Tax Consequences of Non-Cash Gifts

We Will Discuss the Tax Consequences of Specific Gift Vehicles Here

SECTION ONE

CHARITABLE BEQUEST

  1. A testamentary charitable bequest from a will or Revocable Living Trust is generally deductible for federal estate tax and state inheritance tax purposes. The federal estate tax charitable deduction is unlimited in amount.

  2. Complex wills or Revocable Living Trusts calling for the creation of various types of testamentary trusts are often used to avoid or reduce estate and inheritance taxes at death. The federal estate tax is a concern for single donors with estates exceeding $1,000,000 in value or married donors with estates exceeding $2,000,000.

  3. A simple will, leaving everything to a loved one and/or charity is generally used for donors with estates less than $1,000,000 in value.

  4. Each taxpayer’s $1,000,000 estate and gift tax unified credit exemption equivalent is now set by Congress to increase incrementally through the next nine years.

SECTION TWO

OUTRIGHT GIFTS OF PERSONAL PROPERTY

  1. Typically a gift of tangible personal property (e.g. library books, collections or equipment or cars) to First United Methodist Church for its charitable activity (e.g. staff training) is deductible at its fair market value up to 30 percent of Adjusted Gross Income (AGI). Tangible personal property not used for a charitable purpose (i.e. held for resale) by First United Methodist Church is deductible at its cost basis up to 50 percent of AGI.

  2. Long-term capital gain property (i.e. held for more than one year), such as stocks, bonds, and other capital assets, is deductible at its fair market up to 30 percent of AGI (or 50 percent of AGI if the donor elects to deduct the cost) in the year of the gift. Additionally, the donor has up to five carryover years.

  3. Short-term capital gain property (i.e. held for less than one year), such as stocks, bonds, and other capital assets, is deductible at its cost basis up to 50 percent of AGI in the year of the gift. The donor has five carryover years.

  4. For personal property classified as “ordinary income property” (e.g. inventory, farm products, artwork by the artist, Section 306 stock, and certain oil and gas interests), an individual donor may elect to deduct its cost basis up to 50 percent of AGI in the year of the gift. The donor has up to five carryover years. Otherwise the 30 percent limit applies to the fair market value less the amount treated as ordinary income. Special tax rules apply for corporate gifts of inventory and other business assets for certain types of charitable activities.

  5. Individual donors must obtain an independent appraisal to substantiate (on IRS Form 8283) the charitable deduction for certain gifts of property in excess of $5,000 in value ($10,000 for closely-held stock). Any subsequent sale of the gift property by First United Methodist Church within two years of the gift ($10,000 for closely-held stock) must be reported by First United Methodist Church to the IRS using Form 8282.

SECTION THREE

OUTRIGHT GIFTS OF REAL PROPERTY

  1. The donor’s desire to make a gift should be clearly documented in a letter or other written statement drafted by the donor’s attorney.

  2. Long-term capital gain property (i.e. held for more than one year) is deductible at its fair market value up to 30 percent of Adjusted Gross Income (AGI).

  3. Depreciation taken on long-term capital gain real property, to the extent it exceeds straight-line depreciation, may be “recaptured” and taxable as ordinary income to the donor.

  4. A donor may elect to deduct the “cost basis” of the gift property up to 50 percent of AGI, rather than deduct the fair market value of the property (subject to a limitation of 30 percent of AGI).

  5. Short-term capital gain real property (held for less than one year) is deductible at cost, subject to the 50 percent of AGI limitation.

  6. A donor must file an IRS Form 8283 with his or her tax return and obtain an independent appraisal to substantiate the charitable deduction for real property in excess of $5,000 in value.

  7. A subsequent sale of the property within two years of the date of the gift must be reported to the IRS by First United Methodist Church on Form 8282.

SECTION FOUR

BARGAIN SALE

  1. The donor’s desire to make a gift should be clearly documented in a letter or other written statement. This helps to clarify that the “gift” was not merely a negotiated discount in the sales price. It is drafted by the donor’s attorney.

  2. The gift portion of a bargain sale to First United Methodist Church qualifies for the charitable income tax deduction. The deduction equals the difference between the fair market value and the reduced price. For tax purposes, the transaction is thus part sale and part gift to charity.

  3. To determine if there is a taxable gain on the sale, the donor’s cost basis is allocated for tax purposes between the sale portion and the gift portion of the transaction.

  4. The outright transfer of debt-encumbered property to charity is treated as a bargain sale by the IRS, as if the donor had received cash for the amount of “debt relief.”

  5. A donor must file an IRS Form 8283 with his or her tax return and obtain an independent appraisal to substantiate the charitable deduction for non-cash gifts (other than publicly traded securities) in excess of $5,000 in value (or $10,000 for closely held stock).

