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The Art of Non-Cash

Charitable GivingSeptember 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 CharityPrivate Non-Operating

FoundationBasis

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

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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Thank you!