Real Estate - Horwood Marcus & Berk

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Transcript Real Estate - Horwood Marcus & Berk

The Art of
Charitable Giving
September 22, 2011
Richard M. Horwood
Horwood Marcus & Berk Chartered
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
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
The Current Charitable World
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
Aspects of Charitable Giving
 Types of Deductions
 Basis Deduction
 Fair Market Value Deduction
— Considerations:
– Securities and Business Interests: control, buy/sell
– 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)
Aspects of Charitable Giving
 Deduction Limitations for Charitable Contributions
Public Charity
Private Non-Operating
Fair Market Value
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
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
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?
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)
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
 IRS sets forth permissible conservation purposes
 Typically can deduct the fair market value of the easement
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
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
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
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
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
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
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
Example One: Paperweight Collector
 Separate objects not subject to fractional interest rules
 Gift to museum - “related use”
 Importance of gift acceptance
 Collector enjoys sharing his passion
during lifetime
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
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
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
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)
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
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.