Charitable Gifts

Question 1

What are the gift tax benefits of charitable gifts?

Answer 1

Generally, a donor (who is a citizen or resident of the United States) may take an unlimited gift tax deduction for the gratuitous transfer of property to qualified charitable organizations. I.R.C. § 2522(a)

Question 2

When does a partial interest or split interest gift qualify for a charitable deduction gift?

Answer 2

a) An undivided portion, not in trust, of the donor’s entire interest in property (e.g. a fraction or percentage of the donor’s total ownership interest in property);
b) An irrevocable remainder interest, not in trust, in a personal residence;
c) An irrevocable remainder interest, not in trust, in a farm;
d) A qualified conservation contribution (easement);

e) A remainder interest in a trust that is a qualified charitable remainder annuity trust, a qualified charitable remainder unitrust, or a pooled income fund. A pooled income fund is similar to a charitable remainder trust, except multiple donors contribute assets to a public
charity to administer the income fund, rather than to a trust [pooled income funds are described in I.R.C. § 642(c)(5) and Regs. § 1.642(c)-5(b)]; or

f) A guaranteed annuity or unitrust interest, whether or not the interest is in trust (charitable lead trust).

Question 3

What is the value of a charitable contribution, other than money?

Answer 3

Generally, the value of a charitable contribution, other than money, is the “fair market value” of the contributed property, which is “the price at which the property would change hands between a willing
buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.”

Question 4

Who has the burden of proving FMV for the charitable gift?

Answer 4

The donor and the donor’s advisers.

A lot of donors are confused on this point and think it is the charity; it is not.

Question 5

What must the donor file in order to claim deduction for a noncash gift?

Answer 5

The donor must file IRS Form 8283 to claim a deduction for noncash property over $500.00.

If the claimed deduction EXCEEDS $5,000.00 then a qualified independent appraisal that is contemporaneous (dated within sixty days of the date of the gift) is required and the appraiser must sign the IRS Form 8283.

A representative of the charity signs this form for gifts valued over $5,000.00.

An EXCEPTION to the appraisal requirement exists for gifts of public stock traded on a national exchange.

Question 6

What are the two types of gifts?

Answer 6

Cash and noncash

Question 7

What is a helpful publication for appraisals (over $5000) of noncash gifts?

Answer 7

IRS Publication 561 offers guidance on the requirements and expectations for appraisals for many types of noncash gifts.

Question 8

What if the Charity sells, exchanges or disposes of contributed noncash property within three years of the date of the gift?

Answer 8

“Tattle-tell form” Charity must report this disposition using IRS Form 8282.

If a resale or disposition value is less than the value claimed by the donor for the noncash gift on IRS
Form 8283, this may be a “red flag” on audit by the IRS.

No set discretion, but speaker worries about 10% difference.

Question 9

If the charity is legally obligated to sell the noncash gift, what happens to the donor?

Answer 9

The charity should has “significant intervening use”.

If there is a pre-arranged sale of property, the donor will be attributed or assigned the capital gains tax even if the donor is doing the sale.

Question 10

What about if the donor inflated the value of the noncash gift?

Answer 10

The IRS can impose penalties on the taxpayer
for overstating the value of his or her charitable contributions by one hundred fifty percent (150%), or gross valuation misstatement penalties for overstatements of two hundred percent (200%).

There is generally no exception for reasonable cause or good faith, except (in the case of substantial valuation misstatements) the value of the property was based on a qualified appraisal and the taxpayer made a good faith investigation into the value of the property.

Question 11

Have there been cases where donors lose deduction from failure to file an 8283 or failure to get qualified appraisal?

Answer 11

YES! Even when value was known.

Question 12

What is “ordinary income property” for income tax charitable deductions?

Answer 12

Examples of this type of property include (i) capital assets owned for less than one (1) year, (ii) property owned for sale in the ordinary course of business (e.g., inventory), and (iii) original works prepared by the
donor (e.g., artwork).

Question 13

What is the charitable income tax deduction limitation on “ordinary income property” noncash gifts?

