Chapter 6 - Full Chapter 9
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Apr 3, 2024
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64
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Charitable Gifting Compilation
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Charitable Gifting Compilation
The following are all pages from this module linked as a single file suitable for
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Charitable Gifting Compilation
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Overview
Individuals gift property to charities for a number of tax reasons, as well as non-tax reasons. Some of
these reasons include:
personal satisfaction
reducing current income tax liability
reducing the value of the gross estate with lifetime gifts; and
reducing the estate tax liability for gifts made after death.
Therefore, the financial planner will need to consider many factors prior to making a recommendation
that a client contribute to charity.
The first question to be answered is whether or not the client can afford to make a gift. If so, the next
question to consider is "What property is the most appropriate to gift to a qualified charity?" From an
income tax perspective, the identity of the donee, whether it is a public or private charity and the type
of property gifted, will affect the maximum income tax deduction that may be taken once the gift has
been made.
There are various charitable transfer techniques. These include:
outright gifts; split interest gifts, such as charitable remainder trusts and charitable lead trusts
charitable gift annuities
pooled income funds
private foundations; and
donor advised funds.
To ensure that you have a solid understanding of charitable gifting, the following lessons will be
covered in this module:
Charitable Giving and the Estate Plan
Assets Appropriate for Gifting to Charity
Types of Charitable Gifts
Lesson Objectives
The Charitable Gifting
module, which should take approximately three and a half hours to complete,
will describe the most common reasons individuals gift property to charities and the important factors
which financial planners should analyze before recommending that a client make a gift to a charity.
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Charitable Gifting Compilation
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Upon completion of this module, you should be able to:
Evaluate the most suitable property interests to transfer to charity according to client objectives
Compare and contrast the tax and non-tax characteristics of charitable trusts, and
Calculate charitable income tax deductions for various types of charitable gifts.
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Charitable Gifting and the Estate Plan
When considering charitable gifts within the context of an estate plan, the donor has the ability to
transfer these assets to charity either during lifetime or after death. The tax objectives which
charitable gifting satisfy include:
if made during lifetime, reducing current income tax liability
if made after death, reducing the size of the gross estate
reducing the size of the taxable estate, thereby reducing the estate tax.
Therefore, a careful examination of both types of techniques can maximize tax savings in all three
areas.
Practitioner Advice
Although charitable gifting can accomplish a number of attractive tax
advantages, you must be certain that your client is not only charitably
inclined, but can afford to make the gift. It does not matter how attractive the
tax advantages associated with charitable gifts are if your client has no
desire to have a charity share in his or her estate.
To ensure that you have a solid understanding of Charitable Gifting Strategies, the following topics will
be covered in this lesson:
Reasons for Gifting
Gifting Factors
Upon completion of this lesson, you should be able to:
list the most common reasons for gifting property to qualified charities, and
recall important factors that the financial planner needs to analyze before recommending that
the client make a gift to a charity.
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Charitable Gifting Compilation
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Reasons for Gifting
The most common reasons for gifting or bequeathing property to a qualified charity are:
Donor satisfaction
Reduce the size of the donor's taxable estate
Reduce the donor's income tax liability, and
Reduce the gift tax liability.
Satisfaction-
When a donor gifts property to a charity during their lifetime, they get the satisfaction of
seeing the charity enjoy the property. Satisfaction may also be gained when others fulfill the intentions
of the donor, either while he or she is alive or after his or her death. For example, one could bequeath
money to one's church for the purchase of a new organ.
Reduce size of the estate- Lifetime gifts of property
which are gifted to a qualified charity, remove
the gifted asset and also the future appreciation on this asset from the donor's estate. This allows the
donor to exercise some control over the value of his or her estate by reducing the estate tax liability.
Reduce the income tax liability-
Lifetime gifts of property
to qualified charities may also reduce a
donor's income tax liability if they itemize deductions on their tax return. However, in many cases,
more significant tax savings may be realized by claiming the standard deduction instead. In 2024, the
standard deduction is $14,600 for individuals and $29,200 for married couples filing jointly who are
under age 65. Tax deductions for state and local taxes are capped at $10,000 which may further
reduce a taxpayer's itemized deductions below the standard deduction level.
Depending on the type of property gifted and the type of charity to which the gift has been made, the
value of the charitable income tax deduction may be as high as 60% of the donor's adjusted gross
income for cash gifts. As with all charitable gifts, a 5 year carry forward is available for gifts that
exceed the AGI limitation.
A strategy for donors who want to maximize their tax savings is to group several years' worth of
charitable contributions together into a single tax year in an amount that will exceed the standard
deduction. The donor can then report their accelerated charitable deductions and other itemized
deductions in one year and revert to taking the standard deduction again in the following year.
Reduce the gift tax liability-
A gift to a charity also qualifies for an unlimited charitable gift tax
deduction. This means that no gift tax liability will be due on any transfer of assets made to a qualified
charity during the donor's lifetime. There is no limitation on how much you can give to a qualified
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Charitable Gifting Compilation
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charity. Keep in mind that this deduction is in addition to any annual exclusion gifts the donor may
make and does not reduce the donor's $13,610,000 lifetime gift tax exclusion.
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Gifting Factors
Before engaging in a charitable gifting program, the financial planner needs to analyze the client's
financial position to determine whether the donor can afford to make a gift to a charity.
Whether the donor can afford to make a gift to a charity depends on a number of factors. During the
data gathering process, the financial planner should gather most of the data needed to assist in
making this determination. Once the planner has analyzed this information, a discussion should be
held with the client on the feasibility of making lifetime or testamentary gifts to charity.
What are the lifetime financial needs of the donor, the donor's spouse or the donor's beneficiaries?
What are the projected needs of the donor and donor's spouse for retirement purposes?
For example, if the donor needs a specific amount of income for living expenses, it may be
inappropriate for the donor to make a gift to charity if such a gift would reduce the donor’s income and
cause financial hardship to the donor or the donor's family. If the donor and donor's spouse need a
specified sum for their retirement, a gift to charity may be inappropriate if it prevents the donor and
donor's spouse from living comfortably in retirement.
In some states a donor cannot make an unlimited gift or bequest to a charity if a spouse and other
family members survive the donor. Some states have mortmain statutes that are intended to protect
family members from having the decedent bequeath a substantial amount of estate assets to charity.
Any portion of a charitable bequest that generally exceeds 25% of the estate is set aside for the heirs.
Another example of this is the Elective Share statutes.
Therefore, if a donor wishes to make a charitable transfer, the donor should work with his or her
attorney to ensure that all heirs of the estate have been appropriately considered.
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Charitable Gifting Compilation
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Tax Considerations
Does the donor need a reduction in estate tax liability?
Lifetime gifts can be made to reduce a donor's gross estate. However, if the donor needs lifetime
access to assets, a charitable bequest may be made at death. Such a bequest would qualify for the
unlimited charitable estate tax deduction. The result would be a smaller taxable estate and lower
estate tax liability.
From a tax perspective, would the donor be better off by not gifting the property?
For example
, assume that the property being considered for gifting has depreciated in value so that
its present fair market value (FMV) is less than the donor's basis in the property. The donor might be
wise to keep the property, sell it at a loss, and take the capital losses on his or her individual income
tax return to possibly offset any capital gains.
This would be more advantageous for the donor than making a completed gift of the property to the
charity.
A gift of the property to the charity would not enable the donor to take a capital loss. However, a sale
of the property at a loss would allow the donor to take this capital gains tax advantage. In addition, the
donor could take the proceeds of the sale and gift them to the charity. This would enable the donor to
possibly take the charitable income tax deduction, as well as the capital loss, in the same tax year.
In addition to these factors, there may be other factors that need to be considered which could affect
the appropriateness of making a gift.
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Factors that Influence making a Gift
to Charity.
This flowchart illustrates the important
factors that the financial planner needs
to analyze before recommending that
the client make a gift to a charity.
Donor
needs
If making a gift to some
charity would cause
financial hardship to the
donor or the donor's
family, it would be
inappropriate for the
donor.
Projected
needs of
the donor
If a gift of property or
cash prevents the
donor and donor's
spouse from living
comfortably in
retirement, making it
may be inappropriate.
Adequate
property to
gift
If a donor wishes to
make a charitable
transfer, the donor
should first adequately
provide for him or
herself and other family
members.
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Factors that Influence making a Gift
to Charity.
This flowchart illustrates the important
factors that the financial planner needs
to analyze before recommending that
the client make a gift to a charity.
Reduction
in estate
tax liability
If the projected amount
of estate tax liability is
high, the donor may
wish to make a lifetime
gift of property to a
charity in order to
reduce the size of the
donor's gross estate.
Sufficient
liquidity
If there is a liquidity
problem for the estate,
it may not be
appropriate to make
any gift to charity.
Special
reasons
If the donor has a
specific reason for
making a gift to a
charity (for example, a
church or synagogue),
then the donor may
wish to consider a gift
to one of these
charitable groups.
