Gift Planning Tips

Striking While the Market Is Hot

It took almost two years for the Dow to go from closing above 18000 (December 23, 2014) to closing over 19000 (November 22, 2016).  Clients wanting to lock in gains will find there’s a price to pay when they sell appreciated shares: capital gains tax.  Shares held one year or less are taxed at ordinary income rates, as high as 39.6%.  Shares held long-term — more than one year — are more favorably taxed (0% for 10% and 15% taxpayers; 15% for taxpayers in the 25%, 28%, 33% and 35% brackets; 20% for taxpayers in the top 39.6% bracket).  Upper income clients may be subject to the 3.8% tax on net-investment income, in addition to the capital gains tax.

One way around all capital gain and net-investment income tax is to give the appreciated stock held more than one year to charity.  Donors are entitled to a charitable deduction for the fair market value on the day of the gift.  Gifts of short-term capital gain stock are deductible only up to the donor’s basis.

But if a client can’t afford to part with the shares, there are two options to consider:

Charitable gift annuities — In exchange for long-term capital gain stock or mutual fund shares, charity will make payments for life to one or two annuitants.  Rates generally range from 4.4% at age 60 to 9% at age 90 for a one-life gift annuity.  Rates are slightly lower for two-life arrangements.  In addition to a charitable deduction for a portion of the gift value, the donor receives payments that may be favorably taxed, based on the full value of the shares, without depletion by capital gains.

Charitable remainder trusts — Clients can receive either fixed payments (annuity trust) or fluctuating payments (unitrust) for life or a term of up to 20 years, based on the full fair market value of the shares.  In addition, a charitable deduction is available for a portion of the gift value.

To Family or to Charity?

When planning a charitable bequest in a client’s estate plan, consider also the best assets to fund the bequest.  Appreciated securities and other capital assets, which make excellent lifetime gifts, might be best left to family members who will receive a stepped-up basis, avoiding all pre-death capital gains.  What are some good assets to leave to charity?

  • Tangible personal property, particularly if family members are not interested in the assets.  The unrelated use rule [Code §170(e)(1)(B)(i)], which limits a donor’s income tax deduction to basis for gifts during lifetime, does not apply to bequests.

  • U.S. savings bonds.  The estate or family member receiving the bonds will be subject to income tax on the untaxed interest.  Bonds specifically left to charity in the will or living trust pass tax free.

  • IRAs and other qualified retirement accounts.  IRAs, 401(k)s and other qualified retirement plans are subject to income tax at the owner’s death.  While it’s possible to use stretch-out techniques to delay the tax, it will eventually be due when withdrawals are made.  Charity, however, pays no tax on distributions from retirement accounts.  If the client’s estate is subject to estate tax, a charitable deduction is available for the value of what charity receives.

  • Clients can also use savings bonds and retirement accounts to establish testamentary charitable remainder trusts or charitable gift annuities for family members.

Watch the Numbers

The value of the remainder interest in a charitable remainder trust must be at least 10% of the net fair market value of the assets transferred to the trust on the date of the gift [Code §§664(d)(1)(D), 664(d)(2)(D)].  It’s easy, with the aid of planned giving software, to compute the value.  For inter vivos trusts, donors can know before funding a trust if the payout rate or frequency of payments needs to be changed or if a more favorable §7520 rate needs to be used in order to qualify.  But the issue can be more complicated where a testamentary trust is involved and the §7520 rate and age of the income beneficiaries are not known until the testator’s death.

Testamentary trusts should include language providing that if, in order to meet the 10% remainder, the payout rate falls below the minimum of 5%, then the trustee could limit the trust term to a maximum of 20 years, rather than the income beneficiary’s life.  If there is more than one income beneficiary, splitting the trust into a separate trust for each could yield the 10% remainder.  The trustee should be given the power in the trust document to make changes necessary to satisfy the 10% remainder requirement.

Start the Year Right

Clients over age 70½ should be reminded to plan their required minimum distributions for 2017, but for those who normally give to charity, it’s a good idea to also discuss the benefits of qualified charitable distributions (QCDs) early in the year.  Although QCDs up to $100,000 are all tax free, the real tax savings comes from using the QCD to take the place of required distributions.  For example, Arthur has to take $60,000 from his IRA this year.  In his 28% income tax bracket, he pays tax of about $16,800 on his IRA withdrawals.  Arthur generally makes gifts to charity of about $5,000 annually.  If he makes his charitable gifts from his IRA, he can reduce the tax to $15,400, even though there is no charitable deduction for his QCD.

For some clients, the reduction of adjusted gross income from QCDs may provide other benefits:

  • Staying below the $200,000 (single taxpayer) or $250,000 (joint filers) for the 3.8% net-investment income tax;
  • Remaining below the levels that will trigger cutbacks in itemized deductions and personal exemptions ($261,500 for singles, $313,800 for joint filers and $287,650 for heads of households);
  • Avoiding the top 39.6% income tax bracket, which also makes taxpayers subject to a 20% capital gains tax rate, rather than 15%;
  • Reducing the portion of Social Security benefits that are subject to tax;
  • Lowering modified adjusted gross income, which can affect premiums on Medicare Parts B and D.

Clients need not make QCDs early in the year, but should reduce the amount they will take in required minimum distributions over 2017 to allow for their gifts to charity.  Arthur, in the example above, could reduce monthly withdrawals, even if he doesn’t direct the custodian of his IRA to send the gifts to charity until later in the year.  To the extent his QCDs take the place of his required minimum distributions, Arthur can enjoy some of the benefits listed above.


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