Gift Planning Tips

Illegal but Deductible?

What are the tax consequences of a donor giving an item to charity that is illegal to own (e.g., ivory, stuffed endangered animals, eagle feathers)?  In general, courts have held that, although mere possession is prohibited, a deduction may be available, nonetheless.  For example, the Ninth Circuit Court held that where the market value of a donated item (Indian artifacts with eagle feathers) cannot be determined because possession is illegal, the donor was entitled to a deduction for the price paid (Sammons v. Commissioner, 88-1 USTC ¶9152).  The IRS had argued that to allow a deduction would violate public policy.  The Tax Court also allowed a charitable deduction for the value of wild game trophies, although under state (California) law, it was illegal to sell any mounted animal specimens.  The court found that an illegal market existed, with prices close to those paid in neighboring states with no such prohibitions (Robson and Trnavsky v. Commissioner, 73 TCM No. 176). 

Donors will have to be concerned with obtaining qualified appraisals for these types of items, and also the related use rules of Code §170(e).  In addition, the deduction for a gift of taxidermy property from the person who stuffed or mounted the property or the person who paid to have it prepared is generally limited to the lesser of the donor’s basis or fair market value [Code §170(e)(1)(B)(iv)].  The basis includes only the cost of preparing, stuffing or mounting the property, not any costs related to hunting or transporting the animal.

Watch Your Language

IRS sample charitable remainder annuity trust documents (Rev. Proc. 2003-53 through 2003-60) and unitrust documents (Rev. Proc. 2005-52 through 2005-59) provide for the date of the beneficiary’s death to be the last day of the payout period.  Alternative provisions allow for the annuity and unitrust payments to terminate “with the last regular payment preceding the recipient’s death.”  What difference does it make?  Trust distributions dating from the last regular payment to the date of the beneficiary’s death are considered income in respect of a decedent [Code §691], subject to both income and possibly estate tax.  It may make sense to use the alternative provision to avoid the tax.  Other items of IRD (U.S. savings bonds, IRAs) can be specifically left for charity and also sidestep the tax.

Election Decisions

Clients who create split-interest gifts (charitable remainder trusts, charitable lead trusts, charitable gift annuities and remainder interests in homes and farms) can elect to compute the charitable deduction using the Code §7520 rate for the month of the transfer or the rate for either of the two prior months, whichever is more favorable.  Higher §7520 rates generate a larger deduction for gifts to charitable remainder trusts and gift annuities, while lower rates are more favorable for charitable lead trusts and remainder interests in homes and farms.  Lower §7520 rates also provide higher tax-free payouts for charitable gift annuities, although deductions will be slightly lower.

If a client is choosing to use the rate from a month other than the month of the transfer, an election must be made under Code §7520(a).  The notification must state that an election is being made, describe the interest being valued, provide the applicable valuation rate absent the election and inform the IRS of the month and the rate chosen to value the gift [Reg. §1.7520-2].

Where Two Are Better than One

Normally, a charitable remainder trust payable for the life of an individual cannot make payments to a trust for the benefit of that individual [Reg. §1.664-3(a)(5)].  However, the IRS does allow trust payments to be made to a second trust where the individual beneficiary is incompetent (Rev. Rul. 76-270) or “financially disabled,” as defined in Code §6511(h)(2)(A) (Rev. Rul. 2002-20).  This permits parents and grandparents to direct charitable remainder trust payments to be made to special needs trusts that will provide funds that are paid to the beneficiary or for his or her benefit, at the discretion of the trustee, without jeopardizing any governmental benefits to which the individual may be entitled.


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