Answer 13

Charitable deductions for all contributions of ordinary income property must be reduced by the amount of ordinary income that the donor would have recognized if he or she sold the donated property for its fair market
value.

It’s limited to the lessor of basis and FMV.

Question 14

What is “long-term capital gain property” for income tax charitable deductions?

Answer 14

Property held for more than one year.

Question 15

What is the charitable income tax deduction limitation on “long-term capital gain” noncash property?

Answer 15

Subject to an annual limit of up to 30% of AGI for gifts to public charities.

Limit to 20% of AGI for gifts to private foundations. AND contributions to private foundations must be reduced to account for long-term capital gains (does not apply to publicly-traded stock) [Lessor of FMV and cost basis]

Question 16

What are the AGI percentage limits for income tax charitable deductions for gifts of CASH to charity?

Answer 16

60% of the donor’s AGI

For 2020 ONLY: 100% (CARES Act)

This deduction limit does not apply to cash gifts to donor-advised funds or supporting organizations that retain a 60% limit or

to private foundation that retain a 30% limit.

Question 17

What are the AGI percentage limits for income tax charitable deductions for gifts of SHORT-TERM CAPITAL GAINS PROPERTY (less than one year) to charity?

Answer 17

50% of the donor’s AGI.

Question 18

What are the AGI percentage limits for income tax charitable deductions for gifts to charity of the following:

(i) contributions of cash to private foundations other than operating foundations;
(ii) contributions of LONG-TERM CAPITAL GAIN property to public charities; and
(iii) contributions “for the use” of any charitable organization.

Answer 18

30% AGI

*Generally, if an interest is to be held in TRUST for the benefit of charity, then contribution is considered “for the use of” the charity.

Remainder interests are considered made “to” the charity.

Question 19

What are the AGI percentage limits for income tax charitable deductions for gifts to APPRECIATED PROPERTY to private foundations (not publicly
supported) other than operating foundations

Answer 19

20% AGI

Question 20

If a donor makes contributions in the same taxable year subject to more than one of the percentage limitations, the limits would be applied?

Answer 20

Applied as follows:

(i) contributions subject to the sixty percent (60%) limit (or 100% limit for 2020 only) would be deducted
first;

(ii) contributions subject to the thirty percent (30%)
limit are deductible only to the extent of the unused portion of the sixty percent (60%) or one hundred percent (100%) limit;

(iii) contributions subject to the twenty percent (20%)
limit would be taken last and are only deductible to the extent of the lesser of the unused portions of the sixty percent (60%) or 100 percent (100%) limits and the thirty percent (30%) limit.

Question 21

How are excess charitable contributions carried-over?

Answer 21

Charitable contributions in excess of the percentage limitations may be carried-over for up to five (5) years in addition to the year of gift and claimed as a deduction in a subsequent tax year, claiming deductions up to the limit(s) each year.

Conservation easement gifts allow carry-over for fifteen (15) years

Such excess contributions remain subject to any limits that would have otherwise applied in the year the contribution was made.

Question 22

Who has the burden of recordkeeping and proof of a charitable gift?

Answer 22

The donor.

Question 23

What are the recordkeeping requirements on a donor for a charitable gift?

Answer 23

(1) Donors must have a bank record or written communication from a charity for any monetary contribution before the donors can claim a charitable contribution on their federal income tax returns.

(2) Donors are responsible for obtaining a written
acknowledgment from a charity for any single contribution of $250 or more before the donors can claim a charitable contribution on their federal income tax returns.

(3) Charitable organizations are required to provide a written disclosure to a donor who receives goods or services in exchange for a single payment in excess of $75.

Question 24

What should a written acknowledgment from a charity of gift include?

Answer 24

(1) the name of organization,
(2) the date of the gift,
(3) the amount of cash contribution,
(4) a description (but not the value) of non-cash contribution,
(5) a statement that no goods or services were provided by the organization in return for the contribution, if that was the case,
(6) a description and good faith estimate of the value (above a de minimis token value that is indexed annually for inflation) of goods or services, if any, that an organization provided in return for the contribution, and

(7) a statement that goods or services, if any, that an
organization provided in return for the contribution consisted entirely of intangible religious benefits, if that was the case.

