Gift Planning Tips

Stock Gifts by S Corporation Shareholders

Charities have been able to own S corporation stock since 1998, and with S corporations comprising more than 60% of all corporations, the pool of potential charitable donors is significant.

Tax-wise, gifts of S stock may not be quite the opportunity charities would hope for, due to the fact that any item of income, loss, credit or deductions and any gain or loss on the sale or disposition of the stock is taken into account in determining an organization’s unrelated business taxable income (UBTI).

Clients should be aware that deductions for gifts of S stock may be less than the stock’s appraised value.  Donors must reduce deductions by the amount of ordinary income they would have recognized if the stock were sold [Code §170(e)(1)(A)], similar to rules applicable to gifts of partnership interests.  Minority discounts typically reduce deductions, as well.

Charitable remainder trusts are ineligible as shareholders of S corporation stock [Code §1367(c)], although the IRS has ruled that S shares could be transferred to a grantor-type charitable lead trust (Letter Ruling 199908002).

“Replacing” Assets Earmarked for Charity

Gifts of highly appreciated securities, real estate or business interests can be made outright, but often are made through gift arrangements that provide donors with lifetime income, plus charitable deductions.

Clients who feel the need to “replace” contributed assets in their estates can purchase life insurance payable to family members, funded partly by tax savings from their charitable deductions.  The life insurance replaces the assets that charity receives and, if clients employ an irrevocable life insurance trust, their families can receive the insurance proceeds free of federal estate tax.

If a married couple establishes a charitable remainder trust, the trustee of the life insurance trust might purchase a second-to-die policy on the lives of both donors.  Every year, the couple would transfer cash to the life insurance trust sufficient to pay the annual premiums, taking advantage of the gift tax annual exclusion.  Premiums would be paid from the charitable deduction savings and future income from the charitable remainder trust.  There is no need for the life insurance to be owned in trust if the client is not subject to estate tax.

Homes and Farms Only

One exception to the partial interest rule, which denies income tax deductions for less than a donor’s entire interest in gift property, is for remainder interests in homes and farms [Code §170(f)(3)(B)(i)].  A personal residence is defined as any property used by the taxpayer as a personal residence, even though it is not used as a principal residence [Reg. §1.170A-7(b)(3)].  Donors can give remainder interests in vacation homes, co-ops or condominiums.  This exception does not apply to residential property operated as a business, however.  Therefore, no income tax deduction would be available for a remainder interest in an apartment building.  The owner could instead use the apartment building to fund a charitable remainder unitrust, for which an income tax deduction would be available.  Unitrust payments could take the place of rental income, at least a part of which could be favorably taxed as capital gains if the apartment is sold within the trust.  This option might be attractive to a client who wishes to unload the burdens of being a landlord.

Don’t Make the IRS Guess

Donors who create charitable remainder trusts, charitable lead trusts, make gifts of remainder interests in homes or farms or who fund charitable gift annuities, can calculate their deduction using the §7520 rate in effect for the month of the transfer or either of the two prior months, whichever is more favorable [Code §7520(a)].  If a client plans to use the rate for either of the two months prior to the month of the gift, he or she must attach a statement to the return on which the deduction is claimed.  The statement must say that an election is being made under Code §7520(a) to use a rate for a month other than the month of the gift, describe the interest being valued, provide the applicable valuation rate absent the election and inform the IRS of the month and rate chosen to value the gift [Reg. §1.7520-2(b)].

In general, higher §7520 rates yield larger deductions for charitable remainder trusts and charitable gift annuities, while lower §7520 rates generate higher deductions for charitable lead trusts and gifts of remainder interests.


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