Real Estate - Horwood Marcus & Berk
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Transcript Real Estate - Horwood Marcus & Berk
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 operating foundations, pass-through foundations,
donor-advised funds, and pooled-fund foundations
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 taxexempt 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
Designating multiple beneficiaries
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Charitable Trusts
Charitable Remainder Trusts (“CRT”)
An irrevocable tax exempt trust
— 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.
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