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					                                      Case Studies

1.   Widow, 80, is moving from Indianapolis to Bloomington and wants to make a gift of
     her home to local charity in accordance with her deceased husband’s wishes who died
     10 years ago. She and her husband were actively involved with the charity.

     Any suggestions on structuring the gift?

            Suggest she does a retained life estate, so if she changes her mind and wants to
            come back to Indianapolis, her home would be waiting for her.

2.   Is an electronic will legally enforceable?

            Only in Nevada, so far

3.   Do you know if the tax-free portion of an annuity is included in income for
     AMT calculation?

            Of course NOT—It’s not income but RATHER RETURN ON PRINCIPLE

                                             -36-                                    Dallas 7-10
4.   Allaying the Concerns of an Older Donor

     Donor, aged 80, has been considering a gift annuity to be funded with appreciated
     securities worth $500,000, with a low cost basis. She appreciates all the benefits of
     this arrangement, (i.e., large charitable deduction, escape from a locked-in position,
     increased spendable income, lower estate taxes, and recognition of her good work).

     Nevertheless, she has one concern that is still holding her back.

                                        CGA                  CRAT
     Value of transfer                 $500,000             $500,000
     Charitable deduction              $268,420             $182,425
     Net tax savings (35%)             $ 93,947             $ 63,849

           $30,000 premium for guaranteed annuity for 10 years.

5.   Ruth C wants to set up a CRT funded with a combination of stocks, US treasuries and
     municipal bonds. Tax-free income is very important to Ruth.

           Under 4 tier system no assurance you ever reach TAx fREE
           Bifurcate 2 trusts, one funded with municipals.

6.   Corporation matches only cash gifts up to a maximum of $50,000. Donor, employee of
     corporation, owns land valued at $187,000 that he would like to contribute to charity
     but also wants to have gift matched.

           Charity buys undivided in = $50,000
           which he uses for cash gift, gift balance of land.

                                            -37-                                     Dallas 7-10
7.   a. I am hearing that if you satisfy a multi-year pledge with gifts of appreciated stock,
        the donor will recognize the gain as an imputed sale. Have you heard this before?
        The term I am hearing is the “satisfaction of a fixed monetary obligation” using
        appreciated assets.

       Does this mean you can’t use appreciated assets in a multi-year pledge? If so, how
       do you get around this? (See Rev. Rul. 55-410 and Rev. Rul. 64-240.)

           Charitable pledge does not create a debt, so it’s not a legal obligation so
           satisfaction with appreciated property does not create a taxable gain.

     b. Does a grantor lead trust recognize gain on the use of appreciated securities by the
       trustees to make the annuity payments to the private foundation as required by the
       terms of the trust? (See PLR 200920031)

           Yes, it does.

     c. Donor wants to create a unitrust and fund it with $1,000,000 of very highly appreci-
        ated stock and name himself as trustee. He plans to sell the stock this year. Starting
        the following year he plans to margin the account to the hilt, do a lot of short sell-
        ing, and trade vigorously. (See Deputy v. DuPont, 308 US 488, 1940; Rev Rul 95-8;
        Bartles v. US, US Court of Claims, July 1, 2009.)

           Margin the account: Definitely acquisition indebtedness subject to UBTI.
           Lot of short selling: Is it debt financed inc subject to UBIT? No, short selling
                  created obligation but no debt
           Trade Vigorously: May be stupid but no problem

                                             -38-                                        Dallas 7-10
8.   a. What happens if charity goes bankrupt? Can donor-annuitant capture what he is
        owed as income-tax deduction?

                  If PV of annuity payments may be claimed as bad debt.

       Also, if donor-annuitant perceives that charity is on its way into bankruptcy and he
       assigns annuity interest to the charity, does he get a deduction?

                  I think so, shallow pocket charities should not issue CGAs.

     b. If charity re-insures a CGA and then defaults, can donors make a claim directly
        against insurance company? If so, can the payments from insurer be protected from
        the charity’s general creditors? YES. Would either of these change the tax conse-
        quences? NO.

9.   I’m assuming it is possible to convert a DAf to a family foundation but that it is not
     possible to go from a family foundation to a DAf Right?

           No and yes, happens all the time and more and more frequently.

                                            -39-                                     Dallas 7-10
10.   Got your message re: funding a CGA with municipal bonds. The bonds in question are
      tax-free municipals (Iowa Tobacco Settlement Bonds).

