A SIGNATURE PROGRAM OF INDIANA GRANTMAKERS ALLIANCE

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1 A SIGNATURE PROGRAM OF INDIANA GRANTMAKERS ALLIANCE

2 VERY SCARY (AND NOT SO SCARY) GIFTS October 31, 2013 Phil Purcell, JD Vice President, Ball State Foundation GIFT Legal Consultant *Not to be revised or edited without the written consent of Phil Purcell or the GIFT Team

3 Cemetery Funds Son of Accelerated CRT Ghoul and Shark-Fin CLT Tales from the Darkside: Gift Annuities and Life Insurance Control from the Grave: Donor Restrictions The Devil is in the Details!

4 CEMETERY FUNDS

5 CEMETERY FUNDS Cemetery companies are tax exempt per IRC Section 501(c)(13). Therefore, cemetery companies not eligible to become a designated fund to award grants for general administrative expenses. But eligible for field-of-interest fund for ONLY charitable purposes. Note: Gifts directly to cemetery funds qualify for an income tax (but not estate tax) charitable deduction per special statute. Rev. Rul

6 GRANTS TO CEMETERY COMPANIES Requires expenditure responsibility (ER). Must be paid for charitable purposes or programs of the cemetery such as: 1. Beautifying the community 2. Improving public areas 3. Replacing deteriorating headstones 4. Historic preservation 5. Educating the community about history

7 EXPENDITURE RESPONSIBILITY (ER) No payment to maintain a specific lot or crypt. Follow the five steps of expenditure responsibility!

8 FIVE STEPS OF ER 1. Pre Grant Inquiry: Reasonable investigation of grantee to confirm that grant will be used for charitable purpose. 2. Written Agreement: Spelling out the charitable purpose that grant will be used for. Also to prohibit non-charitable uses of grant. 8

9 FIVE STEPS OF ER 3. Separate Account: Grantee must keep grant funds in separate financial account from all noncharitable funds. 4. Regular Reports: Grantee must provide regular reports on the charitable use of the granted funds Reporting: Community foundation should report all grants requiring ER including name of grantee, dollar amounts and charitable purposes. Use Schedule O to explain details.

10 QUESTIONS?

11 SON OF ACCELERATED CHARITABLE REMAINDER TRUST

12 LONG TERM RETIREMENT PLANNING WITH CHARITABLE REMAINDER TRUSTS

13 BASICS OF CRTS Operated pursuant to a trust document that complies with state and federal law. IRC 664. See model CRT template documents provided by IRS ( to offer a safe harbor so long as substantially followed. Counsel can add state trust code powers of trustee, etc.

14 BASICS OF CRTS Donor and/or others designated by donor receive income for life or a term of years not to exceed 20 years. Fixed income payout percentage between 5% and 50%. Established during life or at death. Remainder to charity is irrevocable. But donor may retain right to change the recipient charity(ies) Does charity disclose this fact?

15 TAX BENEFITS OF A CRT Income tax charitable deduction for present value of charity s future interest. Income tax deduction value must be at least 10% of original value of donated cash or assets. Donated cash or assets removed from taxable estate. Assets donated to CRT are sold without capital gains tax liability since CRT is a tax-exempt trust.

16 Standard Unitrust (SCRUT). Net Income Unitrust (NICRUT). Net Income with Make-Up Unitrust (NIMCRUT). Flip CRT (begins as NICRUT or NIMCRUT and flips to a SCRUT). Annuity Trust (CRAT). TYPES OF CRTS

17 PLANNING OPPORTUNITIES Sell assets without capital gains tax. Transforms non-income producing property into income for retirement or for loved ones. Trust document may define income to include realized capital gain at the discretion of the trustee. As trust principal value grows, so does income with unitrusts. Removes worry of property management.

18 FLIP CRT Flip from NICRUT or NIMCRUT to SCRUT. Treas. Reg (a)(1)(i)(c). Excellent vehicle to deal with real estate that may be slow to sell. Get income tax deduction when property is donated to trust. Pay income when asset is sold and proceeds reinvested and trust flips.

19 Triggered on a specific date or by an occurrence which is not discretionary or within the control of any person. The regulations provide specific examples. Treas. Reg (a)(1)(i)(c).

