By Susan Shields and Stephanie Chapman
Charitable planned giving, during lifetime or at death, can
take many forms. Charitable organizations usually cannot
plan for either the amount of charitable contributions that
they are likely to receive or the timing of that receipt. Instead, the
“planning” involved in “planned giving” typically involves assisting
a donor (the giver) with making a charitable gift that is in
keeping with the donor’s personal goals and the donor’s financial
and estate planning. Planned giving helps the donor achieve
the donor’s objectives and desires to support a charitable activity
or a charitable cause that they have already accepted.
A planned gift is a gift that is legally provided
for during the donor’s lifetime and generally
regarded as having been made at a particular
date, although the principal economic benefits
are not received by the charity until a later date.
Death is the usual common denominator of
deferred gifts. Although the donor plans the gift
now and may even make a charitable contribution
right away, its use by the charity is postponed
until someone (often the donor) dies. The
following is a brief discussion of some common
types of planned charitable gifts.
Bequests
A simple form of planned charitable gift is a
gift to charity in a will or trust that takes effect at
the death of the donor. For example, a person
may provide for the following type of specific
bequest in his or her will:
“Upon my death, I leave the sum of $50,000
(or 5 percent of my estate) to the Oklahoma Bar
Foundation.”
If a donor leaves the residue or remainder of
his or her estate (what is left over after specific
bequests are made) to charity, or a portion of the
residue to charity, the donor makes a “residuary
bequest.” A gift becomes a “contingent bequest”
if the donor makes the gift dependent upon the
occurrence or nonoccurrence of a specific event.
For example, a contingent bequest may be used
by a young donor who leaves all of his or her
estate to his or her family, with a contingent beneficiary
designation that provides that if all of
the donor’s family dies before the donor, then
the remainder of the estate goes to a charity.
In general, so long as a donor is competent, his
or her estate planning documents may be
amended prior to death. Thus, no charitable
bequest in a will or revocable trust should be
treated by the charity as a total certainty. It is
advisable for a donor who wishes to make a
charitable bequest for a specific purpose to contact
the charity before drafting his or her will or
trust. This will more likely assure that the gift is
drafted in such a way as to be acceptable to the charity and in a manner that will accomplish
the donor’s charitable purposes.
Outright planned gifts
While most planned gifts are also deferred
gifts, this is not always the case. In many circumstances
the donor achieves greater income
tax benefits [1] by making a charitable gift today
rather than including such a gift in his or her
estate plan. Outright gifts can consist of any
property that is transferred directly from a
donor to a qualified charity, including cash,
securities, real estate and personal property.
Cash gifts are the simplest form of charitable
gift for both the donor and the charity. In the
case of cash gifts, the total amount can be
deducted from the donor’s annual income up
to a limit of 50 percent (30 percent in certain
circumstances) of the adjusted gross income of
the donor. If the gift exceeds 50 percent of
adjusted gross income, the deduction may be
carried over up to five years or until the deduction
is completely exhausted.
Gifts of appreciated securities to a public
charity can result in additional tax savings to
the donor. First, the fair market value of the
securities at the time the gift is made may be
taken as an income tax charitable deduction.
The deduction limit for securities is 30 percent
of adjusted gross income; however, again, the
excess deduction can be carried over by the
donor for the next five tax years. Further, in
most cases, no capital gains tax is paid on the
built-in appreciation of securities given to a
qualified charity, so long as the securities are
long-term capital gain property.
Outright gifts can also be made of tangible
personal property, including art, jewelry,
antiques, automobiles and other items. If the
object donated is related to the work and purposes
of the charity (such as a gift of a painting
to an art museum), the donor may deduct the
current appraised value of the gift from income
taxes. As with securities, the deduction cannot
exceed 30 percent of adjusted gross income but
excess deductions may be carried over. If the
tangible property given is not related to the
recipient’s charitable purposes, then it is
deductible only to the extent of its cost basis to
the donor. Gifts of automobiles valued at over
$500 to a charity are subject to special rules
under the American Jobs Creation Act of 2004.
Real estate may also be given away as a
charitable gift. The tax treatment for gifts of
land, farms, homes and other real property is
the same as the treatment of appreciated securities.
Real estate can also be given in the form
of a bargain sale. A bargain sale involves a
donor who transfers appreciated property, such
as real estate, to a charity in return for a price
that is less than the actual fair market value of
the property. The excess of the fair market
value of the property over the sales price
becomes a charitable contribution to the organization.
The charitable contribution limit for
bargain sales is 30 percent of adjusted gross
income.
Under the strategy of making a gift with a
retained life estate, donors may gift their personal
residences or farms to a charity and continue
to live there for the remainder of their
lifetimes. The agreement can be made for one
or two lives or for a term of years. The donor
receives an immediate income tax deduction
for the present value of the remainder interest
going to the charity. The property gifted may
be the donor’s principal residence or a second
home, vacation home or even stock in a cooperative
apartment used as a residence. A written
agreement is necessary to establish who
will be responsible for repairs, property taxes,
casualty insurance and ongoing maintenance
for the gifted property. For example, if the residence
is rented out to others, the agreement
should provide for management of the property
and specify how rent will be divided. The
agreement also should cover the disposition of
the property in the event the donor chooses to
move away.
The donor receives a benefit by making a
gift with a retained life estate by removing a
significant asset from probate and estate tax
exposure. The donor also receives a current
charitable deduction for income tax purposes,
bypasses capital gains tax on the property and
retains the right to live in the property for his
or her lifetime.
Gifts in trust
A donor may wish to give assets to charity in
a manner that will pay lifetime income to a
donor or a designated beneficiary. Alternatively,
a donor may wish to give an income stream
to charity, retaining a reversionary interest in
the gifted assets. However, a donor is only
entitled to a charitable deduction for income,
gift or estate tax purposes when he or she
makes a contribution to a charitable organization
by means of a trust if the gifts are made in a qualifying charitable lead
trust, qualifying charitable
remainder trust or a pooled
income fund. A charitable lead
trust provides income to a
charity for a defined term with
the trust remainder ultimately
passing to noncharitable beneficiaries,
such as the donor, or
the donor’s family. A charitable
remainder trust provides
income to the donor or the
donor’s family for a defined
term with the remainder passing
to charity.
Charitable lead trust and
charitable remainder trust income payments
may be made annually, or more frequently, and
the payments may be fixed annuity payments
or fluctuating unitrust (i.e. percentage of principal)
payments. Both charitable lead trusts
and charitable remainder trusts may be created
either during a donor’s lifetime or at the
donor’s death. The defined term of the trust
may be for a term of years or measured by the
lifetime of the donor or another person. The
determination of whether to use a charitable
lead trust or a charitable remainder trust, and
the decisions on these variables, should be considered
in light of each particular donor’s personal
and tax planning objectives.
Charitable gift annuity
A charitable gift annuity is a contract between
the donor and the charity. The donor makes a
gift of cash or appreciated securities qualifying
for long-term capital gain treatment to the
charity in exchange for the obligation of the
charity to make fixed income payments for one
or two lifetimes. The rate of return is based on
the age of the beneficiary or beneficiaries at the
time of entering into the annuity agreement.
The annuity contract is a general obligation of
the charity, and is the only type of gift arrangement
that requires the charity to back the obligation
with assets of the organization.
In a charitable gift annuity, the value of the
property transferred by the donor is greater
than would be necessary to purchase a commercial
annuity of the same amount. The difference
is the gift portion of the annuity, and
this factor provides the basis for a charitable
income tax deduction. The value of the annuity
must be less than 90 percent of the value of the
gifted property to qualify as a
charitable gift annuity.
Most charities who issue gift
annuities subscribe to rates
published periodically by the
American Council on Gift
Annuities. Doing so avoids the
need of the charity to independently
obtain actuarial tables.