Question 25

What types of charitable gifts have no deductions?

Answer 25

A pledge.
Loans
Time and services

Question 26

How does a donor complete a charitable gift of noncash?

Answer 26

the donor must relinquish dominion and control over the property before taking a deduction, and the donor generally cannot claim a deduction if he or she retains ownership rights in the property

Question 27

What is the FMV of a charitable gift of stock and how is it delivered?

Answer 27

Average of high and low value of stock on date of delivery.

Date of delivery is the date - can be electronic transfer or physical delivery of stock certificate.

Mailbox rule - date of delivery is the date mailed.

Question 28

What is the FMV of a charitable gift of TPP and how is it delivered?

Answer 28

TPP is completed relinquished ownership, dominion and control

Question 29

What is the “related use” rule for a charitable gift of TPP?

Answer 29

The amount of the deduction is generally the fair market value of the property so long as the charity uses it for the charity’s exempt purpose.

If the use of the property is unrelated to the charity’s
purpose, then the deduction is for the lesser of fair market value and cost basis. (So, if they just sell it and get the cash.)

Example of “related use” is a painting to a museum.

Question 30

What is the FMV of a charitable gift of real estate and how is it delivered?

Answer 30

Date of the deed of transfer is the date of the gift.

Must be a qualified appraisal

Question 31

How is insurance donated to charity?

Answer 31

Same as other property. If the donor wants to continue paying premium as an additional gift, should give the cash to charity and have them pay (60% AGI); if pay direct it’s a “use of” and only 30% AGI.

Question 32

What is a “qualified conservation contribution” of real estate?

Answer 32

a) The contributed property must be a perpetual conservation restriction, a remainder interest, or the donor’s entire interest;
b) The property must be contributed to a governmental entity or a public charity; and
c) The contribution must be exclusively for the preservation of land for outdoor recreation or education of the general public, the protection of a natural habitat, the preservation of open space for a significant public benefit, or the preservation of a historically important structure or land area.
d) The value for the income tax charitable deduction is the difference between the value of the property before and after the easement restriction is placed on the property as determined by a qualified independent appraisal.

The deduction limit is one hundred percent (100%) of AGI for farmers and ranchers and fifty percent (50%) of AGI for other donors with fifteen years to carry-over excess deduction

cf. normally a noncash gift is 30%

Question 33

What is a Charitable Remainder Unitrust (“CRUT”)?

Answer 33

A CRUT requires annual, or more frequent, payments to the donor or another noncharitable beneficiary, for life OR for a specific term not to exceed twenty (20) years, of a FIXED PERCENTAGE (at least five percent (5%) and less than or equal to fifty percent (50%)) of the net fair market value of the trust property (valued annually).

At the end of the term, the remainder interest must be contributed to a qualified charity or held in continued trust for the charity’s benefit.

The donor may receive a gift and income tax deduction for the value of the remainder interest AT THE TIME the property is contributed to the CRUT.

A CRUT can accept additional contributions after its initial funding

The unitrust payment can include realization of capital gains.

Question 34

What is a Charitable Remainder Annuity Trust (“CRAT”)?

Answer 34

A CRAT requires annual, or more frequent, payments to the donor or another non-charitable beneficiary for life OR for a specific term not to exceed twenty (20) years of a FIXED DOLLAR amount equal to at least five percent (5%) and less than or equal to fifty percent (50%) of the trust’s INITIAL net FMV.

At the end of the term, the remainder interest must be contributed to a qualified charity or held in continued trust for the charity’s benefit. The donor may receive a gift and income tax deduction for the value of the remainder interest at the time the property is
contributed to the CRAT.

CRATs must prohibit additional contributions after the initial funding.

Question 35

What is the Minimum Charitable Payout for CRUTs and CRATs?

