Gift Planning Tips

Charitable Gift Opportunities with Living Trusts

Clients should be encouraged to consider both lifetime gifts and transfers at death through their revocable living trusts. Tax benefits are identical to gifts from their non-trust assets.  Revocable living trusts can make transfers to charitable remainder trusts at the death of the grantor, or can be designed to transform themselves into qualified charitable remainder trusts at death, providing financial security for a family member, estate tax savings and deferred benefit for charity.  Where the estate is not subject to federal estate tax, a nonqualified charitable remainder trust may be simpler.

Virtually any bequest option can be adapted as a clause for a trust distribution, including outright bequests, disclaimers, residuary bequests, etc.   Here is a basic clause for a charitable distribution from a trust:

(ARTICLE NUMBER or Section number): Upon the death of the settlor, the trustee shall distribute to the ________ Charity, organized and situated at ________, in the County of ________, the sum of ________ dollars, to be applied for the general purposes of such institution. The succeeding articles of this agreement shall be subject to the trustee’s making or providing for this distribution.

 


Power of Attorney for Philanthropy

Many estate planning professionals view healthcare directives, especially the healthcare power of attorney, as a logical extension of estate planning that goes hand-in-hand with setting up a general durable power of attorney or naming a standby trustee to manage a client’s financial affairs in time of disability.
           
Consideration should also be given to future decision-making with respect to a person’s support for charitable organizations.  Depending on the jurisdiction, the attorney in fact or standby trustee may have intrinsic power to carry on a disabled individual’s usual charitable giving patterns.   But it may also be helpful to equip the attorney in fact or trustee with more extraordinary powers, such as:

  • The ability to establish charitable remainder trusts or charitable gift annuities;

  • The power to make major gifts to fund-raising campaigns;

The ability to accelerate charitable bequests into intervivos gifts that reduce current income taxes, particularly if it appears that the client may not have long to live.

 



Charity as the “Ultimate Contingent Beneficiary” of an Estate

Individuals sometimes provide that bequests shall pass to named charities if the primary beneficiary – a friend or family member – should predecease them.  Another use of alternative charitable bequest clauses is to cover the possibility that ALL intended beneficiaries predecease the estate owner, or the possibility that the testator and his or her intended beneficiaries are killed in a common disaster.  The advantage of naming a charity as one’s “ultimate contingent beneficiary” is twofold:  (1) The testator avoids having his or her estate pass to distant (perhaps unknown) relatives.  In unusual cases, the estate could even escheat to the state.  Instead, the testator has the satisfaction of knowing a worthwhile cause will be benefitted;  (2) the estate will completely avoid federal estate taxes, state death taxes and perhaps taxes on income in respect of a decedent, if everything passes to charity.

 



Charitable Bequests of Tchotchkes and Knickknacks

Some organizations have gift acceptance policies that prevent them from accepting lifetime gifts of tangible personal property, but exceptions are often carved out for bequests of such assets – which typically have poor income tax results if contributed to charity during life.  Bequests of such property, on the other hand, can be 100% deductible for estate tax purposes. 

Ordinary income property – Several years ago, Ted DeGrazia, an artist (and tax protester) living in the southwest burned about $1 million worth of his paintings when he learned they would be subject to federal estate tax.  Had he given some thought to the matter, he might have found it better to bequeath the paintings to a museum, university or other charitable institution.  If the artist had given the paintings to charity during life, his charitable contribution would have been limited under IRC §170(e)(1)(A) to his cost basis – what he paid for paint and canvas.  Paintings in the hands of the artist are one kind of “ordinary income property,” defined as property the sale of which would produce any ordinary income or short-term capital gain.  No such reduction applies with the estate tax charitable deduction.

Tangible personal property – When tangible personal property (e.g., a painting, a boat or a coin collection) is given to charity during life, if the property is put to a use that is unrelated to the donee’s mission, the donor’s deduction will be reduced by 100% of the long-term capital gain element in the property [Reg. §1.170A-4(b)(3)(i)].   Accordingly, if an individual wishes to give an item of tangible personal property to charity, he or she might be well-advised to bequeath the item and permit his estate to claim a deduction for the item’s full fair market value.

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