  6. A subsequent sale of the property within two years of the date of the gift must be reported to the IRS by First United Methodist Church on Form 8282.

  7. The income tax charitable deduction for the gift portion may be taken in the year of the gift, even if the donor receives installment payments for the sale portion.

  8. A bargain sale with a fixed number of installment payments to the donor may be preferable to transferring valuable assets in exchange for gift annuity payments which terminate at the annuitant’s death.

  9. Another alternative is to postpone any taxation by transferring the asset to charity in exchange for “like kind property” of lesser value.

SECTION FIVE

LIFE ESTATE AGREEMENT

  1. Donors can receive a sizable charitable income tax deduction for the gift of a “life estate” in a farm or residence

  2. The donor’s age is taken into consideration when allocating the value of the farm or residence between the donor’s “life estate” and the tax deductible “remainder interest” passing to charity. Older donors qualify for larger charitable income tax deductions since their life expectancy is shorter.

  3. The value of improvements, the useful life, and the salvage value of the residence or farm are also taken into consideration in calculating the deductible value of the charity’s remainder interest.

  4. A vacation home, condo, co-op, or yacht may qualify as a “personal residence,” if it is used for residential purposes by the donor at least some of the time.

  5. The remainder gift of a residence or farm does not include household furnishings and other tangible personal property (e.g. farm equipment).

  6. The deed does not have to include all the land surrounding the residence or farm, or improvements such as barns, silos, dwellings, etc.

  7. An appraiser should be used to allocate the value between land and depreciable improvements for purposes of computing the income tax charitable deduction.

  8. Improvements made to the property by the donor after the gift is made may qualify for additional income tax charitable deductions.

  9. To receive the tax benefits, the deed cannot be placed “in trust,” nor can the donor require the charity to sell the property.

SECTION SIX

CHARITABLE GIFT ANNUITY

  1. The income tax charitable deduction is based on IRS tables for calculating the gift portion of the assets transferred to First United Methodist Church.

  2. A portion of the donor’s basis in the transferred asset is returned tax-free to the designated annuitant in each annuity payment.

  3. The donor’s cost basis and capital gain, if any, is allocated between the gift portion and the annuity portion.

  4. Any capital gain may be spread out over the annuitant’s lifetime (rather than taxed immediately) if the donor is the sole annuitant or the donor and a survivor are the annuitants, provided the annuity is not assignable to third parties other than First United Methodist Church.

  5. The annuity payments are taxed by allocating the donor’s basis and any capital gain over the annuitant’s lifetime, and treating the balance of the annuity payment as ordinary income.

  6. The obligation of First United Methodist Church to make annuity payments may not be secured by specific assets. Rather, it is an unsecured contractual obligation backed by all the assets of First United Methodist Church.

  7. Assets transferred to create a gift annuity for the donor and surviving spouse should qualify for the gift tax marital deduction and avoid estate taxation as well.

  8. There may be gift or estate tax considerations if the donor designates a non-spouse as the sole or surviving annuitant.

  9. Unlike charitable remainder trusts, a gift of tangible personal property to create a gift annuity will generate an income tax deduction equal to the fair market value of the asset in the year of the gift (plus up to five carryover years).

SECTION SEVEN

POOLED INCOME FUND

    1. Typically, an income tax charitable deduction is available for the year assets are transferred to the PIF. The deduction is based on IRS tables for computing the present value of the gift that will be transferred by the trustee of the PIF to First United Methodist Church in the future.

    2. The income tax charitable deduction is postponed for gifts of tangible personal property until the termination of the life interest of the donor or related party.

    3. Generally, all PIF income is distributed and taxed to the income beneficiaries rather than to the PIF. (If the PIF generates some "unrelated business taxable income" (UBTI) only that portion is taxable to the PIF).

    4. PIF income payments are generally taxed as ordinary income to the recipient of the payments.

    5. The PIF is administered so as to avoid any tax on the sale and investment of gift assets. The PIF is not a tax-exempt trust, but enjoys an unlimited charitable set-aside deduction for undistributed long-term capital gains, and also receives a deduction for all income distributions.

    6. The PIF may not accept or invest in tax-exempt securities.

    7. Income payments must be for life rather than a fixed a term of years. But the donor may terminate payments at any time by donating the income interest to First United Methodist Church.

    8. Single life payments or joint and survivor income payments are available from the PIF.

    9. Income payments cannot be made to an unborn class of individuals, (e.g. grandchildren) or to an entity such as a business. Payments must be made to one or two named individuals living at the time of the gift.

    10. First United Methodist Church selects and may remove the trustee of the PIF and must provide a PIF Trust Disclosure Statement to the donor when the gift is made.

    11. The trustee must advise income beneficiaries each year of the tax treatment of their income payments. The PIF uses a "calendar year".

