10. Charitable Gifting

Question 1

Tax objectives of charitable gifting

Answer 1

• during lifetime, reduce current income tax liability
• after death, reduce gross estate
• reduce size of taxable estate

Question 2

Reasons for Gifting

Answer 2

Satisfaction of the donor,
Reduction of the size of the taxable estate: Lifetime gifts of property, especially appreciating property, also removes future gains
Reduction of income tax liability: Lifetime gifts of property- charitable deduction for income tax purposes- may be up to 60% of donor’s AGI
Reduction of gift tax liability.- qualifies for an unlimited charitable gift tax deduction

Question 3

Gifting factors: Availability of Property to Gift

Answer 3

a donor cannot make an unlimited gift or bequest to a charity if a spouse and other family members survive the donor in some states- mortmain statutes/Elective Share statutes

Question 4

Gifting factors: Reduction in tax

Answer 4

if the donor needs lifetime access to assets, a charitable bequest may be made at death. Such a bequest would qualify for the unlimited charitable estate tax deduction. The result would be a smaller taxable estate and lower estate tax liability.

Question 5

Not Gifting

Answer 5

Scenarios where not gifting property would be more advantageous and could still provide charitable gift, eg in the case of depreciated property

Question 6

Doug and Lara want to gift property during their lifetime to reduce their taxable estates. They also want to avoid gift tax liability by not using any of their lifetime gift tax exclusion. They consult their financial advisor, who recommends making a split gift. Do you think the financial advisor made the right recommendation?

Answer 6

Doug and Lara may elect to split a gift in order to reduce their gift tax liability. However, the split gift allows each of the spouses to use their own annual exclusions and lifetime gift tax exemptions. If these clients are interested in making lifetime gifts without using the lifetime gift tax exclusion, then Doug and Lara should consider making lifetime gifts to a qualified charity. As a result of the unlimited charitable gift tax deduction, an unlimited amount of assets may be gifted to a charity without the payment of any gift tax liability.

Question 7

Gifting assets to charity with significant appreciation potential allows for the reduction of which of the following? (Select all that apply)

Answer 7

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

Question 8

Nicolas is thinking of gifting his old family home to a qualified charity. The family home has actually depreciated in value. Its present FMV is less than what Nicolas had paid for the home. As his financial planner, Nicolas is asking you to outline planning strategies, including gifting, which should be considered. Given these limited facts, which strategies would not apply?

Question 9

Assets Appropriate for Gifting to Charity

Question 10

Cash

Answer 10

Max is 60% of donor’s AGI, requires:
-Name of the organization.
-Amount of cash contribution.
-Description of any non-cash contribution.
-A statement that no goods or services were provided by the organization in return for the contribution, if applicable.
-Description and good faith estimate of the value of goods or services. Deductions for clothing and household goods can only be taken if the items are in “good condition” or better. For a donated item >$5,000, a qualified appraisal must be included with the donor’s income tax return.

Question 11

Ordinary Income Property

Answer 11

50% of contribution base ceiling, deduction is limited to basis/cost:
-asset that would have generated ordinary income (rather than capital gain) on the date of contribution had it been sold at its fair market value rather than contributed, includes:
-Capital assets held less than the requisite long-term period at the time contributed,
-Section 306 stock (that is, stock acquired in a nontaxable corporate transaction that is treated as ordinary income if sold),
-Works of art, books, letters, and musical compositions, but only if given by the person who created or prepared them or for whom they were prepared, and
-A taxpayer’s stock in trade and inventory (which would result in ordinary income if sold).

Question 12

Gift of Life Insurance

Answer 12

FMV @ date of gift, limited to 30% AGI for qualified public charity.
For a premium-paying policy, the replacement cost is the interpolated terminal reserve plus any unearned premium at the date of the gift.

a gift of life insurance is a gift of ordinary income property: charitable deduction is lesser of donor’s adjusted basis or FMV of LI policy/

Question 13

LTCG Property

Answer 13

FMV of the asset on the date of the gift, however for income tax deduction = 30% donor’s AGI
can carry forward remaining $12,000 deduction, applying according to 30% rules for next 5 years
- can make an election to have the 50% AGI rule apply to gifts of property (LTC assets) if donor is willing to reduce the value of the gift to the donor’s basis in the asset

Question 14

Tangible Personal Property

Answer 14

Jewelry
Automobiles
Artworks and stamp collections,
Books
(all of these tangibles would be considered capital property if created by someone else)

If use-related, then FMV/ may deduct up to to 30%AGI & 5 yr carry forward rule; or donor can elect 50% AGI by using basis.
If >$5,000, then charity disposes donated property within one year, the income tax deduction is reduced from FMV to cost basis/ If disposed within 1-3 years, donors must recognize income on difference between FMX deduction and cost basis

