the child's income interest qualifies for the annual exclusion unless the donor retains the right to revoke the interest by his will. In that case, only the annual payments distributions qualify as they are made each year.
  
  André

• Can you help me with the logic and the math?
  
  André,
  
  We discussed this one before, but new information has come to light which changes the picture.
  
  Our donor purchased seven $1,000 Series E bonds in 1986 for 50% face value. So his cost basis is $3,500. They have accumulated interest over the years and the cashed-in value of these bonds would be about $12,000.
  
  You recommended that it would be best for him to cash them in himself and purchase a charitable gift annuity for his wife now, rather than bequeath them to Culver in his will with instructions to set up a CGA for her at that time.
  
  The donor is agreeable to this idea, but wants to make sure that he owes no income tax after all is said and done.
  
  Running a PG Calc. scenario for a single-life CGA in the name of his wife (aged 69), we see that the annuity rate is 6.4% with an immediate charitable deduction of $5,035.80.
  
  It looks like he may pay some additional tax because the proceeds from the bond will be $9,500.
  
  Can you help me with the logic and the math?
  
  Thanks,
  Dale
  
  —Dale Spenner
  Director of Planned Giving
  The Culver Academies
  
  

  ---

  
  Hi Dale:
  
  That's how it works: His charitable deduction will offset $5,036 of his $9,500 gain, so the balance of $4,464 will be taxable to him. He has too much gain in this case, which in not the usual case. If his gain was less than $5,036, then he would benefit from deducting some of his basis. The ideal situation would be if he were to make an outright gift of the bond proceeds.
  
  Warm regards,
  
  André

• Using IRA rollover dollars to fund an enforceable pledge?
  
  André,
  
  Quick question for you:
  
  Do you see any problems with donors using IRA rollover dollars to fund an enforceable pledge?
  
  Hope all is well back home in Indiana.
  
  Pete
  
  —W. Peter Sommerfeld
  Senior Director of Gift Planning
  OHSU Foundation
  
  

  ---

  
  Peter,
  
  Greetings from Paris. It's wonderful here.
  
  No, I don't see a problem. This came up at NCPG and the consensus was that it was not. It's no different than using any other asset that a donor owns to pay a pledge.
  
  Warm regards,
  
  André

October 2006

• Forgoing one's interest in a CRUT?
  
  Dr. Cat in the Hat!
  
  What a command performance in SF earlier this year—clearly you missed your calling!
  
  Two items for your wisdom, one easy, one less so …
  
  

  1. Is there a specimen agreement for commuting or forgoing one's interest in a CRUT? I seem to recall a one or two-pager we used years ago.
     
     
  2. Donor would like to gift an appreciated commercial annuity to fund a gift annuity paying to several children (maybe even a couple of grandchildren—a no-no?!) for a period of years (also a no-no?!).
     
     

  My thoughts:
  
  

  • cannot do an immediate-payment GA and convert life interest to a ten-year income stream. But, could do as a DCGA with payments deferred a year, then taken in the form of a ten-year stream?
  • If doable, there would be minimum charitable deduction, plus upfront gift-tax exposure and no use of the annual exclusion provision because this is a future interest gift—correct?
  • And, including grandkids would really get messy?
    
    

  Which suggests:
  
  

  • Use a CRAT instead for a term of years? And, retain the right to revoke during life to avoid upfront gift-tax exposure?
  • Including grandkids still messy, right? Discourage it?
    
    

  Your reactions good counselor, almighty king, and everlasting father!
  
  Thanks,
  Bob
  
  —Robert M. Tuttle
  Director of Major Gifts
  Allegheny College
  
  

  ---

  
  Dear Bob:
  
  Good to hear from you and thanks for your kind words.
  
  

  1. "I hereby irrevocably relinquish, terminate, and assign my entire rights to receive unitrust payments for my life from [title of CRT] established on (date) to Allegheny College. Such transfer shall result in an immediate gift of the present value of my unitrust payments to Allegheny College."
     
     Bob, make sure the donor's lawyer puts this in his or her own language.
     
     
  2. You cannot have a gift annuity for more than two lives or for a period of years.
     
     Solution: as you suggested is a CRAT for a term of years, so long as the charitable residuum is at least 10%. Number of beneficiaries in a term CRT does not affect the charitable deduction. And you can give an independent trustee the power to sprinkle the annuity payments among the beneficiaries.
     
     

  Hope this helps.
  
  Warm regards,
  
  André

• Gift of sizable commercial annuity ...
  
  André,
  
  We have a donor who has a sizable commercial annuity which has been accumulating interest over the years. It has fully matured.
  
  He has lots of current taxable regular income and does not need the income or the assets from the annuity, so he is looking at an outright gift.
  
  What are the implications, advantages, and disadvantages of gifting the entire annuity to Culver?
  
  Is there a benefit to the donor of cashing it in or signing ownership to Culver?
  
  Please advise.
  
  Thanks,
  Dale
  
  —Dale Spenner
  Director of Gift Planning
  Culver Academy
  
  

  ---

  
  Dale:
  
  The result would be the same either way. Let's assume she paid $50,000 for the contract and now it's worth $100,000.
  
  If she cashes in the annuity she will recognize $50,000 as ordinary income and would receive a charitable deduction of $100,000, if she transfers the entire proceeds to Culver.
  
  If she assigns the contract to you, her charitable deduction would be limited to $50,000 ($100,000 reduced by $50,000 of ordinary income).
  
  It's simpler to cash the policy and give you the proceeds.
  
  Warm regards,
  
  André

September 2006

• Create a CGA using appreciated securities ...
  
  André:
  
  I am working with a couple who wish to create a CGA using appreciated securities that are held in a family trust. Are there any implications I need to be aware of in moving forward?
  
  Pete
  
  —Peter A. Beekman
  Director of Principal Gifts
  Clarkson University
  
  

  ---

  
  If it is a revocable living trust there would be no problem since the donors and the trust are considered to be the same person for tax purposes. If they are the beneficiaries of an irrevocable trust, the trust terms dictate whether they can do a CGA. Their attorney would have to advise them on this.
  
  Hope this helps,
  
  André

• Donation of Series E Bond
  
  André:
  
  An 85-year-old man wishes to donate $12,000 to Culver using a Series E Bond. The bond is still earning interest for him. He was told that if he donates the bond during his lifetime, he will still be required to pay income tax on the accumulated interest.
  
  He asked me if he could bequeath the bond to Culver with the instructions to create a charitable gift annuity for his wife.
  
  Would it be possible for him to do this, and if so, is it the best alternative for him (and Culver) financially?
  
  Thank you,
  Dale
  
  —Dale E. Spenner
  Director of Planned Giving
  Culver Educational Foundation
  
  

  ---

  
  Dale:
  
  In this situation your prospect would actually be better off to consummate the transaction while he is alive. Here's why:
  
  Let's assume that his basis in the $12,000 E bond is $8,000 and that his wife is also 85 years old.
  
  

  1. If he cashes in the bond—E bonds cannot be transferred directly to charity during life—he will recognize ordinary income of $4,000.
     
     
  2. If he establishes a gift annuity for his wife, he will receive a charitable deduction of $6,569 that will more than offset his income of $4,000, by $2,569. Assuming a 33% income-tax bracket, this will save him $848 in income tax.
     
     
  3. She will start receiving an annual annuity of $1,140, of which $799 will be tax-free and $341 taxable.
     
     
  4. He can wait and bequeath the E bond to Culver—it would have to be re-registered in your name by the executor—and start the annuity payments at that time.
     
     
  5. A testamentary transfer will lose the benefit of the income-tax benefit and delay receipt of the annuity payments.
     
     

  Hope this helps,
  
  André

• Pension Act affect on gifts or Roth IRA
  
  Hi André,
  
  I was wondering if you could answer a question for me. For the most part, I understand the charitable provisions in the Pension Act recently enacted. I understand that it covers IRAs only. My question is with respect to the Roth IRA. Since the funds put into a Roth IRA are taxed beforehand and a withdrawal is not taxed, what would be the benefit of making a gift out of a Roth IRA?
  
  Please feel free to call if you need clarification of my question.
  
  Thanks,
  
  Chad
  
  —Chad D. Marolf
  Director of Development
  St. Cloud State University Foundation
  
  

  ---

  
  Chad:
  
  Indeed, qualified Roth IRA distributions are tax-free. However, a distribution within five years of establishing a Roth IRA is not a qualified distribution and thus the earnings on the distribution will be taxed to the owner. PPA obviates this problem for a person 70½ and over who has established a Roth IRA within the past five years.
  
  Hope this helps.
  
  André
  
  

  ---

  
  André,
  
  Thank you for responding to my question. So, I understand that there IS a benefit to an individual to utilize a Roth IRA to make a gift, as long as they have held it for less than five years. This, however, doesn't negate the fact that someone could still use it to make a gift even if it had been established more than five years ago.
  
