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Philip T. Temple, White Plains lawyer, Charitable Gift Planning with Split-Interest Charitable Trusts

PRACTISING LAW INSTITUTE

33rd ESTATE PLANNING INSTITUTE

NEW YORK CITY

CHARITABLE GIFT PLANNING

Monday, September 23, 2002

12:00 noon

PHILIP T. TEMPLE, ESQ.

McCarthy, Fingar, Donovan, Drazen & Smith, L.L.P.

White Plains, New York

1. Setting The Scene and, Hopefully, Whetting Your Appetites. An extremely simplified example of the horrific estate tax on the death of a surviving spouse (or, for that matter, a single person. Example where H dies in 2002 and W dies in 2005.

H has $3,000,000 estate. His wife W has a $3,000,000 estate of her own. H gives an amount equal to the equivalent exemption to his children and the balance of his estate is set up in such a way as to obtain the unlimited marital deduction. H dies in 2002; his wife then dies later in 2005, leaving her entire estate to their children. Here is what the estate tax computations would look like:

H’s Estate

Gross estate $3,000,000

Less: Estimated

expenses -- at 5% $ 150,000

Marital deduction --

balance of estate less

$1,000,000 equivalent

exemption $1,850,000 $2,000,000

Taxable estate $1,000,000

Tentative federal estate tax $ 345,800

Less: Applicable credit amount $ 345,800

Federal estate tax -0-

W’s Estate

Her separate assets $3,000,000

Marital share from H $1,850,000

Gross Estate $4,850,000

Less: Estimated expenses -- at 5% $ 242,500

Less: NY State Estate Tax* $ 347,640

Taxable estate $4,259,860

Tentative federal estate tax $1,842,934

Less: Applicable credit amount $ 555,800

Federal estate tax $1,287,134

NY State estate tax $ 347,640

Total Tax $1,634,774

*As of 2005 the state death tax credit is repealed after which there will be a deduction for death taxes actually paid to the state.

2. Integrating Split-Interest Charitable Gifts Into the Estate Plan to Save Estate Tax

Assume that W is charitably inclined. Her Will divides her estate into two parts. With the first part, she creates a 6% charitable remainder unitrust (furnishing a potential hedge against inflation) providing payments to her children in equal shares for a term of 20 years after her death. The other half is placed in a charitable lead trust providing for payment of 8.5% of the initial value of the assets (a guaranteed annuity) to charity for a term of 20 years with the remainder payable to children (or grandchildren) at the end of the 20 year term. Here is what the estate tax calculation in W’s estate would look like using the July 2002 discount rate of 5.6%:

Gross estate $4,850,000

Less: Estimated expenses -- at 5% $ 242,500

Charitable deduction:

Gross principal into unitrust

of $2,303,750 x 30.403% factor $ 697,391.20

into lead annuity trust of

$2,303,750 x 100% factor $2,303,750.00

$3,001,141.20

Less: Federal estate tax payable* $ 87,594.20

Net charitable deduction $2,913,547

NYS estate tax deduction** $ 77,565

Total deductions: $3,233,612

Taxable estate: $1,616,388

Tentative federal estate tax $ 608,175

Less: Applicable credit amount $ 555,800

Federal estate tax $ 52,375

NY State estate tax $ 77,565

Total Tax $ 129,939

The estate tax savings is $1,504,835

*Tax attributable to non-charitable portion of unitrust. Gross principal of each trust is reduced by ½ of estate tax, thereby reducing charitable deduction for each trust. Estate tax is determined by interrelated calculation.

**As of 2005 the state death tax credit is repealed after which there will be a deduction for death taxes actually paid to the state.

3. Overview of Various Trust Agreements

A. Unitrust agreements.

(1) Standard unitrust -- pays stated percentage (at least 5% and no more than 50%) of net fair market value of trust assets, revalued at least annually, out of income and, if income is insufficient, out of principal. Excess income is retained in trust.

(2) Net income with makeup unitrust (the NIMCRUT) -- pays lesser of (i) stat­ed percentage of annual net fair market value and (ii) actual trust income. Deficiencies in distributions from an earlier year are made up in any later year in which trust income exceeds stated percentage. Then excess income retained in trust.

(3) Net income without makeup unitrust -- pays lesser of (i) stated percentage of annual net fair market value and (ii) actual trust income. Deficiencies in distributions from an earlier year are not made up. Excess income is retained in trust.

(4) In net income unitrust, agreement can provide that realized capital

gain -- but only that portion representing post-gift appreciation -- can

be treated as income for purposes of distribution. 

(5) Hybrid agreement (the “Flip” unitrust). Net income unitrust becomes

standard unitrust on sale of, i.e., closely held corporate stock. First,

unpublished PLR said O.K. Then, IRS says it doesn’t work. PLRs

9506015 and 9516040. Then proposed §664 Regs again said O.K.

Final Regs confirmed viability of Flip.

(6) Why the Flip?

(a) In NIMCRUT, once non-income producing asset is sold,

there is expectation that Trustee will invest so as to achieve

ordinary income at the stated percentage payout rate. Not easy to do.

(b) Once crut flips and becomes standard crut, can invest for

total return. Easier to achieve payout percentage and some

reasonable growth in trust assets.

(7) Some Specific Items Regarding Nimcruts.

(a) Excess income in earlier year cannot be used to make up

deficiency in later year.

(b) What is income? Generally state law governs. Be careful

of specific unique situations; i.e., assets such as timber; assets that have periodic large amounts of income. Defining income

to include realized gain attributable to post-gift appreciation.

(c) Net income provision does not change calculation of

charitable deduction for income, gift or estate tax purposes.

B. Annuity trusts.

(1) Annuity amount couched in terms of stated dollars; trustee directed to pay X dollars a year out of income and, if income is insufficient, out of principal. Any excess income is retained in trust.

(2) Annuity amount couched in terms of a percentage of initial fair market value of assets transferred to trust. Once amount determined, stays constant for trust term.

(3) In either case annuity amount must be at least 5% (but no more than

50%) of initial value of assets transferred to trust.

C. Pooled income fund.

Donor irrevocably transfers money, long-term marketable securities or both to qualified charity's separately maintained pooled income fund, where it is invested together with transfers of others who make similar life income gifts. Donor (or other designated beneficiary) receives his share of pooled income fund earnings each year. On donor's death (or death of other designated beneficiary) payments terminate and charity removes donor's gift from pooled fund and uses for charitable purposes.

D. Charitable gift annuities.

(1) Immediate payment. Donor transfers money or property to charity in exchange for promise to pay fixed amount annually to donor (and survivor, if desired) for life. Transfer is part gift and part purchase of annuity. Annual income (rate of return) paid by charity depends upon beneficiary's (annuitant's) age at time of gift. Annual rate of return remains constant for life. 

