Charitable Gift Transfers
Circumstances where charitable gifts are of significant interest:
1) Clients have no direct descendants.
substantial assets and genuine charitable objectives.
substantial antipathy to paying taxes – i.e., a desire to frustrate the tax
collector at almost any cost.
IRC provisions concerning charitable gifts: §§170,
2055, 2522, 501(c)(3), 4940, et. seq.
Issues: Income, gift & est. tax & tax status of the
Types of Charitable Gift
Charitable contribution options:
- Appreciated property
- Bargain sale to charity
- Horizontal split charitable interest
(1) An income interest retained, or, (2) a remainder interest is
retained (in trust or personal residence)
- Charitable gift annuity
- Conservation easements
- Private foundations
Tax Effectiveness of Charitable
1) Avoid inclusion in the income tax base of the accrued appreciation
in the gifted property.
2) Complete the gifts during lifetime to (1) reduce
federal income tax liability (and save income tax cost) and (2) thereby,
increase the assets in the client’s estate (with estate tax exposure
3) Coordinate family giving and gifts through entities, including
(a) depleting assets of the older generation and (b) increasing the interests
of younger generation members in the family business.
Identifying an Entity as a Charity for
What is a Code §501(c)(3) organization?
How legally organize the charity:
(a) corporation or (b) trust? A state law issue (including
re fiduciary risk for directors/trustees).
How qualify the entity with IRS as a §501(c)(3) organization?
IRS Form 1023.
How does a potential donor verify the status of an entity
as a §501(c)(3) organization donee?
Note the definition of charitable gift in §170(a) for income tax;
cf., E&G tax.
Tax Eligibility of an Entity as a
PLR 200151045 – p.5: §501(c)(3) (& §501(e) ); entity
organized to participate in joint venture between various charitable hospitals
to provide specialized health services in that venture.
Does this qualify for charitable tax exemption?
How much “charity care” must be provided?
What is the relevance of the “unrelated business income tax” rules
Code §§511-513? Determined in this PLR that no UBTI existed.
How Designate Charitable
Not to individual beneficiaries – must be to a charitable entity (§501(c)(3)
Local law determination may be required to determine the charitable status of a
recipient entity. Note Bosch case re local law impact.
Possible estate dispute settlement can provide for a
distribution to charity (eligible for a charitable deduction). Vested at
If a charitable gift is made by the estate beneficiaries
then individuals receive an income tax deduction.
Federal income tax – limit to 50% of a taxpayer’s “contributions
Further FIT limits: 30% for capital gains property, and 20% to
No percentage limitations for estate and gift tax purposes. Why? Should the client consider a gift
of his/her entire estate to a private charitable foundation? Why
not a large gift before death and reduce income taxes (and
(possibly) a charitable contributions deduction carryover)?
Allocating the Tax & Expense
§2055(c) specifies a reduction of the charitable gift if the tax
liability and/or expenses are allocated against this gift.
Will a state (e.g., Texas) tax apportionment statute help
the resolution of this question?
If the charitable gift is burdened by expenses then an
interrelated computation is required to determine the net deductible value of
Pay the administration expense from estate income? Note the
marital deduction, Hubert case, and subsequent regulations.
How Document the Fair Market Value of a
Page 15: Substantiation requirements are applicable,
including qualified appraisals for larger gifts for FIT purposes.
See (1) Code §170(f)(11) concerning appraisals, & (2)
Code §170(f)(12) concerning contributions of used motor vehicles, boats and
airplanes. Subsequent sale by charity of gifted property as relevant for
determining gift value?
See Rev. Proc. 96-15 (p.16) re art valuations.
Appreciated Capital Asset
What is the enhanced after (income) tax cost to the donor of a
charitable gift of appreciated property (as contrasted with a charitable
transfer of cash)? Transfer to pay a charitable pledge/debt?
But, what about the potential for accrued appreciation
disappearing at death (under Code §1014)? But, note prior possible
carryover basis regime - Code §1022 (only for year 2010).
Charitable Gifts of Ordinary Income
No “tax arbitraging” for ordinary income property for FIT purposes
- Self-created art, or a manuscript for a
- Assets held for less than 12 months
- Section 306 stock (preferred stock
Make a charitable transfer of IRD items at death (e.g., IRA
balances)? Why? P.18.
Appreciated Tangible Personal
Deduction for the full fair market value of the donated tangible
personal property (e.g., a work of art) (except ordinary income property)?
An income tax charitable deduction limit applies where the gift is
not for the use of the charitable recipient: See Code §170(e)(1)(B)(i).
How make the charitable gift of tangible personal property for “the
use by” the charity?
Remainder in Tangible Personal
Code §170(a)(3) provides a deduction for a charitable gift of a
future interest in tangible personal property only when (1) all
intervening interests have expired, or (2) the interests are held by
non-related parties. A timing limitation. Why? Do “paintings
Cf., gift of a 1/2 interest (i.e., a vertical interest).
See §170(o) – must contribute the remaining vertical interest within ten years
or by death or recapture of earlier deduction.
Bargain Sales to Charity
Code §1011(b): adjusted tax basis is allocated
proportionately to (1) the portion deemed sold and (2) the portion donated to
Cf., treatment of a bargain sale (e.g., net gift) in the intra-family
context. No basis allocation.
