Gift Planning Tips

For What It's Worth

Donors sometimes use hard-to-value assets to fund charitable remainder unitrusts — closely held stock, real estate, tangible personal property.  This can cause a concern if the donor wishes to serve as trustee.  Prior to the issuance of final charitable remainder trust regulations in late 1998, many advisers recommended that an independent trustee be appointed to determine the annual value of the assets, in order to calculate the unitrust payout for the year. 

Now, donors can serve as trustee, provided a qualified appraisal is obtained each year by a qualified appraiser [Reg. §§1.664-1(a)(7)(i)(b); 1.170A-13(c)(3)].  The appraisal is similar to what is required to qualify for an income tax charitable deduction for noncash gifts to charity in excess of $5,000.  Once the hard-to-value assets are sold within the trust, the qualified appraisal is no longer necessary to establish the annual value of the trust.


These Gifts Require Special Attention

Lifetime gifts of tangible personal property are subject to different rules than gifts of cash, real estate and appreciated securities.

Valuation — Donors who make noncash gifts in excess of $500 are required to file Form 8283; if the value exceeds $5,000, a qualified appraisal is also needed [Reg. §1.170A-13(c)(2)(b)].  Art gifts over $20,000 must go before an IRS art advisory panel.  The donor can deduct the cost of the appraisal as a miscellaneous itemized expense [Code §212(3)].

Deduction limits — If the gift is long-term capital gain property, the deduction is subject to a 30%-of-AGI limit, with a five-year carryover for excess deductions [Code §170(b)].  Gifts of ordinary income property (e.g., art in the hands of the artist) are limited to the donor’s basis.

Businesses may take advantage of enhanced deductions (basis plus one-half the unrealized appreciation, up to two times the basis) for certain inventory items given “for the care of the ill, needy or infants” [Code §170(e)(3)(A)] or for gifts of research equipment to colleges, universities and tax-exempt scientific research organizations [Code §170(e)(4)].

Unrelated use — The deduction for a gift of tangible personal property that is unrelated to the charity’s exempt purpose is limited to the lesser of fair market value or the donor’s basis [Code §170(e)].


Borrowing to Make a Charitable Gift

A donor who contributes borrowed funds to make a gift to charity may claim a charitable deduction in the year the gift was made, and need not wait until the loan is repaid.  This is similar to gifts made by the use of credit cards.  At the time a charge is made, the cardholder becomes indebted to a third party and cannot prevent the charity from being paid [Rev. Rul. 78-38].  This is true even where the charge is made late in December but the donor does not pay the credit card bill until early the following year.

This differs from the treatment of pledges, which are mere promises to pay charity and are not deductible until actually paid [Rev. Rul. 68-174].


Love and Charitable Remainder Trusts

Clients who wish to fund a testamentary trust for a surviving spouse and charity have two choices, either of which will completely avoid estate tax.  Code §2056(b)(8)(A) allows a marital deduction for the surviving spouse’s income interest in a charitable remainder trust, an exception to the general rule that the spouse must be entitled to all the income for life.  The surviving spouse must be the only noncharitable beneficiary.  The other option is the garden-variety QTIP trust [Code §2056(b)(7)], in which all trust income is paid to the surviving spouse for life.  The trust qualifies for the marital deduction in the first spouse’s estate and for the charitable deduction in the survivor’s estate.  The charitable remainder trust may be preferable if assets will include items of income in respect of a decedent.

In the case of an inter vivos charitable remainder trust, if only one spouse is the donor and income beneficiary, with the surviving spouse the successor beneficiary, it might be advisable for the donor to retain the testamentary right to revoke the survivor’s income interest [Reg. §§1.664-2(a), 1.664-3(a)(4)].  Otherwise, if the couple divorces, the income interest would pass at the donor’s death to the ex-spouse and would not qualify for the marital deduction [Code §2056(b)(8)].  Where the inter vivos trust is initially funded with joint property and the couple later divorces, the IRS has ruled in several cases that the trust can be split in two, with each spouse continuing to receive the same payout from a smaller trust and each trust terminating at the death of the respective income beneficiary (e.g., Letter Ruling 200035014).

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