1. Charitable Contributions Chapter 32 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company1 Gratuitous transfers of property to a qualified charitable, religious, scientific, educational or other specified organization A charitable deduction may be taken for income, gift, or estate tax purposes What Are Charitable Contributions?

2. Charitable Contributions Chapter 32 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company2 Donor, for non-tax reasons, wishes to benefit the charity Donor wishes to reduce income or estate taxes by taking advantage of deductions allowed for such gifts When Is The Use Of A Charitable Contribution Appropriate?

3. Charitable Contributions Chapter 32 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company3 A donee will be considered a “qualified” charity only if it meets three requirements: 1)Must be operated exclusively for purpose of: Religion Charity Science Education Literary Prevent cruelty to children or animals Foster national or international amateur sports competition What Are The Requirements?

4. Charitable Contributions Chapter 32 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company4 A donee will be considered a “qualified” charity only if it meets three requirements: 2)No part of organization’s earnings can benefit any private shareholder or similar individual 3)Organization cannot be one disqualified for tax exemption because it attempts to influence legislation or participates in, publishes or distributes statements for, or intervenes in, any political campaign on behalf of any candidate seeking public office Note: Descriptions of qualified charities differ for federal income tax versus federal estate and gift tax purposes What Are The Requirements?

5. Charitable Contributions Chapter 32 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company5 Another requirement necessary for a charitable contribution deduction is that the property must be the subject of a gift –Value of taxpayer time or services is not deductible –Rent-free use of taxpayer’s property by a qualified charity is not deductible For a charitable contribution deduction the contribution must exceed the value received by the donor What Are The Requirements?

6. Charitable Contributions Chapter 32 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company6 What Are The Requirements? Gift to the charity must be paid in cash or property before the close of the tax year in order to receive a deduction A charitable contribution at death will be deductible, so long as it is made by the decedent and not his estate or beneficiaries Gifts of a partial interest transferred in trust, where the gift is split between noncharitable and charitable beneficiaries, will only qualify for a deduction if it is an annuity trust, unitrust, or pooled income fund

7. Charitable Contributions Chapter 32 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company7 A qualified appraisal (Form 8283) must accompany a tax return showing donations of property valued at over $5,000 –The appraisal requirement does not apply to gifts of publicly traded securities but it does apply to non-publicly traded securities worth more than $10,000 –Severe penalties exist for overvaluation of charitable gifts All donors must keep canceled checks, receipts, or other reliable written records showing the name of the donee, the date of the contribution and the amount of the gift What Are The Requirements?

8. Charitable Contributions Chapter 32 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company8 For all contributions, including cash, a charitable deduction will not be allowed for contributions of $250 or more without a contemporaneous written acknowledgement that includes: –Amount of money or description of property contributed –Whether the organization gave any goods or services to the taxpayer in return for the contribution –Description and good faith estimate of the value of the goods and services –Statement that the goods and services provided consisted only of intangible benefits What Are The Requirements?

9. Charitable Contributions Chapter 32 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company9 No charitable deduction is allowed for a non-cash contribution unless the taxpayer attaches Form 8283 to his return What Are The Requirements?

10. Charitable Contributions Chapter 32 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company10 Examples: –During Life Write a check Assign stock Transfer life insurance policies Sign a deed to real estate –At Death Will bequest or devise Charity as beneficiary of life insurance contract proceeds Charity as employee benefit contract beneficiary Charity beneficiary under a trust How Is It Done?

11. Charitable Contributions Chapter 32 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company11 Charitable contribution to qualified charity reduces current income taxes (assuming the donor itemizes deductions) No federal gift tax is payable on a gift to a qualified charity Federal estate tax deduction limited only by the value of the gift to a qualified charity Charity will pay no tax upon receipt of either a lifetime gift or a bequest Tax Implications

12. Charitable Contributions Chapter 32 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company12 No income tax will payable by a qualified charity on income earned by donated property An otherwise deductible contribution to a college or university that entitles the donor to purchase tickets to athletic events will be limited to 80% of the contribution value For federal income tax purposes there are percentage limitations on the amount that can be claimed as a charitable deduction Tax Implications

13. Charitable Contributions Chapter 32 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company13 Care must be taken to avoid a taxable transfer in charitable trusts that benefit both husband and wife, due to the equal ownership aspect of community property For federal gift tax purposes, there is the availability of the unlimited marital deduction At a state level, some states still impose a gift tax without an unlimited marital deduction Issues In Community Property States

14. Charitable Contributions Chapter 32 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company14 Gifts of community property to charity by one spouse cannot be made without the consent of the spouse It is possible to split community property interests creating separate interests that can be used to fund separate charitable trusts –The split agreement must be in writing in some states Issues In Community Property States

15. Charitable Contributions Chapter 32 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company15 Determining The Amount Of An Income Tax Charitable Deduction 50/30/20 RuleAGI Limit Type ofPublicPrivateAmount PropertyCharityCharityDeductible Cash50%30%100% S-T Gain50%30%Basis (Ordinary Income) L-T Gain50%20%Basis or 30%100% FMV L-T Gain Tangible Personal Property: Use-Related50%20%Basis or30%100% FMV Use Unrelated50%20%Basis

16. Charitable Contributions Chapter 32 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company16 Example: –Donor sells long-term appreciated property to charity for $4,000 –FMV of property is $10,000 and donor’s basis is $4,000 –The gift amounts to 6/10 (60%) of the property and the donor has given the charity 6/10 of his basis 60% of $4,000 = $2,400 charity basis –The donor now has a gain of $2,400 from the sale; $4,000 sale price - $1,600 donor basis = $2,400 gain – $2,400 x 15% capital gain tax = $360 tax due versus $6,000 gain x 35% marginal tax = $2,100 potential tax Bargain Sale

17. Charitable Contributions Chapter 32 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company17 Qualified Charity Donor Corp. Other Shareholders (Relatives of Donor) Transaction 1 Donor gifts his share of corp. stock to charity Donor gets charitable deduction Transaction 2 Corp. redeems stock Charity gets cash These separate transactions avoid dividend treatment and gift taxes while increasing wealth of other shareholders Note: Make sure there is no formal or informal agreement that the charity or corporation must redeem the stock Stock Bailout How a gift of closely held stock can be used to generate a charitable contribution deduction:

18. Charitable Contributions Chapter 32 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company18 Guaranteed fixed death benefit amount to charity as long as premiums are paid Gift to charity is amplified by using a small premium in installments to purchase a large benefit Life insurance is a self-completing gift, so that even if one premium is paid and the owner dies, the charity gets the gift Benefits of Life Insurance As A Charitable Contribution

19. Charitable Contributions Chapter 32 Tools & Techniques of Estate Planning Copyright 2011, The National Underwriter Company19 Charity gets 100% of the death benefit proceeds free of taxes, probate and administrative costs Because life insurance is a contract, large amounts left to charity cannot be attacked by disgruntled heirs Benefits of Life Insurance As A Charitable Contribution (cont’d)