Gift Planning Tips

The Art of Giving Artwork

Most clients receive the same tax rewards from giving paintings and other tangible property to charity as from a gift of marketable securities: a charitable deduction equal to fair market value and the avoidance of capital gains tax on assets held more than one year.  There are a few important differences to note before making a gift of artwork, however:

Related use rule — Deductions for gifts of tangible personal property to a charity may be reduced to the donor’s basis if the property is put to an “unrelated use” by the charitable donee.  A use is deemed “unrelated” if it is not related to the purpose or function of the charity’s tax-exempt status [Reg. §1.170A-4(b)(3)(i)].  If the gift is one for which the donor must file an appraisal along with the Form 8283, the charity is required to file Form 8282 — the tattletale form — if the asset is sold within three years of the gift, which may raise the presumption that the property was not put to a related use.

Appraisal — A gift of publicly traded securities generally does not require an appraisal, since the value on the date of the gift is readily ascertainable.  A donor contributing tangible personal property such as artwork is required to obtain a qualified appraisal if the deduction claimed is more than $5,000 [Code §170(f)(11)(E)].

Art Advisory Panel — Donors who contribute gifts of art with an aggregate value of $20,000 or more must include a photograph and a signed appraisal with their tax return.  The photo will be used by the IRS’s Art Advisory Panel to determine the accuracy of the deduction claimed.

So Foreign, Yet So Near

Charity may begin at home, but it really knows no national boundaries.  Donors from the U.S. make contributions to organizations and institutions that serve countries around the world.  In some cases, the gift is deductible, as if made to a domestic charity, for income tax purposes.  The rules for deductibility vary, depending upon whether the gift is outright or by bequest.

Income tax consequences — Generally, gifts from U.S. citizens to foreign charities do not qualify for income tax deductions.  Exceptions may apply, such as a treaty with Canada allowing limited income tax charitable deductions for U.S. citizens making gifts to Canadian charitable organizations, provided a deduction would have been permitted had the organization been created or organized in the U.S.

Estate tax consequences — Bequests to foreign charities and governments generally qualify for an estate tax charitable deduction under Code §2055, provided that the use of the funds is restricted to charitable purposes [Reg. §20.2055-1(a)(4); Rev. Rul. 74-523].  The IRS recently ruled favorably on a charitable deduction for a bequest to an organization in a foreign country, noting that the organization is prohibited from private inurement and could not engage in lobbying or attempts to influence legislation (Ltr. Rul. 201702004).

Gifts to U.S. charities performing work in foreign countries — Deductions for gifts to U.S. charities may be denied if the organization is merely a conduit, funneling contributions to foreign charities.  However, conducting charitable activities or making grants in a foreign country generally will not jeopardize a donor’s charitable deduction (Rev. Rul. 63-252).  Deductions will be allowed if the U.S. charity reviews and approves the use of the funds as being in furtherance of its own exempt purposes and if it retains control and discretion over the use of the money (Rev. Rul. 66-79).

Do Mortgages and Charitable Remainder Trusts Mix?

Transferring mortgaged property to a charitable remainder trust can be problematic.  Some options for clients who want to contribute encumbered property:

  • Sell an undivided portion of the real property to the charitable remainderman, sufficient to let the donor pay off the mortgage. The donor then transfers the remaining undivided interest to the charitable remainder trust.  The trustee and the remainderman join to sell the property to a third party, allowing the charity to recover its purchase price.

  • Persuade the mortgage lender to accept other collateral for the outstanding debt. The donor then transfers the real property, unencumbered, to the charitable remainder trust.

  • Persuade the mortgage lender to release part of the property (one-half, for example) from mortgage liability.  The donor keeps the other half, which remains burdened with the mortgage, and transfers the unencumbered portion to the charitable remainder trust free and clear. After the transfer, the trustee and the donor presumably would find a buyer for the entire property and the donor could pay off the mortgage with his or her part of the sale proceeds.

  • The donor might pay off the mortgage if it is insubstantial, perhaps by selling assets in which he or she has a capital loss.

Baby Boomers Meeting Required Minimum Distributions

The leading edge of the Baby Boomer generation (those born between 1946 and 1964) turned age 70 last year.  The first required minimum distribution from IRAs must be made no later than April 1 of the year after the year the IRA owner turns age 70½.  Although many people withdraw funds earlier (generally, penalty-free withdrawals may begin at age 59½), some wait as long as possible, allowing the funds to continue growing tax-free.  In calculating the RMD, the value of all accounts are aggregated and divided by the appropriate life expectancy table.  However, the withdrawal does not have to come out of all accounts proportionally.  Clients may have multiple IRAs (e.g., roll-over accounts from an employer’s 401(k) or inherited IRAs).  Instead, the money can be withdrawn from the account or accounts earning the lowest rate of return, allowing higher-return funds to continue earning tax-free.  Philanthropic clients might find it more satisfying to direct the IRA custodian to send all or a portion of the required minimum distribution (up to $100,000) directly to charity.  Although no charitable deduction is allowed, the IRA owner saves taxes by avoiding tax that would otherwise be owed on the distribution.  Clients must have reached age 70½ at the time of the transfer to charity.


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