Home Estate Planners Corner

Something in Return: Gifts Where Donors Receive Something Back

Charities sometimes give back something of economic value to donors.  Do these transactions qualify as gifts? 

In one line of cases and rulings, the IRS has held that if a donor receives some economic or other material benefit as a consequence of making a transfer to charity (i.e., something in the nature of a quid pro quo, such as, in the case of a transfer to a local government, a favorable zoning decision) he will be found to have lacked a requisite donative intent and will be denied a charitable deduction unless the benefits flowing to him are insubstantial compared with those inuring to the charitable organization [Rev. Rul. 76-257, 1976-2 C.B. 52; Scharf, 32 TCM 1247 (1973)].
 
In another line of rulings, the IRS has simply said that the amount of the donor’s contribution must be reduced by the value of any benefit given to the donor in return (PLR 7930101).  Note that under current gift substantiation rules, donors must obtain receipts for all gifts over $250, and receipts must state whether any goods or services were provided in connection with the gift and estimate the value of those benefits.

Certain nominal items may be given to a donor without jeopardizing the charitable deduction. The IRS has issued “safe harbor” guidelines for charities in determining whether the value of mugs, keychains, newsletters and other token premiums are to be considered when claiming the deduction [Rev. Proc. 90-12, 1990-1 C.B. 471].  Benefits will be considered insubstantial (and therefore the full fair market value of the gift will be deductible) if the gift is part of a fundraising campaign in which donors are told how much of their payments are deductible. Additionally, either of these two situations must exist: (1) the fair market value of all benefits received by the donor is not more than 2% of the payment or $96, whichever is less, or (2) the contribution is $48 (inflation-adjusted for 2010) or more and the only benefits received in return are token items, such as bookmarks, calendars, key chains, mugs, posters, tee shirts, etc., bearing the organization’s name and logo.

Providing for Charity and a Family Member . . . in Privacy

Mrs. H is planning her estate and wants to provide for a charitable organization and also create some financial security for her wayward son, Eddie, who has a history of drug and alcohol problems.  The challenge: She doesn’t want her other children to find out that she’s doing anything for Eddie.  She feels she can’t help him through a will or living trust because the family surely would learn of it.  What can we suggest to Mrs. H?

Life income gift arrangements may help in families where certain relatives are considered outcasts or lack the ability to manage money.  Charitable organizations that offer charitable gift annuities generally will preserve confidentiality regarding any gift.  Mrs. H could provide Eddie with either an immediate or deferred payment annuity, and no one has to know.  If the value of her son’s life annuity is less than $13,000, Mrs. H need not file a gift tax return (for an immediate payment gift annuity).  A gift tax return would be required for a deferred payment annuity, which is a future interest that does not qualify for the gift tax annual exclusion, but this may not be an issue if Mrs. H won’t owe estate taxes.
 
Could she establish a “testamentary” gift annuity for Eddie outside her will?  She might be able to arrange a deferred annuity for Eddie with a starting date likely to occur after her death.  The contract would provide that the start of annuity payments will be moved up to the year of her death, but with reduced annual payments (that are set out in a schedule that preserves actuarial values reflecting the original transfer).

Post-2010 Charitable Planning Where Federal Estate Tax Is Not a Concern

Many estate planners expect Congress will install a $3.5 million federal estate tax credit shelter (or higher) for 2011 and later years.  If that happens, what effect will it have on estate planning for the 99.5% of Americans who won’t face estate tax?  Will any tax strategies be needed?  Are inter vivos contributions now more attractive than testamentary transfers?  What other rewards may be available for philanthropic individuals who don’t have to worry about estate taxes?

Inheritance/state estate tax savings.  A total of 21 states and the District of Columbia impose estate taxes or inheritance taxes.  Real estate and tangible personal property that clients own outside their home states may be taxable under various rules and rates (vacation homes and their contents may be a concern).

Tax-burdened assets.  Income in respect of a decedent will continue to be a problem for heirs.  Donors should be encouraged to leave IRAs, savings bonds and others items of IRD outright to charity. Charitable remainder trusts funded with IRAs or savings bonds could provide lifetime income to family beneficiaries without erosion from income taxes.

