Gift Planning Tips

2015 Begins as 2014 Did

Last year at this time, the IRA rollover provisions had just expired, leaving clients and their advisers wondering about the tax consequences of making direct transfers from IRAs to charity.  Late in December, Congress passed the extenders bill, which retroactively renewed qualified charitable distributions (QCDs) – but only through 2014.  Legislation to renew many of the extenders, including QCDs – some possibly permanently – is expected to be on the new Congress’s agenda in 2015.

In the meantime, is it safe for clients age 70½ and older to make transfers to charity directly from IRAs?  There is little risk, provided the client normally itemizes deductions on his or her income tax return, and makes gifts only up to the amount of the required minimum distribution.  If QCDs are renewed for 2015, earlier gifts directly to charity from an IRA will qualify and income tax will be avoided.  If QCDs are not reinstated, the donor will owe tax on the distribution but will be entitled to a charitable deduction.  If the client wants to contribute more than the required minimum distribution, it’s best to wait until after legislation has passed to make the additional transfer.

Some important rules to keep in mind regarding QCDs:

  • Donors must be age 70½ or older when the funds are transferred
  • No charitable deduction is allowed, although the donor does avoid the income tax that would normally be owed
  • Distributions may be made only from traditional or Roth IRAs
  • QCDs can be made only to public charities, not to donor advised funds or supporting organizations, and may not be used to fund charitable gift annuities or charitable remainder trusts
  • The maximum that can be transferred free of tax is $100,000

Charitable Remainder Trusts that Last "Just for a While"

Mention charitable remainder trusts and most advisers think of trusts for the life of a client – or two lives in the case of a married couple.  But remainder trusts can last for a term of up to 20 years [Reg. §§1.664-2(a)(3)(i), 1.664-3(a)(3)(i)], which may meet several planning needs.

Multiple beneficiaries – A donor wants an arrangement that will pay a 7% annuity to several beneficiaries, ranging in age from 76 to 82.  A charitable remainder annuity trust for the lifetimes of the beneficiaries at 7% would fail the IRS 5% probability test (Rev. Rul. 77-374) and the 10% remainder requirement [Code §664(d)(2)(D)].  But a term-of-years annuity trust lasting 15 years would likely fulfill the donor’s planning needs, satisfies the 10% remainder rule and is not subject to the 5% probability test.

IRA death benefits – A term-of-years charitable remainder trust might be helpful where a philanthropic client wants to use an IRA to benefit several family members with a wide range of ages.  A testamentary unitrust or annuity trust could receive part or all of the donor’s IRA, without any immediate loss to income taxes, and payments could be made to family members for up to 20 years.  Without the remainder trust, distributions would have to be made over the life expectancy of the oldest person in the group, accelerating the exhaustion of the IRA.

Corporate philanthropy – Corporations can be grantors and/or beneficiaries of charitable remainder trusts, with the same tax and financial benefits as those afforded to individuals.  A C corporation with an office building worth $1.5 million can transfer the property to a charitable remainder unitrust that will pay the corporation 6% for 20 years.  The corporation can deduct about $447,000 (2.2% §7520 rate), up to 10% of its taxable income (with a five-year carryover).  If a trust, estate, partnership, association, company or corporation is the beneficiary, the remainder trust must be for a term of year [Reg. §§1.664-2(a)(5), 1.664-3(a)(5)].

Plan Carefully with Gift Restrictions

Clients sometimes have an interest in making gifts or bequests earmarked for specific projects or programs at a charity, rather than for the general purposes of the organization.  Gift restrictions have practical implications for the donee organization, and may present tax issues for the donor’s estate, as well.  Several questions typically arise:

  • How will the restriction be enforced?
  • Does a bequest restriction risk disqualification from the estate tax charitable deduction?
  • Is the restriction of such a nature as to cause the charity to reject or disclaim the gift or bequest?

As to enforcement, a bequest can be drafted as a conditional bequest that fails upon the occurrence or nonoccurrence of some event.  A conditional bequest to charity is still deductible for estate tax purposes if, at the time of the decedent’s death, the possibility that the bequest will fail is so remote as to be negligible [Reg. §20.2055-2(b)(1)].

Will the charity be willing and/or able to accept a gift or bequest that is restricted?  Lifetime gifts involving restrictions typically occur only after consultation and negotiation with the donee organization.  Restricted bequests, however, are often made without charity’s input, sometimes with unfortunate results.  Donors and their advisers should always consult with charities before attaching restrictions to testamentary transfers.

Letting Charity Benefit Early

As the name implies, in a charitable remainder trust, charity receives trust assets at the termination of the income interest.  But it is possible to give charity a portion of the income interest, or allow income distributions at the discretion of an independent trustee.

The IRS has approved a trust in which the donor and charitable remainderman were co-income beneficiaries of a charitable remainder annuity trust.  An independent trustee had the power to sprinkle the trust’s annuity payments with at least 20% required to be paid to the donor (Letter Ruling 9052038).  In another favorable ruling, the IRS allowed an independent trustee to pay up to 75% of the unitrust amount to a charity, saying such a provision did not violate Code §664.  The amount that the noncharitable income beneficiaries receive must be more than “de minimus”, the IRS said (Letter Ruling 200832017).

Naming a charity as an income beneficiary of a charitable remainder trust does not increase the donor’s income tax charitable deduction [Reg. §1.664-3(d)]. 

End-of-Life Charitable Planning

Accelerating charitable bequests into “deathbed gifts” may save tax, particularly for clients who are not subject to the estate tax.  For example, a donor could choose to make a inter vivos gift equal to the amount that was to have passed through a will or living trust, although it should be made clear that the donor is satisfying the bequest, not making the lifetime gift in addition to the bequest.  Accelerating the bequest will generate an income tax deduction on the donor’s final tax return.

Philanthropic clients should include the power to accelerate charitable bequests in their durable general powers of attorney, or give trustees of revocable living trusts the power to prepay testamentary charitable distributions.  The attorney-in-fact or trustee might also be given the power to accelerate testamentary charitable trusts and gift annuities into inter vivos arrangements.


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