Most people make the bulk of their charitable contributions during the year-end holiday season. This post summarizes some of the charitable giving ideas and opportunities, as well as some planning reminders, that donors may want to consider:

Gifts of Appreciated Securities

Many people have benefited this year from the surge in the investment markets. Appreciated marketable stocks are a preferred charitable gift to both public charities and private foundations because the charity benefits from the full fair market value of the gift, while the donor avoids paying a tax on any gain in asset value. Even gifts of appreciated interests in closely held entities (e.g., partnerships and LLC’s) made to a public charity offer the same tax benefits; however, certain formal appraisal requirements should be observed.

IRA Charitable Rollover

Current federal tax law permits an individual who has reached age 70-½ to direct a “qualified charitable distribution” (QCD) of as much as $100,000 to charity from his or her IRA. A QCD is not included in the individual’s taxable income, and can also be used to satisfy the individual’s annual required minimum distribution from the IRA. Only distributions to public charities and private operating foundations will qualify (but not distributions to a private non-operating foundation, supporting organization, donor-advised fund, charitable remainder or lead trust, or a charitable gift annuity). Since this benefit is set to expire in 2013, donors who have considered making a generous gift at some time in the future may want to consider the tax benefits of funding a gift in this manner before the end of the year.

Charitable Remainder Unitrust

A charitable remainder trust (CRT) is a trust that pays an income stream to one or more individuals (the lead beneficiary or beneficiaries) for life or for a fixed number of years, with the remainder at the end of the term passing to charity. Because a CRT is exempt from income tax, contributions of appreciated stock to a CRT can be made without incurring any immediate capital gains tax. A donor creating a CRT is eligible for a charitable income/gift tax deduction for the present value of the interest that will eventually pass to charity. CRTs that pay a fixed annuity (charitable remainder annuity trusts, or CRATs) are less favorable during periods of low interest rates because of the greater likelihood of exhaustion before charitable payout. In contrast, however, the present values of the lead and charitable remainder interests of CRTs that pay a variable annuity (charitable remainder unitrusts, or CRUTs) are only modestly affected by changes in interest rates. For example, a 65 year old donor who in November 2013 (applying an AFR of 2.4%) contributes $1 million to a CRUT that will pay her (in quarterly installments) a lifetime annual payment equal to 5% (the minimum required percentage) of the value of the trust, valued each year, will be eligible for a charitable income tax deduction of $449,380, or 44.938% of her gift, a less than 1% decrease from the deduction if an AFR of 6.2% (August 2006, the highest in 10 years) were applied.

Charitable Gift Annuities

A charitable gift annuity (CGA) involves a contract between a donor and a charity, whereby the donor contributes property to the charity in exchange for a promise to pay a fixed annuity to one or two persons for life. The annuity amount is determined actuarially, based on the age(s) of the annuitant(s). Like CRTs, CGA’s are often overlooked as an alternative for charitable giving in today’s low interest environment; however, a CGA can still provide a favorable fixed income stream for a charitably inclined individual. Most charities offer annuity rates consistent with those recommended by the American Council on Gift Annuities. The current recommended rate is 4.7% for a 65 year old; 5.1% for a 70 year old; and 4.4% for a joint CGA for a husband and wife ages 65 and 70. In contrast, the interest rate for a 10-year Treasury Note purchased on November 15, 2013 is 2.75%.

Housekeeping/Reminders

  • Check the status of the recipient charity. A donor (or the donor’s advisor) should confirm that the recipient charity is in good standing, can prudently manage the property gifted for the purpose intended, and also whether the nature of the property being given and the tax classification of the charity (e.g., private foundation versus public charity) will result in the desired tax benefit. The website www.guidestar.org posts annual returns filed by charities and is an excellent source for information about the activities and finances of charities. Not all charities and charitable deductions are created equally, and the available deduction will depend on the type of property contributed, the tax classification of the charity and the individual’s personal tax situation. See also IRS Publication 526 – Charitable Contributions.
  • Timing is everything. A charitable deduction can only be claimed in the year in which the contribution is deemed “complete”, which will depend on the type of property and the method of delivery (e.g., different rules apply for cash gifts made by check, credit card, or text message). Detailed guidance can be found in IRS Publication 526 – Charitable Contributions.
  • Remember to get/give substantiation letters. A donor wishing to claim a charitable income tax deduction of $250 or more must obtain a contemporaneous written acknowledgement of the gift from the recipient charity (whether a public charity or private foundation), which states the amount of cash and a description (but not the value) of any non-cash property contributed, and whether and to what extent any goods or services were provided in return for the gift (e.g., dinner/entertainment at a benefit dinner). A charitable deduction can be denied on audit if the donor cannot provide the written acknowledgment. See IRS Publication 1771 – Charitable Contributions/Substantiation and Disclosure.
  • Some charitable contributions require a “qualified appraisal. A qualified appraisal is generally required to substantiate value for a non-cash charitable contribution for which the donor is claiming a deduction in excess of $5,000. An appraisal is not required for contributions of (i) most publicly traded stock, (ii) nonpublicly traded stock of $10,000 or less, and (iii) certain other property, such as “qualified” intellectual property. Detailed guidance about “qualified appraisal” and “qualified appraiser” rules, as well as record-keeping and filing requirements for such appraisals can be found in IRS Publication 561 – Determining the Value of Donated Property.

 

Topics:  Annuities, Charitable Donations, Charitable Remainder Trust, Charitable Rollover, IRS, Qualified Charitable Distributions, Stocks, Year-End Planning, Year-End Tax Planning

Published In: Nonprofits Updates, Tax Updates, Wills, Trusts, & Estate Planning Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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