Nontax considerations.  Donors who wish to benefit charities and family members using the same assets may be attracted to charitable remainder trusts or charitable gift annuities because of the money management or trusteeship services these vehicles provide to beneficiaries.  Charitable remainder trusts would not have to meet IRS qualification requirements and could, for example, pay beneficiaries all trust income, rather than an annuity or unitrust amount.  If gift arrangements are established during life, they also avoid probate.

Lifetime gift arrangements will become more important.  Under the federal estate tax, married persons receive no estate tax savings from charitable bequests when the first spouse dies (the estate already has the protection of the 100% estate tax marital deduction).  Spouses, accordingly, may be better advised to make lifetime contributions where feasible – including charitable remainder trusts – and enjoy income tax savings, capital gains tax avoidance and current recognition from charitable organizations.  A $3.5 million estate tax exemption equivalent would amount to virtual repeal of the estate tax for most individuals, so most unmarried persons would be in the same position as married couples – and might be better off establishing inter vivos charitable gift annuities and charitable remainder trusts that reduce current taxes and provide lifetime income.

Will a Charity Turn Down Your Client’s Gift or Bequest?

Charities can and do “look a gift horse in the mouth.”  Organizations will sometimes turn down lifetime contributions, or disclaim charitable bequests, because the proffered gift may create a problem:

• The gift property may be unusable or unsalable by the organization;
• The gift comes with restrictions that are outside the purposes or mission of the organization;
• The costs of gift acceptance are excessive;
• The gift property (or even the donor) may be “tainted” in the view of the charity (e.g., a gift of distillery stock from Al Capone to the Women’s Christian Temperance Union).
• The organization’s gift acceptance policies forbid acceptance of certain kinds of property.

The adviser’s role is to make inquiry concerning potential gift acceptance problems and seek to overcome any hurdles and develop alternatives for both the client and the donee organization. In certain cases, a different charity or gift asset may need to be selected.  It may be helpful to inquire about the charity's gift acceptance policies.  Organizations whose fundraising has progressed beyond simple gifts by check and credit card are likely to have a written statement on gift acceptance policies and procedures.  Such a statement will guide fundraising staff and donors as to whether a charity will accept or reject particular gifts (subject to a variance procedure for unusual situations).  The policies and procedures statement will generally cover:

• What gifts of real estate will be accepted and under what conditions (mortgages, taxes, insurance, environmental audit, etc.);
• What gifts of tangible personal property will be accepted;
• How gifts of securities, both marketable and closely held, will be handled;
• Limitations and procedures for restricted gifts;
• Policies on paying for environmental inspections, appraisals and investment guidance;
• Serving as fiduciary:  whether, and under what circumstances, the organization will serve as trustee or executor, and what fees, if any, will be charged;
• Guidelines on charitable gift annuities and pooled income fund gifts, if the charity offers them, including age and gift minimums, payout rates, etc.      

Gifts and devises of real estate and business interests are of special concern to most donee organizations.  Acceptance of contaminated real estate can subject charities to multi-million-dollar liability under the “Superfund” program established by the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA).  The law requires landowners to pay for cleanup of hazardous waste disposal sites, and charities that accept gifts of land containing hazardous waste may have to pay millions for cleanup, even though neither the charity nor the donor was responsible for the contamination.  Liability under the Superfund program is “joint and several,” which means that charity can be liable for cleaning up adjacent land it doesn’t even own, if it is part of the designated Superfund site.

Gifts of business interests and debt-encumbered property may result in taxable income to the donee charity.  Unrelated business taxable income is defined in IRC §512 as any income derived from any unrelated trade or business regularly carried on by a charity.  Charities are generally taxed at corporate rates on such income, and may have UBIT until the business can be sold.   Limited partnership interests can be problematic, exposing charity to both unrelated business income and debt-financed income.  Charity also could be liable for future contributions of capital if the donor/limited partner has not fully met his commitments.   Stock in S corporations produces unrelated business taxable income for charities upon sale.  Another category of taxable income involves income from certain debt-financed property, including sales.  Examples include mortgaged real estate (especially rental property) and operating businesses of any kind.  Taxable income is not necessarily the end of the world for donee organizations, but careful consideration and consultation with the charity’s financial manager should precede gifts that create UBIT.

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