SECTION EIGHT

Charitable Remainder
UNITRUST

    1. Capital gains tax may be avoided when an asset is transferred to and later sold by the trustee of the unitrust. The gift asset may also avoid federal estate and gift taxation if either the donor, donor’s spouse, or the donor and donor’s spouse are the designated income beneficiaries.

    2. Three types of unitrusts are allowed:

    a. An "ordinary" or "standard" unitrust which may deplete the principal to pay an income beneficiary.

    b. A "net income" unitrust which pays income beneficiaries from ordinary income (as defined in the trust) and not from principal.

    c. A "net income with makeup" unitrust which can make up any income payment deficits from excess ordinary income earned in subsequent years.

    3. Payments to income beneficiaries are generally taxable. The minimum payout allowed is 5 percent at least annually, and the maximum payout is 50 percent. Also, the present value of the charitable remainder must be at least 10 percent of the net fair market value of the property transferred to the trust on the date of the transfer.

    4. Payments may be set for life, or "a term of years" not to exceed 20 years. A "term-of-years" trust may name as income beneficiary an individual, or class of individuals, corporation, partnership, trust, or estate.

    5. A charity may receive income payments if at least one individual is also an income beneficiary.

    6. The named income beneficiary must be alive when the trust is executed, unless the beneficiary is included in a designated class (e.g., "donor’s children") in a trust for a "term of years." Pets do not qualify.

    7. Income payments are based on a fixed percentage of the annual market value of trust assets and will vary in amount as the value of the assets changes.

    8. Payments to income beneficiaries must come exclusively from the trust assets and may not be guaranteed by First United Methodist Church.

    9. Payments to income beneficiaries are taxed on the basis of the IRS rule that trust funds are deemed to be dispersed in accordance with the following tiered order of distribution:

    a. first from ordinary income;

    b. then from capital gain;

    c. then as other income (such as tax-exempt income); and

    d. lastly, as a distribution of principal.

    10. Under the above "four-tier system," when capital gain tax is avoided on the sale of an asset through a unitrust and the proceeds are invested in tax-exempt bonds, the capital gain is deemed to be distributed prior to any distribution of tax-free income.

    11. In many cases, the donor may serve as trustee or choose to appoint (or remove) a corporate or individual trustee. Transactions between the donor and the trustee, or the trustee and certain family members, family corporations, and partnerships are prohibited as "self-dealing."

    12. Typically, the donor is entitled to an income tax charitable deduction in the year assets are transferred to the trust, plus up to 5 carryover years. (However, the deduction for a transfer of personal property is postponed until the termination of the life interest of the donor or the donor’s designated income beneficiary in the personal property, such as the sale of the property by the trust.)

    13. The income tax charitable deduction equals the present value of the remainder interest the charity is expected to receive in the future, based on IRS tables and a floating monthly interest rate.

    14. The income tax charitable deduction is reduced to the extent of any income that would have been recaptured had the asset been sold rather than contributed to the trust. This applies to depreciable real property (to the extent the depreciation taken exceeds "straight line"), depreciable personal property, inventory, accounts receivable, trade or business notes, short-term capital gain property, certain copyrights, and other types of "ordinary income property."

    15. The transfer of mortgaged property to a charitable remainder trust is generally inadvisable due to several potentially adverse tax consequences including disqualification of the trust. It should not be done without a careful and thorough analysis.

    16. Income or gain realized by the trustee on debt-financed assets may, under certain circumstances, cause the trust to realize unrelated business taxable income (UBTI), thereby subjecting all trust income to taxation for the entire year in question.

    17. Unlike charitable remainder annuity trusts, additional contributions may be made by the donor and others to a unitrust.

    18. The named charitable remainder beneficiary may be changed to another charity if the trust document reserves that right for the donor or the donor’s designate.

SECTION NINE

Charitable Remainder
ANNUITY TRUST

    1. Capital gains tax may be avoided when an asset is transferred to and later sold by the trustee of the annuity trust. The gift asset may also avoid federal estate and gift taxation if the donor, donor’s spouse, or the donor and donor’s spouse are the designated income beneficiaries.

    2. Payments to income beneficiaries are generally taxable. Payments may be set for life or "a term of years" not to exceed 20 years.

    3. The named income beneficiary must be alive when the trust is executed, unless the beneficiary is included in a designated class (e.g., "donor’s children") in a trust for a "term of years." Pets do not qualify.

    4. A "term of years" trust may name as income beneficiary, an individual or class of individuals, corporation, partnership, trust or estate.

    5. A charity may receive income payments if at least one individual is also an income beneficiary.

    6. Income payments are a fixed amount, typically stated as a percentage of the initial market value of trust assets. The minimum payout allowed is 5 percent at least annually, and the maximum payout is 50 percent. Also, the present value of the charitable remainder must be at least 10 percent of the net fair market value of all the property transferred to the trust on the date of the transfer. An additional calculation is required to ensure that the probability of the trust being exhausted prior to termination does not exceed 5 percent.