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Factors that Influence making a Gift
to Charity.
This flowchart illustrates the important
factors that the financial planner needs
to analyze before recommending that
the client make a gift to a charity.
Not gifting
From a tax perspective,
if the donor is better off
by not gifting the
property, then he or she
should not gift it to any
charity.
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Sufficient Liquidity
Does the donor have sufficient liquidity in his or her estate so that all taxes and administrative
expenses can be paid?
If an estate is illiquid and assets are gifted during lifetime, then the value of the estate is reduced and
so will the liquidity needs. If the assets are gifted after death, the amount of expenses will also be
reduced.
If there is an estate liquidity problem, the donor should make sure that sufficient liquidity exists in the
estate before transferring assets to charities.
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Assets Appropriate for Gifting to Charity
Once a donor has determined that he or she can afford to make a gift, the next question that must be
asked is, What property is the most appropriate to gift to a qualified charity?
The answer to this question depends on a number of factors, including the type of property owned by
the donor, whether the property produces income or is non-income producing, whether the donee is a
public charity or a private charity, and the donor's adjusted gross income (AGI).
To ensure that you have a solid understanding of assets appropriate for charitable giving, the
following topics will be covered in this lesson:
Charitable Contribution Rules
Type of Charity
Upon completion of this lesson, you should be able to:
recall the general rules for charitable contributions of different types of properties
define long-term capital gain property
identify ordinary income property and long-term capital gain property
identify tangible personal property
distinguish between use-related and use-unrelated tangible personal property
define future interest gifts
determine the maximum amount of a charitable contribution based on the identity of the donee,
and
identify qualified public charities.
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Gift of Cash
Donors who itemize deductions on IRS Form Schedule A can take charitable income tax deductions.
If the donor is making a gift of cash to a public charity, the maximum income tax deduction that may
be taken is 60% of the donor's AGI. Generally, the type of property that is gifted to a qualified charity
is one factor used to determine the value of the charitable income tax deduction.
To be eligible for a deduction, charitable contributions made by cash or checks must be substantiated
by receipts from the charity or from bank statements, cancelled checks or credit card records. For
donations greater than $250, the charity will provide a receipt with the date and value of the donation.
The charity's receipt should include:
Name of the organization.
Amount of cash contribution.
Description of any non-cash contribution.
Statement that no goods or services were provided by the organization in return for the
contribution, if applicable.
Description and good faith estimate of the value of goods or services. Deductions for clothing
and household goods can only be taken if the items are in "good condition" or better.
For a donated item that exceeds $5,000, a qualified appraisal must be included with the
donor's income tax return.
For gift tax purposes, the fair market value of a present-interest gift is reduced by the annual
exclusion and the amount remaining is reduced by a gift tax deduction. For example, Carol wrote a
check for $20,000 to an organization that tutors at-risk children. $20,000 − $18,000 annual exclusion
= $2,000 − $2,000 gift tax charitable deduction = $0 gift tax liability. Furthermore, Carol has reduced
the value of her gross estate by the $20,000 she gifted to charity. Also note that the gift to charity is
not brought back into her estate tax calculation on IRS Form 706 as an adjusted taxable gift.
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Ordinary Income Property
"Ordinary income property" is an asset that would have generated ordinary income (rather than
capital gain) on the date of the contribution had it been sold at its fair market value rather than its
contributed value.
Ordinary income property includes:
capital assets held less than the requisite long-term period at the time contributed
Section 306 stock (that is, stock acquired in a nontaxable corporate transaction that is treated
as ordinary income if sold)
works of art, books, letters and musical compositions, but only if given by the person who
created or prepared them or for whom they were prepared, and
a taxpayer's stock in trade and inventory (which would result in ordinary income if sold).
Ordinary income property given to a public charity (column 2) by an individual is deductible subject to
50% of the contribution base ceiling. However, a taxpayer's deduction is generally limited to the basis
(cost) for the property (column 7).
For example, if a famous painter donated one of his paintings, worth $25,000, to an art museum, his
deduction would be limited to his cost for producing the painting. This means that only the cost for
canvas, paint, etc., would be deductible. No deduction would be allowed for the value of his time and
talent.
Click here to view the Charitable Contribution Deductions Limitations Table.
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Long-Term Capital Gain Property
An investor who owns appreciated stock for more than one year could be subject to capital gains
when the stock is sold. Generally, a long-term capital gain asset is property that has been held for
more than one year. The capital gains tax could be as high as 20%, and the investor could be subject
to an additional 3.8% surtax on net investment income. To avoid these taxes, the stock could be
donated to a tax-exempt charity instead. The charity will incur no capital gains tax when the stock is
sold and the donor will avoid paying a capital gains tax on the appreciated stock that is gifted to
charity.
If the donor makes a gift of property that is a long-term capital gain asset, they can reduce their
income taxes if they itemize deductions. They can take a charitable deduction for the FMV of their
donation, which is the FMV of the asset on the date of the gift. However, the value of the charitable
tax deduction for a long-term capital asset is 30% of the donor's AGI.
Let's assume the donor owns a capital asset, which
qualifies as a long-term capital asset, for example,
corporate stock. The value of the stock on the date of the
gift is $30,000. The donor's AGI is $60,000. Since a long-
term capital asset is being gifted, what is the maximum
charitable deduction the donor can take?
Choose the best answer.
$4,500
$9,000
$18,000
$27,000
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Therefore, the donor will be able to carry-forward the remaining $12,000 deduction, applying it
according to the same 30% AGI rules, for the next 5 years. The 5-year carry-forward allows the donor
to use the unused portion of the charitable deduction in each of the next 5 tax years until the
deduction has been fully utilized.
There is an opportunity for the donor to make an election to have the 50% AGI rule apply to gifts of
property, which are long-term capital assets. This election may be made if the donor is willing to
reduce the value of the charitable gift by the gain he or she has in the property. In other words, willing
to reduce the value of the gift to the donor's basis in the asset.
For example, let's assume the donor has corporate stock, satisfying the long-term capital gains rules,
which has a basis of $900 and an FMV on the date of the gift of $950. The donor may receive the
benefit of the 50% AGI rule if the value of the charitable gift is reduced by the gain in the asset, or
$50. Therefore, in exchange for a higher deduction limit, a small amount of the value is lost. It is
strongly recommended that a careful analysis of the client's income tax situation be made prior to
making this election.
Practitioner Advice
Cryptocurrencies can be donated to certain qualified charities that support
crypto donations. For tax purposes, cryptocurrencies are treated as capital
assets or income, depending on whether the cryptocurrency was held for
investment purposes or received as a form of compensation. Donations
have the same tax benefits as charitable stock gifts; they avoid capital gains
taxes and allows a donor who itemizes to take an income tax deduction. If
the asset was held as an investment for more than one year the FMV of the
appraised amount of the gift can be deducted up to 30% of AGI, with a five-
year carry over. Cryptocurrency donations held as an investment for one
year or less can be deducted as the lesser of cost basis or FMV at the time
of contribution, up to 50% of AGI with a five-year carryover. Donors must
complete IRS Form 8283 and obtain a qualified appraisal for contributions of
cryptocurrency valued at more than $5,000 to substantial their charitable
income tax deduction.
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Tangible Personal Property
If the gift is a gift of tangible personal property that may be sold at a capital gain, for charitable income
tax deduction purposes it will be treated as long-term capital gain property.
Examples of such tangible personal property include:
jewelry
automobiles
art works and stamp collections, but only if created or produced by someone other than the
grantor
books (all of these tangibles would be considered capital property if created by someone else)
When dealing with this type of asset, it is important to determine whether the asset gifted to the
charity is use or non-use related to the exempt purposes of the charitable organization.
The general rule regarding donations of use-related property to a qualified public charity is that the
donor may utilize the FMV of the use-related property, subject to the 30% AGI rule, for charitable
income tax deduction purposes and the 5-year carry-forward rule.
An example might be the contribution of a stamp collection to an educational institution. If the stamp
collection is placed in the donee organization's library for display and studied by students, the use of
the donated property is related to the educational purposes constituting the basis of the charitable
organization's tax exemption.
Review Question
However, if the stamps were sold, even if the proceeds
were used by the organization for educational purposes,
the use of the property would be an _________ use.
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If the donated property is use-unrelated, meaning that the asset is unrelated to the function of the
charity, that is, a gift of jewelry to a religious organization, the donor's charitable deduction is limited to
the basis in the asset, subject to 50% of the donor's AGI.
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Use-Related or Use-Unrelated
The distinction between use-related and use-unrelated tangible personal property depends on the
purpose of the charitable organization. If a donor makes a gift of a gun and rifle collection to a state
historical museum, the donation would be deemed to be use-related
(the property donated to the
charitable organization could be used directly by the charity itself).
If the property donated to the charity is not related to the purpose of the charitable organization then
the donation is classified as use-unrelated
. For example, a donation of a painting to a church that
does not plan to exhibit the painting but intends, instead, to sell it and use the sale proceeds.
