Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

GS 849 Charitable Strategies > Assignment 9: Planning for Gifts of Noncash Assets > Flashcards

Assignment 9: Planning for Gifts of Noncash Assets Flashcards

1
Q

Noncash assets definition

A

Noncash assets–sometimes used to describe gifts of anything other than cash (money), checks, credit cards, and the like.

Noncash can mean, for example. public securities, along with nonpublic assets

But “noncash” is also used to mean gifts of just non-publicly traded assets; these are sometimes called “complex assets”

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Examples of “Complext” assets

A

Typically illiquid and involve many steps to transfer:

  • Land
  • Real Estate
  • Partnership or LLC interests
  • Closely held stocks; restricted stock
  • Intellectual property/royalties
  • Collectibles
  • Timber
  • Oil and gas
  • Bitcoin and other cryptocurrencies
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Cash is Not King in Fundraising

A

According to Russell James, if gifts of noncash assets rise, a charity will experience a significant increase in total giving (according to a 2018 Cash is Not King study where it predicted a 26% increase in total giving if gifts of real estate rise by 10%)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

Important for Fundraisers

A
  • It’s important to solicit and accepts gifts of noncash assets, either directly or via an intermediary
  • The expertise you are acquiring in CAP, along with your willingness to collaborate with other advisors, positions you to make an impact for your organization
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

Important for Advisors

A
  • For gifts of complex assets, such as business interests and real estate, significant expertise is required–advisors are key
  • When donors have complex assets, they may be given directly to the charity, but often, they may be facilitated using a charitable tool (CRT, DAF) that advisors manage
  • The result is an increase in managed assets
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Bryan Clontz’s 10 Worst Noncash Gifts

A
  1. Timeshares
  2. Negative basis pre-86 tax shelter partnerships
  3. Things that eat (i.e. livestock)
  4. Any kind of vehicle, including cars, boats, planes
  5. Life insurance with outstanding loan on the policy
  6. Patent or copyrights without revenue
  7. Small, undeveloped lots on the moon, or Earth
  8. Burial plots
  9. Installment notes and annuities
  10. Non-qualified stock options
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Top 10 Questions to Ask to Qualify the Gift

A
  1. Asset description/expected value?
  2. Who owns the asset?
  3. Partial or entire interest?
  4. Debt or other encumbrances?
  5. Outright, life-income or testamentary?
  6. Capital or ordinary asset?
  7. Tax implications?
  8. Potential buyers and offer status?
  9. Holding period and management?
  10. Transfer timing?
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Family Businesses

A
  • Family businesses make up a major part of the global economy–an estimated 70-90% of the global GDP annually
  • 85% of start-up companies are established with family money
  • Family firms outperform nonfamily firms–6.65% difference in return on assets in the US, 8% difference in Europe and Chile
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Family Businesses and Philanthropy

A
  • 81% of the world’s largest family businesses practice philanthropy
  • Giving is almost equally split between charitable donations and service to the community
  • 47% of family businesses have a family foundation
  • Entrepreneurs are more philanthropic than any other high net worth individuals
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

On the Minds of Family Business Owners

A
  • What is the business without me?
  • What am I without the business?
  • Who will run it when I exit?
  • Who could ever run it as well as I do?
  • Where will I go every day?
  • What will we do with our time?
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Family Business Owner Questions about Potential Sale

A
  • What will we get?
  • How much do we need for ourselves?
  • How much is enough for the children?
  • How much is too much?
  • How can we have an impact on society?
  • How can we reduce taxes in favor or our children or philanthropy?
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Business Succession

A
  • 41% of business owners expect to exit in the next five years
  • 52% intend to sell the business
  • 29% plan to leave the business to family
  • 18% will close the business entirely
  • 10% are unsure
  • 65% are ready to retire
  • 49% want to adjust their work-life balance
  • 46% say it’s a good time to sell because they will receive a favorable price
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Why Succession Plans Fail

A
  • 75% of owners planning to sell believe they can do so in a year or less
  • 58% have never had their businesses appraised
  • 48% have no formal exit strategy
  • 37% have no structures in place to shield sales proceeds from taxation
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Heirs Do Not Want the Business

A
  • Half of family’s adult children work for the family-owned business
  • 89% of business owners say family members are not interested in running the business
  • 21% say members are not qualified
  • 9% prefer family take different career paths
  • 82% say children would rather inherit the assets from the sale than the business itself
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

