Charitable Giving Techniques: from the Simple to the Sophisticated

Transcription

1 Charitable Giving Techniques: from the Simple to the Sophisticated Stephanie (Stevie) Casteel I. INTRODUCTION In the course of providing clients estate, gift and income tax planning advice, advisors should be mindful of the multitude of opportunities available to fulfill philanthropic objectives and reduce taxes by making charitable gifts, whether during life or upon death. The purpose of this Outline is to examine the most popular charitable planning techniques from the simple to the sophisticated, including outright gifts, charitable gift annuities, split interest trusts, community foundations and donor advised funds, private foundations, public charities, and supporting organizations. This Outline also compares some of these techniques and considers when they would be appropriate for a client s particular circumstances. Unless otherwise provided, all references to Section or or Code are to the Internal Revenue Code of 1986, as amended II. OUTRIGHT GIFT A. Outright Gifts of Cash or Property. The most common form of charitable contribution is the outright gift of cash or property made to a charitable organization during the donor s lifetime. These gifts can range from small donations of cash or property to large endowments. Outright gifts to charity can be made in a variety of forms, depending upon the size of the gift and the objectives of the donor. The following discussion provides an overview of some of the options available for structuring outright gifts to charity. Stephanie (Stevie) Casteel has spent most of her career practicing with King & Spalding, where she served as a former Partner in the Tax/Trusts & Estates practice group. Stevie is a Fellow of ACTEC and is an appointed member of its Charitable Planning and Exempt Organizations Committee and New Fellows Steering Committee. She serves as Chair of the Legislative and Regulatory Issues Committee of the Charitable Planning and Exempt Organizations Group of the Real Property, Trust & Estate Law Section of the American Bar Association (ABA), and she serves the ABA as an Associate Probate and Trust Articles Editor for Property & Probate. She also serves as a member of the Steering Committee of the American Law Institute. Stevie has been named a Georgia Super Lawyer by Atlanta Magazine for many years and as one of the Top 50 Women Lawyers since She was selected as one of Georgia Trend s 2010 Legal Elite and has been selected by her peers to be included in the Best Lawyers in America Guide in the areas of both Non-Profit/Charities Law and Trust & Estates since She is a graduate of Agnes Scott College and Emory University Law School. The author wishes to thank her following colleagues for allowing her to use substantial portions of outlines prepared by them: Nancy G. Henderson, Brian P. Tsu, Christopher Hoyt, and Martin Hall. In addition, much of the public charity discussion came from Jody Blazek s Tax Planning and Compliance for Tax-Exempt Organizations.

2 Estate Planning Techniques 5 1. Unrestricted Gifts. The most common form of outright charitable gift is the unrestricted gift. Unrestricted gifts are made to a charitable organization s general fund for use as the officers and directors of the recipient organization deem fit. From the charity s perspective, these are often the most valuable gifts because of the flexibility they provide in allowing the funds to be utilized where they are most needed. 2. Endowments. A donor may make a contribution to a charitable organization to create an endowment, the income from which will either accomplish a specified purpose or supplement the charity s general fund. Endowments are indicated by the ability of the charitable organization to spend income only from the contribution. Endowments are often associated with very large contributions. However, even relatively small endowments can provide a reliable ongoing source of funds to carry out a specific purpose, particularly when the recipient charity has a modest annual budget. For example, a newsletter which costs $1,000 per year for a charity to produce might be assured survival against possible budget cuts with an endowment of only $10,000 or $15, Restricted Gifts. A restricted gift is one restricted to a particular use. Where a restricted gift is large enough to create an ongoing endowment, the donor can have input as to how the funds from the endowment are applied on a continuing basis, although the ultimate decision as to their use must rest with the charitable organization. 4. Project Gifts. A donor can make a gift to a charity for the accomplishment of a specific project or to fund a particular program or activity. 5. Term Gifts. Closely tied with the concept of the project gift is the term gift. A term gift is a promise to make a series of gifts over a specified number of months or years. Frequently, a term gift is connected with a project gift in that the donor agrees to fund a project in whole or substantial part for a period of years. Over the term of the gift, the donor generally decreases the size of the contributions in the expectation that the charity will incrementally replace the donor s support with funds from other long-term sources. 6. Matching Gifts. Matching gifts are commitments to make a gift provided that a certain level of funding is also obtained by the charity from other sources, either to fund a specific project or program, or to assist the charity in generating new sources of general support. 7. Conditional Gifts. Conditional gifts impose some type of requirement upon the recipient before a donation will be made. As an example, the donor might require that the organization establish a balanced budget or implement a plan for increasing its reserves. 8. Preferred Purchasing Rights. Contributions to a college or university entitling the donor to purchase preferred seating for athletic events at the school are limited to 80% of the contribution. Section 170(l)(1).