20 SON OF AN ACCELERATED CRT Donate appreciated stock % payout for 2-4 years. Stock not sold right away. Borrow $ or forward sales contract to provide cash for first 1-2 years of payout. Tax -free return of principal. Escape gain, receive income tax deduction. Little or nothing left for charity!

21 FULL MONTY/CHUTZPAH CRT Original Accelerated CRT concept was prohibited by amendments to IRC Sec. 664 in 1997 and 1998 (e.g., 10% minimum deduction, 50% maximum payout, etc.). Treasury Decision 8926 prohibits Son of Accelerated CRT.

22 MINIMUM CHARITABLE DEDUCTION RULE: EXAMPLE $100,000 donated to CRT Calculated deduction must be at least 10% x $100,000 = $10,000 Otherwise, CRT will not qualify for federal income, gift and estate tax benefits!

23 QUESTIONS?

24 GHOUL CHARITABLE LEAD TRUST

25 Charitable Lead Trusts This image cannot currently be displayed. This image cannot currently be displayed. Charity 1 Gift Donors Charity 2 At end of trust term, the principal is given to individuals named by donor

26 EXAMPLE $1,000,000 donated to 20 year charitable lead annuity trust 5% payout; 7% total return on assets 2% Adjusted Federal Mid-term rate (Nov 2013) $1,819,910 calculated to family at end of trust $1,000,000 million paid to charity during term $182,430 taxable gift to heirs

27 TAX SAVINGS Gift/estate tax savings increase as does % payout and term of payments. No gift/estate tax when trust assets received by heirs freeze technique. Lifetime or testamentary transfers. Lifetime trust: No step-up in basis for heirs. But compare estate with capital gains tax rates! Testamentary trust: Step-up in basis.

28 WHEN AFT DROPS Increase in tax deduction for Remainder Interest in Residence or Farm. Reduction in gift or estate tax liability for Charitable Lead Trust. Minimum impact on CRUTs. Gift Annuity income value increases but deduction decreases. Charitable Remainder Annuity Trust tax deduction decreases. Beware 10% deduction limit and 5% probability test.

29 ER OR GHOUL CLAT Format: Link payout from CLAT to a recruited (for a fee?) young person with a nominally long life expectancy who, in reality, is not well. Gift tax paid at much reduced rate than if an older person (e.g., parent) had been the measuring life. Prohibited by Treasury Decision 8923.

30 JAWS!!

31 SHARK-FIN CLAT: JAWS!? Nominal early payments. Back-Loaded large balloon payments. Maximize early growth to allow for more to heirs. Zero-out gift/estate tax. Life insurance investment to pay balloon.

32 SHARK-FIN CLAT IRS form annotations allow variable payments - but no specific guidance. Authority suggests de minimis payments may be disregarded and that variable payments must be reconsidered annually. Potential self-dealing if charity s payments are at risk by back loading investments. Estate Planning Journal, October 2010.

33 QUESTIONS?

34 TALES FROM THE DARKSIDE

35 CHARITABLE GIFT ANNUITY Contract between donor and charity. Donor gives assets, charity provides fixed and guaranteed income for 1 or 2 lives. Rates of return: American Council on Gift Annuities Rate assumptions: life expectancy, market growth, costs. for current rates and state laws.

36 GIFT ANNUITY RATES Age % Age % Age % Age % Age % Age % Age %

37 GIFT ANNUITY BENEFIT Fixed income for life at attractive rates. Current income tax charitable deduction. Tax-free return of principal. Spread of capital gains tax. Removal from estate tax. Note: Potential gift tax if paid to persons other than donor or spouse.

38 PHILANTHROPY PROTECTION ACT 1995/1997 Class action lawsuit over gift annuities as violation of Sherman Anti-Trust Law. New disclosure requirements for gift annuities and trust investments. Provide disclosure before closure of gift annuity: summary of assets and liabilities. Audited financial statement not required.