Answer 35

The PRESENT value of the charitable remainder must be at least ten percent (10%) of the FMV of the property transferred to the trust.

Question 36

How are Charitable Lead Trusts (“CLTs”) different from CRT?

Answer 36

A CLT is the opposite of a CRT; income from a CLT is paid to a charitable organization for a fixed term of years, using either an annuity trust format or a unitrust format, and the remainder is paid to a non-charitable
beneficiary.

Question 37

What is a Charitable Lead Unitrust (“CLUT”)?

Answer 37

A CLUT requires annual, or more frequent, payments to a charity for a specific term of years, OR the life of one or more individuals who are living when the trust is created, of a FIXED PERCENTAGE of the net fair market value of the trust property (valued annually).

At the end of the term, the remainder interest may be distributed to a noncharitable beneficiary or held in continued trust for the noncharitable beneficiary’s benefit.

A CLUT can accept additional contributions after its initial funding

Question 38

What is a Charitable Lead Annuity Trust (“CLAT”)?

Answer 38

A CLAT requires annual, or more frequent, payments to a charity for a specific term of years, OR the life of one or more individuals who are living when the trust is created, of a FIXED DOLLAR amount. At the end of the term, the remainder interest may be distributed to a noncharitable beneficiary or held in continued trust for the noncharitable beneficiary.

CLATs need not prohibit additional contributions after the initial funding. However, additions to the trust will not produce any income, gift, or estate tax deductions.

Question 39

Which charitable trust is better - annuity or unitrust?

Answer 39

Annuity is better for leverage to one generation down; unitrust better for grandchildren.

Question 40

Which charitable trust is better for Income or Gift tax concerns - grantor or non-grantor LEAD trust?

Answer 40

Grantor CLT - Big present value income deduction

Non-Grantor CLT - Estate tax savings; “estate tax freeze”. Pay the gift tax now on the non-charitable beneficiary’s remainder interest at a reduced present interest b/c of the charity’s interest.

Question 41

What are Donor Advised Funds?

Answer 41

A donor advised fund is defined as an account:
a) That is separately identified by reference to contributions of a donor or donors;

b) That is owned and controlled by a public charity, such as a community foundation, referred to as the “sponsoring organization;” and
c) With respect to which a donor (or a person appointed by the donor as an advisor) has, or reasonably expects to have, advisory privileges with respect to the distribution or investments of amounts held in the separately identified fund or account

Question 42

What benefits does the donor receive from a Donor Advised Fund?

Answer 42

The donor receives up to three (3) tax benefits from making a gift:

1. an immediate income tax deduction (with a five (5)-year carry-forward),
2. an avoidance of capital gains taxes if the gift is of appreciated property, and
3. a reduction of the donor’s gross estate by the amount of the excluded asset.

Cash gifts may be deducted up to sixty percent (60%) of the donor’s AGI for gifts of cash, and up to thirty percent (30%) of the donor’s AGI for gifts of appreciated property.

Question 43

What is the new rule on Donor Advised Funds?

Answer 43

a donor advised fund may pay pledges of the donor or advisor so long as the pledge payment is not referenced when the grant is made

Question 44

How does a bargain sale work with a charity?

Answer 44

A bargain sale is treated partially as a sale and partially as a gift. The gift portion is deductible and valued at an amount equal to the excess of the fair market value over the consideration received by the donor.

The donor can escape capital gains on the bargain portion.

Question 45

What is an IRA Qualified charitable distributions (QCDs)?

Answer 45

Tax-free rollovers:
Permitted as a tax incentive for individuals aged seventy and one-half (70 1/2) years and older, permitting such individuals to directly transfer up to One Hundred Thousand Dollars ($100,000) each year from their IRAs (collectively) to qualified charitable organizations, without having to count the distributions as taxable income.

Instead of dealing with 10 year payout on IRA, plan can be for a testamentary IRA rollover to a Testamentary CRTs and gift annuities - creates lifetime payments to heirs instead of the ten year payout.