  Thanks,
  
  Chad
  
  

  ---

  
  In that case, they would also receive a charitable deduction for the gift to charity.
  
  

  ---

  
  Got it! Thanks!

August 2006

• Bargain sale arrangement …
  
  We are working with a donor who owns multiple pieces of real estate including one and two-family rentals, vacant lots, and one combined commercial/residential property. We are discussing several options with him, one of which is a bargain sale. Through this process, it has occurred to me that at least three things influence whether or not we, as an institution, would want to enter into a bargain sale arrangement:
  
  

  1. Desirability of the property for Butler University purposes (there is none in this case)
  2. Salability of the properties—how easy/difficult it is likely to be for the University to sell them (determined, in part, by #3 below)
  3. Results of appraisals (we require two for property gifts) and an environmental audit (which we also require)

  
  
  With that as a background, my business office has asked for any guidelines or best practices that might exist on charitable bargain sales. Are there suggested percentages with regard to how much a charity might pay for a property? My sense is no, as the above factors (and perhaps others) would influence risk and, therefore, purchase offer amount.
  
  I would welcome any feedback from those of you with experience/wisdom regarding bargain sales, as well as any pertinent language on bargain sales included in gift acceptance or charitable gift policies.
  
  Thanks in advance for your assistance,
  
  —D. Mark Helmus, CFRE
  Senior Director of Development, Gift Planning
  Butler University

  Mark,
  
  We do not have a formal statement regarding the percentage of appraised value that we would agree to pay. We evaluate these on a case-by-case basis. I work closely with our executive director of real estate on these proposals. We also have a real estate committee of staff members at the IU Foundation (general counsel, CFO, VP-Investments, etc.). We meet to discuss proposed gifts that fall outside the usual real estate gifts. There is also a committee of the IU Foundation board that is apprised of the status of proposed real estate gifts, as well as the real estate assets currently held by IUF.
  
  The equation is a little different if the property falls in the IU master plan for any of the eight IU campuses. It is much more likely to be accepted because IU will be paying us (we are a separate 501[c][3]) based on the appraisals we are using for the gift. In other words, IU is aware of the appraisal during the conversation and is not a new buyer coming to the table later.
  
  The marketability issue is the most important hurdle when IU is not a potential buyer. In certain limited circumstances, we do have a chance to take a long view on a property's value rather than be as concerned about immediate marketability. We have chosen to hold parcels as an alternative investment when the potential for development in the area is great in the future. We will sometimes view the possible growth in the value as superior to the expected return of the markets in the same period. Those are very limited circumstances.
  
  We do routinely turn down real estate when the appraisal is clearly overstated, whether it is an outright, bargain sale, or CRT gift. Our ED of real estate is himself an appraiser and has very detailed opinions on marketability. He was previously in the banking industry on the real estate side and is a wonderful resource. He of course does not handle any of the appraisals himself because he is not a qualified appraiser in these transactions.
  
  John
  
  —John T. Keith
  Director, Office of Major & Planned Gifts
  Indiana University Foundation

  
  
  

  ---

  
  Mark,
  
  The only thing I would add to John's excellent response to your questions has to do with taking into consideration your relationship to the prospect, as well as taking a measure of his/her charitable intent. In my experience, many of these ostensible gifts are white elephants and just a waste of your time. The best situations are the ones involving properties adjacent or close to Butler.
  
  Warm regards,
  André
  
  

  ---

  
  André,
  
  Thanks, you honed in on this one without knowing many of the details … This donor has, in the past few months, also tried to gift to Butler a time-share (we declined) and stock that had no value as the company went belly-up more than 20 years ago. That said, we'll do our due diligence to find out if any of these pieces are of interest; if not, we may suggest (as we did with the time-share) that he sell them on his own and make a gift afterward.
  
  Thanks again and be sure to let me know if Pentera has a "white elephant" Christmas party, Butler may (hopefully not) have a gift to contribute …
  
  Mark

• Gift of real estate as pledge payment …
  
  André,
  
  I look forward to seeing you next week at the Planned Giving School. I have been studying the guide you gave to me when I was at your office earlier this summer. I hope I will be ready!
  
  I have some questions I am hoping you can answer before the end of the day tomorrow (Friday). We meet with the donor this weekend.
  
  We have a donor who made a $500,000 pledge to us towards his scholarship fund. He wants to donate a house as partial payment against the pledge. (Value will probably be about $200,000.)
  
  

  1. What is the amount we apply towards his pledge? The appraised fair-market value? Do we reduce the pledge payment by the costs Marian incurs to receive the property?
  2. What amount of money do we place in his scholarship fund? The appraised fair-market value minus the costs? Or do we add to his scholarship fund the amount of money we receive once we sell the property, even if it is greater or less than the fair-market value?
  3. How do we write this up in the gift agreement? Is there some place we can find appropriate language?

  
  
  Thank you,
  
  —Tom Fagan
  Director of Planned Giving
  Marian College
  
  

  ---

  
  Dear Tom:
  
  These are excellent questions and issues. In fact, I will discuss your note at next week's seminar.
  
  

  1. Amount to apply toward pledge: fair-market value according to appraisal or net proceeds. I can understand your quandary because you don't know what you will eventually sell the home for, especially in this market. And you know you are going to incur selling costs of about 8% or more. Not to mention the time it will take to sell it. So you may end up with about $175,000—who knows.
     
     His charitable income-tax deduction will be based on the appraised FMV by a legitimate qualified appraiser, regardless of how much you eventually realize from the sale. Same goes for other illiquid assets.
     
     If this was Lilly stock we would not be having this conversation, even though you would incur selling commissions upon disposition. In so far as he is concerned he is giving you an asset with a $200,000 value (it could be home, Lilly stock, or closely held stock, or a painting) and what you do with it is your business. So I think you have to apply qualified appraised value toward his pledge.
     
     If he wanted a gift annuity, it would be a different story in so far as the annuity you agree to pay. In that case you have a legitimate reason to reflect the above costs in determining the annuity rate and base it on $175,000 or so. But still count $200,000 toward pledge.
     
     
  2. This is a policy decision. If it were me, I would put the net proceeds in the scholarship fund. I may add a bit since he still owes you $300,000 more.
     
     
  3. What agreement? All you need is a letter spelling out the details that you decide to adopt from this letter.

  
  
  Hope this helps.
  
  André

• Senior Settlement Market …
  
  André—To refresh your memory, I am the president of the Long Island Council of the NCPG. We have met at a number of national meetings and I both respect your opinion and enjoy your sense of humor.
  
  I wanted your opinion on the following question. The background is the emergence of the Senior Settlement market. We in the gifting arena have traditionally used the cash value of a policy as the donors' deduction and occasionally the replacement cost—i.e. ITR. I recently did a presentation, with someone representing a senior-settlement company, to a local hospital about the donation of insurance policies and the subsequent selling of the policy.
  
  He insists that the deduction to the donor is the sale price of the policy.
  
  Example: Let's say $1m face value, $100k cash value, ITR $120k, and the sale price is $250k. Obviously, the donor could sell the policy first and donate the proceeds—claiming the full sale price—but the donor would have to pay ordinary income tax on the difference between basis and cash value and Long Term Cap Gain on the difference between the sale price and cash value.
  
  The question is, if the donor donates the policy today and the charity sells it tomorrow can the donor claim a deduction for the sale price, assuming on the date of donation we have a valuation from the ultimate buyer? While I would love it to be true, traditional thinking says to me that you can only claim the "cash value" or ITR.
  
  On a separate note, I would love to chat with you about the Char. IRA as it has long been my opinion that using a Pension Rescue technique is better than donating the IRA with or without the tax savings.
  
  Thanks
  
  Jim Meyer
  
  —James E. Meyer
  Vice President
  The Heritage Group, LLC
  
  

  ---

  
  Jim,
  
  The deduction for a life insurance policy is limited to the lesser of FMV or net premiums paid, since any gain is considered to be ordinary income. Your analysis is correct in that there is really no difference between gifting the policy or selling it and gifting the proceeds.
  
  I wish more people were aware that their policies are far more valuable through a life-settlement arrangement and that the gift to charity would be much larger, although without the benefit of a larger tax deduction.
  
  André

• Targeted marketing of CGAs …
  
  André,
  
  Good morning! I thought of you—and your cellar—last week while tasting wine at the Orfila winery in southern California. Hope all is well with you and your family.
  
  Question: Are you advising clients to do any targeted marketing of CGAs right now due to increasing rates of return? Do you see this as a continuing trend over the next few months? Do you have any sample letters you would share with me if you support this approach? (Our last newsletter was on CGAs.)
  
  I look forward to your comments. Thanks!
  
  Laura
  P.S. Please let Claudine know that I used some of her tips when revising our newsletter for the second issue.
  