If Heirs Inherit the Business

A

Family business owners are highly worried heirs will…

  • Take the business in a different direction - 57%
  • Sell business outside the family – 57%
  • Squander the profits – 55%
  • Not be prepared to run business–54%
  • Not treat employees well–54%
  • Fight over money–52%
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Doing Well While Doing No Harm (Phil Cubetta)

A

“The greatest enemy of knowledge is not ignorance; it is the illusion of knowledge.” – Stephen Hawking

Dunning Kruger Effect: The more incompetent a person is, the more confident he or she is.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Unconscious Incompetent

A
  • Do not impersonate an expert in areas in which you are an unconscious incompetent–you can cause irreparable damage
  • Be humble, build teams, defer to experts
  • Specialize in understanding the client
  • Manage the process as a trusted advisor
  • Knowing your limits is the beginning of wisdom
  • Work within your comfort zone
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Synthesizing Generalist

A
  • You may be an expert in a narrow area and be paid within that area
  • Try out for the role of “synthesizing generalist”, as Lowell Weiss calls it, or that of a “translator” as H. Peter Karoff calls it
  • You may specialize in helping the client achieve clarity “above the line” and move forward with a good team “below the line”
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

Your seat at the table…core or virtual team?

A

Virtual Team for Business case
Core Team–Trusted advisor, tax attorney, CPA, Insurance professional, investment advisor

Virtual Team (brought in when needed)–Family counselor, business evaluation expert, business broker, exit-planning specialists, philanthropic advisor

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Sell or Transfer a Family Business?

A

Sell to employees? –> Can they afford it?
Sell to family? –> Are they interested? Qualified? Have the money? Which members? Who is left out?
Sell to outsiders? –>Where does this leave family? Whose job is eliminated?
Sell assets of the business? –> Then liquidate the empty shell? Where does this leave family who are employees?

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Buy Sell Agreements (Lambert & Wright)

A

“It provides a mechanism for an orderly business succession should an owner decide to transfer his interest due to a voluntary event, such as a retirement, or an involuntary event such as death, disability, insanity, or bankruptcy. Any such event is referred to in the context of a buy-sell agreement as a triggering event. It also affords the co-owners or the business entity the ability to maintain the option or mandatory obligation to purchase the interest from an existing owner in order to restrict outsiders or undesirable business partners from becoming owners.”

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
22
Q

Typical Triggering Events

A
  • Death
  • Disability
  • Retirement
  • Withdrawal
  • Termination of employment
  • Bankruptcy
  • Sometimes the divorce of a shareholder
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
23
Q

Funding a Business Sale

A
  • When a child or an employee buys the business, where do they get the money?
  • For “deathtime” transactions, life insurance is a common funding tool
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
24
Q

Gifts of Fractional Interest

A
  • Generally, a business owner will not give all of the business or other property to charity
  • The owner may donate a portion of the business to offset the gain upon the sale of the rest and to avoid the capital gain on the part donated
  • How the property is divided will differ (shares, interests, deeds, undivided partial interest)
  • Some fractional gifts may include: C-Corp, S-Corp, LLC, LP, real estate
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
25
Q

Gifts of Fractional Interest–Opportunities & Traps

A
  • Usually donated prior to a potential sale, assuming there is no pre-arrangement
  • Valuation for charitable tax deduction must reflect the minority or majority interest, which may affect marketability
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
26
Q

Depreciation

A
  • In working with businesses you will hear that a property or piece of equipment has been “depreciated”
  • Generally, depreciation of an asset is good because it makes the sale by donor less attractive, and makes the avoidance of gain via a gift more attractive

Basic concept:

  1. Buy, let us say for cash at $1M
  2. Basis may decrease each year as property is depreciated or “written off” for tax purposes down to zero
  3. Property may increase in value over 30 years to $2M
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
27
Q

Typical Depreciated Assets

A
  • Investment and commercial real estate
  • Tangible personal property used for business (planes, machinery, cars)
  • Limited partnerships or LLCs owning depreciated assets
28
Q

Traps & Opportunities for Depreciated Assets

A
  • Generally, if a donor used a depreciation method that was more aggressive than straight-line, then any amount that would be deemed ordinary income is recaptured as a dollar-for-dollar reduction in the charitable deduction
  • Generally, if the asset has a negative cost basis, the donor will recognize capital gains tax to the extent of that basis (have to get negative basis up to zero)
  • Capital gain assets that have been fully depreciated under straight-line can make wonderful gifts, as they come with low basis and high capital appreciation
  • *Ask if appreciation method was straight-line or aggressive, then turn over to the experts! Very complicated
29
Q