If use-unrelated then deduction for lesser of cost basis or FMV

Question 15

Future Interest Gift

Answer 15

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

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

Question 16

Identity of the Donee

Answer 16

If public charity (i.e., 50% Limit Organization), then the maximum annual charitable income tax deduction is:
-Cash: 60%AGI
-FMV Cap Gain property: 30%AGI
-Tangible use-unrelated personal property: Lower of FMV/Adjusted Basis up to 50% AGI
-Tangible use-related personal property: FMV up to 30% AGI
-Reduce property to adjusted basis: Lower of FMV/Adjusted basis up to 50% AGI
-Ordinary Income Property- Lower of FMV or Adj. Basis up to 50%AGI
-Unreimbursed expenses up to 50% AGI

If private: limited to the donor’s basis in the property. However, certain gifts of qualified appreciated stock may be deductible at their full FMV.

Question 17

Types of Charitable Gifts

Answer 17

outright charitable gifting or split interest transfers

Question 18

Gifting Strategies

Answer 18

Outright charitable gift
Charitable stock bailout
Charitable remainder annuity trust
Charitable remainder unitrust
Charitable lead trust
Charitable gift annuities
Pooled-income funds
Private foundations
Donor-advised funds
Traditional IRAs

Question 19

Outright Charitable Gift

Answer 19

irrevocable completed transfer of property:
-income tax deduction
-unlimited charitable gift tax deduction
-reduces estate tax liability

Question 20

Charitable Stock Bailout

Answer 20

owner of closely held stock wishes to make a gift of property to a qualified charity
-when the stock is gifted to the charity, there cannot be an understanding or contract (formal or informal) to redeem the stock at a specified time/cannot have characteristics of a prearranged transaction
-donor should gift the stock to the charity and have the charity redeem the stock back through the corporation. If the corporation does not redeem the stock, a redemption of the stock directly to the shareholder would result in dividend treatment of the redeemed stock and could result in taxable income to the donor.

Question 20

Charitable Remainder Annuity Trust (CRAT)

Answer 20

trust is established to provide a noncharitable beneficiary the right to receive income for a period of time (either life expectancy or a set period not to exceed 20 years), after which charity receives remainder interest
Upon the creation of the trust, the donor receives a charitable income tax deduction based upon the remainder interest, which will transfer to the charity. This remainder interest is calculated on the day the transfer is made into the trust.

-Can only make one transfer to corpus
-once established, trust must pay fixed minimal amount of at least 5% and not more than 50% of initial value - corpus can be used to supplement difference
-immediate income tax deduction depends on value of remainder interest
- value of the charitable remainder interest must equal at least 10% of the value of the assets valued when transferred into the trust.

Question 20

tax implications if CRAT Structured as a Postmortem Transaction

Answer 20

decedent’s estate receives a valuable estate tax deduction based on the present value of the remainder interest eventually passing to the charity.
Since gift of life income interest is an exception to terminable interest rule, no need to elect Q-TIP treatment to receive marital deduction for interest income passing to spouse

Question 21

Charitable Remainder Unitrust (CRUT)

Answer 21

• may make >1 transfer to trust
  -once trust is established, trust may pay fixed percentage based on annual balance, at least 5% and not more than 50% of annually reappraised value of corpus
  -income increases each year the value of corpus increases
  -immediate income tax deduction for the present value of the remainder interest in the property that passes to the charity
  -value of the charitable remainder interest must equal at least 10% of the value of the assets transferred into the trust when funded

Question 22

Net Income with Makeup Charitable Remainder Unitrust (NIMCRUT)

Answer 22

alternative to qualified pension plans by investing in assets that produce little or no income in the early years (while the donor’s income is high) and then converting to high-income investments in later years after the donor’s retirement.

Question 23

Charitable Lead Trusts (CLT)

Answer 23

When donor gifts property such as cash or income-producing assets to an irrevocable CLT, provides an income stream for a specified period before reverting back to donor/spouse/beneficiaries

Donor as grantor and remainder beneficiary entitled to charitable income tax deduction for PV of income payments gifted to charity, but donor is also taxed on charity’s income since it retains a reversionary interest in the property.

Income is paid as guaranteed annuity (CLAT) or fixed percentage of trust assets revalued annually (CLUT)

A CLAT is a better choice when interest rates are lower, since smaller annuity payments to charity result in a greater value of the trust corpus for the remaindermen.