  —Laura L. Fike, CFRE
  Principal Gifts Officer
  The Children's Medical Center
  
  

  ---

  
  Laura,
  
  Good to hear from you and I hope you enjoyed your trip to SoCal.
  
  I think you should do target mailers and/or postcards promoting gift annuities at least a couple of times a year, regardless of what is happening to interest rates. I'll send some samples.
  
  Warm regards,
  
  André

July 2006

• Gift of a used car …
  
  Hello André,
  
  Happy rainy summer's day.
  
  This has been a weird day for me. I have offers from donors to give three gifts in-kind:
  
  

  • A used convertible from a donor with a Florida home who no longer wants the car.
  • An old ring with an appraised valuation of $25,000.
  • A Labrador retriever.

  
  
  My questions are about the used car.
  
  

  1. Should Culver accept a used car as a donation?
  2. If so, should it be appraised or should we wait until we sell it to give the donor a receipt?
  3. Who bears the cost of the appraisal, if Culver decides to keep the car?

  
  
  Dale
  —Dale E. Spenner
  Director of Planned Giving
  Culver Educational Foundation
  
  

  ---

  
  Dale,
  
  It's a policy decision as to whether to accept the convertible. I don't see any reason not to since you can always sell it right there in Florida after the gift is made.
  
  If the car is worth more than $5,000, then the donor would need a qualified appraisal for charitable deduction purposes and he should pay for it because it's his deduction.
  
  Warm regards,
  
  André

• Selling an insurance policy to create an annuity …
  
  André:
  
  What is the best way for a donor to surrender/sell an insurance policy in order to create an annuity, and what are the tax implications? Again, thank you for your assistance!
  
  Cathy
  —Cathy Zurbrugg
  Planned Giving Officer
  Culver Educational Foundation
  
  

  ---

  
  Cathy,
  
  You mentioned that this was a whole-life policy owned by a 59-year-old prospect. If he surrenders the policy, he will receive the cash surrender value, including any gains, which will be treated as ordinary income. So if the cash surrender value is $50,000 and net premiums paid $40,000, his deduction for a gift annuity will be based on $40,000, but his annuity rate will be based on $50,000.
  
  If he assigns ownership of the policy to Culver and you surrender it, the same results will ensue to him.
  
  Better yet, he or Culver, if assigned to you, should sell the policy to a Life-Settlement company. In most cases the proceeds of the sale will be in excess of the cash value, sometimes substantially more, depending on surrounding circumstances. Any excess proceeds will be considered ordinary income.
  
  Warm regards,
  
  André

• ½ interest in retained-life estate …
  
  André:
  
  I have a prospective donor whose personal residence is valued at $1.6 million, cost $80,000. He does not want to sell right now so a CRT will not work. Can he gift a ½ interest with a retained-life estate? He is a resident of Connecticut.
  
  Your thoughts?
  
  Thanks
  Hope you & Molly are having a great summer!
  
  Tom
  —Thomas B. Hunt, JD, CFP
  Charitable Gift Planning Consultant
  
  

  ---

  
  Tom,
  
  Are you asking if the donor can make a gift of ½ of the remainder interest to charity? The answer is yes. Of course he can also give an undivided interest in ½ of the home.
  
  All is well here, thanks for asking.
  
  André
  
  

  ---

  
  What I was asking is if he can gift ½ with a retained-life estate and retain ½ outright. Can that be done?
  
  Tom
  
  

  ---

  
  Yes, it can.
  
  André

• Question about lead trusts …
  
  André -
  
  My colleague and I just enjoyed a visit with Doug Weaver. He's the tops. My question pertains to lead trusts. I heard from a consultant that a donor cannot gift real estate to a charitable lead trust and sell it immediately, but instead has to hold it for two years before it can be sold. I thought that was odd, especially as appreciated real estate would make a great gift vehicle and fall within the parameters of other trusts. Doug said to ask you what you knew about this situation. Thanks in advance for considering.
  
  Ellen
  —Ellen C. Granda
  Director of External Relations
  Lake Forest Academy
  
  

  ---

  
  Ellen,
  
  There is no such rule that prohibits the sale of any asset—including real estate—within the first two years after creating a lead trust. You do have to file an 8282 form with the IRS to report the sale of any asset—other than cash or marketable securities—within two years of the date of the gift.
  
  Prior to the 1997 Tax Act, the sale of appreciated property of any type—within two years of establishing a lead trust—triggered a tax to the trust at the tax rate that would have applied had the donor sold the stock. This rule was abolished by the '97 Act as of 8/6/97.
  
  Thank you for you gracious comments about Doug. We think he's tops as well.
  
  Regards,
  
  André
  
  

  ---

  
  André, you rock!
  
  Thanks so much. This circumstance might create a terrific opportunity for us.
  
  Ellen

• How to report gift annuities in fund-raising totals …
  
  André,
  
  In the massive amount of material I have from training and conferences, I can't locate a recommendation or statement of best or common practices for how an institution reports gift annuities in its fund-raising totals. I suspect the choices are between face value, i.e., if an annuity contract is signed and funded with a gift of $500,000 that amount is reported in the gift system; or present value, i.e., the amount of the gift projected to remain once the projected payments to the annuitants are completed. Is that correct? And do you have advice for me?
  
  Dyan
  —Dyan Sublett
  Senior Vice President for Advancement
  Natural History Museum of Los Angeles County
  
  

  ---

  
  Dyan,
  
  According to the CASE guidelines, a gift annuity should be reported by the value of the charitable deduction generated by the gift. This is present value according to IRS tables and assumptions which, of course, bear no relationship to the real world. A more rigorous approach would produce a lower PV and some institutions use this for counting purposes. For crediting purposes it's all over the place—from full value of the transfer regardless of age to PV based on charitable deduction. Hope this helps.
  
  André
  
  

  ---

  
  This is indeed helpful. I'm going to go the CASE route, since its logic seems very clear to me. We all know that the gift realized by the institution will be higher in most cases, but a conservative approach in counting will never produce any accusations of inflating numbers.
  
  Dyan

June 2006

• Question about 529 Plan...
  
  Hi André,
  
  Got your message ... thanks for the return call. If you recall, I've got this guy that I've been working with for about 8 months now. He met with his lawyers a second time last week, and after discussing the pros/cons of using either 6 individual College Annuities or an Education Unitrust for his 6 grandchildren, the attorneys have apparently advised him to scrap these ideas in favor of using 529 plans. He will cash in his $480K worth of stock (cost basis of $5/share ... now worth about $45/share), pay the gain, and have the 529s invested in mutual funds.
  
  I'm just left scratching my head here wondering "what happened"?!
  
  Since Wabash isn't offering to serve as trustee for this seemingly more complicated type of trust, and thus bear the administration costs, the attorneys have advised that the unitrust idea is too expensive, and is too complicated. They have also indicated that the 529 plan has greater flexibility with regard to various contingency issues ... such as "if grandchild 'A' dies before any payments, then who gets the money ... how is it allocated ... what other parameters will allow payments if they don't go to college ... etc." They are apparently also claiming that the contingency issues are something to be concerned about with College Annuities ... same questions (who gets the money if grandchild "A" dies, etc.).
  
  Perhaps this is the end of the road with him. I guess the big question in all of this is ... what do 529 plans have on the Education Unitrust or College Annuities?
  
  Thanks,
  
  David
  
  —David Troutman
  Senior Major & Planned Gifts Officer
  Wabash College
  
  

  ---

  
  David:
  
  There is no charitable component to a 529 plan. It's a prepaid tuition plan where the withdrawals are not subject to tax on the earnings if used for qualified educational purposes. There is a variety of plans; see link for more information.
  
  www.independent529plan.org
  
  André

May 2006

• Offset tax bite from sale of home …
  
  Dear André:
  
  I recently met with a Clarkson alumnus who is selling his home on Long Island (he put it on the market about three weeks ago, and it likely has already sold). He will likely sell it for $1 million+ and it has a cost basis of about $70,000 so he will go over the $500K exclusion. Besides simply encouraging him to make charitable gifts to Clarkson to offset his tax bite, is there anything more creative that he could do at this point in time to help himself from a tax situation while helping Clarkson?
  
  Will
  
  —William F. Mitchell
  Director of Major Gifts and Gift Planning
  Clarkson University
  
  

  ---

  
  Dear Will,
  A charitable gift of $214,285 will generate a tax savings of $75,000, assuming a 35% bracket and, thus, wipe out the $75,000 tax on his $500,000 capital gain.
  
  And if his basis in the gift, assuming appreciated stock, is $74,285, then he would also avoid capital-gain tax of $22,500.
  
  What do you think?
  
  André

• Questions about IRA limits and residue …
  
  Hi André,
  
  I have an IRA question … actually, two:
  
  

  1. Is there a maximum limit to the amount one can draw out of an IRA annually, or can one simply cash in the whole thing if one desires?
     