Debt as a Red Flag

A
  • Debt on an asset can lead to bargain sale treatment for the asset donated, resulting in taxable income to the donor
  • It can lead to unrelated business income tax (UBIT) to the charity
  • The main point is to ask about debt before launching into a gift of that asset

**bottomline…debt is a deal killer!

30
Q

Transfer via Charitable Tools for Business Interests: Business Forms

A
  • Sole Proprietorship
  • Limited Liability company/limited liability partnerships
  • *Care is needed when accepting an LLC interest; check for any restrictions on ownership
  • C-Corporation–the form of most large publicly traded corporations
  • S-Corporation–a special form, with a limited number of shareholders
  • S-corp pays no corporate income tax but are taxed as ordinary income to shareholders
  • S-corps are not entitled to deduct charitable contributions; any deduction passes through to the shareholders
  • Charitable organizations can be S-Corp shareholders, but income from the stock is UBIT to the charity
31
Q

Beneficiary of a CRT

A

If the tool of choice is a CRT, remember that the tax status of the remainder beneficiary passes back to the trust

  • Public or private charity?
  • Will the asset gifted be counted as capital gain property?
  • What is the deduction for? FMV? Basis?
  • Up to what limit?
32
Q

Tax Basis and Holding Period

A
  • Determines the amount of gain and how taxed upon sale

- The higher the taxable gain and the higher the tax rate, the greater the incentive to use a tax-favored tool

33
Q

Self-Dealing Rules

A
  • CRTs are subject to self-dealing rules
  • For example, it is considered self-dealing to have a business inside the trust lease land owned by the donor outside the trust
34
Q

Buyer Waiting in the Wings

A
  • A buyer lined up or in process is a red flag
  • If the IRS deems this to have been a “done deal,” any gain on the sale inside the trust or DAF will be assigned to the donor who will not only have “phantom income” but also no sales proceeds available to pay the tax
  • How close is too close? Seek qualified counsel
  • Ask: How close are you to selling?
35
Q

Sale of Business or Assets

A
  • A buyer can purchase either a going concern, or the assets from inside it
  • Many prefer to buy the assets
  • get stepped-up basis in the asset
  • Avoid hidden liabilities of the prior company

TRAP:

  • Business given to CRT
  • CRT sells assets from inside business
  • Business now must pay tax on that sale
36
Q

Encumbered Property

A
  • Always ask about debt!
  • Bargain sale with imputed income to donor
  • Can create debt-financed income inside the trust, which is subject to excise tax at 100%
37
Q

Other Risks…

A
  • Delayed sale with illiquid asset in CRT
  • Use correct trust design, such as a Flip-CRUT
  • Potential obligation to make in-kind distributions (e.g., CRAT-funded with raw land)
  • A need for ongoing valuation (e.g. a CRUT funded with hard-to-value assets requiring annual valuation–at what cost?)
38
Q

Charitable Bailout

A
  • Donor contributes some stock in her C-Corp to CRT with donor as beneficiary
  • Donor gives some stock to her child
  • C-Corp redeems donor’s stock from CRT
    Results:
  • Shift of % ownership towards child without transfer tax
  • CRT benefits (tax savings and income) to donor
39
Q

Take Care

A
  • Stock must be offered at the same fair price to all concerned, including other owners of the same class of stock
  • Charity cannot be obligated to sell donated stock
  • Qualified appraisal needed
  • Engage in qualified counsel
40
Q

S-Corp Caveat

A
  • Contributing an S-Corp stock to a CRT will disqualify the S election
  • If a charity accepts S-Corp stock, it will have to pay unrelated business income tax on distributions (dividends) received and appreciation on the value if stock is sold
41
Q

Company Makes Gift to CRT

A
  • Company gives asset to CRT
  • Company gets income back from the trust
  • Trust must be for a term of years not to exceed 20
  • Deduction limited to 10% of company’s income with 5-year carry forward
42
Q

Issues of Company Gift to CRT

A
  • Company must continue to exist for the trust term
  • Company must get the income it receives out to the owner’s as…? Dividends? Salary?
  • Company may be reclassified as a holding company by IRS and subjected to penalty tax on undistributed income
  • A gift of substantially all assets may be deemed a sale prior to transfer
43
Q