PLR 9329017, p. 21: Charitable contribution of a remainder
interest in a mortgaged farm. §170(f)(3)(A) & (B)(i).
Holding that mortgage debt treated as amount realized for
bargain sale to charity rules (even though donor remains liable on the
Personal Residence & Bargain Sale to
p. 23 – Accomplished in conjunction with use of the Code §121
gross income exclusion.
Up to $250,000 ($500,000 on joint return) can be excluded
from gross income from the sale of the principal residence (without regard to
whether the sale is to charity).
Gift of Vertically Divided
Examples: gift of part of shares of corporation; part
of farm acreage; gift of mineral rights; gift of an easement (what type
of easement? P.25).
Note (earlier) vertical interest in painting.
Cf., gift of a license to use a patent – donor can not retain any
substantial rights in the patent.
Notice 2004-7, p. 24, re gifts of intellectual property (no
deduction if a retained right).
Gifts of Easements
Code §170(f)(3)(B)(ii) & Code §170(h).
Gift must be a contribution of a “qualified conservation easement.”
I.e., for a conservation purpose, or for “certified historical
Gift of Corporate Stock to Private
Code §170(e)(1)(B)(ii) reduces the amount of the charitable
contribution deduction when the gift is to a private charitable
However, Code §170(e)(5) provides an exception from this rule for
a gift of “qualified appreciated stock.”
What stock is eligible for this treatment? Publicly traded stock?
Mutual fund shares? ETFs?
Gifts by insiders? See p. 26, fn. 33.
Gift & Redemption of Closely Held
Structure: (1) Gift of stock to public charity;
(2) charity then redeems this stock;
(3) reduction of earnings and profits of corp.;
(4) increase in percentage interest of other shareholders (e.g.,
Tax issue: Whether (1) the gift and (2) the redemption
transactions are to be collapsed for federal income tax purposes, with ordinary
dividend treatment attributed to the donor.
Charitable Gift of a Life Insurance
Can an individual give a life insurance policy (on that individual’s
life) to a charity & obtain a charitable deduction?
Does the charity have an insurable interest?
What is the amount of the deduction?
See PLR 200209020, p. 29, charitable deduction allowable after
expiration of the 30-day cancellation period for the single premium whole life
policy. But, “title” not transferred.
No “split dollar” insurance – Code §170(o)(10).
Charitable Gift Annuity
Charity promises to make annuity payments for
life in exchange for donor’s transfer of cash or
If appreciated property is transferred :
1) bargain sale to charity rules are applicable,
2) charitable gift of the excess value, and
income when the
annuity payments are
How determine the annuity amount?
Cf., private annuity treatment (& timing rule).
Code §170(f)(2)(A) specifies no income tax deduction for
remainder gift (in intangibles) unless to a trust which is a CRAT or
CRUT. Similarly, Code §2055(e)(2) (estate tax) and §2522(c)(2) (gift
Minimum charitable gift of 10% of total (cf., zero-out GRATS)
& not + 50%.
See Rev. Proc. 2003-53, p. 35, including other Rev. Procs. re
CRATs & CRUTs defined in §664(d).
Charitable Remainder Unitrust –
§664(d)(2) – charitable annuity based on a specified percentage of
the value as determined on a specified date each year.
See §664(d)(3) re a NIMCRUT or “net income makeup unitrust.”
Only actual income is paid but subject to a recapture/subsequent make-up
Rev. Rul. 2002-20
CRUT benefits paid from CRUT to a separate trust for life of an
individual who is financially disabled (i.e., unable to manage financial
affairs). I.e., “special needs trust.”
CRUT qualifies under §664 if funds are payable to a 2nd
trust for the life of individual and, on death, remaining funds are payable to
estate of beneficiary. Trust is used to make necessary distributions and to
avoid supplanting government benefits.
Pooled Income Funds
A mutual fund (in equivalence) is run by the charity (rather than
a private trustee) with proportionate income distributable to life beneficiary.
Personal Residence Remainder Interest
P. 47 Code §170(f)(3)(B)(i) provides an exception from
charitable remainder trust rules for a gift of a remainder interest in a
family residence. Why?
What is a family residence for this purpose? Including furniture
Similarity to a QPRT in tax approach?
Defective Charitable Remainder
How deal with defective charitable remainder trusts?
See Zella Hall decision, p. 48.
See the trust “qualified reformation” provisions at Code §2055(e)(3).
No more than a 5% variance from “before to after.”
And, see PLR 201125007 (p. 56) re IRS agreeing that a qualified
reformation occurred (after trust reformation in state law proceeding).
Charitable Lead Trusts
Code §§170(f)(2)(B), 2055(e)(2)(B) and 2522(c)(2)(B).
Lead interest for charity and remainder for private beneficiary.
Grantor must be the owner of the income under the grantor trust
Charitable deduction for the discounted present value of the
income stream payable to charity.
Use of a “Private Foundation”
Purpose for using a “private charitable foundation” as
qualified under §501(c)(3)?
Monitoring also by state’s Attorney General (or other official) to
assure charitable purposes are fulfilled for state law requirements?