Gift Planning Tips

Solving the “Pre-Arranged Sale” Puzzle

Charities are sometimes reluctant to accept gifts of real estate without some assurance that they can sell the property quickly, or at a particular price (where, for example, the realty is being transferred for a charitable gift annuity or as a bargain sale).  Ideally, a donor would already have located a buyer who would quickly consummate the sale at an agreed-upon price, following transfer to the charity.  Unfortunately, the IRS says that if the charity has no choice but to step into the donor’s shoes and complete a sale pre-arranged by the donor, then the donor is taxable on any capital gain that would have resulted if he or she sold the property (Palmer v. Commissioner, 62 T.C. 684 (1974)).

There seems to be no prohibition, however, against the donee charity seeking out potential buyers in anticipation of a gift of real estate.  In a transaction known as a “charitable put,” a charity would list the property and pre-negotiate a sale to a prospective buyer.  The parties would enter into a contract for the charity to sell the property to the buyer at a specified price within a particular time frame, should the charity acquire the property.  The charity and the buyer would sign the contract shortly before the gift occurs.



New Survey on Charitable Gift Annuities

The American Council on Gift Annuities has released its latest survey on usage of charitable gift annuities.  Some noteworthy numbers in the survey include:

  • The average age of annuitants is 75, down from age 79 as reported in the 2009 ACGA survey;
  • Women constitute 57% of gift annuity recipients;
  • Deferred payment charitable gift annuities now account for 12% of all contracts – the largest percentage reported since ACGA surveys began in 1994;
  • 95% of annuitants are older than 70 at time of gift;
  • 70% of gift annuities are for the life of one person; 30% for two lives;
  • 28% of gift annuities established in the year prior to the survey were for $100,000 or less; 93% were for more than $20,000;
  • 94% of organizations required minimum funding amounts of less than $25,000;
  • 93% of responding organizations follow suggested payout rates of ACGA;
  • 54% of gift annuity donors are likely to include the issuing organization in their estate plans.


Should Clients Ever Leave a Roth IRA to Charity?

Conventional wisdom regarding charitable bequest planning says:  “Use tax-burdened assets (income in respect of a decedent) to satisfy charitable obligations and leave other assets – cash, cash equivalents or capital assets that qualify for a step-up in basis – to family beneficiaries.”   Charities typically don’t pay income tax, and bequests of retirement accounts, savings bonds and other IRD avoid both income taxes and state and federal estate taxes.

Roth IRAs, or Roth 401(k) plans, don’t create income tax burdens for beneficiaries and therefore seem to offer no advantages as charitable bequests – with one possible exception. 

In 2002, the IRS ruled favorably on an arrangement in which a donor would create a testamentary charitable gift annuity funded with the donor’s traditional IRA (PLR 200230018). Although the full value of the IRA would be included in the donor’s gross estate, an estate tax charitable deduction would be available for the value of the IRA less the present value of the annuity. Since charity is the beneficiary, the IRA’s value will be an item of income in respect of a decedent [Code §691(a)(1)(B)] to the charity, not to the estate.  Of course, the charity is tax exempt, so it’s academic that the organization is receiving IRD.

Importantly, the IRS refused to rule on taxation of future annuity payouts to the beneficiary, saying that to do so would require the IRS to assume a hypothetical situation – that the annuitant would survive the donor.  Charitable gift planners speculated that annuity payments to the beneficiary likely would be taxed 100% as ordinary income because the IRA constituted IRD.  On the other hand, testamentary annuities not funded with IRD should provide annuity payments that are partly tax free during the recipient’s life expectancy.  Since a Roth IRA produces no IRD, a philanthropic client might use it to fund a testamentary gift annuity, especially where the annuitant is in need of money management or fixed annual payments.  Estate tax charitable deductions also would be available, if needed.


Three Gifts Most Charities Won’t Accept

IRS statistics indicate that relatively few charitable contributions are funded with non-cash assets, despite the tax advantages of contributing long-term capital gain property.  Tax-wise donors know that giving charities appreciated securities owned more than one year enables them to deduct not only their cost basis but also any long-term capital gain – while avoiding capital gains taxes and net investment income tax.

Certain assets, however, can create problems for donee charities.  In general, donors of these assets are seeking to give away something they were unable to sell.  One commentator lists three categories of assets charities should never, ever accept:

  • Anything that eats.  Horses lead this category, although it should be said that educational institutions that have agricultural programs sometimes will accept gifts of livestock.

  • Cemetery plots.  Charities cite difficulty in disposing of such property, plus ongoing costs incurred prior to sale, if sale ever occurs.

  • Time shares.  High annual fees and lack of a secondary market for time shares cause knowledgeable institutions to issue polite refusals when these items are proffered.


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