The maximum charitable income deduction on use-related property is based on the FMV of the
property
, subject to 30% of the donor's AGI
. The maximum charitable deduction on use-unrelated
property is based on the donor's basis in the property
, subject to 50% of the donor's AGI.
For use related property that is valued at more than $5,000, the income tax deduction is reduced from
FMV to the property's cost basis if the charity disposes of the donated property within one year. If the
charity disposes of the property from one to three years after receiving the gift, the donor must
recognize income on the difference between the FMV deduction and the cost basis (unless the
charity's explanations satisfy IRS requirements).
Click here to view the Charitable Contribution Deductions Limitations Table.
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Future Interest Gift
Future interest gifts of property to a charity ordinarily do not
qualify for the charitable income tax
deduction.
A future interest gift defined as any gift in which the right to use or enjoy the property is deferred until
sometime in the future. Since there is no immediate right by the donee to use, possess, own, or enjoy
the property, the donee has not received the benefits of the gift in the year of the transfer. For
example, a gift of an original Miro painting to an art museum with a stipulation that allows the donor to
keep the painting until the donor's death.
Practitioner Advice
Certain split interest gifts, in which the charity has a remainder interest in the
gifted property, will allow the donor to take advantage of a charitable income
tax deduction on the date the gift is made. Deductions for fractional interests
cannot be taken unless the donor (or the donor and the charity) own the
property immediately before the gift is made and the charity receives
complete possession of the property within 10 years of the initial contribution
or the donor's death, whichever is sooner. At the donor's death the estate
cannot take account of any appreciation in the property, meaning the
remainder interest is valued at its initial value rather than at FMV at date-of-
death. Therefore, the bequest to charity may not be fully deductible and the
appreciation may trigger an estate tax.
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Types of Charitable Gifts
There are a number of methods by which a donor may transfer assets to a charity. These include
outright charitable gifting or split interest transfers, using either a charitable remainder annuity trust
(CRAT) or charitable remainder unitrust (CRUT).
The various methods of making charitable gifts are designed to accomplish any number of objectives
that a donor may have. It is the financial planners goal to analyze each of the available charitable
alternatives and make the most appropriate recommendation based upon the donor's objectives.
For example, with a split interest transfer, a charitable or noncharitable beneficiary may receive
income. Additionally, either a charitable or noncharitable beneficiary may receive the remainder
interest. The most important thing to remember about split interest transfers is that two property
interests are being transferred: the income and the remainder interest. The interest, which the charity
is entitled to receive if the split interest vehicle is properly created, is the portion eligible for the
charitable income, gift and estate tax deductions.
To ensure that you have a solid understanding of types of charitable gifts, the following topics will be
covered in this lesson:
Gifting Strategies
Tax Implications of Charitable Gifting
Upon completion of this lesson, you should be able to:
determine whether a particular condition is suitable for a particular type of charitable transfer
technique, and
contrast the different requirements for CRAT and CRUT that the donor must comply with.
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Gifting Strategies
The most commonly used types of charitable transfer techniques are:
Outright charitable gift
Charitable stock bailout
Charitable remainder annuity trust
Charitable remainder unitrust
Charitable lead trust
Charitable gift annuities
Pooled income funds
Private foundations
Donor advised funds
Traditional IRAs
The enactment of the Tax Cuts and Jobs Act impacted gifts to charities because some of the income
tax benefits for taxpayers had been curtailed. Taxpayers taking the standard income tax deduction
could not take additional charitable deductions on their income tax returns for charitable contributions
that were less than the standard deduction amounts. An exception in 2020 and 2021 allowed
contributions of $300 for single taxpayers and $600 for married filing jointly to be deducted from
Schedule A for taxpayers who took standard deductions, but this provision ended in 2022.
Based on the provisions of the Tax Cuts and Jobs Act, here are some gifting strategies that wealthier
donors may want to consider:
1. Taxpayers who intend to make gifts greater than the standard deduction amount over several
years may decide to accelerate and bundle their charitable contributions together in the same
tax year to maximize these deductions and itemize them on their Schedule A. These taxpayers
can take the full standard deduction in subsequent years when lesser gifts to charities are
made.
For example, a married couple who usually contributes $15,000 to a donor advised fund every
year can contribute $30,000 this year. They can itemize the charitable income tax deduction
this year which exceeds the standard deduction of $29,200 in 2024 by $800. The couple can
choose which public charities will receive their grants over the next two years. Had the couple
continued to contribute $15,000 each year, they would not exceed the standard deduction
amount or receive the same tax benefit.
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2. Taxpayers have a cap of $10,000 on deductions taken for state and local income taxes (SALT),
and real property taxes if they are not subject to AMT. The Act also reduces or eliminates other
tax deductions that were previously allowed. Therefore, increased gifts to charities may
compensate for this reduction and allow taxpayers to take higher itemized deductions on their
Schedule A in a given tax year.
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Outright Charitable Gift
This involves an irrevocable transfer of property
from the donor to a qualified charity. The donor must
irrevocably part with all ownership or control of the property in order for the transfer to be considered
effective. A completed gift has not occurred if there are "strings attached" or conditions specified by
the donor, such as how the property may be used or enjoyed by the donee.
An example of a condition would be if a donor makes a gift of an original Grant Wood painting to an
art museum only if the museum endorses a certain method by which to acquire additional paintings by
Wood. Such a gift is not a completed gift and therefore not eligible for the tax benefits associated with
making a charitable gift. Requirements for a completed gift must be satisfied in order to receive all of
the tax benefits associated with charitable gifts. These requirements are the same as those for gifts
made to noncharitable donees and are as follows:
donor must intend to make the gift
donor must deliver the gift; and
donee must accept the gift.
Let's remember all of the tax benefits associated with a completed gift to a charity:
1. Income Tax - the donor may be entitled to an income tax deduction based upon AGI limits and
types of property gifted, and whether the amount of the gift exceeds the standard deduction
amount.
2. Gift Tax - a gift to a charity qualifies for the unlimited charitable gift tax deduction. In other
words, the donor does not need to use any of his or her lifetime gift tax exclusion to offset the
tax.
3. Estate Tax - a charitable gift made during lifetime reduces the value of the estate. Given the
unlimited charitable deduction for estate tax purposes, a bequest or a transfer of assets to a
charity after death reduces the taxable estate, and therefore reduces the estate tax liability.
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Charitable Stock Bailout
In situations where the owner of closely held stock
wishes to make a gift of property to a qualified
charity, the charitable stock bailout may be an appropriate charitable transfer technique.
For example: assume the owner of a closely held corporation wishes to make a gift to a charity.
However, the only asset available to gift is closely held stock. The owner's objective is to obtain a
sizeable charitable income tax deduction without taking an income taxable distribution from the
corporation. The stockholder can achieve this result by use of the charitable stock bailout. In the
charitable stock bailout, the stockholder gifts the closely held stock to the charity. The owner then
receives a charitable deduction based upon the value of the stock gifted to the charity. Since the
charity would prefer cash instead of the stock, the corporation can redeem the stock from the charity
only if the corporation is totally unrelated to the charitable gift. Otherwise, the IRS would view the gift
and resulting redemption as an indirect redemption from the donor which would be taxed as ordinary
income to the donor. Instead, with a charitable stock bailout, the charity gets the cash, the donor gets
the charitable deduction, and the corporation gets the stock in exchange for its accumulated cash.
There are a number of considerations that need to be addressed when structuring the transaction for
a charitable stock bailout in order to avoid adverse tax consequences:
The stockholder and the charity cannot agree to the time or certainty of the redemption in order
to qualify for a charitable contribution deduction. In other words, at the time the stock is gifted
to the charity, there cannot be an understanding or contract (formal or informal) to redeem the
stock at a specified time.
If the redemption takes on the characteristics of a prearranged transaction, it tends to lose its
charitable traits and may be construed as a contract to redeem and thereby disqualify the
donor from taking a charitable deduction.
The donor should gift the stock to the charity and have the charity redeem the stock back
through the corporation. If the corporation does not redeem the stock, a redemption of the
stock directly to the shareholder would result in dividend treatment of the redeemed stock and
could result in taxable income to the donor.
The recommendations listed should be followed closely if the client chooses this type of technique in
order preserve the estate, income and gift tax advantages of the charitable stock bailout for the donor
of such stock.
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Charitable Stock Bailout
This list illustrates the considerations
that need to be addressed in order to
avoid adverse tax consequences when
structuring the transaction for a
charitable stock bailout.
No agreement
to time or
certainty of
redemption
To qualify for a
charitable
contribution
deduction, the
stockholder and
the charity cannot
agree to the time
or certainty of the
redemption.
No
characteristics
of a
prearranged
transaction
If the redemption
takes on
characteristics of
a prearranged
transaction, it
may be
construed as a
contract to
redeem, thereby
disqualifying the
donor from taking
a charitable
deduction.
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Charitable Stock Bailout
This list illustrates the considerations
that need to be addressed in order to
avoid adverse tax consequences when
structuring the transaction for a
charitable stock bailout.
No redemption
of stock
directly to
shareholder
The stock must
be gifted to
charity and the
charity must
redeem the stock
back through the
corporation.
Redemption of
stock directly to
the shareholder
could result in
taxable income to
the donor.
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Charitable Remainder Annuity Trust (CRAT)
A Charitable Remainder Annuity Trust (CRAT) is used in situations where the donor wishes to make a
charitable contribution yet retain a fixed annuity stream of income from the gifted property. With a
charitable remainder annuity trust, the trust is established to provide a noncharitable beneficiary the
right to receive a fixed percentage of income for a period of time (either life expectancy or a set period
not to exceed 20 years). Upon the expiration of the income-paying period, the charity receives
whatever is left within the trust. This is known as the remainder interest.
If a term of years is used, the period cannot exceed 20 years
. This is also true of a charitable
remainder unitrust (CRUT). At the termination of the period during which the beneficiary receives
income, the remainder interest in the property passes to the charity. Upon the creation of the trust, the
donor receives a charitable income tax deduction based upon the remainder interest, which will
transfer to the charity. This remainder interest is calculated on the day the transfer is made into the
trust.
CHARITABLE REMAINDER
ANNUITY TRUST -- ONE LIFE
Value of Property
$100,000
Annuity Payment
$5,000
Sec. 7520 Rate
6.0%
Age
55
Frequency of
Payments
Annual
Payments
End of
Period
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CHARITABLE REMAINDER
ANNUITY TRUST -- ONE LIFE
Annuity Factor (age 55,
6.0%)
11.8459
Annuity Adjustment
Factor (annual, 6.0%)
1.0000
Annuity Value [$5,000
x 1 x 11.8459 x 1.0000]
$59,229
Charitable Contribution
[$100,000 - $59,229]
$40,771
A CRAT may be created during the donor's lifetime or at the donor's death. In the event the provisions
for a CRAT are incorporated within the donor's will or revocable trust, the value of the remainder
interest that will be transferred to charity at the donor's death receives a charitable estate tax
deduction. When structured as a postmortem transaction
, the decedent's estate receives an estate
tax deduction based on the present value of the remainder interest eventually passing to the charity.
For example
, if a donor structures a CRAT so that the donor's spouse receives a life income interest
that takes effect when the donor dies, the donor's estate is entitled to receive an estate tax charitable
deduction for the present value of the remainder interest that the charity will eventually receive. The
estate will also receive a marital deduction for the present value of the income interest to the spouse.
Although the donor has made a terminable interest gift to the spouse of the life income interest in
trust, a gift of a life income interest in a CRAT or CRUT is an exception to the terminable interest rule.
Therefore, the donor does not need to elect Q-TIP treatment to receive a marital deduction for the
income interest passing to a spouse.
The donor must comply with the following requirements in order to successfully use the CRAT:
1. The donor must make an irrevocable transfer of the property to the trust.
2. The donor can make only one initial transfer of property to the corpus; there can be no
additions or increases to the trust in later years to generate more income or to provide
additional charitable income tax deductions.
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3. Once the trust is established, the trust must pay out a specified amount of income (a sum
certain) each year based on the initial transfer to the trust—in a CRAT, the trust must pay a
minimal amount of at least 5% and not more than 50% of the initial value of the corpus. If the
trust does not generate at least enough income to meet this 5% requirement, trust assets must
be sold or the corpus must be invaded to supplement the difference. The income must be
distributed to the beneficiary. The beneficiary is taxed on the type of income received. For
example, trust income and dividends distributed to the beneficiary are taxed as ordinary
income. Capital gain assets sold to make up a distribution shortfall are taxed to the beneficiary
as capital gains in addition to any ordinary income received. A return of principal distributed to
a beneficiary is not taxed.
4. The amount of income payable to the trust beneficiary remains fixed once the initial payments
are calculated. Therefore, the amount of income payable by the trust to the beneficiary remains
fixed and does not increase or decrease in succeeding years. Inflation may consequently
erode the purchasing power for a beneficiary who depends upon the fixed income amount to
cover living expenses.
5. The amount of the charitable deduction that the donor can receive depends on the value of the
remainder interest passing to the charity as calculated when the assets are transferred into the
trust. As the charity will eventually receive the corpus of the trust, the donor is entitled to an
immediate income tax deduction
for the present lifetime transfer of the property that passes to
the charity. If the trust is structured to take effect upon the death of the donor, so that the
donor's spouse or some other beneficiary receives the income, then the donor's estate
receives an estate tax charitable deduction
that is based upon the present value of the charity's
right to eventually receive the property.
6. Under Internal Revenue Code Section 7520, the rate to be used for valuing annuities, life
interests or interests for terms of years, and remainder or reversionary interests is based upon
an interest rate determined by reference to the midterm applicable federal rate for the month in
which the valuation date occurs. Implementing regulations prescribe that the pertinent rate is
120% of the midterm applicable federal rate, using annual compounding, rounded to the
nearest two-tenths of one percent.
7. The value of the charitable remainder interest must equal at least 10% of the value of the
assets valued when transferred into the trust.
If the donor complies with these requirements, he will be able to take advantage of all
tax benefits
associated with the use of the CRAT.
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Another tax benefit is available when the donor transfers an appreciated asset to the trust with a low
adjusted basis. The trust can sell the asset without incurring an income tax liability or capital gains
tax, since charitable trusts CRATs and CRUTs are exempt from income taxes. Consequently, the
donor will receive a greater income stream that is not reduced by capital gains taxes when the asset
is sold and reinvested, than if the donor had sold the asset outside of the trust.
Example
You own low yielding, low basis stock in one company that has highly
appreciated. The FMV of the stock is $300,000 and the basis is $50,000.
The dividends are too low to meet your income needs and you prefer to
diversify your holdings and receive more income.
If you sold your stock, your after-tax proceeds would be $262,500.
($300,000 — $50,000 = $250,000 × .15 capital gains rate = $37,500) You
invest the proceeds in bonds yielding 6% to receive an income stream of
$15,750 annually. However, if you had transferred the stock into a CRAT,
there is no capital gains tax when the trust sells the stock. The trust can
reinvest the $300,000 proceeds into bonds yielding 6% to provide you with
an income payout of $18,000 annually.
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Charitable Remainder Unitrust (CRUT)
The Charitable Remainder Unitrust (CRUT) operates in the same fashion as the CRAT, except that it
has the following requirements:
The donor must make an irrevocable transfer of the property to the trust.
The donor may make more than one transfer of property
to the trust; multiple transfers or
deposits of property into the corpus of the trust are possible.
Once the trust is established, the trust must pay out a specified amount of income (a fixed
percentage) each year based upon the annual balance in the Trust; in a CRUT, the trust must
pay out a minimal amount of at least 5% and not more than 50% of the annually reappraised
value of the corpus.
Example
If in year one, $100,000 is placed in the corpus of the trust and the terms of
the trust specify that 8% of the earnings must be distributed, then $8,000
would be distributed to the trust beneficiary. However, if the trust had
actually earned $12,000 in year one, then the remaining undistributed
$4,000 would be added to the corpus of the trust, and in year two, 8% of
$104,000, or $8,320, would be distributed to the trust beneficiary. Therefore,
if the assets in the trust are appreciating in value, this can generate an
increase in income that is distributed to the trust beneficiary. As long as the
undistributed earnings are added to the corpus of the trust and reappraised
annually, the amount of income distributable to the beneficiary increases
with each succeeding year. Of course, if the value of the trust decreases,
then the income stream to the non-charitable income beneficiary will
decrease as well.
The amount of income produced by the trust increases with each year that the value of the
corpus increases. This can be valuable to a trust beneficiary whose income needs to increase
with each succeeding year. This also provides inflation protection for the beneficiary.
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The amount of the charitable deduction that the donor receives depends on the value of the
remainder interest passing to the charity. As the charity will eventually receive the corpus of the
trust, the donor is entitled to an immediate income tax deduction
for the present value of the
remainder interest in the property that passes to the charity. If the trust is structured to take
effect upon the death of the donor so that the donor's spouse or some other beneficiary
receives the income, then the donor's estate receives an estate tax charitable deduction
that is
based on the present value of the charity's right to eventually receive the property- the charity's
remainder interest.
The value of the charitable remainder interest must equal at least 10% of the value of the
assets transferred into the trust when funded. Keep in mind that with a unitrust, additional
transfers may be made to the trust. Each time a new transfer is made, the 10% rule must be
satisfied. The donor will be able to take advantage of the tax benefits associated with the use
of the CRUT if he or she complies with these requirements.
Comparison of CRAT and CRUT
This flowchart contrasts the different requirements for
CRAT and CRUT, respectively that the donor must
comply with.
Nature of
transfer of
property
In both trusts, the donor must
make an irrevocable transfer of
the property.
Number of
transfers
In case of CRAT, the donor can
make only one initial transfer of
property to the corpus, whereas
in case of CRUT, the donor can
make more than one transfer of
property to the trust.
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Comparison of CRAT and CRUT
This flowchart contrasts the different requirements for
CRAT and CRUT, respectively that the donor must
comply with.
Amount of
income to be
paid by trust
In a CRAT, the trust must pay at
least 5% of the initial value of
the corpus. In a CRUT, the trust
must pay at least 5% of the
annually reappraised value of
the corpus.
Income payable
to trust
beneficiary
The income payable to trust
beneficiaries in a CRAT remains
fixed once the initial payments
are calculated, while in a CRUT
it increases with each year as
the value of the corpus
increases in value.
Remainderman
In both types of trust, the donor
is entitled to an immediate
income tax deduction for the
present value of the property
that passes to the charity, as it is
the remainderman.
Estate tax
charitable
deduction
In both types of trust, if the trust
is structured to take effect upon
the death of donor, so that some
beneficiary receives the income,
then the donor's estate receives
an estate tax charitable
deduction.
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Net Income with Makeup Charitable
Remainder Unitrust (NIMCRUT)
The CRUT may also provide that the beneficiary may receive the lesser of the specified percentage of
the trust assets or the trust income for the year, plus any excess trust income to the extent there was
a deficiency in previous years. This is known as the "Net Income with Makeup Charitable Remainder
Unitrust" NIMCRUT.
NIMCRUTs can be used as an alternative to qualified pension plans by investing
in assets that produce little or no income in the early years (while the donor's income is high) and then
converting to high-income investments in later years, after the donor's retirement. Final regulations
treat the value of the entire asset transferred to a NIMCRUT as the value of the gift if the grantor
and/or the grantor's spouse are the only non-charitable beneficiaries.
Example:
A NIMCRUT keeps track of the deficiency between the income actually distributed and the
percentage value since the deficiency may be "made-up" in future years from excess income in a
subsequent year. When the income exceeds the fixed percentage amount, the "make up" amounts
from previous years may be added to the fixed percentage amount, not to exceed the income for that
year.
YR
FMV
5 %
FMV
Income
Distribution
MU
(ann.)
MU
(total) Yr.
1
$1,000,000
$50,000
$40,000
$40,000
$10,000
$10,000
Yr.
2
$1,200,000
$60,000
$50,000
$50,000
$10,000
$20,000
Yr.
3
$1,300,000
$65,000
$90,000
$85,000
$0
$0
In year 3, add the $20,000 MU total to $65,000 (5%FMV) for a distribution of $85,000.
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Charitable Lead Trusts (CLT)
A Charitable lead trust (CLT) is one where the donor gifts property, such as cash or income producing
assets, to an irrevocable trust that pays a fixed income stream to a qualified charity for a period of
years, usually not more than 20. When the charity's interest ends, the trust property reverts back to
the donor or the donor's spouse, or can be transferred to other beneficiaries.
The donor, as the grantor and the remainder beneficiary, is entitled to a charitable income tax
deduction for the present value of the income payments gifted to charity. The donor is also taxed on
the income the charity receives because the donor retains a reversionary interest in the property. This
is an example of a grantor CLT.
The income to charity is paid as a guaranteed annuity, a CLAT, or a fixed percentage of the trust
assets revalued annually, known as a CLUT. Trust principal is invaded if income is insufficient to make
payments to charity, which ultimately leaves less for the trust beneficiaries. The donor can transfer
more assets into a CLUT to ensure the trust corpus is not reduced and to take a further income tax
deduction in the year the transfer is made ( as long as the CLUT is a grantor trust). A CLAT is a better
choice when interest rates are lower since smaller annuity payments to charity result in a greater
value of the trust corpus for the remaindermen.
When the charity's income interest has ended, the donor may choose to designate a non-spousal
beneficiary to receive the remainder interest in the trust. This is an example of a non-grantor CLT. In
this case, the donor is not entitled to an income tax deduction for the charity's income interest and the
donor will not pay tax on the income the charity receives (as long as the trust is a non-grantor trust).
The donor has also made a gift of the remainder interest to the non-spousal beneficiaries and the
annual exclusion cannot be used to offset this future interest gift. However, the trust corpus will not be
included in the donor's estate at death.
Be aware that grandchildren are not ideal beneficiaries of a non-grantor CLAT since the grantor's GST
exemption cannot be allocated to the trust when it is created, only when the charity's income interest
ends. However, with a CLUT the grantor can allocate the GST exemption at the time the trust is
initially funded.
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Charitable Gift Annuities
Charitable gift annuities are arrangements made by qualified charities to obtain contributions from
donors and provide them with annual fixed income payments for life. A charitable gift annuity is a
contract, like any other annuity.
The donor irrevocably transfers a gift of cash or assets to charity in exchange for a fixed income
stream payout for life. The donor can also choose a designated beneficiary to receive a fixed payment
for life. The property gifted to charity has a greater value than the total income that will be paid to the
donor. Therefore, the donor will receive an immediate income tax deduction for the gift because the
value of the property is greater than the present value of the total annuity payments. The amount of
the income tax deduction is based on the present value of the future amount passing to charity and
other factors such as how many annuitants will receive the income, their ages and life expectancies,
the interest rate used, and when the payments will begin.
The American Council on Gift Annuities voted to increase the "rate of return assumption" which is
used as a guideline to set maximum payout rates. Effective 2024, the return assumption will increase
from 4.5% to 4.75% which will increase a donor's income stream. The annuity payments from the
charity are unsecured and their tax treatment is made up of a tax-free return of principal, unrealized
capital gains and ordinary income on the interest received. A donor who outlives their life expectancy,
which is used to calculate the annuity payments, will report their remaining payments as ordinary
income.
A donor who gifts the annuity payments to their spouse or who establishes a joint and survivor annuity
with their spouse, may receive a gift tax marital deduction. A donor is subject to gift taxes if a non-
spouse is designated as an income beneficiary. The gift tax is calculated on the present value of the
income stream. An annual exclusion can be taken for an immediate annuity ( which is a present
interest gift) but not for a deferred annuity (which is a future interest gift).
A gift tax charitable deduction is available for the charitable contribution, based on the value of the
property given to charity, minus the actuarial value of the annuity.
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Practitioner Advice
Charitable gift annuity contracts can be structured as a "deferred gift
annuity," so that a client will start receiving payments at a future date (or
upon a future event such as retirement), rather than immediately while the
client's effective income tax rate may still be high. In this way, the charitable
gift annuity can be a tax-savvy component of an overall retirement plan.
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Pooled Income Funds
Pooled income funds are trusts established by qualified charities to receive charitable donations from
many donors. The funds are commingled together and the charity manages the fund's pool of
investments. However, they cannot invest in tax exempt securities. When donors make charitable
donations to these funds they are purchasing units that will pay them an annual income stream for
life. Donors irrevocably gift assets that will give them a pro rata share of income based upon the rate
of return earned by the fund. If this income is not sufficient, donors can make future contributions to
the fund to increase their pooled income shares.
Donors making charitable donations receive an income tax deduction for the present value of the
charity's remainder interest in the property that passes to the charity at the donor's death. Donors will
pay income taxes on the annual income distributions they receive from the charity. Since the donor is
receiving income for life, the PV of the remainder interest given to charity is included in the donor's
gross estate at death but offset by the estate tax charitable deduction.
The donor may choose to have the income distributed entirely to their spouse. Donors should elect
QTIP treatment on their gift tax return to receive a marital deduction for the income interest gifted
since this is terminable interest property. Donors may also gift the income portion to non-spousal
beneficiaries as well. In this case, the donor is subject to a potential gift tax for the present value of
the income interest, but there is no gift tax for the remaining interest gifted to charity.
At death, the decedent's will may direct a transfer of assets to the pooled income fund, naming the
spouse as the income beneficiary. The donor's executor should make a QTIP election to give the
decedent's estate a marital deduction for this terminable interest transfer. When the surviving spouse
dies, the present value of the remainder interest to charity will be included in the spouse's estate, but
will receive an offsetting charitable deduction.
If the decedent's will names other beneficiaries to receive a lifetime income interest from the fund,
then the present value of the income interest is included in the decedent's gross estate. The estate
will receive a charitable deduction for the present value of the charity's remainder interest.
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Private Foundations
Private foundations or family foundations are separate legal entities which are either not-for-profit
corporations or tax-exempt trusts. They are legally complex and expensive to establish since the IRS
must first issue a tax-exempt status as a private foundation, and set up and maintenance fees are
high. The founder has total legal control over the entity during his or her lifetime and can transfer that
control to his or her heirs at death.
Most private foundations are funded, controlled and managed by wealthy family members who make
tax-deductible gifts to the foundation. The foundation must distribute a minimum of 5% of its assets to
public charities each year. All contributions made to the foundation during life or at death are free of
gift, estate and generation skipping transfer taxes. Income tax deductions are limited to the following
AGI limitations:
30% of AGI for cash
30% of AGI limited to basis for ordinary income assets (i.e. securities held for less than 1 year
FMV up to 20% or basis up to 30% for appreciated long-term capital gain property (i.e.
securities held for more than 1 year
FMV up to 20% or basis up to 30% for tangible personal property held more than 1 year (use-
related)
30% limited to basis for tangible personal property (use un-related) and
Basis or replacement value up to 30% for Life insurance.
Foundation directors can invest and manage the assets or have them managed professionally. The
income earned by the foundation is not subject to income tax, but an excise tax of 1 to 2% is levied on
net investment income.
Private foundations establish a public legacy through the types of charitable organizations they
choose to support. Family members can decide which charities to make donations to also how much
to donate, when to make those donations, and receive payment for their work. The involvement of
family members in the foundation is an excellent way of instilling and perpetuating philanthropic family
values.
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Donor Advised Funds
Donors who wish to actively manage their charitable donations are turning to donor advised funds
with their charitable contributions. Many mutual fund companies and brokerage firms market and
manage these funds. These funds can be established quickly and easily at the end of the tax year.
Donors can contribute cash or appreciated securities that are owned for more than one year, to avoid
paying capital gains on the appreciation. Contributions to qualified charities may result in income tax
deductions if the donor itemizes deductions which are subject to adjusted gross income (AGI)
limitations, and donations reduce the value of the donor's gross estate.
Donors lose control over the assets when they transfer them to a donor advised fund, but they can
make recommendations of grants to be paid from the fund to selected charitable beneficiaries. This
flexibility lets donors decide at a later time which charities they choose to make grants to, while
receiving a current year's income tax deduction. Unlike a private foundation, there is no minimum
distribution that must take place each year.
Practitioner Advice
Donor Advised Funds receive 95% of current cryptocurrency donations. The
charity administrator of a DAF account will exchange the cryptocurrency into
US dollars and invest as per the DAF's asset allocations. The donor can
then direct the monies to the charity of their choice by instructing the
custodian organization.
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Traditional IRAs
Retirement assets such as pensions, IRAs, 401(k) plans and profit-sharing plans are included in a
decedent’s gross estate and are subject to estate tax. The assets are considered income in respect of
a decedent (IRD). If a beneficiary receives an IRD asset at the owner’s death or the named
beneficiary is the decedent’s estate, then double taxation can occur. Payments made to a beneficiary
from retirement assets are subject to ordinary income taxes but a beneficiary can take an income tax
deduction for a portion of the estate tax that is attributable to the IRD asset.
Retirement assets from qualified plans and IRAs can be gifted to charity and the transfer is exempt
from income, gift and estate taxes. Non-charitable beneficiaries such as spouses and family members
can receive income from retirement assets that are transferred to a charitable remainder trust under a
decedent’s will or revocable trust. The assets in a charitable remainder trust will grow tax-deferred
and distributions to trust beneficiaries will be taxed as ordinary income, in the same manner as
distributions are taxed from traditional IRAs. A gift of income to a spouse is offset by a marital
deduction, but a gift of income to a non-spousal beneficiary of a charitable remainder trust is subject
to gift tax for the present value of the income interest.
Gifting IRA distributions to charity
Traditional IRA owners over age 70½ may make charitable IRA distributions of up to $105,000 from
their IRA to a qualified public charity in 2024. These donations are known as Qualified Charitable
Distributions (QCDs). When a donor uses a QCD he will not receive an income tax deduction for the
amount that he directs to charity, however, his RMD will be reduced by the amount that passes to the
charity. A donor may direct up to $105,000 annually, even if his RMD amount is less than that.
Under the SECURE Act 2.0 of 2022, the Required Minimum Distribution (RMD) age increased to age
73 for those who were born between 1951 to 1959, and to age 75 for those born afterwards.
Therefore, there may be no immediate tax benefit for clients who do not have to take RMDs prior to
age 73 to make a QCD before age 73, even though they are still permitted to do so.
The owner of a traditional IRA must take required minimum distributions after they attain age 73. By
making Qualified Charitable Distributions (QCDs) after age 73, the requirement to take mandatory
distributions is met and the owner is not taxed on the income.
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As a result, this gift to charity keeps a required minimum distribution out of a taxpayer's adjusted
gross income. This might reduce income below certain cut-off levels that would trigger taxes and
charges. For example, a lower AGI would reduce your provisional income
which might result in
lowering or eliminating your taxes on Social Security benefits. It might also reduce your Medicare Part
B and Part D premium amounts and/or keep you from paying an alternative minimum tax.
Taxpayers who do not itemize their deductions can take advantage of making this tax-free transfer.
However, the IRA owner will not receive an income tax deduction for the RMD amount given to
charity. By using the QCD, taxpayers get the standard deduction plus they can exclude that amount
from their RMD income. It is actually more advantageous for the owner to gift the IRA dollars than to
write a check to charity because the owner would not be subject to AGI limitations that could reduce
the value of the charitable gift. Also, the contribution won't count towards the annual cap of cash gifts
for the year, which is 60% of AGI.
Qualified Charitable Distributions must be made directly from the IRA to a qualified public charity. Gifts
to donor advised funds or private foundations do not qualify. Donors must obtain a receipt from the
charity that confirms the amount of the gift and the date the gift was made.
Example
Colleen wishes to support her university however she does not have
significant cash or other investable assets with which she can make the
contribution. Colleen has an IRA and her RMD for this year is $68,000. She
does not need the RMD to meet her living expenses so she directs $50,000
to the university. Colleen's RMD will be reduced by $50,000. She will not
deduct the $50,000 on her income tax return, but the taxable portion of her
RMD for the year will be only $18,000.
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Practitioner Advice
Married couples who are over age 73 who both qualify for the QCD and
have traditional IRAs that are subject to required minimum distributions can
each use the QCD to increase their tax benefits. For example, assume a
couple over 73 is in a 22% tax bracket and their deductions are not over the
standard deduction amount of $32,300 in 2024 ($29,200 + $1,550 for each
spouse over age 65). If the couple's combined QCDs are $10,000 the
couple has saved an additional $2,200 in taxes. Tax savings can be much
greater for clients who give more to charity and who are in a higher tax
bracket.
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Gift of Life Insurance
As people age, they may no longer need to keep their life insurance policy if their estate does not
have liquidity needs or an estate tax liability. A life insurance policy can be gifted outright to a charity
or to a donor advised fund to provide a donor with a charitable income tax deduction if the donor
itemizes deductions.
Some benefits for gifting life insurance policies to charities include:
The death benefit the charity receives is a fixed amount that is guaranteed as long as
premiums are paid. Even if death occurs after only one deposit, the charity is assured of its full
gift.
A large future benefit can be provided to the charity for a small annual premium cost. The
donor does not have to divest other assets or investments, or dilute control of a family business
interest to make the gift.
The charity receives the death proceeds free from federal income and estate taxes, probate
costs, and administrative or transfer costs. Payment of a gift made to a charity under a
decedent's will may be subject to probate costs and delays.
A gift of a life insurance policy to charity is valued according to the same gift tax rules as any other gift
of property, i.e. the fair market value at the date of the gift.
A donor who is the owner and the insured may deduct the fair market value of the policy as a
charitable deduction on his or her income tax return, limited to 30% of AGI for a qualified public
charity. The fair market value is the replacement cost
of the policy. For a premium-paying policy, the
replacement cost is the interpolated terminal reserve plus any unearned premium at the date of the
gift. For a single premium or paid-up policy, the replacement cost is based on the single premium the
same insurer would charge for a policy of the same amount at the insured's attained age (increased
by dividend credits and reduced by outstanding loans.) The replacement cost of a newly issued policy
is the gross premium paid by the insured.
A gift of life insurance is at least partially a gift of ordinary income property. When life insurance is sold
at a gain, the gain is taxed at ordinary income rates to the extent the cash surrender value exceeds
premiums paid and capital gain for any excess value over cash surrender value. As such, the
charitable deduction is equal to the LESSER of the donor's adjusted basis or the fair market value of
the life insurance policy. If the fair market value of the policy exceeds the policyholder's net premium
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payments, the charitable deduction is limited to the donor's basis which is the net premium payments
made. The value of the gift is not the face amount of the insurance policy.
Review Question
Let's assume A is owner and insured on a life insurance
policy with a face amount of $50,000. The annual premium
on this policy is $5,000, and the interpolated terminal
reserve cash value is $14,000. The total premium paid on
this policy was $10,000. What is the value of the charitable
gift if A absolutely-assigns the $50,000 policy to Charity C?
When a life insurance policy with ongoing premiums is donated to charity, it is the charity's
responsibility to pay the premiums. A donor may also pay the premiums which are considered gifts of
cash, and they are fully and currently deductible as charitable contributions if the charity owns the
policy outright. The donor sends his check directly to the charity and can take a full deduction up to 60
percent of his contribution base. Charities prefer to receive policies with no ongoing premiums since
they must send the donor a gift receipt each time a premium payment is contributed.
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Practitioner Advice:
One important thing to remember with respect to charities and gifts of life
insurance is the insurable interest rule. Subject to state law, in order for an
individual to receive a deduction for the gift of a life insurance policy or for
premiums paid, the charity must have an insurable interest in the insured.
Otherwise, proceeds could be included in the insured's estate and thus,
subject to federal estate tax. Most states now have insurable interest
statutes giving charities an insurable interest in the lives of their contributors.
Some states require the charity to be the owner and irrevocable beneficiary
while others allow the insured to be the initial owner if a subsequent transfer
to the charity is made.
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Tax Implications of Charitable Gifting
There can be significant estate, gift and income tax implications resulting from a lifetime gift of
property to a qualified charity:
This can effectively "freeze" the estate tax liability in the donor's estate so as to prevent it from
increasing. It can also reduce the estate tax liability, because the FMV of the asset on the date of the
gift is removed from the donor's gross estate.
For a donor who gifts property that is appreciating in value, the lifetime gift
removes the
property and all further appreciation of it from the donor's gross estate. This can effectively
freeze the estate tax liability
of the donor's estate so as to prevent it from increasing. It can also
reduce the estate tax liability
because the FMV of the asset on the date of the gift is removed
from the donor's gross estate.
An appreciated asset may be transferred into a charitable trust without requiring that the donor
recognize the gain in that asset.
A gift of property to a qualified charity
may also provide the donor with significant income tax
savings
in the form of charitable deductions. The deductions can be used to offset the donor's
income tax liability.
In addition, if the property, which is gifted, is income producing, the donor acquires additional
income tax savings
, since the donor no longer receives the income.
If appreciated property is transferred to a GRAT, GRUT or QPRT, the tax on any gain will
eventually be paid by the grantor, or the trust, or the beneficiaries. Having taxes paid by the
grantor may not, however, be a disadvantage, since the purpose of the trust is to "defund" the
grantor's estate and shift as much wealth as possible to the remainder person with minimal gift
taxes.
Finally, the gift of property to a qualified charity
can produce significant gift tax savings
for the
donor. For clients who are charitably inclined, a gift to a qualified charity is not taxed due to the
donor's annual exclusion and the gift tax charitable deduction. The donor's lifetime gift tax
exclusion is not reduced so it remains available to offset gift taxes on gifts made to non-
charitable beneficiaries.
Therefore, for a donor seeking to reduce estate, income and gift taxes, a gift to a qualified charity may
satisfy all of these objectives.
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Identity of the Donee
The identity of the donee can determine the maximum amount of a charitable income tax deduction.
If the donee is a public charity, then the maximum annual charitable income tax deduction is:
Maximum Annual Charitable Income
Tax Deductions.
This flowchart illustrates the maximum
amount of annual charitable
deductions for different types of gifts if
the donee is a public charity.
Gifts of
cash
60% of the donor's
AGI.
Gifts of
ordinary
income
property
50% of the donor's
AGI, limited to the
donor's basis.
Gifts of
long-term
capital gain
property!
30% of the donor's
AGI, based upon
FMV of the asset
(except where the
donor may elect to
use the basis to
become eligible for a
50% AGI deduction.
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Maximum Annual Charitable Income
Tax Deductions.
This flowchart illustrates the maximum
amount of annual charitable
deductions for different types of gifts if
the donee is a public charity.
Gifts of use-
related
tangible
personal
property
30% of the donor's
AGI, based upon
FMV of the asset.
Gifts of use-
unrelated
tangible
personal
property
50% of AGI, based
upon the donor's
basis in the asset.
The income tax deductions for gifts to private charities are significantly lower than those to public
charities. An example of a private charity is a private foundation. The amount of the income tax
deduction for a gift of appreciated assets to or for the use of a private charity is limited to the donor's
basis in the property. However, certain gifts of qualified appreciated stock may be deductible at their
full FMV.
An example of qualified appreciated stock is publicly traded stock (with certain exceptions) which, if
sold on the date of the gift, would result in a long-term capital gain. The AGI limitation for contributions
of long-term capital assets to private charities is the lesser of 20% of the donor's AGI or 30% of the
donor's AGI less the amount of charitable deductions allowed for public charities. If a gift of an asset
other than a long-term capital asset is made to a private charity, the income tax deduction is the
lesser of 30% of the donor's AGI or 50% of the donor's AGI less the amount of charitable deductions
taken for public charities.
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Defining Public Charity
Under IRC Section 170, the charitable deductions we have already discussed, 30%/50% of AGI, are
only allowed for contributions to qualified public charities. Examples of these charities include:
nonprofit schools
universities
institutions of higher learning
churches
synagogues
the Young Men's Christian Association (YMCA)
the Young Women's Christian Association (YWCA)
the United Fund
the United Way
the American Red Cross, and
the Boy Scouts and Girl Scouts of America.
Qualified organizations also include groups whose primary purpose
is to assist in the discovery of a
cure for a disease
, such as:
the Heart Association
the American Cancer Society
the American Diabetes Association
the Arthritis Foundation, and
the Society for the Prevention of Blindness.
As long as the organization has, as its primary purpose
, some religious
, educational
, philanthropic
,
scientific
, or literary purpose
, and is intended to benefit the public at large
, it will be a public charity.
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Case Studies
The organization does not qualify
for a charitable deduction if its purpose is
to influence legislation or political ideologies. Therefore, most political action
committees and political action groups (
for example
, Common Cause, the
National Rifle Association, or any political group that hires lobbyists, such as
the American Dairy Association) cannot obtain a charitable deduction for
donors who contribute property to them.
Practitioner Advice
Charitable contribution deductions are allowed for donations of goods—such
as clothes and household items, that are in usable good condition. The
deduction amount is limited to the item's fair market value at the time of
contribution—for example, its thrift-store price. When a taxpayer who
itemizes claims more than $500 in total deductions for non-cash
contributions, they must file IRS Form 8283 with their tax return. Taxpayers
who donate more than $250 to a qualified charity must retain a receipt from
the charity to document the contribution.
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Module Summary
Charitable Gifting
A. Outright gifts
B. Charitable Remainder Trusts
1. Unitrusts (CRUTs)
2. Annuity trusts (CRATs)
C. Charitable Lead Trusts
1. Unitrusts (CLUTs)
2. Annuity trusts (CLATs)
D. Charitable gift annuities
E. Pooled income funds
F. Private foundations
G. Donor advised funds
H. Charitable remainder
I. Inter-vivos and testamentary charitable gifts
A. Outright Gifts
The donor can make an outright gift to a qualified charity and receive a charitable income tax
deduction for FMV or basis according to the type of property gifted. Gifts of cash that are donated
directly to charity receive an income tax deduction up to 60% of the donor's AGI.
Example
: If a life insurance policy is gifted to charity the donor's income tax deduction is the lesser of
the replacement cost of the policy (up to 30% of AGI) or basis, which is the amount of premiums paid
for the policy (up to 50% of AGI). Gifts to charity are not taxed because the donor's annual exclusion
and charitable gift tax deduction reduce the gift tax to zero. The donor can also make testamentary
gifts to qualified charities and receive an estate tax charitable deduction, but no charitable income tax
deduction.
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B. Charitable Remainder Trusts
A grantor irrevocably transfers assets to a trust, receives payments for up to 20 years or life, and the
remainder interest passes to charity at the grantor's death. Grantors often transfer appreciated stock
with a low basis to the trust since the charity can sell the stock without paying taxes on capital gains.
Consequently, more money is available in trust to produce a greater income stream for the donor
and/or the donor's spouse. Annual payouts cannot exceed 50% of the initial FMV of the assets
transferred into the trust, and the remainder interest must be at least 10% of the net FMV of the
assets.
CRAT
– Donor receives fixed annual payments
which are at least 5% of the initial value of
the property transferred into the trust, paid from trust income. If the trust produces insufficient
income, payments must be made from principal. Fixed payments are an inflation concern
because additional assets cannot
be added to the trust to generate more income.
CRUT
– Donor receives a fixed
percentage of the assets for life,which is at least 5% of the
trust assets, revalued annually. Payments are based on the trust's investment performance,
which can be an inflation hedge. More assets can be added to the trust to produce greater
income, if desired.
With CRUTS, theIRS allows, but does not require, invasion of trust principal to make
payments. If the trustee must dip into corpus to make payments, there is less corpus available
to generate a future income stream.
NIMCRUT
– Net Income Makeup CRUT. If the trust states that invasion of principal is not
mandatory to meet income payments, then the trust can have a "make-up" provision. A
beneficiary can receive the lesser
of a percentage of income or the actual trust income each
year, plus any excess income had there been a deficiency in previous years. Assets should
produce little income in early years while the beneficiary's income is greater, then the trustee
should convert to higher income investments in retirement years when the beneficiary is in a
lower tax bracket.
Estate and gift taxes for CRATs and CRUTs
Donor takes an income tax deduction for the present value of the charity's remainder interest. A
larger income tax deduction is taken for a CRAT or a trust with a shorter income interest, since
the charity will receive the remaining assets sooner.
The donor and/or the donor's spouse are taxed on the annual income received.
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Gift tax: If the income beneficiary is not the donor or the donor's spouse, the present value of
the income interest is subject to gift tax.
Estate tax: All trust assets are included in the donor's or the spouse's estate at death, but this
amount is offset by the estate tax charitable deduction.
Testamentary CRAT or CRUT: If the income beneficiary is a non-spouse, the present value of
the income interest is included in the donor's estate.
C. Charitable Lead Trusts
There are two kinds of charitable lead trusts, grantor trusts and non-grantor trusts. These irrevocable
trusts are funded with cash or income producing property to give charities an income stream for a
number of years.
With a grantor charitable lead trust, a grantor receives a charitable income tax deduction for the
present value of the income payments the charity receives over the income term. The trust property
reverts back to the grantor or the grantor's spouse when the charity's income interest ends. Therefore,
this reversionary interest is included in the grantor's estate. The grantor is taxed on the income
generated from the trust property every year.
With a non-grantor charitable lead trust, the trust corpus is transferred to non-grantor trust
beneficiaries when the charity's income interest ends. The grantor is not entitled to a charitable
income tax deduction for the income stream donated to charity, but the grantor does not pay any
income taxes on the trust income. The gift of the remainder interest to a non-spousal beneficiary is
the present value of the remainder interest, not subject to annual exclusions. The corpus is not
included in the grantor's estate at death.
The two types of charitable lead trusts are charitable lead annuity trusts (
CLATs
) and charitable lead
unitrusts (
CLUTs
). The income distributed to charity is paid as a guaranteed annuity in a CLAT,
or a
fixed percentage of trust assets revalued annually in a CLUT
. With a CLAT, the trust principal is
invaded if the income is insufficient to make payments to charity, which leaves less in trust for the
remainder beneficiaries. The grantor cannot transfer more assets into the CLAT to guarantee fixed
income payments as they can with a CLUT. A CLAT is better when interest rates are low since smaller
annuity payments are made to charity, leaving more for the trust beneficiaries.
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D. Charitable Gift Annuities
A donor transfers cash or property to a charity and the charity pays the donor or other donees an
annuity payment each year for life.
Gift tax – charitable deduction is the FMV of the property given to charity minus the actuarial
value of the annuity.
Gift annuity to spouse – a marital deduction is available if the spouse receives all annuity
payments and has a general POA over payments after the donor's death.
Joint and survivor annuity – decedent can take a marital deduction for the value of the
spouse's annuity interest included in the decedent's estate.
Other beneficiaries of annuity payments – gift tax is the present value of the annuity payments.
E. Pooled Income Funds
A donor irrevocably gifts property to a charity and receives an annual pro rata share of income from
the charity's commingled funds for life. Additional gifts can be made to the fund to increase the
donor's income stream.The charity manages the fund which cannot invest in tax-exempt securities
and receives the remainder when the donor's income interest ends.
Income tax consequence: Donor takes an income tax deduction for the present value of the
charity's remainder interest. The donor pays income taxes on the income received from the
fund.
A donor who gifts the income to a spouse can elect Q-TIP treatment on the gift tax Form 709 to
receive a marital deduction for the spouse's income interest.
A donor who gifts the income to a non-spouse may incur a gift tax for the present value of the
income interest, but a charitable deduction is available for the present value of the charity's
remainder interest.
Estate tax: Decedent bequeaths funds to charity with the surviving spouse as the income
recipient. Executor makes a Q-TIP election to obtain a marital deduction for this terminable
interest. The present value of the remainder interest to charity will be included in the surviving
spouse's estate, but will receive an estate tax charitable deduction.
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Estate tax: If the decedent's will names other beneficiaries as lifetime income recipients, then
the estate only receives a charitable deduction for the present value of the charity's remainder
interest.
F. Private Foundations
Private foundations are a separate legal entity, either a not-for-profit corporation or a tax-exempt trust.
Most are funded and controlled by family members, and set-up and maintenance fees are high.
Family members who make gifts to the foundation may take an income-tax deduction limited to 30%
for cash and to 20% for long-term capital gains property. The foundation must distribute a minimum of
5% of the assets to public charities every year.
G. Donor Advised Funds
Donor advised funds are maintained by charities, community foundations or mutual fund companies.
Donors may irrevocably contribute cash, stock or other property to their individual fund accounts and
select the charities to receive their grants. Donors are entitled to an income tax deduction based on
the type of property contributed, subject to AGI limitations.
H. Charitable remainder
A donor can gift a farm or a personal residence to a charity while living there for life. The donor takes
an income tax deduction for the present value of the remainder interest given to charity, calculated
actuarially. A decedent can also bequeath a life estate in the home to a spouse or other beneficiary at
death and have the charity receive the property after they die. The estate can take a marital and
charitable deduction for property passing to a spouse and charity, but can only take a charitable
deduction for the present value of the charity's remainder interest if the property is bequeathed to a
non-spouse.
I. Inter-vivos and Testamentary Charitable Gifts
The charitable deduction is subtracted from the decedent's adjusted gross estate to reduce the
taxable estate. Gifts of property to charity at life or death may result in income, gift and estate tax
benefits. A consequence of gifting or bequeathing property to charity is that there are fewer assets to
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transfer to heirs, which may be an estate planning concern. Often life insurance is purchased for
wealth replacement to ensure that beneficiaries receive an equitable value at the insured's death.
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Practice Questions
Which of the following statements is not correct in regards
to gifting life insurance to charity?
The donor can deduct the interpolated terminal reserve plus and
unearned premium at the date of the gift for a premium-paying
policy on their income tax return.
✘
The donor can deduct the amount that the same issuer would
charge for a policy of the same amount, at the insured’s attained
age (increased by credits and reduced by outstanding loans), for a
single premium policy on their income tax return.
✘
The donor can deduct the premiums paid up to the date of transfer
for a premium-paying policy on their income tax return.
✔
The donor can deduct the amount of the gross premium paid by
the insured for a newly issued paid up policy on their income tax
return.
✘
Elaine makes a gift of Exxon stock that she has owned for
five years to a qualified public charity. The value on the
date of the gift was $45,000. Elaine’s adjusted gross
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income for the year was $75,000. What is the maximum
charitable deductions that Elaine can take?
$27,500
✘
$22,500
✔
$15,500
✘
$8,500
✘
The donor’s charitable deduction is limited to the basis in
the asset, subject to 50% of AGI, for which of the following
gifts?
A civil war musket to a historical museum
✘
A first edition book to a college
✘
A diamond ring to a synagogue
✔
A Picasso painting to an art museum
✘
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Which of the following are requirements for a CRAT?
The donor must irrevocably transfer the property to the trust.
✔
A CRAT can only be created during the donor’s lifetime.
✘
The donor can make multiple transfers of property into the trust.
✘
The income payments to the trust beneficiary remain fixed once
they are calculated.
✔
The value of the charitable interest must equal at least 10% of the
value of the assets when they are transferred into the trust.
✔
Which of the following are requirements for a CRUT?
The income payments to the trust beneficiary remain fixed once
they are calculated.
✘
A CRUT can be created during the donor’s lifetime or at their
death.
✔
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The donor can make only one initial transfer into the trust.
✘
The value of the charitable interest must equal at least 10% of the
value of the assets when they are transferred into the trust.
✔
The trust must pay out a minimal amount of at least 5% and not
more that 50% of the annually reappraised value of the trust
corpus.
✔
Which testamentary gift is better to pass to charity than to
the decedent’s beneficiaries?
A decedent's life insurance policy
A decedent’s IRA
A decedent’s bank accounts and investment accounts titled as
TOD and POD
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Problem 06-05 (Algo) [LO 6-1, 6-4]
FruAgro Company has average annual gross receipts of $58 million annually. This year, FruAgro earned $3 million of business interest
income, incurred $8 million of business interest expense and has adjusted taxable income of $14 million.
Required:
Compute FruAgro's current deduction for business interest and the amount of any business interest carryforward.
Note: Enter your answers in dollars not in millions of dollars.
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PINANIA is a famous chocolate factory in Switzerland. Each
year, the company must produce as many as 2,200 units
(with the same amount of production). Sales are evenly
distributed throughout the year. The company wants to
determine the number of sizes that can be charged for
ordering (setup costs) and holding costs (carrying costs). It
can be seen that the production cost for each unit is $50,
the carrying cost is 10% of the average inventory and the
setup cost is $20 (per production).
Question : By using the Differentiation Method (1st and
2nd Derivative Test),
Determine the economic lot size for the company and
provide an explanation of the calculation results.
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