Life insurance
Donors may also choose to
designate a charity as the primary
or contingent beneficiary
of a life insurance policy. Estate
tax benefits are generally realized
by having these assets pass to charity.
Donors who wish to name a charity as the beneficiary
of their life insurance policy get leverage
by making a charitable gift at a fraction of
the face value of the policy.
Sometimes a donor has a life insurance policy
which is no longer needed because the
original reasons for its existence have been fulfilled.
A donor may choose to use such a policy
to complete a pledge for making a major charitable
gift without having to expend additional
dollars.
As with bequests, a donor can also name a
charity as the contingent beneficiary of a life
insurance policy. A donor can also assign dividends
from a policy to a charity and receive
income tax deductions as the charity receives
the dividends.
Gifts of retirement plan assets
Donors may also designate a charity as a primary
or secondary beneficiary of a qualified
retirement account, such as an IRA or a 401(k)
account. If the qualified plan assets pass to
charity after the death of the account owner, an
estate tax charitable deduction will be available
and income tax liability will be avoided. Historically,
however, lifetime charitable gifts
funded with retirement plan assets have not
been favorable from a tax standpoint. To make
a lifetime gift, the donor must withdraw assets
from a plan, report the withdrawal as taxable
income, and then claim a charitable deduction
for the gift, which deduction may not entirely
offset the income tax liability.
The provision for tax-free distributions of up
to $100,000 from IRAs for donors age 70 ½ and
older to public charities expired at the end of 2011. This tax break may be reauthorized by Congress later in 2012.
Proposals related to planned giving
The past few years have been a tumultuous
time, and the tax system has been the focus of
numerous proposed and actual overhauls. The
area of planned giving has not been spared. For
the past three years, the president has proposed
a 28 percent cap on itemized deductions, including
charitable deductions, for individuals with
annual incomes of $200,000 or more and for
families earning $250,000 or more. While a number
of people had, optimistically it turns out,
predicted that the charitable deduction would
be excluded from the proposed cap this year, the
proposed budget does not include such an
exclusion. [2] Interestingly, the cap is part of the
“Buffett Rule,” a reference to billionaire Warren
Buffett’s stated frustrations with the perceived
inconsistency of the current tax code.
In addition to the cap, the current budget
proposal would eliminate a charitable deduction
for conservation easements on golf courses.
The rationale given for this proposal is that
conservation easements are often overvalued
and more so in the context of golf courses
because nearby property owners can benefit
from overvaluation separate from the deduction.
Finally, although the expired allowance
for tax-free distributions from individual retirement
plans for charitable purposes is often
cited as a popular provision, the proposed
budget did not include such a provision.
The budget is not the only proposal for tax
reform. Numerous other proposals would convert
the charitable deduction into a credit.
Some even contemplate that the IRS could pay
the credit to charities, as opposed to refunding
it directly to the taxpayer. These seem unlikely
to gain widespread support, but are being discussed
in congressional testimony and other
writings. Further, some have proposed limiting
charitable contributions to allow a deduction
only for contributions in excess of 2 percent of
adjusted gross income.
Conclusion
“Planned giving” can be a misleading label.
Numerous techniques currently exist to afford
taxpayers tax deductions for charitable gifts
even where the charity cannot be certain when
or how much it will receive. However, at a time
when charities are struggling to find new funding
sources and maintain their existing relationships,
beggars can’t always be choosers.
And in a time when comprehensive tax reform
seems more and more likely, all tax planning,
including charitable planning, is a little more
interesting.
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This paper does not address the tax rules applicable to charitable
planned giving in detail. However, reference may be made to Internal
Revenue Code Sections 170 et seq. and IRS Publication 526, “Charitable Contributions.”
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The budget proposals can be found in General Explanations of
the Administration’s Fiscal Year 2013 Revenue Proposal (the Green
Book) published by the Treasury Department.