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Recent Commentary

Increasing Lifetime Cash Flow

Thursday, June 30, 2022

A SCRUT can increase the donors' cash flow, defer their capital gain taxes, and provide the desired benefit to charity.

Visual Planned Giving - Chapter 7 - Bargain Sale Gifts

Wednesday, January 23, 2019

In the seventh chapter of Visual Planned Giving: An Introduction to the Law & Taxation of Charitable Gift Planning, author Russell James discuss the specifics of a bargain sale. Essentially, the bargain sale is the sale of an asset to a charity for less than the asset's fair market value. Another way of understanding the concept is to view it as a gift by the donor to charity, where the donor receives back money or other property. Generally, the gift is the asset's fair market value, less the amount received from the charity. A charitable gift annuity is a form of bargain sale. While the calculations are complex, the basic rules are the same, where the donor deducts the value of the asset transferred, minus the present value of the charity's obligation to make payments.

With a bargain sale involving a gift of an appreciated asset or involving encumbered property (where there is a mortgage, for example), the tax rules become more complicated. The donor receives a charitable income tax deduction but also recognizes capital gain. The Code treats the transaction as if the donor sold some of the property and gifted the rest. With a gift of appreciated property, the basis must be allocated between the sale and gift portions of the transaction, in the same proportions as the sale price and the gift relate to the fair market value. This results in capital gain recognition, but at a lower amount than if the donor sold the property, and gifted some of the proceeds. If a donor makes a gift of mortgaged property, the Code states the donor has received a payment equal to the amount of debt on the property. As with a bargain sale of an appreciated asset, the basis must be allocated between the sale and gift portion of the transaction. Typically, a taxpayer cannot avoid this result by continuing to pay the mortgage, though those payments will be treated as additional donations. Accordingly, a donor who is considering making a gift of encumbered property should consider paying off the debt first or transferring it to other assets.

Mr. James has created a set of 65 videos for his Complete Charitable Planning Training Series, to help his readers understand Chapter 7 and the entire book.

Zero Estate Tax Planning using a CLAT

Thursday, June 23, 2022

Using a charitable lead annuity trust, donors can transfer significant assets to charities and heirs, and in doing so, can "zero out" gift and estate taxes.

Visual Planned Giving - Chapter 6 - Income Limitations on Charitable Deductions

Wednesday, January 23, 2019

In the sixth chapter of Visual Planned Giving: An Introduction to the Law & Taxation of Charitable Gift Planning, author Russell James focuses on the rules limiting charitable income tax deductions.

Gift planners must be able to explain the consequences of charitable income tax deductions to their donors/clients. First, they must understand the dollar value of the deduction generated by the transfer; and second, they must understand how much of the deduction can be used in the current year, or the five succeeding years. Charitable deductions cannot eliminate 100% of an individual's taxable income (because they are deductions, not credits). The total amount of income that a charitable deduction can eliminate may be 20%, 30%, or 50% in a taxable year. These limitations are important, because most persons making significant charitable gifts do not do so out of income. Many persons, holding valuable assets, especially those in or nearing retirement, do not have significant incomes, and may not be able to use the charitable deduction in the immediate tax year. Some may not have enough income to use the carryforwards over the next five years, so the value of the deduction diminishes.

The Code prioritizes gifts based on what type of asset is gifted (cash vs. appreciated assets), and the identity of the charity (public charity vs. private foundation). Cash given to a public charity can be deducted against 50% of adjusted gross income ("AGI"), while gifts of long-term capital gain property can offset up to 30% of AGI. On the other hand, the same gifts to a private foundation can offset 30% and 20% of AGI, respectively (but only if the asset is qualified appreciated stock). Cash, creations by a donor, business inventory, and short-term capital gain property are all deductible at 50% of AGI. The deduction available for these items is limited to the lower of their cost basis or fair market value.

Long-term gain property does not receive the same favorable tax treatment as cash, because the donor gets a double avoidance of tax. The donor pays no capital gains tax when transferring the asset to charity, and receives a deduction for the full fair market value. If the income limitations prevent the donor from utilizing the full deduction in the first year, it can offset income for the next five years. If the donor has made gifts from more than one class of assets, the favored gifts (i.e., cash to a public charity) are deducted first, then less favored gifts (i.e., appreciated securities to private foundation). Gifts made during the year are counted before carryforward gifts.

Mr. James has created a set of 65 videos for his "Complete Charitable Planning Training Series," to help his readers understand Chapter 6 and the entire book.