Gift Planning Tips

Plan Early for IRA Rollover Gifts

Now that qualified charitable distributions (QCDs) from IRAs are permanent, advisers should determine which clients could benefit from making the gifts and plan these early in 2016, before required minimum distributions have been made.  How can clients help themselves while assisting their favorite organizations?  Here are a few examples:

Taxpayers who make charitable gifts but don’t itemize — Only about 35% of taxpayers itemize their deductions, with the majority relying on the standard deduction.  As a result, many generous taxpayers get no added tax benefit from their gifts.  But with QCDs, even taxpayers who don’t itemize save taxes, since amounts sent to charity (up to $100,000 annually) pass free of the tax that would ordinarily be owed on a distribution.

Retirees who are taxed on a portion of their Social Security benefits — Up to one-half of a recipient’s Social Security benefits can be taxed when provisional AGI exceeds $25,000 (single taxpayers) or $32,000 (joint filers).  Up to 85% of Social Security benefits are taxed when provisional AGI exceeds $34,000 or $44,000 respectively.  Required minimum distributions may increase a retiree’s income enough to put him or her above these AGI levels.  For certain clients, making a QCD may reduce the tax on Social Security benefits.

Clients who want to reduce their gross estates — Only estates in excess of $5.45 million are subject to estate tax in 2016.  Because the value of IRAs is included in the gross estate, making QCDs, even in excess of a taxpayer’s required minimum distribution, may enable the client to keep his or her estate below the applicable exclusion amount.  Keep in mind that IRAs left to charity at death avoid both the estate tax and the tax on income in respect of a decedent.

Taxpayers already at the deduction limit — Very generous donors may find they can’t claim all their deductions and must carry over the excess to future years.  In general, cash gifts are deductible up to 50% of a donor’s AGI, while deductions for gifts of appreciated property are limited to 30% of AGI, with a five-year carryover.  QCDs do not count toward these deduction limits.

Clients whose AGI makes them subject to cutbacks or penalties — There are several AGI “triggers” that can result in higher taxes for certain clients.  For example:

  • 3.8% net-investment income tax applies to taxpayers when AGI reaches $200,000 (single filers) or $250,000 (joint filers).
  • Taxpayers who reach the top 39.6% income tax bracket are also subject to a 20% rate on long-term capital gains and dividends when AGI tops $415,050 (single) or $466,950 (joint) in 2016.
  • Certain itemized deductions and personal exemptions are reduced when AGI exceeds $259,400 (singles) or $311,300 (joint) in 2016.

Some eligible clients may benefit by making QCD gifts that will help reduce their AGI below these levels.

Clients who want to see their gifts put to use during their lifetimes — Instead of making a bequest through a will or living trust, clients could contribute a similar amount through QCDs, in a single year or over several years, and see the good their generosity can do while they are alive.

When to Choose a Charitable Remainder Annuity Trust

Charitable remainder unitrusts are generally preferred by donors over the fixed-income annuity trust, due to their greater flexibility.  But some older individuals may find a 20-year annuity trust to be attractive.  There are several reasons why this may be true:

  • The clients wish to add a fixed-income component to their investment portfolios;
  • Mortality tables indicate the income beneficiaries are unlikely to live more than 20 years, so the financial risk of outliving the trust is small;
  • They feel someone in their family should benefit from the charitable remainder trust in the event they died a few years after the trust is established.

A husband and wife, both in their late 70s, could establish a 20-year annuity trust and know that their family will benefit for 20 years, no matter what.  It may be that no one actually depends on those payments financially; it’s just a more appealing arrangement psychologically.

The current low §7520 rates have also made term-of-years annuity trusts more attractive from a qualification standpoint.  Annuity trusts for the lifetime(s) of one or more beneficiaries must pass a 5% probability test [Rev. Rul. 77-374] — that is, the trust is disqualified if there is more than a one in 20 chance that trust assets will be exhausted when the trust ends.  The probability test does not apply to trusts lasting a fixed term of years.

Advantages of Giving Closely Held Stock

Among the most valuable “hidden assets” for giving to charity are shares in a business owner’s closely held corporation.  A majority shareholder of a closely held C corporation typically has a low basis in the shares, relative to their fair market value.  Selling the shares to an individual or back to the corporation triggers capital gains tax.  However, a charitable contribution of the shares does not cause the realization of capital gain, and the donor can deduct the fair market value of the shares on the date of the gift.

The corporation can use corporate profits to buy back the stock, so long as charity cannot be required, as a condition of the gift, to turn the shares in to the corporation for redemption (Rev. Rul. 78-197).

Gifts of closely held stock require appraisals and the filing of Form 8283 if the claimed value exceeds $10,000.  If the value is between $5,000 and $10,000, the donor need not obtain a qualified appraisal, but a partial appraisal form must be attached to the tax or information return.

Charitable Gifts that Thrive on Low Interest Rates

Charitable remainder trusts, gift annuities, lead trusts and gifts of remainder interests in homes and farms generate deductions that are calculated using §7520 rates, which have been stuck in the 2% range for the past year.  Some charitable deductions are lower when interest rates are down, but others go up, which may open the door to gift opportunities.

Gifts of income interests in charitable remainder trusts and gift annuities — Donors who decide they have no need of income from life income gift arrangements may find their best contribution asset is their remaining income stream.  They can assign income interests in charitable remainder trusts to the charitable remainderman and receive significant deductions, especially when interest rates are low.  The same strategy works with charitable gift annuities.

Charitable lead trusts — Low §7520 rates make 2016 the perfect time for lead trusts.  Deductions are higher with low rates, and clients may own stock that has dropped in value recently.  Stock values will eventually rise far above today’s levels, meaning more for heirs, free of transfer tax, when the trusts end.  Charitable lead trusts can enable donors to stretch the $5.45 million of gift tax shelter to $10 million, $20 million or more, depending on the length of the trust term, the amount paid to charity and current interest rates.

Gifts of remainder interests in personal residences and farms — A donor can take a deduction for the contribution of a remainder interest in a farm or personal residence [Code §170(f)(3)(B)(i)].  A residence need not be the donor’s primary residence, so a remainder interest in a vacation home, condo or stock in a cooperative housing corporation are deductible for income tax purposes.  Agricultural land may provide particularly attractive deductions, allowing the owner to continue farming the land or receiving income from leasing the farm to another farmer.


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