|
Tax Treatment and Management
|
Public
Charity
501(c)3
|
Private
Foundation
|
Donor
Advised
Fund
|
|
Income, Gift and Estate Tax deductible contributions
|
Yes
|
Yes
|
Yes
|
|
Fair market value tax deduction
|
Usually
|
Sometimes
|
Usually
|
|
AGI limits for cash contributions
|
50%
|
30%
|
50%
|
|
AGI limits for contributing publicly traded securities
|
30%
|
20%
|
30%
|
|
AGI limits for appreciated “hard to value assets”*
|
30%
|
Basis
|
30%
|
|
Tangible property** with a “related use”
|
FMV
|
Basis
|
Basis
|
|
Founder/Donor control or influence over grant-making
|
None
|
Significant
|
Some
|
|
Operating complexity for donor
|
None
|
Significant
|
None
|
|
Flexibility
|
Little
|
Significant
|
Moderate
|
|
Cost of making and distributing charitable gifts
|
None
|
Significant
|
Little
|
|
Easy to operate and stay in compliance
|
Simple
|
Complex
|
Simple
|
|
Excise tax on investments
|
None
|
2%
|
None
|
Paving over Farmland – Malpractice XII
Keep those tax notes updated.
John and Julia Ramirez have a
citrus grove in what is turning into a rapidly growing neighborhood. They have drawn the unwanted attention of a
number of buyers seeking large tracts of agricultural land for its commercial
and residential potential. Additionally,
because they possess senior water rights, a nearby city has been pressuring
them to sell the rights to develop wells and add capacity to the city’s water
system. Rising property tax rates and
increased suburbanization have added further pressure to sell out and move on,
especially when they routinely find youngsters prowling around their equipment
and getting into mischief. These
liability concerns have forced them reluctantly to accept the inevitable and sell
out to commercial developers, and one of their advisors has suggested a
charitable remainder annuity trust and a private foundation to minimize the tax
hit on the transaction.
Generally, a CRT is a good
idea to defer capital gains recognition, especially if the family has
charitable inclinations. However, a CRAT
is a poor choice for most real estate sales because of its limitations and
rigidity. A better choice would be a custom
drafted unitrust (CRUT) because it offers more flexibility. Whether they choose a standard CRUT, “FLIP-CRUT”,
or a NIMCRUT depends more on the family’s need for control, flexibility and a
predictable income stream, as the income tax benefits and basic structure is
the same for all three variations of the CRUT.
Besides recommending the
wrong charitable trust, their advisor’s assumptions about using a private
foundation as a remainder charity are probably incorrect as well. Although private foundations previously offered
a fair market value income tax deduction for gifts of appreciated assets, after
1998, the rules changed and the more favorable tax treatment is now limited to just
cash and appreciated qualified (publicly traded) securities. If land is used, the income tax deduction is
restricted to basis or cost when private foundations are the eventual
recipients. A better choice for tax
efficient gifts with hard to value assets like farms, commercial real estate,
or residential property would be a CRT with a public charity or, if ongoing
family influence is desirable, a donor advised fund inside a community
foundation is used instead.
Why would a donor advised
fund be a better choice? It is simple, easy,
and less hassle. The umbrella charity
provides oversight and compliance, spreads the cost of operation over many
funds, offers economical management, and still provides for a donor to make
recommendations in support of his or her charitable interests. Many legal and tax commentators routinely
suggest the use of a private foundation when contributions exceed $5 million,
others suggest that $10 million is more appropriate when families seek to create
legacies and provide for ongoing family management. However, when transferred assets are more
modestly valued, then the donor advised fund offers the same immediate tax treatment
as that of a public charity with some of the advantages and donor continuity of
a private foundation. Remember to
consider all of your options; charitable planning involves irrevocable tools
and for this planning to work, articulate specific
philanthropic goals. Too many planners
and families allow tax deductions to drive the process instead of treating it
as an ancillary benefit.
* closely held stock,
commercial real estate, farms or ranches, life insurance policies with cash
value, patents, personal residences and vacation homes, retirement plan assets
(via beneficiary designation), securities, unimproved property
** art, collectibles or other
tangible personal property, equipment or inventory, royalties, copyrights,
ordinary income assets
*** Electing “step-down”, uses
basis against AGI instead of FMV with 3% itemized deduction reduction rule.
© 2003 -- Vaughn W. Henry
Gift
and Estate Planning Resources
Springfield,
IL 62703-5314
217.529.1958
-- 217.529.1959 fax
VWHenry@aol.com
on
the web at gift-estate.com
Gift and Estate Planning Resources
Springfield, IL 62703-5314
217.529.1958 -- 217.529.1959 fax
VWHenry@aol.com www.gift-estate.com
Vaughn W. Henry
Henry & Associates
Gift and Estate Planning Resources
22 Hyde Park Place
Springfield, IL 62703 USA
Phone: (217) 529-1958 Fax: (217)529-1959
Toll-free: (800) 879-2098
E-mail: VWHenry@aol.com
CONTACT
US FOR A FREE PRELIMINARY
CASE STUDY FOR YOUR OWN CRT SCENARIO or try your own at Donor Direct. Please note -- there's much more to estate and charitable
planning than simply running software calculations, but it does give you a
chance to see how the calculations affect some of the design considerations.
This is not "do it yourself brain surgery". When is a CRUT superior
to a CRAT? Which type of CRT is best used with which assets? Although it may be
counter-intuitive, sometimes a lower payout CRUT makes more sense and pays more
total income to beneficiaries. Why? When to use a CLUT vs. CLAT and the traps
in each lead trust. Which tools work best in which planning scenarios? Check
with our office for solutions to this alphabet soup of planned giving tools.