DAF for Business Transfer

A
  • Can a DAF be used in lieu of a CRT for C-Corp stock?
  • Yes: the charitable stock bailout would work the same way (gift into DAF, followed by redemption at a fair price offered to all stockholders of the same class of stock)
  • *emerging as a tool for business transfer
  • Parent could gift stock to DAF
  • A child or outside buyer could purchase it
  • Beware the prearranged sale issue
44
Q

DAF and Foundation Rules

A
  • The Pension Protection Act of 2006 extends the “excess business holdings rule” from foundations to also include DAFs
  • DAFs may not hold more than a minor interest in a business when a disqualified person (the donor, fund advisor or a related party) also owns an interest in the business
  • DAFs receiving gifts of a business enterprise have 5 years to divest holdings that are above the permitted amount
45
Q

Business Transfer at Death

A
  • Liebell and Brunner draw on their practice in this market
  • The market is of great interest not only to attorneys and CPAs, but also to life insurance agents
  • Gift planners should be no less alert
  • A business owner’s net worth may be 90+ percent in the business
  • How to transfer at death?
  • A constant dilemma
  • Who should get how much?
  • Which heirs will remain in the business, and which are out?
  • How can taxes be reduced through a charitable gift?
  • How can the remaining estate tax be paid?
46
Q

For Death Time Business Transfer

A
  • Foundation?
  • Charitable Lead Trust?
  • Liebell and Brunner are carefully working within the foundation rules and their many nuances
  • They are trying to solve the issue of how a business interest can go into a foundation or CLT–an apparent violation of the foundation rules
  • At death, as in life, it may be possible to gift stock to a CRT or DAF and have the company “bail it out” with fair price offered to all
47
Q

Bequest with Optoin

A

“Advanced Brain Surgery” per Phil Cubetta

  • Bequest of business to a foundation or CLT
  • The bequest can be coupled with an option to family members to purchase the business from the estate prior to the gift
  • The purchase can be for cash (consider life insurance to generate these funds) and a note
  • If purchased from the estate, the cash and the note can go into the foundation or CLT
  • At “deathtime” an exception is allowed for a note under the foundation rules that would otherwise prevent it as self-dealing; also there would be no excess business holdings, since neither the foundation nor the CLT holds the business
48
Q

CLT

A
  • The business goes to the heirs via purchase from the estate
  • Cash and note into CLT from estate
  • CLT pays into charity or, perhaps a DAF
  • CLT assets eventually go to the heirs
    Not bad! BUT…
  • High planning tolerance needed
    *Right set of facts
  • Top legal team
49
Q

Deathtime legal transfer with CLT: Many Practical Issues

A
  • This approach comes with many caveats and legal nuances
  • Also, the note must be serviced
  • Will the business prosper and provide the needed cash flow?
  • Will the business’ cash flow be available to those paying the note?
  • Will the interest rate be high enough to produce the cash flow needed by the CLT to “zero out?”
50
Q

Case Studies with DAFs–donor prospects

A
  • Donors with real estate wealth and closely-held business wealth are by far the most charitably inclined without exception
  • They are also the ones with the most illiquid assets and tend to make current charitable gifts of cash
  • They’ve invested almost everything in their businesses (very low cost-basis and high appreciation)
51
Q

Closely-Held C Corp and DAFs

A

Family Business (C-Corp) –>Community Foundation (gifts partial interest)
Community Foundation –>Family Business (C-Corp) (Corporate redemption)
1. Donor contributes stock - receives full deduction
2. Company buys stock back
3. Minority interest holders increase their percentage of ownership with no gift tax
4. Donor creates named research fund

52
Q

Commercial Real Estate and DAFs

A

Review Bryan Clontz case study of 4 doctors who owned a $6M medical building and wanted to sell practice to charity:

  • Gave a 20% partial interest to establish 4 CRTs for life
  • CRTs funded 4 DAFs
  • REIT (Real Estate Investment Trust) purchased buliding
  • DAFs provided the source of charitable grants for the rest of their lives (cash savings for the docs)
53
Q

Limited Partnerships and LLC/DAFs

A

LPs and LLCs** –>Give partial interest to Community Foundation for DAFs

Step 1: Donor contributes partial interests – Receives FMV deduction
Step 2: Charity sells LP or LLC interests to Third Party Buyer

**Already has limited liability–mitigates risk for charities

54
Q

Traps and Opportunities/DAF case studies

A
  • Be careful of any underlying asset debt or active business income (may create a bargain sale or UBIT
  • Be careful of any capital calls or other kinds of partner or shareholder liability (this is why general partnerships are usually declined by charities)
  • Works well for outright or life-income donations
  • The structure provides additional liability protection for the charity
55
Q

