Gift Planning Tips

Income with a Lower Tax Price Tag

There are several options for clients looking to secure tax-free or favorably taxed income while also assisting favorite charities:

Charitable remainder annuity trust — An annuity trust can be funded with tax-exempt bonds or with cash that will be used to purchase bonds.  The income will be tax free to the donor.  The trustee can’t be required to hold or purchase tax-exempt investments, and state prudent investor rules must be considered.  If the trust is funded with appreciated property that the trustee sells in order to purchase tax-exempt bonds, the capital gain will have to be distributed to the beneficiaries under the four-tier system [Code §664(b)] before any tax-free income could be realized.

Charitable remainder unitrust — A standard charitable remainder unitrust can be invested to produce partly tax-free return of principal and favorably taxed long-term capital gains and qualified dividends.  While income is not wholly tax exempt, such a plan can be tax efficient for a beneficiary in a 35% or 39.6% tax bracket.

Charitable gift annuity — A gift annuity funded with cash offers an annuitant the greatest amount of tax-free return of principal, lasting for the annuitant’s life expectancy.  A gift annuity funded with appreciated securities provides favorably taxed capital gains income.

Exercise Caution with Trustee Powers

In noncharitable trusts, it’s common practice to give trustees the broadest powers allowed under state law, but for trustees of charitable trusts, some powers could lead to disqualification of the trusts.  For example, state laws might allow the trustee to invade trust assets to pay for the funeral expenses of the grantor or spouse.  In a charitable remainder trust, however, no amount other than the annuity or unitrust amount may be paid to or for the use of any person other than charity [Reg. §§1.664-2(a)(4), 3(a)(4)].  A charitable remainder trust that gives the trustee all the powers conferred under state law might run afoul of this rule, even if the trustee never actually invades corpus to pay funeral expenses.  Charitable remainder trusts should include language precluding the trustee from having any power under state law that would prevent the trust from qualifying as a charitable remainder trust.

Divide and Conquer Doesn’t Always Work

A donor giving noncash assets (other than marketable securities) valued at more than $5,000 is required to obtain a qualified appraisal [Code §170(f)(11)(C)].   Often donors are reluctant to incur the expense for an appraisal when they estimate that the total value is only slightly more than $5,000.  For example, a client with a coin collection worth $7,500 may ask whether it’s possible to give half the collection to one organization and half to another (assuming both will put the coins to a related use).  Each deduction would be $3,750, which is below the $5,000 appraisal threshold.  However, in determining the $5,000 amount, all similar items of property donated to one or more donees are treated as one property [Code §170(f)(11)(F)], so the appraisal requirement is not avoided.  The client could, instead, make a gift of the collection over two or more years and keep the deductions below $5,000.

When a Deduction Has to Wait

The deduction for charitable gifts of cars, trucks, boats, planes and other vehicles is generally limited to the gross proceeds charity receives from a sale [Code §170(f)(12)(A)(i)].  No qualified appraisal is needed, but the donor cannot claim the deduction until he or she receives Form 1098-C from the charity, along with a contemporaneous written acknowledgment.

In some cases, the sale by charity will occur in a different year than the gift, possibly even after the donor has filed the income tax return for the year.  In that case, the donor will have to file an amended return in order to claim the deduction.

If the charity plans to put the vehicle to a related use, rather than sell it, the regular rules relating to substantiation and appraisals apply.


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