     
  2. Can someone leave the entire residue of an IRA to charity even if they have heirs? Or is there some rule that a portion must go to heirs?

  
  
  —Dyan Sublett
  Senior Vice President for Advancement
  Natural History Museum of Los Angeles County
  
  

  ---

  
  Hi Dyan, just back from beautiful Cleveland.
  
  Yes, you can withdraw your entire IRA account, if you wish. If you are under 59 ½ there could be a 10% early withdrawal penalty.
  
  Yes, generally you can leave the entire IRA residue to charity. Depending on state law, a surviving spouse may have elective rights against the account but not children or other heirs.
  
  André

• Tips on handling flip CRUT …
  
  André:
  
  I have a tax question for you.
  
  Facts: Donor owns a 40% interest in a general partnership; 3 partners own 20% each. The partnership owns 2 parcels of commercial real estate. The value is approximately $1.7 million.
  
  Donor establishes a flip CRUT in January 2006 with a 20% partnership interest. Property is very low basis and fully depreciated. One parcel has been under contract for sale for several months, subsequent to the establishment of the flip CRUT ($400,000) is to close within the next 60 days. Donor now wants to contribute his remaining 20% to the flip CRUT.
  
  QUESTIONS: Can the donor do this without any adverse income-tax consequences? Any solutions for the donor to add the remaining 20% to the flip CRUT?
  
  I'd appreciate your assistance with this one. I'm concerned by the fact that one parcel of the partnership is under a firm contract for sale.
  
  Your thoughts?
  
  Tom
  
  —Thomas B. Hunt, JD, CFP
  Charitable Gift Planning Consultant
  
  

  ---

  
  Tom,
  
  That would be considered an assignment of income with respect to the remaining 20%. One solution is to undo the deal with the consent of all the parties, then contribute the interest to the CRUT.
  
  Another thought: Consider the impact of discount on the gift as opposed to a gift of proceeds without discount.
  
  That was a wonderful and well-deserved tribute to you by Frank at ACGA.
  
  André

• How to get a notice of probate from alumnus …
  
  Dear André:
  
  I just received a notice of probate for a Clarkson alumnus. A copy of the will was not included. I plan to call the personal representative, but as I understand it, the personal representative is not required to give me a copy of the will. I know that I may get a copy from the probate court. Given that the court is in South Carolina, can I get a copy mailed to me? What's the process for doing that? Do I just write a letter to the court, referencing the case number and provide a copy of the notice of probate?
  
  Thanks,
  
  Will
  
  —William F. Mitchell
  Director of Major Gifts and Gift Planning
  Clarkson University
  
  

  ---

  
  Will,
  
  You could ask a Clarkson alum who is a lawyer.
  
  André

• How to credit gifts in campaign …
  
  André:
  
  Any thoughts on how I would answer the below e-mail? Thanks,
  
  John
  
  —John Finke
  Director of Development
  Marian College
  
  We have read a number of your messages describing the various ways that people can help Marian in this fund-raising campaign. My wife and I are trying to understand the approach that might be most appropriate for us. You have described:
  
  

  • Gifts as part of an estate by will
  • Gifts as all or part of a unitrust
  • Gifts from a pooled income fund
  • Gifts from a gift fund/stock transfers
  • … and gifts of real money

  
  
  How would the gift of $1 be valued by Marian in this campaign when given in these various ways? At the time, our particular question focused on the unitrust, but all are important. Obviously, the direct gift of $1 would be valued at 100%. Unfortunately, that kind of gift may be least workable for us. How would the other gift-giving approaches be valued?
  
  Sometime when it is convenient for you, phone us and let's talk about the alternatives available relative to this campaign for Marian.
  
  

  ---

  
  John,
  
  This crediting issue bedevils all charities and they all have their own way of counting and crediting.
  
  Clearly, an outright gift of $1 deserves a credit of $1.
  
  How about a bequest of $1? Some don't give any credit, others give full credit if the donor is over a certain age—usually 70 or 72.
  
  As to unitrusts and other life-income gifts, again some count the full value of the trust while others count the present value of charity's remainder interest.
  
  This is a policy decision that has to be decided internally. For further guidance, you may wish to check CASE guidelines or NCPG guidelines, though in my experience charities only pay lip service to these and do what they want.
  
  Hope this helps.
  
  André

• Dollar amounts appearing in donor stories on Web site …
  
  Hi André-
  
  Question: How do you feel about dollar amounts appearing in the donor stories on the pg Web site? The first four now on the site do not, but suddenly our writer put dollar amounts in the next three profiles I'm about to submit to Doug. None of the three donors have objected to using a dollar amount, but I want your opinion.
  
  Marv
  
  —Marvin L. Kelley
  Senior Gift Planning Advisor
  Northfield Mount Hermon School
  
  

  ---

  
  Marv:
  
  If they don't mind, it's ok. A variety of numbers would indicate a prospect can participate at his/her own level.
  
  On the other hand, Steve Gauley, director of gift planning, DePauw University, who is visiting, said he would not do it unless the donor insisted. Go figure.
  
  André

• Potential donor coming into some "big" money …
  
  André,
  
  Can you help me out with a question?:
  
  I have a potential donor who is possibly coming into some "big" money. They want to know how to avoid the burden of having to pay significant taxes on this money, mainly by the benefits of making donations to nonprofits. Do you have any literature on this type of question? Thanks,
  
  —John Finke
  Director of Development
  Marian College
  
  

  ---

  
  Hi John,
  
  Could you let me know how your prospect is coming into this money: gift, inheritance, sale of business or property, bonus, etc.? I would be better able to help you.
  
  André
  
  

  ---

  
  Sale of a business …
  
  John
  
  

  ---

  
  Has the business been sold?
  
  André
  
  

  ---

  
  No, not yet.
  
  John
  
  

  ---

  
  The prospect would be able to avoid the capital-gain tax on any of his stock that he gives to Marian prior to the sale of the company and receive a charitable deduction for its value. The purchasers would then buy your stock along with his, and you get your cash at that point.
  
  Hope this helps.
  
  André

February 2006

• Making a gift to a charitable organization from funds in retirement account without incurring a penalty …
  
  André,
  
  Thanks for the info. The specific question a donor posed was: Can he make a gift to a charitable organization from funds in his retirement account without incurring a penalty to either himself or having the charitable organization having to pay taxes on it?
  
  John
  
  —John Finke
  Major and Planned Gifts Officer
  Marian College
  
  

  ---

  
  John,
  
  Unfortunately, the withdrawn funds would be included in his gross income, but he would receive a charitable income-tax deduction for any amounts contributed to charity. If he is under 59½ years of age, he would also incur a 10% early withdrawal penalty.
  
  André

• Advising donor to place home in Will, not a retained-life estate trust …
  
  Hi André,
  
  I have an instinct about what I need to recommend in a certain situation, but I'd appreciate your guidance.
  
  A woman who is devoted to the Museum recently asked me to meet with her at her home to discuss giving her house to the Museum. She claims her house is valued at $350,000, though I don't have an appraisal. She is 78 years old, has an annual income of $35,000, and has no family and no heirs.
  
  When I met with the donor two things were clear to me: She is becoming forgetful and, although seemingly physically healthy, may need care down the road. She has very few resources. When I asked about how she planned to care for herself if she was unable to continue living in her home later in her life, or needed assistance in her home, she cheerfully said she had $20,000 in savings.
  
  The donor is interested in the retained life estate arrangement because the tax savings appeals to her. But she is very naïve, and her true motivation is simply to make sure her greatest asset goes to support the Museum.
  
  I feel that the donor does not have enough assets to provide for herself in her later life, and that placing her home in a trust would cause her to give up the very asset she may need. I also feel that in her tax bracket, and with her annual income, she may receive more of a deduction than she would ever be able to take advantage of (though I could be wrong about this, being a math-challenged individual).
  
  My instinct is to advise the donor to place her home in her will for the Museum, not a retained life estate trust. Am I right?
  
  Dyan
  
  —Dyan Sublett
  Senior Vice President for Advancement
  Natural History Museum of Los Angeles County
  
  

  ---

  
  Amen, you are right on all counts Dyan. Your instincts and thoughtfulness are admirable. She is very lucky to be dealing with you.
  
  André

• Can you give us a little more knowledge on how to handle the discussion on gifts of life insurance?
  
  André,
  
  Life insurance is one of the featured topics in our next newsletter, Culver Perspectives on Financial Planning.
  
  Can you give us a little more knowledge on how to handle the discussion on gifts of life insurance?
  
  We would like to know the following:
  
  Question:
  What are the tax implications on the annual premiums paid of a life insurance policy when Culver is the beneficiary?
  
  Answer:
  Unless Culver is the owner and irrevocable beneficiary, no income-tax deduction for premium payments.
  
  Question:
  What are the tax implications when the paid-up life insurance ownership is transferred to Culver?
  
  Answer:
  Donor gets a deduction for the lesser of fair-market value of the policy or the sum of the net premiums paid.
  
  Question:
  What are the tax implications, if any, when paid-up life insurance policy simply nominates Culver as a beneficiary?
  
  Answer:
  No income-tax benefits. Policy proceeds included in gross estate but also deductible for estate-tax purposes.
  
  Question:
  Is there anything else you think we should know when a donor asks about the benefits of life insurance as a gift?
  
  Answer:
  I think it's a great way for younger donors (ages 30 - 50) to participate in gift planning—immortality on the installment plan. You may wish to refer to the Indianapolis seminar binder's section on life insurance for a more in-depth discussion.
  
  Please call if you have other questions.
  
  Regards,
  
  André

January 2006

• Transferring two assets at different times to fund the annuity …
  
  Hi André,
  
  I was just talking with a donor who is interested in funding a CGA. He had a question for me that I was unable to give a firm answer on ... so I thought I'd check with you.
  
  The donor's interested in transferring two assets at different times to fund the annuity. One is a stock transfer and the other is a Fidelity account. He'd like to go ahead and send the stock now to preserve the capital-gain value and then send the other account later in the year, or possibly even next year. My question is, can we accept the one asset, put it into a holding/suspense account, and wait until we receive the second asset before pulling the trigger on writing the annuity agreement, even if it were months that went by before receiving the Fidelity account?
  
  What if he split the two gifts between two calendar years ('06 and '07 … not likely, but possible), then how would the annuity tax-deduction be treated? Would the potential five-year carrry-over be subject to the date in the year of the first gift or last gift? He would like to avoid creating two annuities. My hunch is that we can do this but our comptroller in the business office thinks otherwise; however, he's not 100% certain either. My belief is that as long as we don't write and execute a signed agreement with the donor, we can hold just about any asset for as long as he or she would like us to, but that the terms of the agreement wouldn't begin until the document is signed, at which time the beginning of any deferral period would commence (for deferred CGAs).
  
  Your thoughts?
  
  Thanks,
  
  David
  
  —David Troutman
  Senior Major & Planned Gifts Officer
  Wabash College
  
  

  ---

  
  Hi David,
  
  If he transfers the stock to Wabash and you hold it until he is ready to execute the gift annuity agreement, the gift is not complete until the agreement is executed and the then price of the stock will determine the deduction and his annuity.
  
  If you sell the stock prior to the execution of the agreement and hold the proceeds until he is ready to do so, you'll be acting as his agent and the capital gain will be recognized and attributed to him, unless he elects to treat the transaction as an outright gift to you prior to the sale.
  
  If he is that concerned about preserving the capital gain in the securities it's best to go ahead and establish a gift annuity now, then you can sell the stock and preserve its full value.
  
  The second agreement with the other asset can dovetail with the first—as to payment dates—so he'll be receiving only one check once both agreements are executed.
  
  His deduction will be for the year each agreement is entered into.
  
  André
  
  

  ---

  
  Hi André,
  
  Thanks!!! And it's a beautiful answer, I might add. I would have thought that it was possible, but the recognition of the capital gain and the college acting as "agent" was something I was not aware of ... but makes sense!
  
  Thanks, André.
  
  David
  

• Wondering if we can craft a blanket agreement that covers everything …
  
  André,
  
  I sent this to the general e-mail box prior to finding your address. My boss posed a question that I thought you might be able to help us with. (See below). Thanks for all your help … we really appreciate our service from Pentera. Nancy, Steve, and Doug are great.
  
  Jack
  
  —Jack A. Simpson
  Assistant to the President
  Milligan College
  
  "We have a donor who wants to give periodically to create gift annuities, but she would rather not have separate agreements each time. I am wondering if we can craft a blanket agreement that covers everything. I am thinking that it is actually the transaction of money and promise that creates the legal situation, and that the agreement sets forth expectations.
  
  I think that legally, we would not even need an agreement to have a contract. (Obviously, we are all much more comfortable with that.)"
  
  —Todd Norris
  Vice President
  for Institutional Advancement
  Milligan College
  
  

  ---

  
  Hi Todd,
  
  This issue came up yesterday with a person who wanted to transfer two different assets at separate times, months apart, and cover the transactions with a single agreement. You need separate agreements for each transfer. Sometimes when assets arrive within a few days of each other you can hold and wait till they all get there and execute the agreement. Again, you run the risk of the asset falling in value during the wait.
  
  In some states only the charity needs to sign the gift annuity agreement. Check with a local lawyer or a Tenn. charity to see if this works and, if so, your donor need not be bothered with signing the agreements. The donor would need to sign a CGA application each time providing all pertinent information about him and the asset he or she is transferring for the CGA, the charity signs the agreement, and it's best that the application be attached to the contract.
  
  Hope this helps.
  
  André
  
  

• Are you set up to handle—and how do you handle—a 1035 conversion? …
  
  Hi André,
  
  I received a letter from a Clarkson alumnus, class of '60, with some questions, one of which I was hoping you could help me address.
  
  He asks, "Are you set up to handle—and how do you handle—a 1035 conversion of the tax-deferred cash value of an insurance policy to an annuity?"
  
  I'm not sure what he means or if I can help him...
  
  Thanks,
  
  Will
  
  —William F. Mitchell
  Director of Major Gifts and Gift Planning
  Clarkson University
  
  

  ---

  
  Will,
  
  The tax law permits the tax-free exchange of certain like-kind productive use or investment assets (IRC sec. 1031 for general rules), including a life insurance contract for another life insurance contract or annuity contract or an annuity contract for another annuity contact (IRC sec. 1035(a)(3). However, the favorable tax treatment applies only to contracts issued by life insurance companies. Clarkson is not a life insurance company, so you are not set up for a 1035 conversion.
  
  Your donor would have to cash in his policy, pay the tax on the gain, and use the proceeds to get a CGA from you.
  
  André
  

• Can a company fund a deferred CGA …
  
  Hi André,
  
  Thanks again for your help the other day on the phone regarding my question about CGA's and KETRA … I look forward to meeting you in person.
  
  Below is an e-mail I received from a young alumnus, class of '88, in response to my recent newsletter on CGA's. He and his wife have no children, and he already has included Clarkson in his will. I think in his first question, he is simply wondering if he gets a tax deduction in the year he makes a gift to establish a deferred CGA (Yes). I was hoping you could help me with his question about whether a company can fund a deferred CGA and the tax implications.
  
  "Will,
  
  Happy New Year and thanks for an informative issue of Clarkson Planner. Our current situation is such that I would like to meet the following objectives:
  
  

  1. minimize our personal income-tax liability, as my wife and I have few tax deductions,
     
  2. consider a deferred CGA, and
     
  3. consider, if possible, having a corporation make a deferred CGA with me as the recipient of the deferred annuity.
     
     

  You can see the common theme here—provide my wife and me with an investment vehicle that minimizes our current income-tax situation while providing a nest egg for some retirement savings. We currently hold a variety of investments, ranging from 401k contributions, individual IRAs, and other savings (stocks, mutual funds, bonds, etc.). So, the bottom line question is—does a deferred CGA come off our top-line income for the year one contributes to such an annuity? And secondly, please help address my question regarding the corporate option. That is, can my company provide me with a retirement plan in the form of a deferred charitable gift annuity? My company offers no conventional retirement plan, and as an owner, any conventional plans that we could establish for tax protection are generally considered unsecured assets, so in the event of financial trouble or other possibilities, the owners' retirement funds are behind other creditors in the pecking order. So the bottom line question is can a third-party beneficiary be named for a CGA, and if so, what are the tax implications at the corporate level for such a gift?
  
  Any guidance you can provide would be helpful and would further our interest in establishing such a gift for Clarkson."
  
  Thanks André for any feedback to help me respond!
  
  Sincerely,
  
  Will
  
  —William F. Mitchell
  Director of Major Gifts and Gift Planning
  Clarkson University
  
  

  ---

  
  Hi Will,
  
  As you noted, the deduction for a deferred CGA is available for the year it is created.
  
  Yes, the company can establish a deferred CGA for an employee's benefit. The employer will be able to deduct the full amount partly as compensation and the balance as a charitable contribution.
  
  However, the present value of the annuity payments will be treated as phantom compensation to the employee and he will be taxed on its value. (IRC section 83.) Later, the annuity payments will also be taxed as received, part taxable, and part tax-free over his life expectancy.
  
  Your young alumnus should be commended on his commitment to Clarkson and you may wish to consider putting him on you planned gift committee. He would make a great volunteer, it would seem.
  
  André

December 2005

• I am writing to ask whether you know of a qualified appraiser …
  
  Good afternoon,
  
  I am writing to ask whether you know of a qualified appraiser who can value the income interest of a donor who wishes to relinquish his or her income interest in a life-income vehicle. Thanks for any referrals you might be able to make.
  
  Regards!
  
  Debbie Layton
  
  —Deborah Layton
  Director of Estates and Trusts
  Office of Gift Planning
  University of Pennsylvania
  
  

  ---

  
  Debbie,
  
  Frank Minton and his firm offer this service. Call him at 206.329.8166.
  
  Happy Holidays,
  
  André
  
  

  ---

  
  Hi André
  
  Thanks so much; best wishes to you and yours for a happy holiday.
  
  Debbie
  

November 2005

• Are there any gift-tax implications if someone sets up a charitable remainder trust …
  
  André:
  
  Are there any gift-tax implications if someone sets up a charitable remainder trust with the income going to two beneficiaries who are not related to the donor?
  
  Thanks—
  
  Kate
  
  —Kate Hillas
  Director of Planned Giving
  The Madeira School
  
  

  ---

  
  Kate,
  
  Yes, there are. The present value of the income stream—the difference between the value of the trust and the charitable deduction—is the value of the taxable gift, against which you can apply the annual exclusion and lifetime exemption. This applies to strangers as well as non-spouse family members.
  
  André
  

• 70+ year old who wants to put his grandson through Culver …
  
  Hi André,
  
  Hope you're enjoying New York. Thanks for your immediate phone reply on my question regarding the Katrina Act. I think we're set with that one for now. I do have a question about mixing and matching appreciated assets and cash donations in the same year, but that can wait.
  
  Now, casting your mind back a month or so ago, I asked you about a 70+ year old who wants to put his grandson through Culver. The child is three years old. After I went on about not being able to get a tax deduction for making a direct scholarship gift to benefit relatives, you suggested looking into a NICRUT w/flip and make-up. I did. It might work. But I have a few questions for you. Your normal thoughtful and thorough reply would be appreciated.
  
  Here's the deal:
  
  

  • Donor: A 74-year-old male. Born 7/8/31
    
  • The income beneficiary is three years old. Born in 2002
    
  • Grandson would enter Culver at age 13 or so. Say 10 years from now—September 2015.
    
  • Contribution: $200,000 or more in an irrevocable charitable remainder trust if it is proven to be the best instrument. The donor wishes to have the proceeds of the trust available to pay for the grandson's tuition at Culver.
    
  • The remainder will go to Culver Educational Foundation
    
  • Tax Deduction: $75,194
    
  • Special Condition: If the grandson doesn't go to Culver, the entire amount can go to Culver Educational Foundation—nothing to the child.
    
  • Projected Annual Tuition: The current tuition is about $30,000/year.
    
  • Assuming a 4.5% annual increase in tuition, in years 10 through 13, the average annual tuition will be $49,750, or approximately $199,000 in total
    
  • Yield: A 14 year 7% CRUT will yield $14,000/yr. for 14 years or $196,000.
    
  • Flip Event: Son is accepted at Culver Military Academy by May 1, 2015, for entry in the fall of 2015.
    
    

  ---

  
  Thank you for replying to my e-mail by phone this morning. I am very pleased to hear that it is possible to accomplish the donor's wishes to finance his grandson's tuition to Culver using a tax-deductible financial instrument, namely a Flip Net-Income Charitable Remainder Trust with a make-up provision. It is also possible to make the payout contingent upon the child attending Culver.
  
  Let me restate the questions and my understanding of your answers to make sure I can relate it correctly:
  
  Q: Is the grandson's acceptance into Culver an allowable triggering event?
  
  A: No, but a specific date is an allowable flip-triggering event. So assuming that the grandson is three now and he will start Culver at 13, the triggering event could be, for example, May 1, 2015.
  
  

  ---

  
  Q: What are the tax implications for the income beneficiary if he receives a lump sum of the make-up income of say, $140,000 after the flip?
  
  A: The tax implications are that the parents are liable to pay the taxes on this income before the child is 14 at their tax bracket. After he is 14, the child must pay the tax at his own tax bracket. The goal should be to have the asset appreciate in value with little or no annual income over the first 10 years, so that the entire amount is a capital gain and not ordinary income. This would keep the asset accumulating within the trust and not paid out until it is needed. It is best to have the donor's tax attorney advise him on this proposal.
  
  

  ---

  
  Q: Are there investments that can defer income for 10 years that would make this NIMCRUT work? Possibly a zero coupon bond or something?
  
  A: Yes, there are. It is best to check with the donor's personal investment advisor.
  
  

  ---

  
  André, you also advised me that making the trust pay out contingent upon the grandson attending Culver is indeed a qualified contingency under the Internal Revenue Code 664F. If the grandchild does not attend Culver Military Academy, the entire trust is paid directly to the Culver Educational Foundation as a charitable gift.
  
  Please, review my reflection of your advice and reply to me making any corrections. Then I'll make contact with the donor. Thanks again for your help.
  
  Dale
  
  —Dale E. Spenner
  Director of Planned Giving
  Culver Educational Foundation
  

• Four very good questions regarding his gift of property …
  
  André,
  
  Mr. H. has four very good questions regarding his gift of property in Hawaii using a CRUT. I have deferred the questions to our attorney, but both he and I would like your answers, too, as a cross check.
  
  1. Would our income stream be terminated or threatened if CEF (Culver Educational Foundation) were to fold or bankrupt, or are the funds in trust with a third party?
  
  2. Would CEF be willing to guarantee a minimum of (let us say) 5% of the original capital contributed, regardless of market conditions or performance?
  
  3. Who determines the character of the investments made? Is that a function of the total CEF investment portfolio or some specific funds within the total portfolio? How is that determined?
  
  4. If, perchance, interest rates were to rise in the near future, would the defined 5% return be a number that we would then expect to be higher, say 6% or 7%?
  
  Thank you for your continuing "counsel" on this "magnificent and generous gift." Nice quote.
  
  All the best,
  
  —Dale E. Spenner
  Director of Planned Giving
  Culver Educational Foundation
  
  

  ---

  
  Dale,
  
  Now that's a great note! Re: four questions:
  
  1. The obligation for the payments is the unitrust's, regardless of who the trustee is. If the assets are dissipated, the beneficiary's only remedy is to sue the trustee for violation of his/her/its fiduciary duties and responsibilities, not an easy endeavor if the trustee has acted prudently. If this were a gift annuity, the annuity payments would be guaranteed by the issuer; here it would be CEF.
  
  2. CEF cannot guarantee any minimum payments. The trust is an independent, separate legal entity and is solely responsible for the payments.
  
  3. The trustee of the trust determines the character of the payments.
  
  4. Future interest rates have no bearing on the percentage payout rate that is determined by the donor when the trust is established and must be at least 5% of the value of the trust as it is revalued each year. So if the value of the trust goes up, so do the payments from the trust, and the reverse is true as well.
  
  I hope this helps.
  
  Warm regards,
  
  André
  
  

• We have a retired investment banker who is interested in setting up at $300,000 …
  
  André
  
  We have a retired investment banker who is interested in setting up at $300,000 (possibly larger), 5%, one-life unitrust with us in 2006 but would like to serve as trustee. We don't usually do that at the college but given his background and the fact that he is a board member are willing to do it—are there other reasons (i.e. IRS) that we shouldn't agree to this???
  
  Thanks,
  
  Kim
  
  —Kimberly Tanner '90
  Associate Vice President for Institutional Advancement
  Earlham College
  
  

  ---

  
  Kim,
  
  There are no reasons why he could not serve as trustee. Given his background, I would encourage you to go along with this. Please note that he does not need your consent to do this.
  
  André
  
  

  ---

  
  André
  
  Typically when your client's donors set up charitable remainder trusts, who arranges for the attorney to draw up the document and covers the fees?
  
  In the past, we have always required the donor to do both—but according to a colleague in our office who has been at a number of other colleges—they all worked with the college's attorney to set up the paperwork, paid for it, and then encouraged the donor to have their counsel review it. I don't want to disadvantage us with donors by having a policy that has them doing things that other institutions are not requiring. What are your thoughts?
  
  Also, another colleague wanted me to ask when in the coming weeks it might be a good time to have a phone consultation with you. We have a donor who has property holdings in Northern California worth approximately $20 million. We want to structure a proposal for an outright gift of probably $1 million or more. My colleague wants to have your assistance in making sure we are prepared to explain and make the case to the donors appropriately for a gift of property. At the moment they are working on their estate and are being advised by a planner to develop five LLC's (Limited Liability Corps) for his family real estate business, with one umbrella LLC to oversee the activities of the five LLC's. Is this something you think you could be of help with?
  
