Gift Planning Tips

Landing a Deduction for Business

Corporations often own excess parcels of real property that can be used to satisfy the philanthropic goals of the companies and/or the shareholders.  In most cases, the tax advantages are the same as those available to individuals.

The Largesse Company, a closely held C corporation, owns vacant land worth $750,000 that does not produce income.  The company is currently paying real estate taxes and insurance on the parcel.  Although Largesse could sell the land, there would be significant capital gains due.  The company’s financial adviser suggested that the parcel be used to fund a charitable remainder unitrust.  The trustee could sell the land and make payments to the company based on the full sale price.  The adviser explained that the trust could last for a term of up to 20 years [Reg. §1.664-3(a)(5)].  If the trust pays a 5% unitrust amount, the company would be entitled to a charitable deduction of about $275,100 (assuming annual payments and the use of a 2.2% §7520 rate).  The company turns an asset with a negative cash flow into a 20-year stream of income — $37,500 in the first year.  There is a charitable deduction for Largesse and future benefit for the charitable remainder beneficiary.

 


Comparison Shop With Stock Gifts

Stock values have climbed dramatically in recent months, but many investors hesitate to sell due to capital gains tax of up to 20% and the possible 3.8% net investment income tax.  An option for charitably inclined clients is a life-income gift.

Consider a donor, age 75, who purchased stock for $50,000 that is now worth $100,000.  The comparison assumes quarterly payments, a 2.2% §7520 rate and payouts of 5%, except for the gift annuity which has a 5.8% recommended rate.

 

Annuity Trust

Unitrust

Charitable Gift Annuity

Annual Payout

$5,000

Fluctuates

$5,800

Charitable Deduction

$52,611

$60,144

$45,028

Tax
Treatment

1. Ordinary income to extent trust has current ordinary income or undistributed ordinary income from prior years.

 

Ordinary $1,368.80

 

2. Capital gain to extent trust has current capital gain or undistributed capital gain from prior years.

 

Capital gain $2,216.57

 

3. Tax-free income to extent trust has such income, current or past years.

 

Tax free $2,214.63

 

4. Tax-free payments from corpus.

 

 

 



Charitable Ideas for Gen Xers

Many charitable gift techniques are best suited to donors in their 70s and 80s — the Baby Boomers and their World War II-era parents.  But Gen Xers — those born from the early 1960s to the early 1980s — also have opportunities to assist charity while solving financial planning needs.

Saving for retirement is a primary goal of many 40- and 50-somethings.  A program of deferred payment charitable gift annuities offers current income tax deductions plus deferral of income to later years.  Unlike qualified retirement plans, deferred gift annuities have no contribution limits, no age limits and may be funded with appreciated assets, with favorable tax consequences.

Longer life expectancies means children in their 50s and early 60s may be providing financial help to elderly parents.  Rather than give after-tax dollars, a child could fund a charitable remainder trust that will pay their elderly parents with tax-sheltered dollars.  The donor is entitled to an income tax deduction and the value of the parents' income interest qualifies for the $14,000 annual exclusion [Code §2503(b)].

College tuition for children may be a concern for those in their 40s and 50s.  A parent may wish to create a charitable remainder trust that pays income to the student for a term of years — long enough to graduate and establish a career.  Appreciated assets that might normally be sold to finance the child’s education could be used to fund the trust, thereby avoiding capital gains tax.

 


Dances and Auctions and Golfing . . . Oh My!

Many payments that clients think are charitable contributions are not, in fact, deductible in the eyes of the IRS.  This is most common where donors are attending an event such as a dinner or golf outing.  To assist supporters who purchase tickets to such events, charities are required to provide donors with a written good faith estimate of the value of any goods or services provided for payments in excess of $104 (2014 amount) (IRS Pub. 1771).  For example, an invitation to a golf outing might state that $50 of the $250 cost of the event is a deductible charitable gift.  If a donor purchases a ticket and chooses not to attend, the deduction is still limited to the stated amount, unless the benefit is rejected either by checking a box on the solicitation or by returning the tickets [Rev. Rul. 67-246].

In the case of an auction, the winning bidder is generally considered to have paid fair market value for the item, and is therefore not entitled to a deduction, unless the donor can demonstrate that he or she paid an amount in excess of fair market value and that the difference was intended as a charitable gift [Reg. §1.170A-1(h)].

Certain items are considered de minimus and will not reduce a donor’s deduction.  The safe harbor guidelines provide that the value of low-cost items such as keychains, mugs and calendars that bear the organization’s name and logo are not a substantial benefit.

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