Gift Planning Tips

Cash (Saving) Crops

For some farmers wishing to make significant gifts to charity, their most valuable asset might be their crops.  One way to make a gift of crops is with a warehouse receipt.  Code §170(e)(1)(A) requires operating farmers to reduce their charitable deductions by the amount of ordinary income that would have been recognized if the crops had been sold — basically reducing the deduction to basis.  In most cases, the farmer has deducted the cost of seed, fertilizer and other expenses, so the charitable deduction will be zero.  However, the value of the crops will not have to be recognized as income, thereby saving the farmer income and self-employment taxes.

If the donor is a landlord who receives crop shares as rent from a tenant, he or she must report the crop shares as ordinary income, regardless of whether they are given to charity.  If given to charity, the donor will be allowed to claim the market value as a contribution deduction.

A farmer may wish to fund a charitable remainder trust, even without a deduction, to avoid recognition of income upon a sale.  The IRS approved the transfer to a net-income charitable remainder unitrust of cattle and crops by a rancher.  The donor’s deduction was zero because he had deducted the costs of raising the cattle and crops as a business expense under Code §162.  However, the IRS ruled that the assignment of income theory would not apply, so proceeds from the eventual sale of the cattle and crops by the trustee would not be considered income to the donor (Letter Ruling 9413020).

Life Expectancies and Actuarial Values

IRS actuarial factors are based on average life expectancies and may not be used to value interests where the measuring life is terminally ill [Reg. §§1.7520-3(b), 20.7520-3(b), 25.7520-3(b); Rev. Rul. 96-3].  An individual is considered terminally ill if he or she “was known to have an incurable illness or deteriorating physical condition such that there is at least a 50% probability that the individual will die within one year.”  A special factor based on the actual life expectancy of the measuring life must be computed.  When is this likely to be an issue?

A grantor of a charitable lead trust would “borrow” the life expectancy of a relatively young person with an illness that was likely to result in death in more than a year but long before the actuarial life expectancy.  The result would be an artificially large charitable interest — and deduction — and a reduced remainder interest subject to transfer tax.  These “ghoul” or “vulture” trusts ended with the introduction of Reg. §§1.170A-6(c)(2)(i)(A) and 1.170A-6(c)(2)(ii)(A), which limit the measuring life of a charitable lead trust to the donor, the donor’s spouse, a lineal ancestor or the spouse of a lineal ancestor of all the remainder beneficiaries.

The life expectancy of a terminally ill beneficiary may also arise with a charitable remainder trust.  For example, a donor creates a remainder trust naming a brother, age 60, to receive income for life.  The noncharitable interest would be artificially high if the brother is terminally ill, resulting in a lower charitable deduction that does not accurately reflect the present value of charity’s interest.  If a special actuarial factor is used, the charitable deduction will more closely match the amount charity is likely to receive.

Controlling IRA Distributions from Beyond the Grave

Naming a child or grandchild as the designated beneficiary of an IRA allows the distribution of the funds — and the taxes — to be spread over many years, possibly many decades.  But that works only if the beneficiaries have the discipline to limit withdrawals to the required distributions due on inherited IRAs.  One option for clients concerned about their beneficiaries blowing the savings on fast cars and exotic vacations is to establish a conduit or see-through trust, which uses the life expectancy of the beneficiary to make distributions.  One downside to this option is that if there are multiple beneficiaries, there must be a separate trust for each or the required minimum distributions will be calculated using the age of the oldest beneficiary.

Another option is to create a testamentary charitable remainder trust, naming the family members as income beneficiaries.  The value of the charitable remainder must be at least 10% of the amount transferred [Code §§664(d)(1)(D), 664(d)(2)(D)], which may be difficult to achieve if there are multiple beneficiaries or young beneficiaries.  Solution: multiple trusts or a term-of-years trust (maximum 20 years).  Another charitable option is a charitable gift annuity.  Although most charities have minimum ages for immediate gift annuities, some may lower the age if a deferred gift annuity is established.

Charitable Solution to Excess Earnings

C corporations with more than $250,000 in accumulated earnings and profits ($150,000 for personal service corporations) may be subject to tax at a rate of 20%, in addition to the regular corporate income tax (Code §531).  One way to reduce accumulated earnings and profits is to declare dividends, which may not be attractive for the shareholders who will be subject to tax.  Another option is to make a gift to charity.  The company is entitled to a deduction up to 10% of taxable income for the year (with a five-year carryover), but in determining accumulated taxable income, the full amount of the gift is allowed as a deduction [Code §535(b)(2)].


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