The Art of Non-Cash Charitable Giving - Horwood Marcus _ Berk

Document Sample
The Art of Non-Cash Charitable Giving - Horwood Marcus _ Berk Powered By Docstoc
					   The Art of
Charitable Giving
       September 22, 2011

       Richard M. Horwood
 Horwood Marcus & Berk Chartered

Why Donate Non-Cash Assets?

      83% of Americans give to charity annually
          Many individuals donate to charity due to personal charitable
           goals and the accompanying tax advantages
      Cash gifts are not always easy to accomplish
          Non-cash property may be an individual’s most significant
           asset, for example:
             — Securities and Business Interests
             — Real Estate
             — Art, Antiques and Collectibles
             — IRAs
             — Life Insurance

Why Donate Non-Cash Assets?

      Charities are increasingly accepting non-cash gifts
          For Tax Year 2008, 23 million individual taxpayers itemizing
           deductions reported $40.4 billion in deductions for non-cash
           charitable contributions
      Fulfill personal charitable goals and financial goals
          Two different approaches:
              — During lifetime, avoid gain realization by contributing the asset to
                a charity and obtaining an income tax deduction
              — On death, avoiding estate tax

The Current Charitable World

Aspects of Charitable Giving

       Types of Charities
           Public Charities
              — For example: churches, hospitals, governmental units,
                American Red Cross, libraries, community museums
              — Private operating foundations, pass-through foundations,
                donor-advised funds, and pooled-fund foundations
           Private Non-Operating Foundations
              — Example: Bill and Melinda Gates Foundation

Aspects of Charitable Giving

       Types of Deductions
           Basis Deduction
           Fair Market Value Deduction
              — Considerations:
                  – Securities and Business Interests: control, buy/sell
                  – Real Estate: mortgages, economic and environmental factors
                  – Art, Antiques and Collectibles: authenticity, physical
                    condition, extent of restoration
       Deduction Limitations
           Limits the percentage a donor may deduct from his or her
            contribution base (adjusted gross income)

Aspects of Charitable Giving

       Deduction Limitations for Charitable Contributions

                                           Private Non-Operating
                        Public Charity          Foundation
  Deduction/Cash             50%                    30%

  Fair Market Value
      Deduction              30%                    20%

Securities and Business Interests

       Publicly Traded Securities
           May include stocks, bonds or mutual funds
           Great incentive to contribute rather than sell
              — Avoid Federal and state income taxes on gain
                  – Example: Illinois resident with appreciated securities
              — But not securities held at a loss
       C-Corporation Stock
           Deduction generally equal to fair market value of stock
            (except private non-operating foundations)
           No tax on gain
           Charity will want exit strategy
              — No prearranged purchase
              — Review shareholder agreement

Securities and Business Interests

       S-Corporation Stock
           Ensure charity is permitted S Corp shareholder
           Three negatives
              — Deduction generally equal to fair market value of stock
                less recapture/ordinary income items
                (except private non-operating foundations)
              — Charity subject to UBTI on S Corp income
              — Charity subject to tax on gain from stock sale
           Alternative: Have S Corp gift assets to charity

Securities and Business Interests

       LLC and Partnership Interests
           Deduction generally equal to fair market value less any ordinary
            income gain (except private non operating foundations)
           Charity subject to UBTI on trade or business income
       Private Foundation Issues
           Self dealing?
           Diversification?
           Excess business holdings?

Real Estate

       Gift of unencumbered real estate to public charity
           Charitable deduction equal to the fair market value of the
            real estate
           If private foundation, donor may deduct his or her basis
           Qualified appraisal required if the real estate is valued
            at over $5,000
       Real Estate Encumbered by a Mortgage
           Must reduce contribution deduction by the mortgage
           Unrelated Business Taxable Income (“UBTI”)
              — Debt-financed property will often result in UBTI (gross income
                from an unrelated trade or business)

Real Estate

       Contributing a Partial Interest in Real Estate
           Retain a life estate in a personal residence and gift the
            remainder interest to a charitable organization
           Caution!
               — Difficult to sell real estate after contributing a partial interest
       Conservation Easement
           Limits the use of the land to protect its conservation values
               — Donor continues to own and use land, and the donor retains his
                 or her right to sell or pass land on to heirs
               — Example: easement with rare wildlife may prohibit land
           IRS sets forth permissible conservation purposes
           Typically can deduct the fair market value of the easement

Art, Antiques and Collectibles

       The Related Use Rule
           If a charity uses an art object for a purpose related to its tax-
            exempt status, the donor may deduct the FMV of the object
            (assuming the object is capital gain property), if not, the donor’s
            deduction is limited to his or her basis
              — Applies to all tangible personal property
              — Use does not have to be immediate

