Gift Planning Tips

Tax Reform Proposal Would Shrink Tax Rewards of Giving

Dave Camp (R-Michigan), chair of the House Ways and Means Committee, has put forth a tax reform proposal that would reduce tax rates but at the same time take a major bite out of most deductions, including charitable contributions.  Measures that would affect charitable giving tax incentives include:

  • Significant increases in standard deductions, reducing the number of taxpayers who could deduct charitable contributions;
  • Elimination of deductions for state and local taxes, non-business property taxes, medical expenses, alimony, employee business expenses and moving expenses would make it much harder for donors to itemize;
  • Deductions for contributions of long-term capital gain property would be limited, for the most part, to a donor’s cost basis;
  • Contributions would be deductible only to the extent they exceeded 2% of a donor’s AGI;
  • Ceilings on deductibility of gifts would be lowered from the current 50% of AGI (30% of AGI for gifts of long-term capital gain assets).

On the positive side, donors would be permitted to treat gifts made from January 1 to April 15 as having been made during the prior tax year.  Testamentary charitable remainder trusts funded with IRAs or qualified retirement plans would be more attractive if a proposal passed to require inherited retirement accounts to be distributed within five years.  Capital gains tax rates would go up for taxpayers in the highest bracket, making funding of inter vivos CRTs with investment assets more appealing.

Commentators suggest that major tax reform probably will not occur in 2014, but something akin to the Camp proposal could pass in the future.  Clients who contemplate making major gifts “sometime” during their lives might be well advised to give sooner rather than later.

 


 

Tax Result of Satisfying a Decedent’s Charitable Pledge

George’s executor was contacted by a charitable organization explaining that George had made a $100,000 pledge to its building campaign, and that $50,000 of the pledge remained unpaid at his death.  If the executor satisfies the outstanding pledge amount, will the estate be able to take an estate tax deduction?

A charitable pledge by an individual that is satisfied by his executor following his death is not deductible as a charitable contribution. However, it will qualify for deductibility as a claim against the individual’s estate if (a) it was a contractual obligation created in good faith for an adequate and full consideration in money or money’s worth, or (b) it would have constituted an allowable charitable deduction if it had been a bequest [Reg. §20.2053-5]. Most pledges fall into category (b) and are thus deductible as claims against the estate.

 



“Scrivener’s Errors” Can Cover a Multitude of Sins

Barbara and Earl established a net-income with make-up charitable remainder unitrust with the help of the trustee and charity. They intended that realized post-contribution capital gains be allocated to trust income. Sometime later, the couple’s attorney realized the trust did not contain a provision on the allocation of capital gains to income. The trust had been administered as though the appropriate language was included.

The parties sought a court order authorizing a retroactive trust amendment. The court ordered a reformation to correct a scrivener’s error. As amended, trust income will be determined as defined in IRC §643(b) and post-contribution gains will be allocated to income. All pre-contribution gains are considered principal.

Although Barbara and Earl are disqualified persons with respect to the trust [IRC §4941], a charitable remainder trust’s payments to the income beneficiary do not result in self-dealing [IRC §4947(a)(2)(A)]. The consistent administration of the trust and treatment of post-contribution capital gains indicates that the parties intended to include the gains in trust income, said the IRS, adding that a retroactive judicial amendment of the trust does not constitute self-dealing (PLR 200532022).

 



CRT Trustee Can Divert Some Trust Payments to Charities

The IRS several years ago approved a two-life charitable remainder unitrust that allowed charitable organizations to be auxiliary income beneficiaries, as well as remainder beneficiaries.  The individual beneficiaries were guaranteed a minimum of 25% of the unitrust payout, but an independent trustee was given the power to allocate the remaining 75% among charities of the trustee’s choosing and the individual beneficiaries (PLR 200813006).

The grantors of the unitrust received no additional income tax charitable deduction for charity’s potential income benefits, but the individual beneficiaries will not have reportable income as to distributions actually made to organizations.  This arrangement may be attractive to donors who want to benefit charity before the trust ends and don’t need 100% of the trust payments for their financial security.  Individuals do achieve “backdoor” tax savings, not only by diverting taxable income to charities, but also by trimming adjusted gross income as well – the yardstick for a variety of unfortunate tax results. 

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