  Thanks for everything,
  
  Kim
  
  —Kimberly Tanner '90
  Associate Vice President for Institutional Advancement
  Earlham College
  
  

  ---

  
  Kim,
  
  As you would expect, policies regarding this practice range all over the place. Some do ask the donor to use and pay his or her counsel to draft the trust document. Others provide the donor with a list of attorneys to interview and select one to work with. Many provide the donor's counsel with sample/draft trust documents to review, approve, and execute.
  
  I would strongly advise against working with the donor directly on the "paperwork" and then "encourage" the donor to have counsel review it. All matters relating to the implementation of the CRT should be consummated with the donor's advisor who should also review and approve the plan suggested to the donor. This is even more important in light of the recent Circular 230 issued by the IRS.
  
  Also, by paying for the drafting of the CRT by the donor's counsel you would be releasing the donor of his legal liability to do so. Thus, you would have to provide him with a 1099 to reflect the cost you assumed on his behalf.
  
  We can discuss this further during our phone consultation.
  Please call me to set up a time. Next week I am in New York.
  
  Warm regards,
  
  André
  
  P.S. I received a call last week from one of the seminar attendees regarding gifts of retirement-planning assets.
  
  

• Any ideas as to what vehicle might work in this situation …
  
  Howdy gents. Thanks again for a great week. It definitely met my expectations.
  
  While I was with you I got a call from one of my colleagues here at Regis asking me to do an illustration for a $100,000 CGA. He had been approached by one of our donors that day. With Crescendo on my laptop, I was able to get something to him fairly quickly.
  
  When he and I finally got together a couple of days ago, he advised that the donor's scenario had changed in some interesting ways. The donor—age 70—still wants to give us $100,000. But she advised my colleague that she will likely lose a battle with a chronic health problem in the next three to five years—probably the lesser—versus the 17 years of remaining life calculated by Crescendo for a CGA. So, she wants a payout—over a three to five year period—that equates as close as possible to the $110,000 she would receive if she lived the additional 17 years.
  
  I can't imagine that we'd agree to a CGA or CRAT with terms like that. We'd barely break even. Not to mention that the payout rate would be way beyond ACGA guidelines.
  
  Any ideas as to what vehicle might work in this situation and still meet the criteria for a charitable gift?
  
  One thing I was going to suggest would include proposing to her that she consider her initial tax deduction of $40,000 as part of the "income" (I do not know her tax bracket info or if she intends to fund this from appreciated assets or cash) and set up a trust that pays out the other $60,000 +/- over a short three to five year period. If I am thinking through this logically, we should end up with about half the original amount when the trust ends.
  
  Am I in the ballpark? Is there something else that makes more sense? Should we realistically decline this gift?
  
  Thanks in advance for your help.
  
  —Russ Shaw
  Director of Planned Giving
  Regis University
  
  

  ---

  
  Hi Russ,
  
  Why not suggest a 5% CRAT for life or 17 years—whichever is longer. This way, she'll be assured that the income will be paid for her life expectancy of 17 years. This would not work with a CGA because of the term of years aspect.
  
  A CRAT paying $17,000 a year for five years would not work because it fails the 5% probability test.
  
  Hope this helps and keep me posted.
  
  It was great to meet you and thank you for you gracious comments about the seminar.
  
  Warm regards,
  
  André
  
  

October 2005

• The alumnus wants to make the gift from a corporation …
  
  Steve and André:
  
  I visited Saturday with an alumnus in Vero Beach who is considering a $250,000 contribution, possibly to fund a charitable gift annuity, and came away with a question. André, Steve suggested I contact you in the hope you might shed some light.
  
  The alumnus wants to make the gift from a corporation which he says is the company he owned and founded and sold. He said it was a C-corporation, but there is some problem with giving directly from it, perhaps because he would have to sell the assets rather than giving directly. That sounds like an S-corporation. However, then he said the company owns common stock of the other companies, mentioning specifically Exxon and GE. Apparently those shares are highly appreciated, with the company worth about $3 million. Also, his accountant is urging him to make the gift from the corporation, but there is another problem of having already given too much from the company, having reached some kind of limitation.
  
  I know this all sounds vague, but that's the way it was presented to me, and the alumnus admitted he doesn't understand it himself. This may necessitate asking permission to speak directly to the accountant—but I thought I would run it by you guys first. Thanks for whatever insight you may provide.
  
  PS. André, I attended the NCPG conference last week and enjoyed one lunch session with your daughter, Claudine. She is a lovely and intelligent young woman, and I enjoyed meeting her!
  
  —Christopher J. Wurster '69
  Director of Capital Gifts
  DePauw University
  
  
  

  ---

  
  Chris
  
  Good to hear from you.
  
  More than likely, this is a C-corporation. The buyer bought the assets so he could depreciate them rather than the stock, which is nondepreciable and may contain unforeseen liabilities. The C then invested the proceeds of the sale in Exxon and GE, etc., which then appreciated.
  
  Now here he is, owning the C which owns the appreciated stock. If he were to sell the stock and take the money out, C would have to pay capital-gain tax, and he would have to pay tax on the distribution. Not pleasant!
  
  Or the C could contribute the stocks and get a deduction. But corporations are limited to a 10% deduction, and this is where the problem could be.
  
  Another option is for him to contribute some of the C stock to you and then have the C redeem the stock from you. He'll get a deduction and you'll end up with cash.
  
  I strongly urge you to make sure his accountant and lawyer make all the decisions regarding this potential gift.
  
  Thank you for kind remarks about Claudine.
  
  Regards,
  
  André
  
  

  ---

  
  Hi André,
  
  I am following all this from the left coast where the weather is sunny, and the traffic is muggy.
  
  It sounds to me like there are several challenges in this gift over and above the donor's advisors making the call.
  
  I think you are suggesting a corporate bailout buyback on the part of the C. This seems to leave DPU in a vulnerable position, since I seem to recall that the Palmer letter ruling stated that the bailout works only as long as there is no written agreement on the part of the C to buy back the stock. In this case the donor wants to make the gift in exchange for a CGA. Could we potentially be stuck with an unfunded CGA? If so, how can we protect DPU?
  
  The second DPU concern has to do with the valuation of the gift of C stock which would, I assume, have a discounted value, owing to the fact that it is partial interest in the C and we have no control over the liquidity. Your thoughts please?
  
  —Stephen K. Gauly
  Director, Office of Gift Planning
  DePauw University
  
  
  

  ---

  
  Steve,
  
  Indeed, you could get stuck with unfunded annuity payments if C does not buy back its stock. DPU can, however, on its own get C to agree to a "put" of the stock by DPU in anticipation of the gift to DPU. Clearly, this approach would work well if it were an outright gift situation, as there would be no downside to DPU. With a gift annuity there is still some risk.
  
  And, some in the field think this may push Palmer too far, others think it should work. The litmus test being that—at the time of the gift—the charity is not under either an express or implied binding obligation imposed by the donor that compels charity to sell the stock to C in this case.
  
  And, of course, the stock would be subject to minority and lack of marketability—discounting for valuation purposes.
  
  André

• I was interested in making the gift this calendar year …
  
  André
  
  I was introduced to you by an associate. We talked briefly on the phone, but I dropped the ball in getting back to you. I understand that you are traveling in Europe.
  
  I've been a member (and now chair) of my college's planned giving recognition society. My most recent venture ended prematurely (albeit profitably) and I need to fulfill my pledge to the college. The proceeds I received were in restricted stock of our public acquirer (restricted for one year from June '05). I was interested in making the gift this calendar year, both for my own personal tax benefits and so the college can get the use of the funds (or at least have the value) ASAP. Do you have any ideas on how I can accomplish this?
  
  If you are available for a conversation let me know and I'll give you a call to discuss.
  
  L.T.
  donor
  
  
  

  ---

  
  L.T.,
  
  Good to hear from you and I am traveling for most of the rest of this month.
  
  Regarding your question, you may gift the restricted stock to the college subject to the restrictions at anytime before the end of the year, if you wish. But even though the underlying stock is publicly traded, the restriction necessitates that an independent appraiser provide an objective valuation of the stock to reflect the impact of the restrictions and to sustain your charitable deduction. This has to be done within a period starting 60 days before the gift and extending to the due date of your tax return—including extensions.
  
  Your former employer's human resources department can provide you with a list of independent, qualified appraisers that you can select from. They should also be able to guide the college as to when to sell the stock and in what amounts so it does not run afoul of the restrictions.
  
  And, finally, please consider this simply curbside information. I cannot act as your attorney and you will have to rely on him or her for legal counsel to act upon.
  
  Let me know if I can be of further help.
  
  Regards,
  
  André

September 2005

• An exempt marital trust was established with $16 million in the name of the wife …
  
  Hi, again, André:
  
  Thank you for your phone call yesterday.
  
  As I am looking at the trust agreement now I can be more specific. I should know by now I can't do things from memory anymore!
  