3 6 ALI CLE Estate Planning Course Materials Journal December No Earmarked Gifts. Earmarked gifts are gifts to a charitable organization which are intended to benefit a specific person or group of persons. Such gifts are not deductible, even if the benefitted person or group is within the normal constituency served by the recipient charity. See, for example, S.E. Thomas v. Comm r., 2 T.C. 441 (1943). 10. S Corporation Stock. The S corporation rules permit an organization exempt under sections 501(a) and (c)(3) to hold S corporation stock. 1361(b)(1)(B) and (c)(6). It is important to note, however, that S corporation stock cannot be transferred to a Charitable Remainder Trust or a Charitable Lead Trust, as neither meets the requirements for a Qualified Subchapter S Trust ( QSST ) (except for Charitable Lead Trusts that are grantor trusts). See, for example, PLR and Rev. Rul , C.B. 1, each holding that a Charitable Remainder Unitrust cannot hold S corporation stock, even where there is a net income make-up provision. (For more information on Charitable Remainder Trusts and Charitable Lead Trusts generally, see the discussions in Sections IV and V, below). B. Outright Gifts of Life Insurance. 1. Charitable Gifts of Unwanted Policies. Frequently an individual will own a life insurance policy which he or she no longer wishes to keep in force because the intended purpose for the policy is no longer present. Rather than allow the policy to lapse, the individual might consider making a gift of the policy to a charitable organization. 2. Income Tax Deductions. In order for a contribution of a life insurance policy to be deductible for income tax purposes, the donor of the policy must irrevocably assign all rights under that policy to the donee organization. Merely designating the charity to be the beneficiary of the policy will not be sufficient to generate a deduction. If the policy is fully paid, then the donor is entitled to a deduction equal to the replacement value of the policy. Treas. Reg (a), Example (3). If the policy is not fully paid, then the deduction generally is limited to the interpolated terminal reserve value of the policy, although particular facts and circumstances (such as the immanent death of the insured) may require that the actual value of the policy be determined differently. Treas. Reg (a). If the donor continues to pay the premiums on the policy after it has been given to charity, then the donor will receive a charitable deduction for the amount of each premium payment as it is made, just as if the payments were cash gifts to the charity. Comment: Some donors wishing to benefit charity at their deaths will purchase large life insurance policies on their lives and then transfer the policies to a charity, such as the donor s alma mater, or even a Family Foundation. Although the donor obtains income tax deductions over his or her lifetime for the payment of

4 Estate Planning Techniques 7 policy premiums, the primary motivation for these purchases is generally the donor s knowledge that, at the donor s death, a substantial charitable legacy will be created in his or her name. C. Charitable IRA Rollover. The charitable IRA rollover, or qualified charitable distribution (QCD), is a special provision allowing individual IRA owners at least age 70 1/2 to exclude from their taxable income - and count toward their required minimum distribution - a charitable transfer of IRA assets (up to $100,000 annually) made directly to public charities (other than supporting organizations and donor advised funds). The provision was first enacted for tax years 2006 and 2007, and was periodically extended, most recently in December, 2014, when it was made available for 2014 (retroactively). The provision has not yet been made available for Bills continue to be introduced to extend permanently the IRA charitable rollover. If the provision becomes available again, in addition to its use to make a charitable gift, it can be used to reduce the 3.8% surtax imposed by The surtax applies to net investment income to the extent that modified adjusted gross income exceeds $250,000 for married individuals filing jointly or $200,000 for single individuals. The income tax charitable deduction plays no role in the computation of either net investment income or modified adjusted gross income and so does not reduce the surtax. But there are two viable strategies for reducing the surtax: 1) reducing net investment income, which includes all forms of investment income but does not include distributions from qualified plans, such as IRAs, or 2) reducing modified adjusted gross income, which does include distributions from qualified plans. For donors 70 ½ or older, making a QCD from an IRA, instead of directly receiving a required minimum distribution from the IRA, will reduce modified adjusted gross income. 408(d) and Example 1: Harry Potter is single. In 2014, assuming the QCD provision is made applicable again, he contributed $5 million to charity. His 2014 income consists of $200,000 net gain from his investment portfolio and a $100,000 taxable distribution from his IRA. Potter s modified adjusted gross income is $300,000. Potter s net investment income is $200,000. The 3.8% surtax applies to investment income of $100,000, the excess of 4300,000 modified adjusted gross income over the $200,000 threshold for singles.

5 8 ALI CLE Estate Planning Course Materials Journal December 2015 Despite the $5 million charitable contribution, Potter s 2014 net investment income tax is $3,800 ($100,000 x 3.8%). Example 2: Instead of receiving a $100,000 required minimum distribution from his IRA in 2013, Harry Potter directs the IRA custodian to transfer $100,000 to ABC, a charity that is not a supporting organization or donor advised fund. Because the $100,000 IRA distribution to charity is not included in modified adjusted gross income, Potter reduces his $300,000 modified adjusted gross income to $200,000. Even though he still has $200,000 of net investment income, his modified adjusted gross income ($200,000) does not exceed his net investment income. Potter s 2014 net investment income tax is zero. III. CHARITABLE GIFT ANNUITIES A. Introduction. A charitable gift annuity (CGA) is a type of bargain sale transaction in which the donor transfers cash or other assets to a charitable organization in return for the charity s promise, backed by its general assets, to make annuity payments to one or more individuals for their lifetimes. Most charities determine the annuity amount based on rates published by the American Council on Gift Annuities (ACGA). These rates in turn are based on the number and age of the annuitants and certain expectations with respect to expenses and the rate of return earned by the institution s assets (or dedicated CGA reserve fund) and are designed to produce an average residuum or gift to the organization at the expiration of the agreement of approximately 50 percent of the amount originally donated (based on present values as of the time of the gift). As a consequence, the rates are lower than, and are not in competition with, commercially offered annuity rates. From a donor s standpoint, CGAs are desirable for their simplicity and security. A CGA contract is a short document; there is no complex trust instrument underpinning the arrangement. Furthermore, the gift annuity is a direct obligation of the charity and is paid from the charity s general funds. The payments are not generated by, and dependent upon, the limited assets of a trust, as in the case of a Charitable Remainder Trust. From the charity s perspective, a CGA is attractive because it can be established at minimal cost, which permits the charity to offer it to a wider group of donors. Furthermore, assets contributed by a donor for a CGA can be used by the charity immediately the charity does not have to wait for the annuitant to die before it can access the funds, although in some states, insurance regulations may require the charity to hold a portion of the contributed assets as a reserve fund.