Charitable Articles

"S Corporation Charitable Deduction Timing"In Rev. Rul. 2000-43, the IRS held that an S Corporation's charitable deduction must be taken in the year the charitable contribution is actually made rather than in the year the contribution is authorized. You need to sign up first at http://www.pgdc.net/

This document contains final regulations relating to the definitions of a guaranteed annuity interest and a unitrust interest for purposes of the income, gift, and estate tax charitable deductions. The regulations affect taxpayers who make transfers to charitable lead trusts. The regulations restrict the permissible terms for charitable lead trusts and are necessary to ensure that the amount the taxpayer claims as a charitable deduction reasonably correlates to the amount ultimately passing to the charitable organization.

This document finalizes regulations that modify the application of the rules governing the character of certain distributions from a charitable remainder trust. These regulations are necessary to prevent taxpayers from using charitable remainder trusts to achieve inappropriate tax avoidance. The regulations affect charitable remainder trusts described in section 664 and certain beneficiaries of those trusts.

"Estate Tax Charitable Deduction Resulting From Disclaimers" (2001) In Ltr. Rul. 200052006, the Service held that an estate was entitled to estate tax charitable deductions for IRAs and annuity contracts, among other interests, passing to charity as a result of qualified disclaimers.

Charitable Split Dollar Tax Court Opinion  (2002) Commentary and text by JJ McNab

Ten Charitable Planning Mistakes to Avoid This article highlights specific areas of the charitable planning process where mistakes seem to re-occur based on the authors' combined experiences as charitable planning consultants. Believe it or not, newcomers to the field of planned giving aren't the only ones making mistakes. By sharing real-life situations, the authors hope to provide practical experience and knowledge from the trenches, not from the painful school of hard knocks, but via the less painful route, "only a fool learns from his own mistakes."

Charitable Deductions: IRS has reminded (IR-2002-134) taxpayers that they can use their year-end gifts to tax-exempt charitable and religious groups to reduce their taxes. The IRS notes that only contributions actually made during the tax year are deductible. However, the IRS cautions that this is available only to taxpayers using itemized deductions. The general rules for the donation of stock, other property, and automobiles are explained.

CRAT: (2003) In this set of revenue procedures, the IRS makes note that if these forms are followed, deductions will be available to citizens and residents of the U.S. As a prefatory matter, it also states that the IRS will recognize as qualified CRATs any trust using these forms if (1) the trust operates consistently with the terms of the trust, (2) it is a valid trust under local law, (3) the alternatives given in the revenue procedures are “properly integrated into” the sample forms (as of yet an unknown factor), and (4) provisions other than those in the revenue procedure that may be used are “substantially similar” to those in the revenue procedure (it is also not clear what “substantially similar” will mean from their point of view).

The IRS further points out that a trust that contains substantive provisions in addition to those in the revenue procedures or the omission of terms in the sample forms will not necessarily disqualify the CRAT. But neither will it automatically be deemed qualified. Rulings on substantive provisions other than what is in the revenue procedures will be issued by the IRS.

The eight new revenue procedures containing model agreements for charitable remainder annuity trusts (CRATs) are as follows:

• Sample Inter Vivos CRAT for One Measuring Life (Rev. Proc. 2003-53)
• Sample Inter Vivos CRAT for Term of Years Annuity Period (Rev. Proc. 2003-54)
• Sample Inter Vivos CRAT for Consecutive Interests for Two Measuring Lives (Rev. Proc. 2003-55)
• Sample Inter Vivos CRAT for Concurrent and Consecutive Interests (Rev. Proc. 2003-56)
• Sample Testamentary CRAT for One Measuring Life (Rev. Proc. 2003-57)
• Sample Testamentary CRAT for Term of Years Annuity Period (Rev. Proc. 2003-58)
• Sample Testamentary CRAT for Consecutive Interests for Two Measuring Lives (Rev. Proc. 2003-59)
• Sample Testamentary CRAT for Concurrent and Consecutive Interests (Rev. Proc. 2003-60)

CRT:  The Charitable Remainder Trust (CRT) is a statutory creation, and its operation is defined and controlled by a number of federal statutes and regulations. If a trust qualifies under the statutes and regulations, there are significant income and transfer tax advantages associated with the trust. This makes the CRT a popular and powerful planning technique.