Crops and Timber Gifts

A

Crops and Timber –> Public Charity (university)
Public charity –> Third Party Buyer (commodities buyer)

  1. Donor contributes crops/timber as futures contract or with the land
  2. Charity sells crops/timber to third party
  • Remember: farmers are both real estate wealth and closely-held business wealth
  • *Crop: ordinary income property
56
Q

Crops/Timber Opportunities

A
  • Even if crops are donated at cost of goods sold (cost basis), ordinary income is usually not recognized
  • Timber deeds, in some states, may be deductible at FMV if held for investment purposes (these are complex rules)
  • Timber deeds are kind of like a futures contract, but be careful–when timber is cut it becomes tangible personal property
57
Q

Crops/Timber Traps

A

More traps than opportunities–very complex!

  • Crops and timber are usually ordinary income assets; deduction is generally the lesser of cost basis or FMV, subject to 50% AGI limit (for public charity)
  • Generally, only get FMV deduction if crops or timber are still attached to the donated land
  • Be careful of tangible personal property rules as well as partial interest rules (can’t donate land, yet retain timber/crops)
  • State rules vary; the use can also have impact tax deductibility (active business rules vs. investment rules) ALWAYS USE EXPERTS!
58
Q

Art & Collectibles

A

Art/Collectibles–>Public Charity–>Third Party Buyer (Action House)

  1. Donor contributes art/collectibles –is it use related?
    * Receives FMV deduction if yes/Lesser of basis if no
  2. Charity sells art/collectibles to buyer
59
Q

Art & Collectibles–Considerations

A
  • The donor only gets FMV deduction if the charity uses the donated property for a related exempt purpose, but this kind of gift may still be attractive to the donor, even as a gift for unrelated use
  • Such gifts need a qualified appraisal, even if the gift is counted at only basis
  • Donor can avoid the federal capital gains tax, state income tax, and possibly the 3.8% net investment income surcharge
  • Donor also gets out from under all the costs of ownership, such as storage and insurance
  • Coins are very complicated (face value, qualified appraisal value, materials value, etc.)
60
Q

Art & Collectibles–Opportunities

A
  • Many donors wish to make these kinds of gifts for lifestyle reduction
  • Their heirs may not want the property, and the donors may not want to store, insure, and otherwise manage these assets
  • Gift to an appropriate nonprofit
61
Q

Art & Collectibles–Certain Charitable tools

A
  • Direct to one charity for related use?
  • Direct to one for unrelated use?
  • Establish an operating foundation (e.g. create a museum to house the collection?)
  • Create a supporting org (under the wing or in partnership with an existing museum)
  • Via a DAF, to benefit several charities
  • Charity still has to complete Form 8283 if it is related use/ form 8282 if sold within three years
  • Art gifts over $50,000 must be reviewed by an IRS Art Advisory Panel
62
Q

S-Corp Gifts to a DAF

A

Possible but very difficult!
S-Corp:
- One of the most common business forms
- One of the most difficult to work with for charitable purposes
- The moral is: do not walk away from this charitable planning opportunity!

63
Q

S-Corp to DAF Considerations

A
  • The donor will receive a deduction at FMV for the gift of the S-Corp stock
  • The income passes through to the DAF as UBIT
  • Any gain upon the sale inside the DAF is UBIT too
  • The DAF sponsor can take a charitable deduction for gifts made from the funds
64
Q

Further S-Corp to DAF Nuances

A
  • Tax rates for UBIT will depend on the type of DAF sponsor (corporate or trust entity)
  • State income tax may or may not be due, depending on the domicile of the DAF sponsor
  • S Corp shareholder agreements may or may not allow a DAF or charity to be a shareholder
  • Suggestion: Make some calls!
  • Ask your local community foundation (some use a supporting org to accept SCorp stock gifts)
  • Call Charitable Solutions (Bryan’s company)
  • National Gift Funds
  • National Christian Foundation
  • Defer to client’s own tax and legal advisors
65
Q

Smart vs. Wise Students

A

SMART students learn the intricacies cold and give advice…Until they make one mistake…Or, until they get fired for giving tax advice beyond the scope of their employment

WISE students jot down the names and phone numbers of the experts…Find a prospect…and defer to the experts all the way to the bank

GS 849 Charitable Strategies (9 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions