Deliberate giving officers for charities, legal professionals and different professionals who advise people who make important presents to charity typically encounter obstacles concerning the charitable planning across the donation.
“Important presents” are massive presents and sometimes contain trusts, corresponding to charitable the rest trusts (CRTs), and naming rights, such because the donor’s proper to have their identify positioned on some bodily construction.
It’s pretty well-known that the federal tax regulation affords “carrots” to people who make such presents, corresponding to the flexibility to assert a federal earnings tax charitable deduction. Much less well-known is that the federal tax regulation imposes “sticks,” corresponding to denial of a charitable deduction, to donors who don’t adjust to an array of extremely advanced guidelines.
Utilizing some examples, I’ll deal with the sticks.
Perils of the Pledge
Let’s think about Husband (H) and Spouse (W), a rich couple who reside in a big American metropolis. Their major lawyer is a senior accomplice at a white-shoe regulation agency of their metropolis, they usually’ve established a non-public basis (PF). This assertion of details could seem innocuous however is stuffed with tax-related peril for H and W, who wish to donate a 7- or 8-figure sum to a significant charity of their metropolis.
This couple will cope with a number of people who’re extremely positioned within the specific charity—for instance, the charity’s excessive profile president or board chair, who maybe calls H and W by their first names and belongs to the identical golf equipment. On the floor, there’s nothing improper with this image. However I see some sticks, bearing in mind that: (1) a present of the type in query is prone to be one for which H and W get their names on one thing on the charity (a naming reward); (2) the reward is prone to be made by H and W’s PF; and (3) the reward is prone to be made pursuant to a written pledge that H and W make to the charity.
The stick on this state of affairs is that the cost of the pledge could also be an act of self dealing. A pledge is both enforceable (as a contract) or unenforceable. Enforceability is set underneath the regulation of the state governing the pledge. A minimum of three states, Iowa, New Jersey and Pennsylvania, don’t require both consideration or detrimental reliance for a pledge to be enforceable.1 A pledge or a big quantity ought to at all times be in writing, and the writing ought to comprise a governing regulation provision. The pledge made by H and W can be enforceable underneath contract regulation (the promise to offer is supported by the consideration of naming). This implies any cost of the pledge by H and W’s PF could be a prohibited act of self-dealing. It’s a giant, dangerous stick, to make sure.2
Let’s have a look at one other state of affairs involving pledges that will lead to a stick. In Income Ruling 81-110, Social gathering A made a legally binding (enforceable) pledge. Social gathering B paid the pledge. The Inside Income Service dominated that Social gathering B’s cost was a switch to Social gathering A and that Social gathering A was deemed to pay the pledge (and will take the corresponding charitable deduction).
To keep away from (most) issues with pledges, a charity ought to: (1) decide up entrance the supply or sources of cost for the pledge; and (2) be sure that the event workplace vets all pledges earlier than signing the pledge settlement. In a single case involving a pledge of an 8-figure quantity, I realized this wasn’t achieved, and a nasty consequence ensued for each the charity and the rich donor couple.
Certified Appraisal Guidelines
Assume the donor is a reasonably rich particular person who needs to make use of extremely appreciated marketable inventory value $250,000 to ascertain a CRT for the eventual advantage of Charity A, which can function trustee of the CRT.
Till Jan. 1, 2019, when new certified appraisal guidelines took impact, tax advisors typically believed that no certified appraisal was wanted for the CRT the donor meant to create. Amendments to the Treasury rules modified all that. The brand new guidelines present that if a partial curiosity (corresponding to the rest curiosity in a CRT) is given to a charity, the partial curiosity (not the asset used right here to fund the CRT) is topic to the certified appraisal guidelines.3 The one exception is that such an appraisal isn’t required for a cash-funded CRT.4 Appreciated property, nonetheless, not money, are usually used to create a CRT described right here.5
Present Receipt
The tax regulation requires a contemporaneous written acknowledgment (CWA) for a charitable reward for the donor to be entitled to a charitable deduction.
Charity reward officers are conscious, by and huge, of the tax regulation requirement that for a donation of $250 or extra, the donor wants to have the ability to substantiate the reward with a CWA that states: (1) whether or not the charity offered any items or companies to the donor in consideration of the reward, and (2) if it did, the financial worth of these items or companies.
In actual fact, reward officers are so conscious of this requirement that sometimes they misapply it. The misapplication happens when the charity points an ordinary no-goods-or-services CWA to a present annuity donor. The annuity funds made by the charity to the annuity recipient (who’s most frequently the donor) are “items” probably having important financial worth. The tax regulation on this state of affairs expressly requires the CWA to state whether or not the annuity recipient acquired something of worth along with the annuity from the charity.6
Different Widespread Sticks
Listed below are another sticks stopping donors from getting a charitable deduction:
The donor doesn’t know the idea, and there aren’t any data to ascertain foundation. On this state of affairs, the idea is zero. That’s as a result of a taxpayer has the burden of building a positive tax place, and the donor can’t do that.7
A dealer wires inventory to the charity from the donor’s particular person retirement account as a professional charitable distribution (QCD). That is problematic as a result of the IRS hasn’t mentioned when the QCD is deemed to have been made or methods to calculate its quantity. So the donor could not be capable to meet the necessities for a charitable deduction. No federal earnings tax charitable deduction is allowed for a QCD.
The donor has inventory wired to charity to ascertain a present annuity, and the inventory drops in worth whereas in transit. It’s unclear what worth to make use of to compute the annual annuity cost. The reply could also be discovered within the charity’s reward acceptance coverage (GAP). If the GAP is silent on the matter, there’s a probably messy struggle in retailer.
PF pays for gala dinner tickets. It is a recurring downside for one motive: The IRS has mentioned the purchaser’s PF could not pay the “charitable half” of the ticket value.8 To establish which is the charitable half versus the price of dinner, the price of dinner is set by discovering out what a comparable industrial venue would cost.
IRA cash is left to a charity on the donor’s demise. This poses a recurring downside as a result of some IRA custodians need charitable beneficiaries to arrange inherited IRAs. The issue right here is that charities typically have discovered it troublesome or not possible to obtain their beneficiary distributions from an inherited IRA. Present officers at charities typically imagine it’s as a result of the custodian needs to carry on to the IRA property. I’m inclined to imagine they’re right.
Endnotes
1. As to New Jersey, see Jewish Federation of Central New Jersey v. Barondess, 234 N.J. Tremendous. 526 (1989) (spoken pledge held to be enforceable). As to Iowa, see Salsbury v. Northwestern Bell Phone, 221 N.W.second 209 (1974). As to Pennsylvania, a written pledge wherein donors (a married couple who file a joint federal earnings tax return) state that they intend to be certain by their promise to donate is enforceable statutorily (see 33 P.S. Part 6).
2. See Treasury Laws Part 53.4941(d)(2(f).
3. Treas. Regs. Part 1.170A-6(b)(2).
4. Treas. Regs. Part 1.170A-15(g).
5. Appreciated property (specifically, securities and actual property) are usually used as an alternative of money to ascertain a charitable the rest belief (CRT) as a result of transferring an appreciated asset CRT doesn’t trigger the appreciation to be realized as capital beneficial properties. That’s as a result of the switch isn’t a sale or change.
6. Treas. Regs. Part 1.170A-13(f)(16).
7. As to foundation guidelines typically, see IRS Publication 561.
8. See Personal Letter Ruling 9021066 (March 1, 1990).