As implied by its name, the CRT provides a remainder to one or more qualified charities. This remainder is irrevocable, that is, the charitable beneficiary must receive the remainder at the end of the trust term. However, there may be a degree of flexibility in terms of naming and changing the charitable beneficiaries and the trust may be drafted to allow the grantor or income beneficiaries to change the designated charitable beneficiaries. The choice of remainder beneficiary may dovetail nicely with an estate plan where the charitable beneficiary is a family foundation created and funded by the client.

The FLIP Trust (George Chamberlain 2005) An important technique often used by clients wishing to reduce income and transfer taxation while benefiting charity is the charitable remainder trust (CRT).1 One feature of the typical CRT is the requirement that the payout method is defined at the trust's inception and cannot be altered without the trust losing its characterization as a CRT. Amendments to the regulations governing the CRT have made possible an advanced level of planning using what is called a flip provision to control timing of income and cash flows within the CRT and thereby change the payouts. This article will examine the opportunities offered by the FLIP trust to advisors and their clients within the context of using the Wealthcare process to create and evaluate financial strategies.

Over-Selling the Concept, Abusing good planning tools injures clients. Vaughn Henry (2006)

A charitable remainder trust is often a great planning tool for clients with philanthropic interests and an interest in selling an appreciated asset that is not producing income commensurate with its value. For some clients a CRT is a blessing; unfortunately, for others it is a curse. Why might the CRT planning be cursed? Too often, advisors approach financial and estate planning as an opportunity to sell a product, and a CRT should neither be sold as a product (it is part of an integrated process); nor should product sales drive the planning decisions.

John and Pat Knopf, married for 39 years and parents of two married daughters who are themselves already well set in their respective careers, have amassed significant stock through John’s employer. With a five million dollar estate, their assets tripped the trigger for federal estate tax liabilities, which should have posed several planning scenarios for the Knopf’s advisors. Since almost all of their wealth was either in John’s 401(k) or a stock portfolio that held nothing but his employer’s stock, their assets were not properly diversified. John’s reluctance to reallocate his stock holdings hinged on the unrealized gain in the low basis stock, as he simply did not want to incur a capital gains tax to put the investment account into balance as he approached retirement.

Into this mix stepped a financial advisor, introduced as an estate planning expert, but his recommendations had more to do with selling product, and inappropriate product at that, than solving problems. The Knopfs were persuaded to transfer all of the publicly traded stock into a two-life NIMCRUT and to purchase a large “second to die” life insurance policy with the premiums paid from the charitable trust’s income distributions. What was not properly disclosed in this transaction were the following issues:

1.) a CRT is an irrevocable trust appropriate for clients with real philanthropic interests, this is not a tax avoidance scam; you can not make money by giving it away

2.) while a CRT will reduce the size of a client’s taxable estate, there are other non-charitable planning techniques that may also be utilized as a part of a coordinated strategy to ensure that the client’s financial independence and family legacy are properly addressed

3.) contributing highly appreciated, publicly traded securities to a NIMCRUT as a client approaches retirement with a need for reliable income is not a tactically prudent move when a CRAT, Standard CRUT, or FLIP-CRUT would better serve a client’s need for income without regard for what the trust produces as net income

4.) a NIMCRUT is better used when funding it with illiquid and hard-to-value assets, e.g., real estate or closely-held stock

5.) contributing every bit of a client’s liquid assets to a charitable remainder trust ties up all of the donor’s income producing capacity and may produce a larger income tax deduction than the client can utilize, it would be better to transfer a smaller amount of stock and see how the trust operates, and then make additional transfers into a flexibly designed CRUT once the client is satisfied with the process instead of locking up everything the client has inside a restrictive trust

6.) contributing all of the client’s appreciated stock means intra-family family gifting is going to be restricted, and to replace the gift requires significant premium payments to maintain the larger than necessary life insurance policy

7.) using a deferred annuity inside a NIMCRUT may be appropriate for a young income beneficiary who is willing to delay income distributions for seven to ten years, but for an older client who is depending on consistent revenue to maintain lifestyle or to pay large life insurance premiums, a NIMCRUT using typical annuity products may not be able to make distributions when the market declines

8.) the trustee has a fiduciary obligation to manage the investment portfolio for both the income and the charitable beneficiaries; in some states, the attorney general will step in and require prudent investment policies be followed

9.) a CRT is no place for creative investment products or day-trading, prudent and well-diversified investments tat are tax efficiently managed would be the preferred vehicle

Any client or advisor considering the use of a NIMCRUT would be well-advised to look at all of the options to ensure maximum flexibility, and understand the use of the various investment tools inside the trust to ensure it performs as expected. With so few experienced CRT advisors, a trust maker should spend time and research the experience and management philosophy of any advisor who will be working with the proposed charitable trust.

Other Charitable Incentives in PPA 2006

1. Gifts of Food Inventory

C corporations making gifts of inventory to the ill, needy or infants qualify for an enhanced deduction. The amount equals the lesser of basis plus one-half of the item's appreciation or twice the basis. IRC. Sec. 170 (c)(3). The Katrina Emergency Tax Relief Act of 2005 expanded the availability of the deduction for the gift of "apparently wholesome food" to any taxpayer. The deduction is limited generally to 10% of the taxpayer's net income. PPA 2006 extends this provision for 2006 and 2007.

2. Charitable Gifts by Subchapter S Corporations

PPA 2006 will make possible larger gifts of appreciated property from Subchapter S corporations. Under prior rules, an appreciated gift by the S corporation flowed through to shareholders but required a reduction of shareholder basis in the Sub S stock by the fair market value of the donated asset. If there were no basis in the Sub S stock, the deduction could not flow through to the shareholder. Under the new rule, the appreciated property gift flows through to shareholders but requires a reduction of shareholder basis only by the basis of the asset.

For example, an S corporation made a gift of stock to charity with cost basis of $200 and fair market value of $500. Under PPA 2006, the $500 appreciated deduction flows through to the shareholder with a reduction of shareholder stock cost basis of only the $200 cost basis to the corporation.

3. Enhanced Book Inventory Deductions

The Katrina Emergency Tax Relief Act of 2005 extended the C corporation enhanced inventory deduction rule to qualified book contributions. PPA 2006 extends the KETRA rule for 2006 and 2007. C corporations may receive the enhanced deduction for contribution of books to elementary or secondary schools. The school must certify that the books are suitable for their educational program.

4. UBI For Rents and Royalties from Controlled Subsidiaries

Exempt charities normally do not pay income tax, unless they have unrelated business taxable income (UBTI). Rents, royalties and annuities are usually excluded from UBTI. However, because of the potential for moving taxable income to a non-taxable entity, rent from a taxable controlled subsidiary paid to a parent charity is deemed UBI. H.R. 4 modifies this rule. Only the excess over the fair market value defined under Sec. 432 would be deemed UBI. However, there is a potential 20% penalty on unreported excess payments from controlled subsidiaries.

5. Enhanced Conservation Easement Deductions

Conservation easements are deductible if a qualified real property interest is given to government or a conservation charity. The conservation easement must preserve land for outdoor recreation, protect natural habitat of wildlife, preserve open space or preserve historically important land or a certified historic structure.

Conservation easements previously qualified for the appreciated charitable deduction with a 30% of adjusted gross income limit and a five-year carry-forward. PPA 2006 creates a new category for qualified conservation easements with a deduction of up to 50% of adjusted gross income and a carry-forward for up to 15 years. However, for qualified farmers and ranchers, the deduction is increased to 100% of adjusted gross income, with a 15 year carry forward. The qualified farmer or rancher must receive more than 50% of his or her gross income from a ranching or farming activity.

6. Excise Tax Exemptions for the Red Cross

PPA 2006 provides the Red Cross and other blood collector organizations with exemption from certain retail and manufacturers excise taxes. Among these various tax exemptions are taxes on diesel fuel and gasoline used in "qualified blood collector" vehicles.