      The value is approximately $80,000 and cost basis around $72,000. Purchased in
      2002; one due in 2025, the other in 2035.

      Question is whether there would be negative tax implications for the donor if these
      are given.

      I’m copying André since you mentioned that you’d be out of the office the rest of the
      afternoon. I have the broker/donor on hold for now, but donor (age 102!!) is going on
      a cruise and wanted to get this resolved before he departs.

             Actually positive implications, a high annuity rate more than offsets loss of tax
             free treatment of municipals.

11.   a. Hope you had a nice Thanksgiving ... just sitting here in my office late on this fine
         friday evening trying to hammer out some call reports. I have a question for you ... .

        I had a question last week from a prospective donor who wanted to know how taxes
        are handled if someone dies with commercial annuities in this estate but makes
        charity the beneficiary. I welcome your answer if you care to comment.

             Best deal in town—avoid both estate tax and income tax.

      b. We have a donor, aged 76, interested in gifting a variable annuity and possibly set-
         ting up a CGA. His annuity is worth $170,000, with a basis of $50,000. The annuity
         has not yet started paying out. His tax bracket is 25%.

        Birth dates are as follows:

        Husband 10/30/33
        Wife 07/16/33
        Son 08/06/67 (currently contingent beneficiary)

        Am I correct in assuming there are no disadvantages from a tax perspective to
        gifting the annuity to us and setting up a CGA?

             You are correct. He’ll have table income of $120,000 and a income tax deduc-
             tion for the present value of charity’s remainder interest in this gift annuity.

                                              -40-                                      Dallas 7-10
12.   If the charitable organization is the owner and beneficiary of a policy, can the donor
      make an IRA rollover gift and direct proceeds to be used to pay the premium?

      How is this any different from the donor sending a check to charity directing that
      proceeds be used to pay the premium?

            Yes, he or she can do so.

13.   On July 22 a person establishes a five-year grantor CLAT with annual payments at the
      end of the year.

      The IRS template would provide for a prorated payment made on December 31 for
      2009; four full-year payments made on December 31 of 2010, 2011, 2012, and 2013;
      and a prorated payment made on July 21 of 2014.

      It is possible to provide for five full-year payments made on July 21 of 2010, 2011,
      2012, 2013, and 2014. The advantage is that it allows extra time for market recovery
      before having to pay anything out.

            No, it’s not. You must have a distribution in 2009.

14.   How complicated is it for a grantor of a revocable trust to require the trustee to create
      a CGA for an heir at the time of the death of the grantor? I’m sure timing of the CGA
      can be a problem.

      It’s not complicated, simply direct the trustee to do so. Charity may have to wait for a
      period of time to receive the funds and thus may have negative cash flow until CGA
      is funded.

                                             -41-                                      Dallas 7-10
15.   A donor would like to give a gift of a time-share. We do not have a gift acceptance
      policy in place that addresses this type of gift. Other than the annual fees, which we
      would ask him to pay until the time-share is sold, are there other concerns we should
      be thinking about? Is his tax deduction calculated the same way that other gifts of real
      estate are handled, i.e., appraised value less basis?

            No, deduction is based on their market value of the time share.

16.   My question of the moment has to do with a CRT with the donor acting as trustee.
      The stock to fund the trust is anticipated to grow. Donor currently has voting rights
      and wants to be able to retain these voting rights. As self-trustee, I presume that he
      can do so? Can you comment please. Also, what issues if any might there be if the
      stock is privately held, which I think it is. I will be on a conference call tomorrow to
      learn more.

            You are right, as trustee he can do so.

                                             -42-                                       Dallas 7-10
17.   The prospect lives on the fifth floor of a co-op apartment building in Washington, D.C.
      He has his medical practice in a space on the first floor that will become an apartment
      after he stops practicing. The co-op board would not let a business continue in the

      1. Can a co-op apartment be given in a life estate? Yes, if other co-op owners agree

      2. Can he give his practice space in a life estate? No.

      3. The practice space is $1 million and his apartment is $2 million. If #2 isn’t possible
         how difficult would it be to give an undivided partial interest in a co-op for a
         retained life estate?

             It is practically difficult.

18.   Is it possible to fund a CGA with commodities? I’m suspecting UBI is a problem...

             Yes, it is. Almost all gains are OI and charity has to be ok with UBIT

19.   I think I understand the question I’ve gotten from a development officer. A donor
      prospect wants to create a DAf funded with closely held stock. And he wants to leave
      the stock in the DAf as the fund’s only asset. He will use the returns generated by the
      stock to fund his charitable activities. Is it ok to leave the stock as the only asset?

