Gift Planning Tips

Plan Ahead for Avoiding Tax on Group Term Life Insurance

An employee whose employer provides more than $50,000 of group term life insurance coverage is taxed on the excess coverage under the Uniform Premium Table [Reg. §1.79-3(d)(2)].  However, excess group coverage will not be taxed to the employee if a charity is the sole beneficiary during the entire taxable year [Code §79(b)(2)].  This treatment is available when any portion of the total group coverage is payable solely to charity for the entire taxable year [Reg. §1.79-2(c)(3)].

For example, Bob, age 56, is provided with $300,000 of group term coverage under a noncontributory plan.  The amount included in Bob’s gross income is computed as follows:

Excess coverage

$250,000

Annual cost per $1,000 of excess coverage

          $5.16

Annual cost of Bob’s excess coverage

   $1,290

Now assume $50,000 is made payable solely to Bob’s favorite charity for the entire taxable year.

Annual cost of Bob’s excess coverage

$1,290

Less annual cost of $50,000 payable to charity

   $258

Amount includible in Bob’s income

$1,032

Not only has Bob reduced the taxable cost, but the employer’s premiums remain fully deductible.

Clients subject to tax on excess group term life insurance may want to act, prior to year’s end, to name charity as the beneficiary of all or a portion of the excess for 2018, enabling them to reduce income taxes paid next year.


Taking the Pledge

Pledging a charitable gift over several years often allows donors to make larger gifts towards a specific purpose, such as a capital campaign or the establishment of a named scholarship fund.  But what happens if part of the pledged amount is still outstanding at the donor’s death?  The donor can provide in his or her will that any outstanding pledges are to be paid, allowing the executor to fulfill the pledge from funds in the estate.  Although the estate will generally not be entitled to an estate tax charitable deduction, it may be able to deduct the pledge as a claim against the estate under Reg. §20.2053-5, provided that the payment would have qualified as a charitable deduction if it had been made as a bequest.


Advancing Lead Trust Payments

On occasion, the remainder beneficiaries of a non-grantor charitable lead trust may wish to advance their interests by commuting the lead trust — paying charity the present value of its lead interest outright rather than over the trust term.  The IRS has taken the position that if the trustee has the discretion to commute and prepay a charitable lead annuity interest prior to the expiration of the specified term of the interest, it does not qualify as a guaranteed annuity interest under Code §2522 [Rev. Rul. 88-27].  A guaranteed annuity is the right to receive periodic payments over a specified period of time.  The exact amount payable must be determinable as of the date of the gift.  If the lead interest is commuted, charity does not have the right to receive payments over a specified period of time and the amount of each payment would be dependent upon whether the trustee decided to prepay, reasoned the IRS.  The IRS has said the same reasoning applies to charitable lead unitrusts (Letter Ruling 9734057).


Charitable Gifts That Avoid Year-End Cash Crunch Problems

The most common way to reduce income taxes is by boosting itemized deductions, and probably the easiest deduction to increase significantly is the charitable deduction.  But many people believe they would lose some income or have to part with cash.  There are ways for clients to qualify for deductions that won’t reduce their cash reserves or spendable income.

Remainder interest in homes or farms — Instead of leaving a primary residence or vacation home to charity in a will, a donor can make a lifetime gift of the home, retaining the right to live in it for the rest of his or her life [Code §170(f)(3)(B)(i)].  The donor gets an immediate income tax deduction, while continuing to live in or use the home.  The donor’s income is not reduced and the tax savings can be reinvested for more income.

Gifts of closely held stock — The owner of a C corporation can make a gift of some shares of his or her company stock and be entitled to a deduction equal to the fair market value of the shares.  Most charities, not wishing to be involved in the business, will seek to sell the shares.  The company can redeem and retire the shares, leaving the owner in full control.  The owner is not considered to have received a dividend from the company, provided charity is not required to sell [Rev. Rul. 78-197].

Transfers to charitable remainder trusts or charitable gift annuities — Selling investments to reinvest for higher yields generally involves capital gains tax.  Donors could instead contribute low-yield shares to a charitable remainder trust or to fund a charitable gift annuity.  Capital gains are avoided completely when appreciated securities are sold by the trustee or by charity.  Donors can claim an income tax charitable deduction and also receive payments based on the full value of the gift assets.

These gifts might take longer to complete, so donors should take steps prior to the end of the year to achieve tax savings.

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