Gift Planning Tips

Charitable Giving: It’s Good for Business

Corporations gave an estimated $17.88 billion to charities last year, according to a recent report by Giving USA Foundation.  A variety of philanthropic opportunities are open to companies:

  • C corporations, S corporations and partnerships can be grantors and income beneficiaries of charitable remainder trusts (e.g., Letter Rulings 9205031, 9340043, 9419021).  The trusts must be for terms of no more than 20 years.

  • Corporations can give charity an option to purchase shares at a set price at some future date.  The company is entitled to a charitable deduction when the option is exercised for the difference between the option price and the fair market value of the shares (Rev. Rul. 75-348).

  • Shareholders of closely held C corporations can make gifts as individuals but have the money come from the companies.  For example, the sole owner of a corporation gives shares worth $10,000 to a favorite charity.  The company offers to buy the shares from the charity.  The donor remains the sole owner following the redemption but does not have to recognize the $10,000 paid to charity as a dividend, provided the organization cannot be required to have the shares redeemed by the corporation (Rev. Rul. 78-197)


Two Provisions for Every Will or Trust

Estate plans are personal, each geared to the client’s family and financial situation.  But there are two clauses that should be considered in every estate plan. 

Disclaimer language – The will or trust can direct that assets disclaimed by a beneficiary pass instead to a named charity.  In the absence of such language, a disclaimed bequest generally passes to the residuary estate or under state intestacy laws.  A disclaimer provision allows the named beneficiary to decide whether the bequest is needed.

Contingency language – A bequest may fail where the beneficiary has predeceased the testator.  Instead, the will or trust can provide for alternative charitable bequests, in the event a named beneficiary is not alive at the testator’s death.

A charitable distribution as the result of either a disclaimer or contingent bequest is considered a transfer “by the decedent” and qualifies for an estate tax charitable deduction [Reg. §20.2055-1(a)].  The bequest should be conditioned upon the organization’s tax-exempt status as of the date of death.  The executor or trustee should be given the discretion to select a qualifying charitable beneficiary, in the event the named organization is no longer in existence or has lost it tax-exempt status, to safeguard the charitable deduction.


An Alternative to Dormitory Life

Parents or even grandparents with offspring heading for college could consider buying a house near campus, rather than spending money on room and board in a dormitory.  With interest rates down, mortgage payments may be less than the cost for campus housing, particularly if the house can accommodate extra tenants for rental income.  The child can be the property manager in exchange for free rent. 

When the student graduates, the house can continue as rental property, or the owner can use it to fund a charitable remainder trust that will provide income for life.  It’s important, however, that any mortgage be paid off before the home is contributed to the trust, to avoid having the donor considered to be the owner of the trust under Code §677.


Don’t Need Life Insurance for Taxes?  Give Policies to Charity

Thanks to the $5.34 million estate tax exemption, it’s estimated that fewer than 4,000 estates per year will be subject to tax.  Clients who purchased life insurance for the primary purpose of covering estate tax obligations may be looking for other options for the policies.  Two charitable options exist:

Name charity the death beneficiary – No income tax deduction is available, because the gift is considered revocable, but the owner can make a larger gift than might otherwise be possible.

Transfer ownership of the policy to charity – The donor is entitled to an income tax charitable deduction for the value of the policy.  Generally, the deduction is equal to the lesser of the donor’s basis in the policy or the replacement cost, in the case of a paid-up policy [Reg. §25.2512-6(a)], or the interpolated terminal reserve for policies that still have premiums due. 

Donors should be aware that a qualified appraisal is required if the deduction exceeds $5,000.


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