(2) Deferred payment. Donor makes gift to charitable institution in exchange for charity's promise to pay him guaranteed life income starting at retirement (or any other date specified).

E. Charitable lead trusts.

(1) Donor can avoid tax on income paid to charity, but the trust must not provide reversion for donor or spouse. Trust should be lead unitrust or lead annuity trust. Otherwise, value of charity's income interest will be subject to Federal gift tax. And, if donor dies before property reverts to him, there will be no estate tax charitable deduction.

(2) Main drawback of law is that donor cannot get income tax charitable deduction unless trust so drawn that he is taxed on income paid to charity -- a grantor trust. Thus, except for very wealthy individuals, charitable lead trust created during lifetime is generally not advantageous. Some create trust with tax-exempt bonds so that income is not taxable.

(3) Lead trusts paying income to charity are advantageous when created by donor's will. Estate tax charitable deduction allowed for value of income stream paid to charity under lead trust created by donor's will. To get estate tax deduction, income interest must be guaranteed annuity (annuity trust) or fixed percent of net fair market value of trust assets, determined yearly (unitrust). 

(4) The Jackie O Lead Trust: Illusionary?

4. Basic Tax Implications

A. Income tax charitable contribution deduction allowed for charitable remainder interest or other gift element. In order to qualify, value of

remainder must be at least 10%.

B. Capital gain avoidance; the problem of prearranged sales.

(1) Palmer still lives. [Palmer v. Commissioner, 62 T.C. 684 (1974), aff'd on other grounds, 523 F.2d 1308 (8th Cir. 1975)]; Rev. Rul. 78-197, 1978-1 CB 83; Letter Ruling 8639046.

(2) What about Blake? [Blake v. Commissioner, 42 T.C.M. 1336 (1981), aff'd 697 F.2d 473 (2nd Cir. 1982)].

C. Gift tax charitable deduction (unlimited) allowed for remainder interest.

D. Estate tax charitable deduction (unlimited) allowed for charitable remainder interest.

E. Taxation of remainder trust beneficiary -- four-tier system:

(1) Ordinary income.

(2) Capital gain income. WIFO basis.

(3) Other income, including tax-exempt interest.

(4) Return of principal.

F. Taxation of pooled income fund beneficiary.

5. The Lifetime Uses of a NIMCRUT

A. Use of securities.

(1) Highly appreciated, but low-income stock to fund "net income with makeup" unitrust.

(a) Provide low percentage payout -- but, at least 5% -- to increase charitable deduction.

(b) By retaining securities with high apprecia­tion potential but low income, reduce income paid to donor when in higher income bracket and less need for income.

(c) Trust sells later when securities appreciated and invests proceeds in high yield securities paying stated percentage of increased value plus make-up of deficiencies from earlier years; donor now possibly in lower tax bracket (say, at retirement) or needs higher income.

(2) Transfer of closely held corporate stock (charitable stock bailout) to charity.

(a) Donor transfers stock of close corporation to charity generating deduction for fair market value with no tax on appreciation.

(b) Corporation, although not legally obli­gated to do, redeems stock from charity. Palmer; Rev. Rul. 78-197; but see Blake.

(c) Transfer to charitable remainder trust.

(i) Generally not good idea unless trust can sell without violating self-dealing prohibitions.

(ii) A way out: Offer to redeem all stock is made. 

(iii) Query: Is close corporation stock a "prudent" trust investment?

B. Use of zero coupon bonds.

(1) Basic rules.

(2) Watch state law on questions of whether trust can make interest income on redemption or sale principal.

(3) Flexibility of timing.

C. "The Spigot Trust." Use of commercial tax deferred annuity contract. 

(1) Donors funded a net income with makeup unitrust with appreciated common stock; the trustee plans to reinvest the trust assets in a commercial deferred annuity contract.

(2) Regular annuity payment tax rules don't apply (payments partially excludable; IRC '72(b)(1)); because contract not held by natural person, it's all ordinary income -- but, that's good. Trustee will be able to use entire later payments to make up deficits. Also, Donors can “control” when they will begin to receive income.

(3) IRS made noise that “retirement unitrusts” are suspect. Then in T.A.M. (LTR 9825001), IRS ruled in technical advice that purchase

of deferred annuity contracts doesn’t adversely affect qualification

of unitrust and would not be considered an act of self-dealing.

D. Funding Charitable Remainder Trust With Individual Retirement Account (IRA).

(1) The general rules on "income in respect of a decedent."

(2) Other tax problems on IRAs and like plans.

(3) IRS Private Letter Ruling. (LTR 9237020)

(a) D has Individual Retirement Account. She plans to create testamentary CRUT for son's benefit. To fund trust, D will name CRUT as beneficiary of her IRA.

(b) IRS rules. Trust will qualify and entitle D's estate to estate tax charitable deduction for value of remainder interest. Any IRD received by CRUT will have same character in its hands as it would have had in D's hands, had she lived and re­ceived it.

(c) IRS also said that trust won't be taxable on its income unless it has unrelated business income. This, CRUT won't be taxable on IRD; instead, that income will be taxed to son piecemeal as it's paid to him in satisfaction of annual unitrust amounts under four-tier provisions of IRC '664(b).

(d) Generous individuals often disappointed to learn that IRAs and other pension plans can't be "rolled over" tax-free into charitable remainder trusts during lifetime. Resulting income is taxed to donor in year of trans­fer, reducing funds available for trust. However, by funding testamentary unitrust with her IRA, D has avoided up-front income tax. And unitrust payments based on a percentage of assets in CRUT, as revalued each year. Thus, the more (untaxed) assets pass to trust, higher payments will be - and more pre-tax funds will be available for reinvestment.

(4) Current ruling -- LTR 9901023. IRS confirmed its holding in above

ruling, but made it clear that income tax deduction for estate tax

attributable to IRD belongs to CRT not its beneficiaries. Extent of

adverse impact?

E. Wealth Replacement

(1) Create CRT

(2) Use tax savings and/or increased income stream to purchase life insurance to replace amount transferred to CRT. Perhaps use life insurance trust to hold insurance.

6. Some Potential Pitfalls

A. Transfer of mortgaged property to remainder trust.

(1) Don't do it. 

(2) Some possible outs.

(a) Pay off mortgage or get lien released.

(b) Sale to charity of undivided interest. Donor uses proceeds to pay debt and transfers balance of his interest to CRT. Caveat: The undivided interest problem and self-dealing.

B. Installment obligations.

(1) Transfer triggers unreported gain.

(2) Better to use testamentary gifts.