39 GIFT ANNUITY STATE REGULATIONS Charity bankruptcy in Arizona. North American Securities Administrators Association (NASAA) list gift annuities as a Top Ten Scam. Summary of state laws: Not regulated in Indiana per IC

40 TRICK OR TREAT? COMMISSIONS FOR GIFT ANNUITIES Payment to financial advisor by charity for referral of gift annuity donors. Aggressive marketing. Violates Ethical Standards. See White Paper at

41 COMMISSIONS FOR GIFT ANNUITIES: PROBLEMS 1. Potential SEC regulation. 2. State insurance licensing. 3. State securities regulation. 4. Potential reduction of deduction. 5. Reduces charitable residual. 6. State solicitation laws.

42 VERY SCARY! National Community Foundation of New Life International founded by Norvell Olive has paid commissions for gift annuity referrals. No longer soliciting gift annuities. National Foundation of America (NFOA), Richard and Susan Olive, officers. Tennessee Department of Commerce and Insurance obtained control of NFOA for doing insurance business without certificate of authority. Also, NFOA has not received 501(c)(3) status. Other states involved. rce/documents/nfoa_receiver ship_order_ pdf

43 REINSURANCE Insurance company pays charity for right to death benefit of policies. Insurance company pays annuitant. Charity still legally obligated to pay if insurance company cannot. Charity may receive significantly less than the residual projected by ACGA. A financial investment decision! Beware overly cautious board of directors.

44 QUESTIONS?

45 GIFTS OF LIFE INSURANCE: THE GOOD Charity as Beneficiary only. Charity as Owner and Beneficiary with no loan. Gift of Existing Policy which has an outstanding loan.

46 CHARITY BENEFICIARY ONLY Charity may be primary or contingent beneficiary. No income tax charitable deduction. Qualifies for estate tax charitable deduction.

47 CHARITY OWNER AND BENEFICIARY (NO LOANS) New Policy: Charitable deduction for premium paid (subject to AGI limit). In Force Policy: Charitable deduction for lesser of donor s basis and policy s interpolated terminal reserve. IRC Sec. 170(e). Paid Up Policy: Lesser of basis or replacement cost. Term Policy: Deduction for unused premium.

48 CHARITY OWNER AND BENEFICIARY (NO LOANS) Cash gives to charity to cover premium: 50% AGI deduction limit so long as no legally binding commitment by charity to pay. Helpful for charity to receive premium notices to assure annual payments. Idea: Donate stock that is used by charity to pay premium. Premium paid directly to insurance to companycould be 30% limit. A gift for the benefit of a charity.

49 CHARITY OWNER AND BENEFICIARY (LOAN) Deemed a bargain sale. Donor s basis is allocated between the sale portion and the gift portion of the transaction on a pro rata basis. Treas. Reg Donor s adjusted basis allocable to the gift portion is deemed to be deducible gift to charity.

50 CLAIMING THE CHARITABLE DEDUCTION Indiana: Charity has insurable interest in donors: Indiana Code Sec Written acknowledgement describing the donated policy. IRS Form 8283: Noncash Charitable Contributions. Qualified independent appraisal? IRS Form 712: Life Insurance Statement IRS Form 8282: Donee Information Return.

51 LIFE INSURANCE: THE POTENTIALLY BAD AND UGLY!

52 THE POTENTIALLY BAD AND UGLY! Premium Financed: loan to pay premiums Group insured: board members, others Commercial annuities: depends on contract date Charitable reverse split dollar: charity and family as beneficiaries legally prohibited! See Life Insurance Valuation Guidelines at

53 QUESTIONS?

54 CONTROL FROM THE GRAVE! DEALING WITH DONOR RESTRICTIONS

55 WHAT IS A CHARITABLE GIFT? To qualify for tax benefits: income tax charitable deduction, capital gains tax savings. Definition of gift : Intent plus objective test (i.e., actual transfer to qualified charitable organization). No return benefit or quid pro quo. U.S. v. American Bar Endowment, 477 U.S. 105 (1986).

56 NO STRINGS ATTACHED Deduction denied if conduit for a person. PLR Deduction denied if donor asserts inappropriate control or personal benefit. No deduction if gift is to be returned if restriction unfulfilled (right of reverter, right of first refusal). Ferguson, 21 B.T.A (1930).

