Gift Planning Tips

Forecast Calls for Remainder Trust Sprinkling

Some clients interested in establishing charitable remainder trusts may want to retain flexibility when it comes to naming income beneficiaries.  Rev. Rul. 77-285 allows donors to name a class of beneficiaries — grandchildren, for example — who can receive income.  The exact amount distributed each year can be sprinkled among those beneficiaries as the trustee decides.  A grandparent could fund a 20-year term charitable remainder trust that will make payments to different grandchildren as they attend college.  Because the donor would be considered the owner of the trust if he or she retained the sprinkling power [Reg. §1.674(d)-2(a)], an independent trustee must be named.

The IRS has also ruled favorably on a charitable remainder trust that granted an independent trustee the discretion to pay up to 75% of the unitrust amount to a qualified charity (Ltr. Rul. 200832017).  The trust did not violate the provisions of Code §664, provided that the amount received by the noncharitable beneficiaries is not de minimus.  A donor and a charity could also be co-income beneficiaries, with an independent trustee holding the power to sprinkle the trust’s annual distribution, provided the charity not receive more than 80% (Ltr. Rul. 9052038).  The sprinkling power to benefit charity with income distributions does not disqualify the trust, but the donor’s income tax charitable deduction is not increased [Reg. §1.664-3(d)].

Converting and Contributing

Clients who might consider converting their traditional IRAs to Roth IRAs often have second thoughts when they realize there will be an income tax price tag attached.  But charitable gifts - and the resulting income tax deductions - can help overcome the reluctance for philanthropic clients.  One especially attractive gift option is the deferred payment charitable gift annuity, which has the added benefit of providing payments in retirement.

Take the example of Vicky, age 60, who plans to convert $25,000 from her traditional IRA into a Roth IRA.  She’ll be taxed on the $25,000 and is looking for a way to offset some of the tax with an itemized deduction.  Vicky might transfer $75,000 in cash in exchange for a gift annuity that would begin paying her $5,250 (7%) annually, beginning at age 70.  She receives an immediate income tax deduction of more than $34,000 (assuming quarterly payments and the use of a 2.4% §7520 rate) that offsets the Roth IRA conversion tax.  After five years, all withdrawals from her Roth IRA will be tax exempt, and a portion of her future gift annuity payments will be tax free, as well.

Other ideas for offsetting the tax on switching from a traditional IRA to a Roth IRA:

  • Make outright gifts to charity, possibly even accelerating several years worth of gifts into the year of the conversion.  If appreciated securities are used, capital gains taxes can be avoided.
  • Fund a charitable remainder trust.
  • Establish a grantor charitable lead annuity trust that makes payments for a fixed time period to charity and then returns all trust assets to the donor.  This option works best where the trust is funded with tax-exempt securities.

Despite Tax Reform Uncertainty, Some Gifts Still Make Sense

Tax reform is on the agenda for 2017.  Whether it will happen and what shape it will take are still question marks.  But some gifts continue to offer tax benefits, beyond merely the charitable deduction.

Long-term capital gains securities — The tax deduction for gifts of publicly traded securities owned more than one year is the average (mean) between the highest and lowest quoted sales prices on the date of the gift (not the value at the close of the trading day).  If donors have purchased stock of the same corporation at different times and different prices, they should contribute the shares for which they have paid the lowest price, retaining those having the highest cast basis.  For shares held in a brokerage account, donors should specify what shares they wish to transfer to charity; otherwise, the IRS will apply the “first-in-first-out” rule - which may mean transferring shares with a high basis.  The broker should provide written confirmation that shares transferred were bought at the lowest price.  Gifts of other long-term assets offer the same benefits, although in the case of tangible personal property, clients should be cautious to satisfy the related use rule, or their deductions will be limited to basis [Code §170(e)].

Qualified charitable distributions from IRAs — The law permitting IRA owners over age 70½ to make direct transfers to charity has been made permanent.  Up to $100,000 annually can be given in this manner.  Gifts cannot be made from other retirement plans, such as 401(k)s.  A qualified IRA gift can substitute for required minimum distributions, so donors can reduce taxes, even if they don’t itemize deductions.  There is no charitable deduction allowed for QCDs.  The IRA trustee or custodian must make the gift directly to charity; otherwise the donor would have a taxable distribution.

U.S. savings bonds — All savings bonds eventually stop paying interest.  Treasury regulations prohibit transfer of bonds directly to charity, but owners can cash in bonds and reinvest the proceeds.  Redeeming the bonds is usually a taxable event, but taxes can be offset if bond proceeds are contributed to charity or used to establish life-income gifts.

Rates Going Up

End-of-Life Charitable Gift Planning

Estate planners of a certain age may remember when deathbed gifts to charity were doubly advantageous from a tax standpoint.  Why?  Because they could produce both income and estate tax benefits.  For example, suppose that in 1980, Harold, a married man of substantial wealth, found himself gravely ill.  By making a gift to his favorite charity before he died, Harold could reduce his final income taxes.  Furthermore, because the gift presumably would be made within three years of his death, it was included in his gross estate, which increased his maximum marital deduction allowable for estate tax purposes (50% of the gross estate before 1981).  The gift washed out of the estate tax computation as a charitable contribution.  The 1981 Tax Act changed all that, allowing married persons to pass their estates tax free to their spouses.

Accelerating charitable bequests into deathbed gifts can still save income taxes by generating income tax charitable deductions for the decedent’s final income tax return.  Transfer taxes are also reduced, thanks to the gift tax charitable deduction.  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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