C. (1) S Corporation stock.

D. The Accelerated Unitrust and the “Chutzpah Trust”

7. Ethical Considerations.

1. Acting as fund-raiser and not attorney.

2. Potential conflict of interest.

See Primer attached for more detailed descriptions of various split-interest gifts

APPENDIX

A PRIMER ON DEFERRED GIFTS

I. INTRODUCTION

This portion of the outline is designed to furnish a fuller discussion of the various types of planned (or deferred) gifts available to institutions and their donors.

II. CHARITABLE REMAINDER UNITRUSTS

A. In Brief. Donor irrevocably transfers money, securities, real property to trustee (often the charity) who invests and reinvests assets as separate fund. Donor (or other designated beneficiary) receives amount each year determined by multiplying fixed percent (minimum of 5%) by the fair market value of trust assets, valued each year. On donor's death (or death of other designated beneficiary) payments terminate and then assets are absolute property of designated charitable remainderman.

B. Three Types of Unitrusts Authorized:

1. Plan 1: Specifies that "recipient" (income beneficiary) receives annual payments based on fixed percent (cannot be less than 5% nor more than 50%) of net fair market value of trust assets, as determined each year. Percent, determined at time trust created, remains constant for entire trust term. Any income not paid out added to principal. If income is insufficient to pay required amount, capital gains and/or principal make up deficit.

2. Plan 2: Trustee pays beneficiary only trust income if actual income is less than stated percent. Deficiencies in distributions (i.e., where trust income is less than stated percent) made up in later year(s) if trust income in later year(s) exceeds stated percent.

3. Plan 3. Trustee pays beneficiary only trust income if actual income is less

than stated percent. Deficiencies in distributions (i.e., where trust income

is less than stated percent) not made up.

C. The FLIP Charitable Remainder Unitrust:

A second variation on the unitrust is a hybrid or “flip trust.” There had been some confusion about these trusts which provide for a change in the method of calculating the unitrust amount; first the Service said okay, then it said they didn’t work.

In December 1998, the IRS issued regulations dealing with flip trusts. These spell out the conditions under which the governing instrument may provide for “flip” from a net income charitable remainder unitrust to a standard unitrust during the term of the trust.

The flip trust is especially useful for unmarketable, low-income producing assets that may take some time to sell. The flip unitrust allows the trustee to invest for total return once the trust becomes a standard unitrust.

The regulations will allow the flip trust if (1) the trust instrument requires the flip, so that the trustee does not have discretion to change the type of CRT, (2) the CRT uses a net income method (with or without make-up) until the flip occurs, typically upon the sale of a specified asset or group of assets contributed at the time the trust was created and (3) the trust thereafter is required to convert to a standard charitable remainder unitrust for calculating distributable amounts. Note that any deficit not “made up” by the time of the flip is lost.

The regulations give examples of valid and invalid triggering events for the flip.

Valid triggering events include: an individual’s marriage, divorce, death or birth of a child; the sale of an unmarketable asset (more properly thought of as a hard-to-market asset); and a fixed date.

Invalid triggering events include: the sale of marketable assets; a request from the income beneficiary or his or her financial advisor that the trust flip.

With many trustees moving to a total return concept, without regard to whether the return is categorized as income or capital appreciation, the flip trust may be increasingly popular.

D. Income Tax Charitable Deduction:

1. To qualify, value of charitable remainder interest must be at least 10%.

2. Donor gets sizable income tax charitable deduc­tion in year he creates unitrust. Deduction is for value of charitable institution's right to receive unitrust principal (the remainder) after donor's life. Determined by official Treasury tables.

3. Amount of charitable deduction depends on:

(a) Donor's age (and age of any other beneficiary).

(b) Percent to be paid.

(c) Amount of money or fair market value of long-term securities or real property contributed.

(d) Discount rate of month. Can make election to use rate for either

of two months preceding month of gift.

4. Donor's gift deductible up to 50% of adjusted gross income when unitrust is funded with money and remainderman is a school, church, hospital or other publicly supported charity. Any "excess" deductible, until exhausted, over five following years -- up to 50% of each year's adjusted gross income.

5. For unitrusts funded with long-term appreciated securities or real property, contribution deductible up to 30% of adjusted gross income -- with five year - 30 % carryover for any "excess." In some cases, ceiling can be increased to 50% with five year carryover by electing to reduce amount of charitable deduction by 100% of appreciation allocable to remainder interest. Generally not good idea.

E. Providing Income for Another: Donor's unitrust can provide income for another -- his wife, parent, child, etc. He can also have income paid to him for life and then to a family member. Contribution deduction lower for two life unitrust since payments are for longer time than in one life plan.

F. How Unitrust Payments Taxed:

1. Amount paid to income beneficiary retains character it had in trust. Each payment treated as follows:

First, as ordinary income to extent of trust's ordinary income for year (and any undistributed ordinary income from prior years).

Second, as capital gains to extent of trust's capital gains for year (and any undistributed capital gains from prior years). On WIFO

(Worst In, First Out) basis; first short-term, then long-term. 

Third, as other (usually tax-exempt) income to extent of trust's other income for year (and any undistributed other income from prior years).

Fourth, as tax-free distribution of principal.

2. Potential Favorable Tax Treatment for Trust Payments. Part of income received by donor each year can often consist of capital gains (which can be offset by beneficiary's capital losses or is taxed at somewhat more favorable capital gains tax rates) or even be tax-free return of principal. This achieved by growth rather than income oriented investment policy. In Plan 1 unitrust (described above), income beneficiary receives stated percent each year even though unitrust income less than stated percent. Capital gains or principal are distributed to make up any deficit.

G. Capital Gains Benefits When Unitrust Funded With Appreciated Property:

1. No capital gains tax on transfer of appreciated securities or real property to fund unitrust. Furthermore, contribution deduction for gift of long-term appreciated securities or real property determined by multiplying

appropriate actuarial factor from Treasury tables by property's full fair market value -- not lower cost-basis. Note: Appreciation element is tax preference item for alternative minimum tax purposes.

2. Gains on sales of appreciated securities by unitrust not taxed to trust; nor is ordinary income. Exception: Unitrust not exempt from tax in any year it has income which would be taxable unrelated business income if trust were exempt organization. Unrelated business taxable income includes debt-financed income. Payments made to income beneficiary taxed as described above.

H. Estate Taxes Reduced. Substantial estate tax savings also achieved. When Donor is only beneficiary (or, in two life unitrust, is not survived by second beneficiary), unitrust not taxed to estate. If there is survivor beneficiary, only value of

survivor's right to life payments (computed on donor's death) subject to tax in donor's estate. If survivor beneficiary is spouse, qualifies for marital deduction. Charitable gift -- charitable institution's right to unitrust principal on death of survivor -- completely free from estate tax.

I. Gift Tax Implications: 

1. One life unitrust. No gift tax implications if donor beneficiary. If donor names another as beneficiary, gift made to that person for value of life interest (reciprocal of remainder interest). If spouse, qualifies for marital deduction.

2. Two-life unitrusts. Donor who funds unitrust with own property and provides for income first to himself and then survivor, makes gift to survivor. However, proper drafting of trust agreement -- donor retains right, by his Will, to revoke survivor's interest -- makes gift to survivor free of gift tax. If spouse is survivor beneficiary, qualifies for marital deduction.

J. Generation-Skipping Transfers

1. If charitable remainder unitrust deemed to create a "generation-skipping transfer," no income, gift or estate tax charitable deductions will be allowable. Reason: Tax on generation-skipping transfer is payable out of trust assets. Charitable remainder trust disqualified if possibility exists that payments will be made from trust assets -- other than those required to be made to trust beneficiaries or for good and valuable consideration.

2. Most charitable remainder trusts will not run afoul of generation-skipping rules because they provide payments to only donor or to donor and spouse.

3. Generation-skipping trust generally one in which there are two or more generations of trust beneficiaries younger than the donor's generation.

4. Generation-skipping implications should always be considered before creating charitable remainder trust.

K. Applicability of spousal election rule. Under New York law, a surviving spouse has the choice of receiving that part of the estate passing to him or her by will and other testamentary provision or renouncing this interest and claiming his or her elective share. Prior to September 1, 1992, the spousal share could be satisfied with a transfer of assets in trust if the surviving spouse would receive all of the income annually from the trust. Under the revised law, only an outright interest in property will satisfy the elective share. EPTL Section 5-1.1-A.

The base against which the elective share may be claimed has been expanded, and now includes property transferred by the decedent in which he or she retained some interest. A transfer to a charitable remainder trust in which the decedent retained a life-time income interest is included in this base, as well as gifts over $10,000 made in the year before death.

As a result, it is possible that a gift to charity - - either outright in the year before death, or through a charitable remainder trust in which the decedent retained an interest - - will be reduced to contribute to the spousal election. For example, if a donor dies within a year of making a gift of art to a museum, the museum may be compelled to return up to one-third of the value of the gift in contribution to the

elective share. Because a charity may be required to return a portion of a gift, there is a risk that the IRS will disallow part of the charitable deduction.

A more serious risk is that the charitable remainder trust will not qualify because the trust would not be exclusively for a charitable remainderman from its inception. As a result, not only would the charitable income tax deduction be denied, but the remainder trust would not be tax exempt and would not qualify for estate and gift tax benefits.

Example:

Tom Jones contributes low basis, highly appreciated stock to a charitable remainder trust. He and his wife, or the survivor of them, will receive a unitrust amount. Mrs. Jones did not waive her right of election under New York law. If the IRS were to take the position that no charitable deduction would be permitted, because the trust does not qualify, the trust would be taxed on the capital gains realized when the stock is sold, and on future income and gains from investment. In addition, the gift would not qualify for the gift tax deduction, so the value of the transfer to charity, if worth more than $10,000, would be subject to gift tax.

To avoid unintended consequences to estate plans, a non-contributing spouse should waive a right of election as to a charitable remainder trust at the time the trust is created. If a waiver was not obtained at the time the trust was established, consider a late waiver as a reformation of the original charitable remainder trust.

III. CHARITABLE REMAINDER ANNUITY TRUSTS

A. In Brief. Donor irrevocably transfers money, securities, real property to trustee (often the charity) who invests and reinvests the assets as separate fund. Donor (or other designated beneficiary) receives annually fixed dollar amount (at least 5% but no more than 50% of initial net fair market value of transferred property). No annual valuation (or variation of amount of payment) as with unitrust. Any income not paid out added to principal. If income insufficient to pay required amount capital gains and/or principal make up deficit. On donor's death (or death of other designated beneficiary) payments terminate and then assets are absolute property of designated charitable remainderman.

B. Stated dollar amount may be expressed as fraction or percentage of initial net fair market value of property irrevocably passing in trust as finally determined for Federal tax purposes: But governing instrument must then provide: If such initial net fair market value is incorrectly determined by Trustee, Trustee shall pay to each recipient (in case of undervaluation) or be repaid by each recipient (in case of overvaluation) amount equal to difference between (i) amount which Trustee should have paid recipient if correct value were used and (ii) amount which Trustee actually paid recipient. Payments or repayments must be made within

reasonable period after final determination of correct value.

C. Income Tax Charitable Deduction:

1. To qualify, value of charitable remainder interest must be at least 10%.

2. Donor gets sizable income tax charitable deduction in year he creates annuity trust. Deduction is for value of charitable institution's right to receive annuity trust assets (the remainder) after donor's life. Determined by official Treasury tables.

3. Amount of deduction depends on:

(a) Donor's age (and age of any other beneficiary).

(b) Amount of annual payments.

(c) Value of assets used to fund annuity trust.

(d) Discount rate of month. Can make election to use rate for either

of two months preceding month of gift.

4. Donor's gift deductible up to 50% of adjusted gross income when annuity trust is funded with money and gift is to school, church, hospital or other publicly supported charity. Any amount not deductible in year of gift deductible over five following years, until exhausted, up to 50% of adjusted gross income each year.

5. When funded with appreciated long-term securities or real estate, ceiling on deductibility 30% of adjusted gross income with five year - 30% carry-over for any "excess." In some cases, possible to increase ceiling to 50% of adjusted gross income (with five year carryover) by electing to reduce charitable deduction by 100% of appreciation allocable to remainder interest. Generally not beneficial.

.

D. Providing Income for Another: Annuity trust can provide income for wife, parent, child, etc. Donor can also receive income for life and then have income go to family member. Charitable deduction lower for two-life annuity trust since payments are made for longer time.

E. Taxation of Annual Payments. Same as for unitrust. See above.

F. Capital Gains Benefits When Annuity Trust Funded With Appreciated Property. Same as for unitrust. See above.

G. Estate Tax Implications. Same as for unitrust. See above.

H. Gift Tax Implications. Same as for unitrust. See above.

I. Generation-Skipping Transfers. See discussion above in unitrust section.

J. Annuity Trust Differs From Classic Charitable Gift Annuity In Number Of Ways:

1. Donor looks to separately invested annuity trust income, and principal if necessary, to provide annual payment. If annuity trust runs dry because

payments set too high or because of poor investments, annual payments terminate. For classic charitable gift annuity, charity makes payments from own funds or reserves.

2. For classic charitable gift annuity, amount of annual payment depends upon beneficiary's age at date annuity starts -- older the beneficiary, higher the rate of return. For annuity trust, annual payment can be set without regard to standard rate structure. But, watch out for 5% probability test

and 10% minimum remainder requirement.

3. Way in which annual payments taxed to beneficiary differs between two types of gifts.

4. Capital gain implications: When classic charitable gift annuity is funded with highly appreciated property, there are capital gains implications. Capital gains can be avoided with annuity trust. This not as big a problem as first appears.

K. Applicability of spousal election rule. Same as for unitrust. See above.

IV. POOLED INCOME FUNDS

A. In Brief. Donor irrevocably transfers money, long-term marketable securities or both to qualified charity's separately maintained pooled income fund, where it is invested together with transfers of others who make similar life income gifts. Donor (or other designated beneficiary) receives his share of pooled income fund earnings each year. On donor's death (or death of other designated beneficiary) payments terminate and charity removes donor's gift from pooled fund and uses for charitable purposes.

B. To qualify as pooled income fund, the charitable remainderman must be organization described in clauses (i), (ii), (iii), (iv), (v) or (vi) of IRC Sec. 170(b)(1)(A).

C. Income Tax Charitable Deduction:

1. Donor gets sizable charitable contribution deduction in year he makes gift. Amount of deduction determined by official Treasury tables, which discount gift by value of life income interest.

2. Exact amount of deduction depends on:

(a) Donor's age.

(b) Pooled income fund's earning experience in recent years. Funds with less than three years experience are deemed to have an assumed rate of return (which fluctuates depending on discount rate) for purposes of computing the charitable deduction. If a

fund has more than three years experience, the highest rate earned in the last three years is used in computing the deduction.

3. Ceiling on income tax charitable deduction. See discussion of ceiling in sections on unitrusts and annuity trusts above.

D. Capital Gains Benefit To Funding Life Income Contract With Appreciated Securities.

1. Life income contract way to shift investments without paying penalty capital gains tax. No capital gain when donor transfers appreciated securities to pooled income fund.

2. Pooled income funds pay no capital gains taxes on sales by fund of securities held long-term. Fund takes over donor's holding period; if donor held securities long-term before transfer to pooled income fund, there is no capital gains tax on sale by fund. Nor is there capital gain if combined holding period -- time donor held securities plus time fund holds securities -- is long-term before sale by fund. In brief, only time there is capital gain is on sale by fund of short-term securities; and tax is paid by the fund itself. Donor not personally subject for gains tax.

E. Estate Tax Benefits. See discussion in section on unitrusts above.

F. Gift Tax Implications. See discussion in section on unitrusts above.

G. Some Non-Tax Advantages.

1. Donor gains advantage of diversified investment portfolio when he invests in pooled income fund.

2. Donor may prefer not to manage his funds any longer. Pooled income fund takes over chore for him. Or, he may be reluctant to permit inexperi­enced members of his family to manage his estate.

3. The life income contract provides for distribution of property at death -- just as surely as through a Will.

V. CHARITABLE GIFT ANNUITIES

A. In Brief. Donor transfers money or property to charity in exchange for promise to pay fixed amount annually to donor (and survivor, if desired) for life. Transfer is part gift and part purchase of annuity. Annual income (rate of return) paid by charity depends upon beneficiary's (annuitant's) age at time of gift. Annual rate of return remains constant for life. Annuitant is considered to be his age at his nearest birthday.

B. Most institutions use rates recommended by American Council on Gift Annuities, 2401 Cedar Springs, Dallas, Texas 75201.

C. The Texas lawsuit -- Ritchie vs. “All.” Antitrust claims have now been dismissed.

D. Income Tax Contribution Deduction:

1. Donor entitled to immediate charitable contribu­tion deduction on his income tax return for year of gift. Amount established by official U.S. Treasury tables.

2. When funded with money, donor's contribution deductible up to 50% of adjusted gross income. Any "excess" deductible over five following years -- up to 50% of adjusted gross income each year until exhausted.

3. When funded with long-term appreciated property, contribution deductible up to 30% of adjusted gross income, with five year carryover for any "excess." Possible to increase ceiling to 50% -- with five year carryover -- in some instances by electing to reduce amount of deduction by 100% of appreciation allocable to gift element.

E. Tax-Free Income. Significant portion of each annuity payment annuitant receives is tax-free. Tax-free amount each year for life (but not to exceed life expectancy -- after investment in contract is recovered, payments fully taxable) is fixed by

annuitant's age at time of gift. Determined by official Treasury tables. Called the exclusion ratio.

F. Capital Gains Implications On Transfer Of Appreciated Property:

1. Transfer of appreciated property is deemed to be bargain sale.

2. In computing amount of gain, cost-basis of transferred property must be allocated between gift portion and "investment in contract" (value of annuity received).

3. Amount of capital gain is difference between investment in contract and allocated basis.

4. Gain so determined is taxed to donor over his life expectancy, if annuity is nonassignable. Capital gain divided by annuitant's life expectancy and reported over his life expectancy, but only from that portion of annual payments which is return of investment in contract. Still not bad deal.

5. Gain reported ratably over life expectancy only if donor is sole annuitant or is one of annuitants in two-life annuity.

G. Estate Tax Benefits:

1. Annuity for donor's sole life completely excludable from his estate.

2. In two-life annuity, estate of first annuitant (purchaser) not subject to estate tax if second annuitant does not survive. If second annuitant survives: Includable in estate of first annuitant (purchaser) is only value of survivor's annuity -- what it would cost to purchase annuity paying survivor same annual amount that was paid to annuity purchaser. This value based on survivor's age at annuity purchaser's death. If no gift annuity purchased, entire amount used to purchase annuity subject to estate tax. If survivor annuitant is spouse, can qualify for marital deduction.

3. Survivor receives same amount tax-free each year as first annuitant did. In addition, survivor gets income tax deduction spread over his life expectancy for any Federal estate tax paid by first annuitant's estate on value of survivor's annuity.

H. Gift Tax Implications of Two-Life Gift Annuities. Donor who funds annuity with own property and provides annuity payments first to himself and then to survivor,

makes gift to survivor. However, proper drafting of annuity agreement -- donor retains right to revoke survivor's interest -- can make gift to survivor free of gift tax.

VI. DEFERRED PAYMENT GIFT ANNUITIES

A. Many donors with sufficient current income from employ­ment or other sources would like to make sizable charitable gift of capital now, but are concerned that on retirement they will need income their capital earns. They would also like to reduce their current income taxes. Deferred payment gift annuity often

answer. It provides retirement income and saves income taxes now -- and lets donor make important charitable gift. Now sometimes called the IRA substitute.

B. In Brief. Donor makes gift to charitable institution in exchange for charity's promise to pay him guaranteed life income starting at retirement (or any other date specified).

C. Advantages:

1. Satisfaction of making significant charitable gift.

2. Donor gets sizable charitable deduction now when he is in higher tax bracket than he will probably be after retirement. Charitable gift now (rather than after retirement) generates greater tax savings. Reason: Higher the tax bracket, larger are tax savings generated by charitable gift.

3. Donor receives guaranteed annual income at retire­ment when his income will probably be lower than current income. Thus, receives income at time when it is needed and when it may be taxed in lower income tax brackets.

4. Part of each guaranteed payment will be tax-free.

5. Donor rids himself of management and investment worries.

6. Donor will save estate taxes and probate costs.

D. Determining Payments To Be Made:

1. Annual income charity pays (rate of return) depends upon (1) annuitant's age now, and (2) age annuitant will be when payments are to start.

2. American Council on Gift Annuities recommends this procedure:

(a) Take amount transferred and compound annually at 6% a year from date of transfer until six months before first payment. However, period of compounding is then rounded off to first even number of years six months before date of first payment.

Example: On February 1, 1995 donor transfers $100,000 for deferred payment annuity with first payment to be made on February 1, 2115. Period of compounding would be 19 years. That is, 20 years until first payment, reduced by six months and then rounded off to nearest whole year before first payment.

(b) Once amount transferred compounded as provided above, determine amount of annuity to be paid by multiplying rate of return charitable organization currently offers for immediate annuities for individuals who are now age annuitant will be when annuity payments are to start.

E. Income Tax Savings:

1. Donor receives income tax charitable deduction in the year he makes transfer. Amount of contribution established by official U.S. Treasury tables.

2. When funded with money, contribution deductible up to 50% of donor's adjusted gross income. Any “excess” deductible over five following years -- up to 50% of adjusted gross income each year -- until exhausted.

3. When funded with long-term appreciated securities, contribution deductible up to 30% of adjusted gross income, with five year - 30% of adjusted gross income carryover for any "excess." Possible to increase ceiling to 50% of adjusted gross income with five year - 50% of adjusted gross income carryover in some instances. Same transfer is made but amount deemed contributed reduced by 100% of appreciation allocable to gift part of annuity.

F. Favorable Taxation Of Annuity Payments. Substantial part of each payment received is tax-free until invest­ment in contract is recovered. Tax-free amount depends on : (1) annuitant's age now, (2) age when payments start, (3) Treasury's life expectancy tables in effect when payments start, and (4) income tax laws in effect when payments begin. This information enables computation of "exclusion ratio."

G. Capital Gains Consequences:

1. There are capital gains implications when deferred payment gift annuity funded with appreciated securities. However:

(a) Gain is smaller than gain would be on sale of appreciated securities (instead of transfer for deferred payment gift annuity).

(b) Gain should not be reportable in year of transfer for deferred payment gift annuity (as it would be if securities sold). Should be reported ratably over donor-annuitant's life expectancy, starting when payments begin.

2. Treasury regulations give capital gains implica­tions for "immediate" gift annuities (when payments start within one year of gift). Assumed that rules will be same for deferred payment gift annuities. Private letter ruling so holds. 

H. Benefiting Family Member:

1. Donor can have deferred payment gift annuity pay income to him for life (starting when he chooses) and then to his wife (or other designated family member) for life.

2. How two-life annuities work: Payments made to one individual for life (starting at specified date) and then to survivor for life; or payments can be made jointly and then to survivor. Which way best depends on donor's wishes and how assets used to fund annuity are owned. Deferred payment gift annuities can generally be written so that family member's right to payments not subject to Federal gift tax.

3. Rate of return lower for two-life deferred payment gift annuity because period of payments is actuarially longer.

I. Estate Tax Benefits:

1. If donor is only annuitant (or, in two-life annuity, is not survived by second annuitant) annuity not taxed to estate at all.

2. If there is survivor annuitant, only amount includable in estate of first annuitant (purchaser) is value of survivor's annuity - what it would cost to purchase annuity, paying survivor same annual amount that was paid to annuity purchaser. This value based on survivor's age at annuity

purchaser's death.

J. Income Tax Benefits For Survivor. Survivor receives same amount tax-free each year as first annuitant did. In addition, survivor gets income tax deduction spread over his or her life expectancy for any Federal estate tax paid by first annuitant's estate on value of survivor's annuity.

VII. CHARITABLE INCOME (LEAD) TRUSTS

A. Pre-1986 Tax Reform Act:

1. Donor could transfer money or property to trustee and provide that income be paid to designated charity for number of years before it returned to him.

In order for donor not to be taxable on income paid to charity, trust term had to be at least 10 years.

2. Income tax charitable deduction allowed only if:

(a) Charity's income interest is guaranteed annuity (short-term annuity trust) or trust specifies charity is to receive fixed percent each year of net fair market value of trust assets, determined yearly (short-term unitrust); and

(b) Donor taxed on income paid to charity (e.g., his reversionary interest would or might take effect within 10 years).

3. Income Tax Charitable Deduction. In limited case where deduction was allowed, limited o 20% of donor’s adjusted gross income, with no five year carryover for any “excess.” This is gift “for the use of.”

B. Law still allows donor to avoid tax on income paid to charity, but the trust must not provide reversion for donor or spouse. Trust should be lead unitrust or lead annuity trust. Otherwise, value of charity's income interest will be subject to Federal gift tax. And, if donor dies before property reverts to him, there will be no estate tax charitable deduction.

C. Main drawback of law is that donor cannot get income tax charitable deduction unless trust so drawn that he is taxed on income paid to charity. Thus, except for very wealthy individuals, charitable lead trust created during lifetime is generally not advantageous. Some create trust with tax-exempt bonds so that income is not taxable.

D. Lead trusts paying “income” to charity are advantageous when created by donor's will. Law allows estate tax charitable deduction for value of income paid to charity under lead trust created by donor's will. To get estate tax deduction, income interest must be guaranteed annuity (annuity trust) or fixed percent distributed yearly of net fair market value of trust assets, determined yearly (unitrust). However, income paid to charity need not be taxed to donor's estate in order for estate to get Federal estate tax charitable deduction.

1. Example of lead annuity trust. Donor's will creates $100,000 trust

providing that trustee pay ABC College $6,000 each year for 15 years. Then trust principal is to be distributed to donor's children.

2. Example of lead unitrust. Donor's will creates $100,000 trust providing that trustee pay ABC College each year for 15 years amount determined by multiplying 6% by net fair market value of trust assets, as valued each

year. Then trust principal is to be distributed to donor's nephews and nieces.

E. Be careful, in large trusts, of generation-skipping problems.

VIII. GIFTS OF PERSONAL RESIDENCE OR FARM WITH RETAINED LIFE ESTATE

A. Charitable deduction (for income, gift and estate tax purposes) allowed for gift of remainder interest in real property (not made by transfer to charitable remainder unitrust, annuity trust or pooled income fund trust) only if remainder interest is in personal resi­dence or farm.

1. What is personal residence? Any property used by donor as personal residence even though not principal residence. For example, donor's vacation home may be personal residence. Term personal residence also includes stock owned by donor as tenant-stockholder in cooperative housing corporation if dwelling he is entitled to occupy as stockholder used by him as personal residence.

2. What is a farm? Any land used by donor or his tenant for production of crops, fruit or other agricultural products - or for sustenance of livestock.

B. Estate may be retained for one or more lives. Estate may also be retained for term of years.

C. Valuing the remainder interest:

1. For income tax charitable deduction, in determining value of remainder interest, depreciation (computed on straight line method) and depletion must be taken into account. Depreciation on structure only, not land. Those values are, under current law, discounted at a rate of 10% per annum.

2. For gift and estate tax purposes, Code does not specify that depreciation (or depletion) must be taken into account in valuing remainder interest. Nor do Treasury regulations require that deprecia­tion (or depletion) be taken into account in computing gift and estate tax charitable deduc­tions. IRS, in private letter ruling issued to a mid-western college, stated that for gift and estate tax charitable deductions, depreciation (or depletion) need not be taken into account.

3. Computing charitable deduction for remainder interest in personal residence or farm not simple. Easier part is purely mechanical computation using IRS tables and formulas. Difficult part is determination of hard fact questions:

(a) Fair market value of the property - with fair market value allocated between land and structures.

(b) "Estimated useful life" of structure (longer the estimated useful life, larger the charitable deduction).

(c) Value of structure at end of estimated useful life ("salvage value"). The greater the value at end of estimated useful life, larger the charitable deduction.

D. Gift of Undivided Interest in Real Property. Income, gift and estate tax charitable deductions allowed for undivided portion of donor's entire interest in real property whether or not a personal residence or farm.

IX. LIFE INSURANCE GIFTS: BENEFITS, PITFALLS AND PRATFALLS

A. Basics.

1. Donor gets income tax charitable deduction when donates insurance policy. Donor makes public charity irrevocable beneficiary and assigns all incidents of policy ownership to charity. Retention of just about any control over policy -- including power to change beneficiary or to borrow against policy -- precludes deduction.

2. Insurable interest ruling. LTR 9110016.

(a) Rule differs from state to state. Which law governs?

(b) The New York experience.

(c) Assume there is no problem in Pennsylvania where policy is assigned by the insured who obtained the insurance policy.

3. Amount of deduction depends on type of policy contributed.

(a) Gift of policy on which premiums remain to be paid. Amount of income tax charitable deduction is policy's interpolated terminal reserve at date of gift, plus proportionate part of gross premium last paid before gift that covers the period extending beyond date of donation. Translated into English: Generally slightly above cash surrender value. However, if "interpolated terminal reserve," etc., exceeds cost basis of policy (the premiums paid minus dividends received), deduction is limited to policy's cost basis. 

Gift qualifies for 50% of adjusted gross income deductibility ceiling, with a five-year carryover for any "excess."

(b) Payment of premiums. Donor not obligated to continue paying premiums after contributes policy. If donor stops making payments, charity may (1) continue to pay premiums so as to eventually receive full face amount, (2) elect to receive paid-up policy in reduced face amount on which no further premiums payable or (3) surrender policy for cash value.

If donor continues paying premiums directly to insurance company, gets income tax chari­table deduction each year for premiums paid during year. Those payments are considered gifts "to" charity, qualifying for 50% ceiling and five-year carryover.

(c) Gift of fully paid-up life insurance policy. Income tax charitable deduction is allowed for policy's replacement cost. However, if replacement cost exceeds policy's cost basis (premiums paid minus dividends received), deduction is limited to cost basis. Gift qualifies for 50% ceiling, with five-year carryover for any "excess."

B. Estate Tax Benefits From Lifetime Charitable Gifts of Life Insurance.

1. In addition to income tax savings, donor can save estate taxes -- if estate would otherwise be subject to tax -- by giving life insurance policy to charitable institution. Proceeds received by charity are immune from federal estate tax. Because policy contributed during lifetime, proceeds are not includable in donor's gross estate. If gift made within three years of death, proceeds will be includable in gross estate, but will be deductible as estate tax charitable deduction -- resulting in washout.

2. Retaining incident of ownership to increase size of estate tax marital deduction. Now that marital deduction is unlimited, there's no point in keeping scintilla of ownership. Donor who has retained interest in policies contributed to charity should review those policies and transfer all retained rights to charity. Although any amount included in gross estate (due to retained rights) will be deductible as a charitable deduction, amounts includable in gross estate (and hence adjusted gross estate) may result in distortions that disqualify estate for IRC Sec. 2032A special use valuation, redemptions under IRC Sec. 303 and the IRC Sec. 6166 installment payment of tax when the estate has an interest in a closely held business.

C. Pitfalls.

1. Charitable gift of maturing endowment policy. Income tax charitable deduction is value of policy, minus amount that would be taxed as ordi­nary income on sale. However, deduction need not be reduced by ordinary income element if policy matures in year of gift.

Caveat. Donor who contributes endowment policy will have to report (as ordinary income) difference between cost basis of policy and maturity value in year policy matures -- that is so even though charity (not donor) receives proceeds.

2. Charitable gift of annuity contract linked to purchase of term insurance at discount rates. No income tax charitable deduction allowable for charita­ble gift of annuity contract under those circumstances.

3. Split-dollar plan involving charitable gift. Under charitable split-dollar plan, donor gives cash value portion of paid-up policy (or ordinary life policy on which premiums continue to be paid) to charity, retaining right to designate beneficiary of insurance proceeds that exceed cash value.

In 1973 private letter ruling, IRS held that charitable split-dollar arrangement is "partial interest" gift that does not entitle donor to income tax charitable deduction.

4. Proposed legislation would prohibit gift of cash surrender value. In Rev. Rul. 76-143, donor irrevocably assigned cash surrender value of paid-up insurance policy to college, and gave college possession of the policy. College had right to share in death benefits to extent of policy's cash surrender value if policy was not terminated before donor's death. College also had right to surrender policy for cash value or to borrow from insurer up to cash surrender value without donor's permission. But donor kept right to name or change beneficiary and to assign balance of policy.