57 DONOR ADVISED FUNDS U.S. v. Mosley, Northern District of California (2003). Charitable income tax deductions claimed for six-figure gifts to DAF held by National Heritage Foundation. Grants from DAF to pay tuition for education at private school of donor s child. Criminal tax evasion: jail and financial penalties.

58 IRS PUBLICATION 526: CHARITABLE CONTRIBUTIONS No deduction for gift of time/services. No deduction for loan of property. No deduction for gifts of partial interest in property - with specific exceptions for split interest gifts (e.g., charitable remainder trust, etc.). Gift of ordinary income property limited to basis (e.g., gift of art by artist).

59 CASE STUDY: THE ART OF THE STEAL Bequest: Dr. Albert C. Barnes. Billion $ art collection. Merion, PA : remain in location. Bankrupt museum: Move? Court rules: Move it! Doctrines of cy pres and equitable deviation. Montgomery County, Pennsylvania Orphan's Court (2004).

60 DEALING WITH RESTRICTIONS Document donor intent and purpose as clearly as possible. Suggest a Plan B or Plan C. Always remember the importance of the variance power!

61 QUESTIONS?

62 THE DEVIL IS IN THE DETAILS!

63 IRS PUBLICATION 1771: ACKNOWLEDGEMENT Requirements for gift receipts: 1. Name of charity recipient. 2. Date of gift (disputed requirement). 3. Dollar value if cash gift. 4. Description if non-cash gift. 5. Value of goods or services received by donor if above de minimis token, OR 6. Statement: No goods or services received in exchange for gift.

64 GIFT RECEIPTS Tax Court denied a $23,000 charitable income tax deduction, even though IRS conceded charitable gifts were made. Charity did not add phrase "you received no goods or services" on receipt. Law does not allow for corrections after the due date for income tax return. Durden v. Commissioner, T.C. Memo (May 17, 2012).

65 NON-CASH GIFTS: FEDERAL REQUIREMENTS IRS Forms 8283 (donor) and 8282 (charity): Disclosure of value and subsequent sale of non-cash gifts. Pension Protection Act of New guidance by IRS re: qualified appraisal and appraiser. See

66 VALUATION OF NON-CASH GIFTS U.S. Tax Court acknowledged property worth over $18 million (and not over-valued) was donated to a charitable remainder trust. ENTIRE charitable deduction disallowed - appraisal requirements not satisfied. No independent appraisal and not all information provided on Mohamed v. Commissioner, T.C. Memo (May 29, 2012).

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69 GIFTS OF TANGIBLE PERSONAL PROPERTY If use is unrelated to mission, then deduction is limited to lesser of FMV and cost basis. Examples: Grain, livestock, artwork, equipment. Applies to gifts for charity auctions. Special rule for automobile gifts

70 SALE OF DONATED PROPERTY IRS Form 8282: Reporting proceeds of sale of donated property by charitable organization. Filed if property is sold within three years of date of gift. IRS audit red flag if value of claimed for charitable deduction significantly exceeds the charitable organization s sale value.

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73 If the claimed charitable deduction exceeds $5,000, then a qualified independent appraisal is required of donor. Exception for publicly traded stock. Other exceptions. Donor pays for appraisal. See IRS Publication 561. VALUATION

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75 GIFT OF BONDS Income tax charitable deduction for full current fair market value of bonds. Complete escape of capital gains tax. Gift to a charitable remainder trust or in exchange for a gift annuity. Pays income to donor and/or loved ones. Income tax charitable deduction for present value. Escape capital gains tax.

76 GIFTS OF S STOCK: WARNINGS 1. The donor s charitable deduction is likely not fair market value. Similar to gift by partnership, i.e., must be reduced by potential gain in property. Note: Fair market value allowed for gifts at death. 2. Charity will owe unrelated business income tax on income earned by the S Corp if stock is not redeemed or sold. 3. Charitable remainder and lead trusts accepting S stock disqualifies S status.

77 GIFTS OF TIME SHARES Gift of a contract right. Requires independent valuation if deduction claimed over $5,000. Due diligent review of time share fees, maintenance costs, insurance, rights of tenant and land owner relative to timing of use, use by others, marketability, etc.

78 QUESTIONS?

79 THANKS FOR THE MUMMYRIES! R.I.P. SAMMY TERRY!

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