    7. Payments of income beneficiaries must come exclusively from the trust assets and may not be guaranteed by the charity.

    8. Payments to income beneficiaries are taxed based on the IRS rule that trust funds are deemed to be dispersed in accordance with the following four-tier order of distribution:

    a. first from ordinary income;

    b. then from capital gain;

    c. then as other income (such as tax-exempt income); and

    d. lastly, as a distribution of principal.

    9. Under the above "four-tier system", when capital gains tax is avoided on the sale of an asset through an annuity trust and the proceeds are invested in tax-exempt bonds, the capital gain is deemed to be distributed prior to any distribution of tax-free income.

    10. In many cases, the donor may serve as trustee or choose to appoint (or remove) a corporate or individual trustee. Transactions between the donor and the trustee, or the trustee and certain family members, family corporations, and partnerships are prohibited as "self-dealing." Likewise, use of the trust property by the donor or donor’s family is prohibited.

    11. Typically, the donor is entitled to an income tax charitable deduction in the year assets are transferred to the trust, plus up to 5 carryover years. (However, the deduction for a transfer of personal property is postponed until the termination of the life interest of the donor or the donor’s designated income beneficiary.) Subsequent contributions to an annuity trust are prohibited.

    12. The income tax charitable deduction equals the present value of the remainder interest the charity is expected to receive in the future, based on IRS tables and a monthly floating interest rate.

    13. The income tax charitable deduction is reduced to the extent of any income that would have been recaptured had the asset been sold rather than contributed to the trust. This applies to depreciable real property (to the extent the depreciation taken exceeds "straight line"), depreciable personal property, inventory, accounts receivable, trade or business notes, short-term capital gain property, certain copyrights, and other types of "ordinary income property."

    14. The transfer of mortgaged property to a charitable remainder trust is generally inadvisable due to several potentially adverse tax consequences including disqualification of the trust. It should not be done without a careful and thorough analysis.

    15. The named charitable remainder beneficiary may be changed to another charity if the trust document reserves that right for the donor or donor’s designate.

SECTION TEN

Charitable
LEAD TRUST

    1. There is no income tax charitable deduction unless the income earned by the trust is reportable on the grantor’s personal income tax return. The deduction equals the present value of the future payments to charity and is limited to 30% of adjusted gross income in the year of the transfer, plus up to 5 carryforward years.

    2. The Family Lead Trust (technically known as a non-grantor charitable lead trust) is a separate taxable entity. All income, less the amount distributed to charity, is taxable to the trust.

    3. A non-grantor charitable lead trust provides a gift tax charitable deduction equal to the present value of the future payments to charity. There is no income tax deduction. However, since the income is taxable to the trust it is effectively removed from the donor’s personal income tax return and circumvents the adjusted gross income percentage limitations.

    4. The donor’s basis is carried over to compute realized gains and losses from the sale of trust assets. The sale of property by the trustee within two years of receipt from a living donor is taxed at the donor’s tax rate.

    5. Lead trusts are typically drafted to last for a stated term of years. The duration can be for any term (including the life of an individual plus 21 years) that does not violate state law.

    6. A charitable lead unitrust provides variable payments to charity equal to a fixed percentage of the annual asset value of the trust. A charitable lead annuity trust provides fixed payments to charity equal to a stated amount. The unitrust or annuity amount must be paid to a qualified charity at least annually.

    7. Payments to charity are not subject to minimum payout requirements as with charitable remainder trusts. The trustee can make payments in-kind such as appreciated stock, although such payments trigger a capital gains tax to the trust.

    8. The " private foundation rules" prohibiting self-dealing, excess business holdings, etc., apply to a charitable lead trust and make it somewhat more difficult to fund with closely held stock.

     

SECTION ELEVEN

LIFE INSURANCE

    1. The income tax charitable deduction for a gift of a paid-up policy equals the replacement cost of a comparable policy (except to the extent it exceeds the donor’s original cost).

    2. If First United Methodist Church is designated as beneficiary, but not as owner of the policy, the gift is revocable and does not qualify for the income tax charitable deduction. The value of the insurance proceeds will be included in the policy owner’s estate for federal estate tax purposes, and is offset by the estate tax charitable deduction for the proceeds paid.

    3. The amount of the income tax charitable deduction for a policy on which future premiums are payable is roughly equal to the policy’s cash surrender value. The exact value is the "interpolated terminal reserve" value available from the insurance company policyholder service department.

    4. If First United Methodist Church owns the policy and the donor pays future premiums, the premium payments qualify for the charitable deduction (subject to the 50 percent AGI limit for payments directly to First United Methodist Church, or the 30 percent AGI limit for payments made directly to the insurance company).

### End of Tax Consequences for Various Gify Types ###

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