             Yes, it is.

                                              -43-                                     Dallas 7-10
Charity issues 5% municipal bonds with a 35-year maturity rate to fund a building
      project. Donor, aged 70, purchases $5,000,000 worth of the bonds that he uses to fund
      a 20-year term, 5% CRAT and names himself as trustee. How would our institution
      credit this gift for campaign purposes?

      face value: $ 5,000,000    Charitable deduction (3.4%): $1,369,000

                  $ 3,585,000 Total of tax free distribution that he gives back to charity.

                  $ 1,511,000 Present value of 15 years of bond payments that charity
                              does not have to pay.


20.   Quick question... .We have an alum who wants to sign over to us their NQDC plan
      (non-qualified deferred compensation ... we think). Can this plan be signed over to us
      and then we use the fund for funding a gift annuity for them? He is a doctor, and this
      is a plan through his practice ... all funds went in tax-free.

             Same as IRA.

                                             -44-                                      Dallas 7-10
21.   Are private foundations with asset losses required to make payments of 5% annually,
      or may they defer or carry-forward the 5% distribution?

            Yes, they are.

22.   We have a couple who want to make us the trustee of their existing CRUT. Their
      trust says the successor trustee can be a bank or trust company, which doesn’t include
      our organization.

      My opinion is that this has such a low level of risk that I think we should take on the
      management/administration with only a letter from the donor indicating it wasn’t their
      intention to be so restrictive describing a successor trustee. Our internal legal person
      indicated it would be his preference to have the donor go through the hassle of getting
      the trust officially amended though he is not so adamant that he is willing to let me
      make the decision.

            You are not a bank.

                                            -45-                                     Dallas 7-10
23.   Last year we received a retained life estate. The appraisal was $256,000. The donor
      passed away recently and upon a recent appraisal we have valued the property and are
      selling it at $160,000. Are there any implications to the donor’s estate considering he
      was eligible to receive a deduction for $171,000?

            So long as appraisal was qualified and no hankey pankey.

24.   If the donor dies before using all the charitable deduction, what happens to the
      portion that remains and was not used?

            Gone, bye bye

                                            -46-                                     Dallas 7-10
25.   We have a legal matter we’re trying to conclude, and my boss has asked for an expert
      opinion from the planned giving field. The situation is unfortunate, and I advised him
      more than a year ago that we should just decline our right to distribute and walk away
      from the suit. But here’s the story.

      In the early 90s we engaged a third party organization to locate donors unknown to
      us and produce deferred gifts (trusts) that would name the organization as beneficiary.
      The principal was paid a monthly retainer of $10,000. There was an attorney with the
      organization who performed the legal work necessary for gift agreements.

      We have a group of about 30 trusts in this manner, with a market value of around
      $5 million but a present value of around $2 million. You can imagine that we have
      a handful of trusts that are problematic, to say the least. I’m actually surprised there
      are not more. Around 2004 we terminated the arrangement. Among other things, we
      discovered that the attorney working with him had let his license lapse.

      One of the largest trusts has been in litigation since the donor died. The family
      claims that the organization, and our charity, deceived the elderly donor, who had
      no relationship with us, and coerced him into establishing the trust. They sued our
      charity. We have paid nearly $1 million already in legal fees, against an expected
      distribution of around $2 million (I suspect that’s dwindling).

      We have no documented evidence of donor intention (Mr. Principal evidently
      thought it too much trouble to write contact reports or memorandum in exchange
      for his handsome retainer) beyond the simple signature on the trust agreement. The
      family knows that their organization was terminated by us, and that the attorney’s
      legal license lapsed. What they may not know, but could easily find out, is that the
      organization is named in a class action lawsuit by a number of nonprofits in our area
      who claim he defrauded them.

      While none of this makes us look good, it is also true that we entered this
      arrangement in good faith. My boss would like to know whether there is research in
      the field, or an expert opinion, documenting the fact that the practice of engaging
      third party firms like this was common during the 90s, and that we did nothing more
      than major universities or hospitals. Do you know of any such research or article? Can
      you offer an opinion (other than the wise caution not to go trolling for people who
      have no relationship with you or possible donor intent, offering them a philanthropic
      vehicle as some sort of investment scheme)?

            I had no solution to this.

                                             -47-                                      Dallas 7-10

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