Art, Antiques and Collectibles

       Related Use Issues
              — Donate art to a museum (display v. storage)
              — Donate art to a university (library for study v. hall for display)
              — Donate art to a hospital
       Verification Requirements
              — Requirements increase if claimed value is over $250
              — Qualified appraisal required if valued at over $5,000
              — Qualified appraisal must be attached to tax return if valued at
                over $500,000
              — Strict v. substantial compliance

Art, Antiques and Collectibles

       Fractional Interest in Tangible Personal Property
           Contribute an undivided portion of an art object
              — Example: Donor contributes a 25% interest in a painting to an
                art museum
              — Subsequent contribution deductions are limited to lesser of the
                fair market value at the time of initial contribution or at the time
                of the subsequent contribution
              — Possibility for recapture

Individual Retirement Accounts (“IRAs”)

       How to continue giving to charitable causes without sacrificing
        your retirement security
           A donor over the age of 70 ½ may contribute up to $100,000
            directly from an IRA to a charity
              — No charitable deduction, but avoid ordinary income taxes
              — Caution! No direct transfer if under 70 ½
       Designate a charity as a beneficiary
           Avoid income tax and receive an estate tax deduction
       Designating multiple beneficiaries

Charitable Trusts

       Charitable Remainder Trusts (“CRT”)
           An irrevocable tax exempt trust
              — Pays an annual stream of income to a non-charitable
                beneficiary for one life, two lives or a term of years
              — Assets remain in the CRT at the end of the trust term
                and pass to charity
           Balance charitable goals and heirs’ inheritance
              — Use life insurance as “make up” to heirs
       Charitable Lead Trusts (“CLT”)
           No current charitable deduction (unless a grantor trust)
           Remainder, if any, to non-charitable beneficiaries

Charitable Gift Annuities

       Donor may transfer assets to a charity and in return
        the charity will make the annuity payment to one or more
        individuals for their lifetimes
       Allows donor to retain income interests and deduct the fair
        market value for the contribution
           Caution!
              — UBTI issues may arise

Life Insurance

       Must contribute the entire policy to receive maximum
        tax benefits
           No immediate income tax deduction for the mere
            payment of premiums for a policy with a charity named
            as beneficiary where the donor still maintains the
            ability to change the beneficiary
       Payment of additional premiums

Example One: Paperweight Collector

      Separate objects not subject to fractional interest rules
      Gift to museum - “related use”
      Importance of gift acceptance
      Collector enjoys sharing his passion
       during lifetime

Example Two: Matching Gift

      Client funds departmental program at a university with
       publicly traded stock and closely held business interests
      School to obtain donors to match dollar for dollar
      Consequences of matching funds
          Matching funds fall short?
          University discontinues program?
      Benefits
          Client involvement in program
          Charitable deduction
          Leveraging gift through match

The Importance of a Gift Acceptance Agreement

      May outline the terms of a contribution so that the donor
       and charity agree on how the contribution will be used
      Have a clear understanding of the donor’s purpose and
       the charitable organization’s requirements
      Common problem gifts:
          Ambiguous Gifts
          Overly Restrictive Gifts
          Naming Rights Gifts
          Large Gifts
          Testamentary Gifts with Current Recognition

Example Three: Residence with Substantial Acreage

      Retain substantial land and gardens surrounding the estate
       during lifetime
      Fund new music auditorium on college campus
      Yearly charitable contribution from client
       to cover bond interest costs for college
      College able to book gift towards
       Capital Campaign and build
       the auditorium now
      Upon death of donor, college
       receives gift of land that can be

Example Four: New York Puzzle

      Background: Client has substantial interests
       in commercial real estate,
       investment portfolio, an IRA,
       paid-up life insurance
       and an art collection
      Goal: Contribute 10% of assets to
       charity and lessen taxes
       (during lifetime or at death)

Example Four: New York Puzzle

      During Lifetime
          Commercial real estate and investment portfolio
             — Options for valuation discounting and freezing
             — Consider using formula clause (see Hendrix) to
               reduce valuation risk
          Life Insurance
             — Cover capital campaign pledge
      On Death:
          All assets, including the IRA and art collection, are options
             — Use of disclaimers provides flexibility

Conclusion: Delivering Value

       For the client: Tax savings and the ability to give more
       For the advisor: Tell them something they don’t know
       For the charity: More giving options = more giving

As you leave today… think about someone who will
benefit from the combination of your creative planning
and their passion.


Shared By: