1 1 The Art of Non-Cash Charitable Giving September 22, 2011 Richard M. Horwood Horwood Marcus & Berk Chartered 2 Why Donate Non-Cash Assets? 83% of Americans give to charity annually • Many individuals donate to charity due to personal charitable goals and the accompanying tax advantages Cash gifts are not always easy to accomplish • Non-cash property may be an individual’s most significant asset, for example: — Securities and Business Interests — Real Estate — Art, Antiques and Collectibles — IRAs — Life Insurance
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The Art of Non-Cash
Charitable Giving
September 22, 2011
Richard M. Horwood Horwood Marcus & Berk Chartered
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Why Donate Non-Cash Assets?
§ 83% of Americans give to charity annually • Many individuals donate to charity due to personal charitable
goals and the accompanying tax advantages § Cash gifts are not always easy to accomplish
• Non-cash property may be an individual’s most significant asset, for example:
— Securities and Business Interests — Real Estate — Art, Antiques and Collectibles — IRAs — Life Insurance
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Why Donate Non-Cash Assets?
§ Charities are increasingly accepting non-cash gifts • For Tax Year 2008, 23 million individual taxpayers itemizing
deductions reported $40.4 billion in deductions for non-cash charitable contributions
§ Fulfill personal charitable goals and financial goals • Two different approaches:
— During lifetime, avoid gain realization by contributing the asset to a charity and obtaining an income tax deduction
— On death, avoiding estate tax
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The Current Charitable World
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Aspects of Charitable Giving
§ Types of Charities • Public Charities
— For example: churches, hospitals, governmental units, American Red Cross, libraries, community museums
• Private Non-Operating Foundations — Example: Bill and Melinda Gates Foundation
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Aspects of Charitable Giving
§ Types of Deductions • Basis deduction • Fair Market Value Deduction
— Considerations: – Securities and Business Interests: control, buy/sell
agreements – Real Estate: mortgages, economic and environmental factors – Art, Antiques and Collectibles: authenticity, physical
condition, extent of restoration
§ Deduction Limitations • Limits the percentage a donor may deduct from his or her
contribution base (adjusted gross income)
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Aspects of Charitable Giving
§ Deduction Limitations for Charitable Contributions
Public Charity Private Non-Operating
Foundation Basis Deduction/
Cash 50% 30%
Fair Market Value Deduction 30% 20%
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Securities and Business Interests
§ Publicly Traded Securities
• May include stocks, bonds or mutual funds • Great incentive to contribute rather than sell
— Avoid Federal and state income taxes on gain – Example: Illinois resident with appreciated securities
— But not securities held at a loss
§ C-Corporation Stock
• Deduction generally equal to fair market value of stock (except private non-operating foundations)
• No tax on gain • Charity will want exit strategy
— No prearranged purchase
— Review shareholder agreement
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Securities and Business Interests
§ S-Corporation Stock • Ensure charity is permitted S Corp shareholder • Three negatives
— Deduction generally equal to fair market value of stock less recapture/ordinary income items (except private non-operating foundations)
— Charity subject to UBTI on S Corp income — Charity subject to tax on gain from stock sale
• Alternative: Have S Corp gift assets to charity
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Securities and Business Interests
§ LLC and Partnership Interests • Deduction generally equal to fair market value less any ordinary
income gain (except private non operating foundations) • Charity subject to UBTI on trade or business income
§ Private Foundation Issues • Self dealing? • Diversification? • Excess business holdings?
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Real Estate
§ Gift of unencumbered real estate to public charity • Charitable deduction equal to the fair market value of the
real estate • If private foundation, donor may deduct his or her basis • Qualified appraisal required if the real estate is valued
at over $5,000 § Real Estate Encumbered by a Mortgage
• Must reduce contribution deduction by the mortgage • Unrelated Business Taxable Income (“UBTI”)
— Debt-financed property will often result in UBTI (gross income from an unrelated trade or business)
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Real Estate
§ Contributing a Partial Interest in Real Estate • Retain a life estate in a personal residence and gift the
remainder interest to a charitable organization • Caution!
— Difficult to sell real estate after contributing a partial interest § Conservation Easement
• Limits the use of the land to protect its conservation values — Donor continues to own and use land, and the donor retains his
or her right to sell or pass land on to heirs — Example: easement with rare wildlife may prohibit land
development • IRS sets forth permissible conservation purposes • Typically can deduct the fair market value of the easement
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Art, Antiques and Collectibles
§ The Related Use Rule • If a charity uses an art object for a purpose related to its tax-
exempt status, the donor may deduct the FMV of the object (assuming the object is capital gain property), if not, the donor’s deduction is limited to his or her basis
— Applies to all tangible personal property — Use does not have to be immediate
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Art, Antiques and Collectibles
§ Related Use Issues — Donate art to a museum (display v. storage) — Donate art to a university (library for study v. hall for display) — Donate art to a hospital
§ Verification Requirements — Requirements increase if claimed value is over $250 — Qualified appraisal required if valued at over $5,000 — Qualified appraisal must be attached to tax return if valued at over
$500,000 — Strict v. substantial compliance
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Art, Antiques and Collectibles
§ Fractional Interest in Tangible Personal Property • Contribute an undivided portion of an art object
— Example: Donor contributes a 25% interest in a painting to an art museum
— Subsequent contribution deductions are limited to lesser of the fair market value at the time of initial contribution or at the time of the subsequent contribution
— Possibility for recapture
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Individual Retirement Accounts (“IRAs”)
§ How to continue giving to charitable causes without sacrificing your retirement security
• A donor over the age of 70 ½ may contribute up to $100,000 directly from an IRA to a charity
— No charitable deduction, but avoid ordinary income taxes — Caution! No direct transfer if under 70 ½
§ Designate a charity as a beneficiary • Avoid income tax and receive an estate tax deduction
— Pays an annual stream of income to a non-charitable beneficiary for one life, two lives or a term of years
— Assets remain in the CRT at the end of the trust term and pass to charity
• Balance charitable goals and heirs’ inheritance — Use life insurance as “make up” to heirs
§ Charitable Lead Trusts (“CLT”) • No current charitable deduction (unless a grantor trust) • Remainder, if any, to non-charitable beneficiaries
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Charitable Gift Annuities
§ Donor may transfer assets to a charity and in return the charity will make the annuity payment to one or more individuals for their lifetimes
§ Allows donor to retain income interests and deduct the fair market value for the contribution
• Caution! — UBTI issues may arise
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Life Insurance
§ Must contribute the entire policy to receive maximum tax benefits
• No immediate income tax deduction for the mere payment of premiums for a policy with a charity named as beneficiary where the donor still maintains the ability to change the beneficiary
§ Payment of additional premiums
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Example One: Paperweight Collector
§ Separate objects not subject to fractional interest rules § Gift to museum - “related use” § Importance of gift acceptance
agreement § Collector enjoys sharing his passion
during lifetime
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Example Two: Matching Gift
§ Client funds departmental program at a university with publicly traded stock and closely held business interests
§ School to obtain donors to match dollar for dollar § Consequences of matching funds
• Matching funds fall short? • University discontinues program?
§ Benefits • Client involvement in program • Charitable deduction • Leveraging gift through match
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The Importance of a Gift Acceptance Agreement
§ May outline the terms of a contribution so that the donor and charity agree on how the contribution will be used
§ Have a clear understanding of the donor’s purpose and the charitable organization’s requirements
§ Common problem gifts: • Ambiguous Gifts • Overly Restrictive Gifts • Naming Rights Gifts • Large Gifts • Testamentary Gifts with Current Recognition
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Example Three: Residence with Substantial Acreage
§ Retain substantial land and gardens surrounding the estate during lifetime
§ Fund new music auditorium on college campus § Yearly charitable contribution from client
to cover bond interest costs for college § College able to book gift towards
Capital Campaign and build the auditorium now
§ Upon death of donor, college receives gift of land that can be sold
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Example Four: New York Puzzle
§ Background: Client has substantial interests in commercial real estate, investment portfolio, an IRA, paid-up life insurance and an art collection
§ Goal: Contribute 10% of assets to charity and lessen taxes (during lifetime or at death)
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Example Four: New York Puzzle
§ During Lifetime • Commercial real estate and investment portfolio
— Options for valuation discounting and freezing — Consider using formula clause (see Hendrix) to
reduce valuation risk
• Life Insurance — Cover capital campaign pledge
§ On Death: • All assets, including the IRA and art collection, are options
— Use of disclaimers provides flexibility
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Conclusion: Delivering Value
§ For the client: Tax savings and the ability to give more § For the advisor: Tell them something they don’t know § For the charity: More giving options = more giving
As you leave today… think about someone who will benefit from the combination of your creative planning and their passion.