Non-grantor CLT: If donor chooses non-spousal beneficiary to receive remainder interest, not entitled to deduction and will not pay tax on income. gift of remainder interest is a future interest gift, so annual exclusion can’t be used, Trust corpus would not be included in donor’s estate. Grandchildren are not ideal beneficiaries since can’t allocate GST exemption until charity’s income interest ends

With CLUT, grantor can allocate GST exemption when trust is initially funded

Question 24

Charitable Gift Annuities

Answer 24

donor irrevocably transfers a gift of cash or property to charity in exchange for a lifetime income stream
Property gifted to charity>total income paid to donor, donor will receive income tax deduction for gift

Question 25

Pooled Income Funds

Answer 25

donors make charitable donations to these funds / purchasing units that will pay them an annual income stream for life. Donors irrevocably gift assets that will give them a pro-rata share of income, based upon the rate of return earned by the fund, receive an income tax deduction for the present value of the charity’s remainder interest in the property that passes to the charity at the donor’s death, included in gross estate

Question 26

Private foundations / family foundations

Answer 26

charitable entities established by wealthy individuals who contribute to the foundation, then select the charities they wish to donate to. The foundation must distribute a minimum of 5% of its assets to public charities each year
Income tax deductions are limited to 30% of AGI for cash and 20% of AGI for long-term capital gains property

Question 27

Donor-advised funds

Answer 27

Donors establish an account with a mutual fund or brokerage firm that offers these funds to receive a charitable income tax deduction and to select the charities they wish to support, subject to adjusted gross income (AGI) limitations, and they reduce the size of the donor’s gross estate.
best to use appreciated securities that are owned for more than one year, to avoid paying capital gains on the appreciation

Question 28

Qualified Charitable Distributions (QCDs)

Answer 28

tax-free distributions up to $100,000 from IRA to a qualified public charity. owner not taxed on income, will not affect taxability of SS benefits; however no income tax deductions, not subject to AGI limitations. Must be from IRA, not DAF/private foundation

Question 29

Tax Implications of Charitable Gifting

Answer 29

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

Question 30

limitation on itemized deductions

Answer 30

When calculating AMT, add back as an adjustments for AMT:
-Medical itemized deductions in excess of 7.5% of AGI.
-State income taxes and local property taxes.
-Difference between home mortgage and qualified-residence interest.

Question 31

Choose items that are categorized as ordinary income property for charitable giving purposes

Answer 31

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

Question 32

If a taxpayer donates a highly appreciated long-term capital asset to a public charity and chooses to use the current fair market value, the maximum deduction is _____ of the donor’s AGI.

Answer 32

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

Question 33

If a taxpayer donates a highly appreciated long-term capital asset to a public charity and chooses to use the basis, the maximum deduction is _____ of the donor’s AGI.

Answer 33

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

Question 34

The annual gift tax exclusion application to charitable gifts

Answer 34

Does not apply: Charitable gifts are unlimited, but the tax deduction a donor receives each year will depend on the taxpayer’s AGI, as well as the type of property gifted and the type of charity to which the gift is made.

Question 35

Each of the following vehicles for charitable giving generates a deduction equal to the present value of the charity’s remainder interest EXCEPT:
Charitable Remainder Trust
Pooled Income Fund
Donor-Advised Fund
Charitable Gift Annuity

Answer 35

When contributing to donor-advised funds, donors are entitled to a charitable income tax deduction based on the type of property contributed, subject to AGI limitations.

With charitable remainder trusts, pooled income funds, and charitable gift annuities, the available tax deduction is equal to the PV of the charity’s remainder interest.

Question 36

When a charitable contribution of tangible, use-related property is made to a qualifying public charity, the maximum deduction permitted when selecting the FMV of the asset is _____ of the taxpayer’s AGI.

Answer 36

When a charitable contribution of tangible, use-related property is made to a qualifying public charity, the maximum deduction permitted when selecting the FMV of the asset is 30% of the taxpayer’s AGI.

Question 37

When using a charitable gift annuity to make payments to a spouse, if the spouse receives all payments and has a general power of appointment following the donor’s death, _______________________ is available.

Answer 37

For gift annuity payments made to a spouse, a marital deduction is available if the spouse receives all annuity payments and has general POA over payments after the donor’s death.
When implementing a charitable gift annuity, a donor transfers cash or property to a charity and the charity pays the donor or other donees an annuity payment each year for life.

Question 38

Samuel has a $50MM estate and a team of physicians has recently noted his life expectancy is approximately 3 years. Working with his CFP® professional, Samuel has developed the following plan to disburse his estate:

Gift $5MM annually to his spouse, Candace.
Fully fund a Bypass Trust upon death.
Use remaining assets to fund a Power of Appointment Trust.
Calculate the amount of the estate that will be transferred that will qualify for the marital deduction.

Answer 38

Samuel will gift $5MM each year for his remaining life expectancy of 3 years. $5MM x 3 years = $15MM. All these assets will qualify under the marital deduction as gifts given outright to a spouse qualify.

To fully fund a B-Trust, assets will be transferred up to the lifetime exemption amount of $12.92MM (2023). These assets will NOT qualify for the marital deduction. The remaining assets (i.e., $22.08MM) will be placed into the A-Trust and will qualify for the marital deduction for the decedent (Samuel).

Thus, $15MM (3 years of gifting) + $22.08MM (A-Trust funding) = $37.08MM of assets that qualify for the marital deduction.