IRS ruled that cash surrender value of policy was partial interest that did not qualify for income tax charitable deduction. It was not fraction or percentage of each and every substantial interest because donor retained right to designate beneficiary.

D. Other Possible Life Insurance Charitable Gifts.

1. Retaining right to change beneficiary. Donor can name charity beneficiary of life insurance policy, keeping ownership of the policy and right to change beneficiary. Although receives no income tax charitable deduction, any proceeds paid to charity on death will qualify for estate tax charitable deduction.

2. Naming charitable institution as successor beneficiary. If individual's plan requires naming family members as beneficiaries of life insurance, can show interest in charitable institution by naming it successor beneficiary. Thus, charitable institution will receive proceeds if primary beneficiaries predecease.

3. New life insurance policy. Instead of giving charity ownership of existing policy, individual can buy new policy, designate charity as benefi­ciary and assign ownership to it. If many members of a college class, for example, participate in this plan, benefits to charity can be significant -- even though cost to each individual relatively small.

4. Gift of group term life insurance coverage. Employee who receives group term life insurance must include in income cost of coverage over $50,000. Normally, employee can pay resulting additional income tax out of cash compensation received, but must use after-tax dollars or capital. Although employer's payment of premiums for insurance coverage results in economic benefit to employee, employee has less spendable income because of increased taxes.

Under important exception, value of group term life insurance protection over $50,000 ("excess coverage") not taxed when employee names charitable organization beneficiary of excess. No income tax charitable deduction is allowed for gift, but employee can avoid paying income tax on the value of premiums needed to furnish the insurance protection over $50,000.

E. Life Insurance and Charitable Remainder Trusts.

1. LTR 7928014. IRS rules that unitrust funded with life insurance policy qualifies as CRT and donor's annual payment of premiums qualifies for income tax charitable deduction on remainder value.

2. LTR 8745013. Donor establishes charitable remainder unitrust. Asset transferred is highly appreciated, non-income producing real estate. Trustee intends to sell appreciated real estate and use proceeds to purchase

life insurance on the life of the recipients of unitrust amount. Sole asset of trust would then be life insurance policy.

IRS rules:

(a) If trustee borrows from insurance policy and invests proceeds to create income, acquisi­tion indebtedness will be created and income will be deemed debt-financed income.

(b) Transaction does not violate provision restricting trustee from investing trust assets in manner which can result in annual realization of reasonable amount of income or gain from the sale or disposition of trust assets. Trust includes provision which states that nothing in agreement shall be so construed.

(c) Purchase of life insurance will not automatically be considered jeopardy investment.

(d) Apparently trust is not disqualified although IRS refuses to rule on other issues.

F. Wealth Replacement.

1. How it works.

(a) Donor transfers appreciated property to charitable remainder trust; avoids capital gains tax and gets income tax deduction.

(b) Donor uses tax savings (and, in some cases, increased income) to purchase life insurance.

(c) Assigns policy to children or has children obtain policy -- or transfers policy to irrevocable life insurance trust.

(d) Insurance proceeds not included in estate nor is charitable remainder trust taxed.

2. Caveats and concerns regarding the use of a "crummy power."

X. VALUATION AND SUBSTANTIATION RULES

A. Valuation -- General Rules.

1. Basics. If a charitable contribution is made in property other than money, the amount of the contribution is the fair market value of the property at the time of the contribution... fair market value is the price at which the property would change hands between a willing buyer and a willing seller,

neither being under any compulsion to buy or sell and both having reason­able knowledge of relevant facts.

2. Comparable sales. 

(a) Comparable sales technique (also known as "market data method") most useful when donated property similar to other property available on open market.

(b) Appraiser locates several similar items -- called "comparables" -- that were sold or available for purchase near time of donation.

(c) That gives ballpark figure. Then value increased or decreased, depending on how donated property stacks up against comparables.

3. Capitalization of income.

(a) If asset generates income, value can sometimes be appraised by estimating how much income it can be anticipated to earn.

(b) Then match to market rates.

4. Replacement cost.

(a) This method most often used when property to be valued is unique and isn't expected to generate income.

(b) Because replacement cost represents value of brand-new asset, adjustments may be made to reflect depreciation on property before its donation.

5. Subsequent sales.

(a) Often, charities that have no immediate use for donated property sell property and use sales proceeds for charitable endeavors. Although sale price of donated asset is not conclusive evidence of fair market value, IRS and the courts generally find it very persuasive.

(b) Indeed, new reporting requirements for certain contributed property sold within two years of gift show how probative Congress finds that information.

B. Form 8283: Appraisal summary.

C. Form 8282: The "tattle tale" form.

D. Appraisals.

1. What must be appraised?

(a) Property gifts (other than money and publicly traded securities) if claimed or reported value of property exceeds $5,000. To deter­mine whether $5,000 threshold crossed, only part of gift claimed as charitable deduction counts. Thus, if land worth $25,000 is placed in charitable remainder unitrust, appraisal requirements apply only if charity's remainder interest more than $5,000 and donor claims income tax charitable deduction.

(b) What is "qualified appraisal"?

(i) Qualified appraisal can be done any time from 60 days before donation up until due date (including extensions) for return on which donor reports or claims gift; post-donation appraisals are okay.

(ii) Regulations require qualified appraisal to give following information:

(A) Description of property in sufficient detail for person who is not generally familiar with type of property to ascertain that appraised item is property contributed.

(B) In case of tangible property, its physical condition.

(C) Date (or expected date) of contribution to donee-charity.

(D) Terms of any agreement or understanding entered into (or expected to be entered into) by or on behalf of donor (or donee) that relates to use, sale or other disposition of contributed property; includes, for example, terms of any agreement or understanding that -

(1) Restricts (temporarily or permanently) donee-charity's right to use or dispose of donated property;

(2) Reserves to, or confers upon, anyone (other than charity or organization participating with charity in cooperative fund-raising) any right to income from donated property or possession of property - including right to vote donated securities, to acquire property by purchase or otherwise, or to designate person having income, possession, or right to acquire; or

(3) Earmarks donated property for particular use.

(E) Name, address and TIN of qualified appraiser (or appraisers) and - if qualified appraiser is a partner in partnership, employee of any person (whether individual, corporation, or partnership or inde­pendent contractor engaged by person other than donor - name, address and TIN of partnership or person who employs or engages qualified appraiser.

(F) Qualifications of appraiser who signs appraisal, including appraiser's background, experience, education, and membership, if any, in professional appraisal associations.

(G) Statement that appraisal was prepared for income tax purposes.

Contact Me

If you think you may require the assistance of Phil Temple in any matter, email (ptemple@mccarthyfingar.com) or phone him (914-385-1028) with any question you may have.