Gift Planning Tips

Appraisal Rules Obsolete?

Reg. §1.170A-13(c)(3)(i)-(ii) sets out the rules donors must meet when obtaining an appraisal for non-cash gifts to charity.  In general, donors need appraisals when claiming deductions for gifts (excluding publicly traded securities) in excess of $5,000 ($10,000 in the case of closely held stock).  The appraisal must be dated no earlier than 60 days prior to the date of the gift and no later than the due date of the return on which the deduction is claimed, with extensions.  The cost of an appraisal, which is the obligation of the donor, had been deductible as a miscellaneous itemized deduction subject to a 2%-of-AGI threshold.  Under the Tax Cuts and Jobs Act of 2017, the cost of the appraisal, as well as other miscellaneous itemized expenses, is no longer deductible.

The question donors must ask: Are appraisals still necessary?  Reg. §1.170A-13(c)(2)(i) requires the appraisals when a donor “claims or reports a deduction with respect to a charitable contribution.”  With higher standard deductions, it’s possible that a client who contributes tangible personal property to charity will not even be itemizing, in which case the donor could save money by not obtaining the appraisal.

For example, Tom and Bernice, both over age 65, have a standard deduction for 2018 of $26,600 ($24,000 standard deduction plus the $2,600 extra deductions for those age 65 or older).  Their only other itemized deduction is the $10,000 allowed in state and local taxes, so the couple is unable to itemize, even if they contribute a painting worth $10,000 to charity.  Because they will not be itemizing, they could seemingly disregard the appraisal requirements and avoid incurring an expense for which they can’t claim a deduction.  It would also appear that the unrelated use rules would not apply.  Code §170(e)(3) limits the deduction to the donor’s basis, rather than fair market value, if a gift of tangible personal property is put to a use that is unrelated to the charity’s mission.


Charitable Bequests: Taxes Aren’t the Only Reason

Long gone are the days when average Americans considered charitable techniques when trying to reduce or avoid estate taxes.  As recently as 2001, the estate credit sheltered estates only up to $675,000.  Now, with estates up to $11.2 million exempt from tax and couples able to shield $22.4 million, charitable vehicles are not needed for most estates to avoid tax.  That doesn’t mean that clients won’t want to include bequests to charity as a way to provide continuing support to favorite charities or to achieve other estate planning goals.

  • Bob has four nieces to whom he wants his estate to pass.  However, he doesn’t think he needs to leave his entire $3 million estate to them.  He plans, instead, to divide his estate into five shares — one for each niece and one for the charities he has supported.  He feels that $600,000 is sufficient to leave each niece, and he is pleased that he can leave significant bequests to several charities at his death.

  • Marilyn wants her IRA to pass to her brother at her death.  But because her brother is a poor money manager, she’s concerned he might withdraw and spend the funds, leaving nothing for his future needs.  Instead, she has the IRA pass to a charity, on the condition that a charitable gift annuity be established for her brother.  He will receive payments for life based on the payout rate the charity offers to other annuitants her brother’s age at the time of her death.  Marilyn has the satisfaction of knowing she is assisting charity and that her brother will have an income source he can’t outlive.

  • Bill and Irene have six grandchildren, all younger than age 10, who they’d like to benefit at their deaths.  They could arrange to have a portion of their estate pass to a charitable lead trust at the death of the surviving spouse.  This would allow them to support favorite charities and have the assets then pass to the grandchildren when they are older and able to handle the inheritance.  Bill and Irene could also establish the lead trust during their lifetimes, be able to see their charitable giving at work, reduce their gross income and have the assets pass to grandchildren in 10 or 15 years, as the children will be starting college, and most likely with no concerns about generation-skipping transfer taxes.


Forget the Marital Deduction

There is no marital deduction for a charitable remainder trust that pays to children at the death of the spouse.  Code §2056(b)(8) requires that the surviving spouse be the only non-charitable beneficiary.  One work-around has been to use a QTIP trust that then empties into a charitable remainder trust at the death of the surviving spouse.  At the first spouse’s death, the value of the trust is sheltered by the marital deduction [Code §2056(b)(7)(B)].  Trust assets are included in the surviving spouse’s estate, but an estate tax charitable deduction is available for the value of charity’s remainder interest.

If an estate will not be subject to tax, the lack of a marital deduction might be of no concern.  This could be especially useful in the case of second marriages where the first spouse to die has children to whom he or she wants the funds to eventually pass.  A trust lasting for the life of the surviving spouse and then to the children for life might not pass the 10% remainder requirement [Code §§664(d)(1)(D), (d)(2)(D)].  One alternative might be to limit the children’s interest to only 20 years.  Another option is to create multiple trusts with the surviving spouse the first beneficiary and one child the successor income beneficiary.


Want to Keep All the Income? There’s a Way

Although pooled income funds are nearly as rare as unicorns, there is a reason new funds may be attractive.  Pooled income funds are much like mutual funds, in that earnings are distributed annually to fund participants in proportion to their interests.  Low investment yields in recent years and the inability to pay tax-exempt income have made contributions to existing funds not particularly inviting.  As a result, charities have simply allowed funds to expire or have encouraged fund participants to either make gifts of their remaining interests or to use the value of the interest to fund a charitable gift annuity.

The deduction for a gift to a pooled income fund is determined with reference to the fund’s highest yearly rate of return for the preceding three years.  The higher the rate, the lower the deduction.  But for new pooled income funds without a history of returns, a deemed rate is used.  The deemed rate is one percentage point less than the highest average §7520 rate for the three preceding years [Reg. §1.642(c)-6(e)(3)].  For 2018, the deemed rate is 1.4%, which yields a much more attractive charitable deduction than that available for a 5% charitable remainder unitrust.

Consider two 65-year-old donors, one of whom funds a 5% charitable remainder unitrust with $100,000 and one who contributes $100,000 to a new pooled income fund.  The deduction for the unitrust, assuming quarterly payments and January’s §7520 rate of 2.6%, is $44,977.  The deduction for the pooled income fund is $78,697 — more than 78% of the amount contributed.

Donors can’t establish pooled income funds themselves, as they can with charitable remainder trusts.  A public charity must maintain the fund; the fund cannot accept or invest in tax-exempt securities; distributions retain their character in the hands of beneficiaries; and at the death of an income beneficiary, the trustee must sever an amount from the fund equal to the value of the remainder interest, which then passes to charity [Code §642(c)(5)].  While few charities offer pooled income funds, the impetus for establishing a new fund could come from a donor who is looking for lifetime payments and a large deduction.

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