  Donors are both 66. An exempt marital trust was established with $16 million in the name of the wife. At her death, the trust will commence paying net income to the husband. At his death, this trust will terminate and the remainder will be distributed to a charitable lead unitrust. At that time, the unitrust will commence paying 8% annually, split evenly between Western and one other school.
  
  So, the question is this: In your opinion, can we book anything now? I don't see how we can do anything other than publicize the gift and move on for other support from them for our campaign.
  
  P.S. This is actually a good story. These people were not on our radar. They had never made a gift to WIU, not a penny. He called—a student-worker took the message and gave it to me when I returned late in the day. Normally, I probably would have put it on my desk to call the next day but for some reason I took the number home and called that night. I reached the wife and in trying to transfer to the husband I kept getting cut off. Finally, after about 30 minutes of trying, we made connections. All that I knew was he was considering establishing a trust that would benefit Western. I told him that I would be happy to make the trip to Memphis to visit with him and his wife. He responded by saying that I didn't even know what the amount was and I told him the amount wasn't important. Well, as you know, this is being split between two schools. He told me on the visit that they were considering three schools that had been attended by him and his wife. However, in the initial call to the third school he told them that he was considering a trust that would benefit their school and the response was that they would send him a map to the campus and that when they wanted to come by for a visit someone would meet with them! Well, needless to say, three schools become two and they have made gifts totaling close to $50,000 in the last year and we will talk with them about an endowed chair. You just never know!
  
  —Brad Bainter
  Director of Planned Giving
  Western Illinois University
  
  
  

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  Brad,
  
  Their combined life expectancy is over 25 years, after which you'll receive $640,000 a year for 20 years for a total of $12,800,000.
  
  Assuming an 8% expected rate of return and an 8% discount rate (although it really should be higher), the present value of that income stream at the beginning of the 20-year term is about $3,678,000. The present value of that amount discounted at 8% over 25 years is $537,000.
  
  As I said yesterday, recognition and crediting are policy issues. If they were 70, many places would credit them. But it's your call.
  
  André

• I just want to confirm that if a donor establishes a life insurance policy …
  
  Hi André!
  
  I just want to confirm that if a donor establishes a life insurance policy and we are named owner and beneficiary of the policy, whether the donor makes the payments to us or the life insurance company, the payments are still tax-deductible, as long as we are the owner and beneficiary?
  
  Thanks so much!
  
  Kelly
  
  —Kelly Lang
  Director of Development
  Good Samaritan Hospital Foundation
  
  

  ---

  
  Hi Kelly,
  
  You are correct. However, it is a lot cleaner if the donor were to contribute an amount equal to the premium to the hospital, and then you make the premium payment. It is easier to receipt. And the deduction limitations are more liberal since the payment to the insurance company could be considered a gift for the benefit of the hospital and not to the hospital.
  
  - André

April 2005

• Wealthy sister Mary, 76, wants to fund a $50,000 6.8% CGA to benefit poor sister Esther, 73
  
  The annuity will provide $3,400 annually to Esther. If Mary does this:
  
  

  1. will she be subject to the gift tax?
  2. will Esther's annuity payments be partly tax-free as they normally are?
  3. if Mary uses appreciated stock to fund the annuity, will her capital-gain tax be reduced as it normally is?

  
  
  Jane Kolson
  Director of Planned Giving
  Washington National Cathedral
  
  

  ---

  
  Jane,
  
  1. Yes, the value of the sister's annuity interest is subject to the gift tax against which she can apply her $12,000 annual exclusion and $1,000,000 gift tax exemption.
  
  2. If cash is used the payments will be part ordinary income and part tax-free return of principal over her life expectancy, all ordinary income thereafter.
  
  3. If appreciated securities are used, the reportable capital-gain portion will be fully taxable to rich sister up front.
  
  Call if you have other questions.
  
  - André

March 2005

• On commercial annuities that people have, can they be rolled into a gift annuity?
  
  Would this bypass any taxes that might be owed? What do I need to be aware of here?
  
  —Nelson Rediger
  Associate Director
  William Taylor Foundation
  
  

  ---

  
  No, they cannot be rolled into a gift annuity at Taylor.
  
  - André
  
  

  ---

  
  Then the only solution would be to cash them in, pay whatever tax, take out a gift annuity, and receive a charitable deduction to offset the other tax liability.
  
  - Nelson
  
  

  ---

  
  Yes, but no tax deduction.
  
  - André
  
  

  ---

  
  Thanks so much for your help. I guess we'll see what else they have …
  
  Have a great weekend.
  
  -Nelson

• We have just been notified that Madeira is a $1 million beneficiary in the will of an alumna who turns 40 at the end of the month.
  
  I would like to count this gift in our campaign totals, but we cannot count it at the full value due to her age. How do you come up with the formula for discounting a gift like this?
  
  I have PGCalc, so if this is a question I need to ask them, just let me know. Obviously I have never done this before!
  
  —Kate Hillas
  Director of Planned Giving
  The Madeira School
  
  

  ---

  
  Assuming a 42-year life expectancy and a 5% discount rate, the PV of $1,000,000 comes to $128,840.
  
  But do note that most institutions would not count or credit such a gift. Take a look at the CASE and NCPG positions on this issue.
  
  - André

• A quick question about a pooled income fund
  
  A quick question about a pooled income fund
  
  Can an individual who is not a part of the original investment group join in and contribute to the fund after it has already been established?
  
  —Mary C. Cosgrove
  Development Officer
  Canisius College
  
  

  ---

  
  Indeed he or she can. A pooled income fund is open to all who wish to participate. It is not restricted to participants who joined at the inception of the fund.
  
  Warm regards to Mike and to you.
  
  - André
  
  

  ---

  
  That was easy enough! THANK YOU André!
  
  - Mary

• I have been talking with a donor in conjunction with a major gifts officer.
  
  The donor has one grandchild (a granddaughter age 5 right now) that she would like to "do something for." The donor is already contributing to a 529 plan, but the major gifts officer suggested that she could help the granddaughter w/ a charitable trust that the granddaughter could use for anything—since 529 plans are for education.
  
  Do contributions to 529 plans count toward the 11k/yr. gift that can be excluded from gift tax?
  
  Here's some pertinent info. on the donor:
  
  

  • I think the donor's capacity is for a gift of 100-200k outright, but her largest gift to-date is a 10k CGA that required quite a bit of back-and-forth. I think there is a lot more $ than she thinks there is.
    
    
  • She is no longer working, and is a volunteer and Bd. member for arts/health orgs., and her husband is a cardiologist who is still working, but will likely retire soon.
    
    
  • She has two children, both of whom I understand are quite well-off on their own. The son is sr. editor at Rolling Stone and the daughter—who has the granddaughter—is a physician. She described the granddaughter as "the light of my life."
    
    
  • She is very interested in endowing/naming a fund at the College.
    
    
  • The husband is disabled and employs a car and driver full-time to get to the hospital for work (could be paid for by the hospital, but don't know) and the donor has a lot of pain from time to time from an accident—they could both have significant health care cost issues as they go along.

  
  
  I was wondering if there was a way to do a flip trust for a term of years, thinking that she could make the gift now, and the trust could be invested so that it doesn't pay out to the granddaughter until she turns X age, pays for 5-10 years, and then comes to Barnard. Of course, she could simply set-up a CRAT for a brief term of years down the road, but I was trying to think of a way for her to make a gift sooner rather than later.
  
  But probably a better suggestion is a lead trust? If the trust paid to Barnard for 10-15 years, and then passed the principal on to the granddaughter at a certain age, it would allow the donor a current deduction (while the husband is still earning more), the lead income to the College could endow something in the donor's name, and then the granddaughter would have $ for school, travel, etc.
  
  Would the generation-skipping taxes be the same in each instance? I have been flipping through your seminar examples, but I wanted to run this by you for your suggestions. Any advice/outline you can offer is greatly appreciated!
  
  —Heidi A. Williamson
  Office of Planned Giving
  Barnard College
  
  

  ---

  
  A nongrantor lead trust could work and has the advantage of starting to benefit Barnard immediately—over the term of the trust—and the granddaughter would receive the trust assets in 12 years for her education and other needs. At the end of the trust term, any appreciation in the value of the trust would pass to her free of transfer taxes.
  
  The downside is that the donor would not be entitled to an income-tax deduction for any portion of his charitable gift.
  
  Generation skipping is applicable to this and any other transfer to a grandchild. However, the $1,500,000 GST exemption would more than offset any tax resulting from the noncharitable portion of the transfer.
  
  I think a term unitrust invested in index funds that will flip in 12 years would probably work best. A current income-tax deduction would be available and the gift GST exemptions would offset any transfer-tax liability. I prefer this approach over the CRAT because current income distributions can be minimized.
  
  Finally, contributions to 529 plans qualify for the $11,000 gift-tax annual exclusion, but not for the tuition exclusion.
  
  Hope this helps.
  
  - André