Gift Planning Tips

Reminders at Year’s End

Year-end planning generally involves determining capital gains and loss exposure, comparing 2015’s return to what’s expected for 2016 and making sure clients have paid in enough, through withholding or timely estimated tax payments, to avoid a penalty.  But there are two more points advisers should broach with clients:

  • High-income taxpayers may be subject to cutbacks in itemized deductions when AGI exceeds $259,400 for single filers and $311,300 for joint filers in 2016.  Up to 80% of certain deductions can be lost.  Although the deduction for gifts to charity is one of the affected deductions, clients generally need not worry that they will lose the tax advantage for their giving.  Upper bracket taxpayers usually have sufficient other itemized deductions (state and local taxes, mortgage interest, property tax and miscellaneous itemized deductions) to more than absorb the cutbacks. It’s simple to show clients that their charitable deductions will not be affected:

    1. Estimate client’s AGI for 2016
    2. Subtract the threshold amount
    3. Excess over AGI threshold
    4. Multiply line 3 by 3%



    If the client’s other itemized deductions equal or exceed the amount on line 4, their deductions for charitable gifts will be unaffected.

  • Clients age 70½ or older are required to take minimum distributions from IRAs for 2016.  For those who haven’t already taken the withdrawal, a qualified charitable distribution (QCD) directly from their IRA can save income taxes, even for clients who don’t itemize their deductions.  Up to $100,000 can be sent directly to charity, tax-free.  The QCD cannot be used to fund a charitable gift annuity or charitable remainder trust and may be given only to public charities, not donor advised funds, private foundations or supporting organizations.

Contribute and Replace

Many investors own stock that has appreciated significantly in the recent market run-up.  These shares, if held more than one year, make excellent year-end gifts.  The donor is entitled to an income tax charitable deduction for the fair market value of the shares on the date of the gift, and all capital gain that would be realized if the shares were sold is avoided.  But what if the client really likes the company and its prospects for future growth?  A gift of the shares, followed by a repurchase of the same stock, will give the client a new, higher basis, possibly reducing capital gains at some future date. 

If shares have gone down in value, it’s best to sell the stock and contribute the proceeds, qualifying for two deductions — one for the capital loss and one for the charitable gift.  If the client is optimistic about the company’s potential for a rebound and wants to purchase replacement shares in the same company, it’s best to wait more than 30 days after the sale.  If shares in the same company are purchased within 30 days of a sale, any capital loss is postponed until the new shares are sold, under the wash sale rules [Code §1091].

Keep Track of Donor Advised Funds

Clients with donor advised funds should review directions for the funds at the clients’ deaths.  In general, a DAF donor may name another person to advise gifts at the donor’s death, may direct that the funds remain with the DAF sponsor, with income distributions made to organizations reflecting the donor’s interests or all dollars in the fund can be distributed while the donor is alive.  If the client isn’t sure how remaining funds will be distributed, he or she should contact the sponsoring organization and then take steps to determine which option most closely fits the client’s philanthropic goals.  A client and surviving spouse may support the same organization, making it easy to name the spouse to continue advising the fund.  But if the spouse has different charitable interests, or if the client is not married, it’s important to determine whether other family members are interested in assuming the role.  If not, the client may be well advised to distribute the charitable dollars prior to death.

Corporations Can Give, Too

Individuals are not the only donors who can establish charitable remainder trusts.  A corporation can fund a trust, retain income for up to 20 years and claim a charitable deduction [Code §§664(d)(1)(A), (d)(2)(A)].  If the company is an S corporation, the deduction will pass through to the shareholders according to their respective interests, to be claimed on their personal income tax returns [Code §1366(a)(1)(A)].

Consider a company with vacant property on which it currently pays insurance, maintenance and real estate taxes.  Assuming the property is worth $250,000 and can be sold shortly after the trust is funded, the company can turn an asset with negative cash flow into a source of regular payments.  A 5% charitable remainder unitrust that is to last for 20 years generates a charitable deduction of more than $91,000 (assuming a §7520 rate of 1.6%) and a payment of $12,500 in the first year.  Unitrust payouts in future years will depend on the trust’s investment performance.  If the property is likely to take a while to sell, a net-income or a net-income with make up charitable remainder trust can be used.


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