CHARITABLE GIVING
BASIC CONCEPTS
Several years ago while I was delivering a speech regarding the benefits of charitable giving, a man in the audience stood up and shouted: "You know what I think of charitable giving?" I asked, "What?" He then responded: "After all is said and done, more is said than done."
After three decades of law practice in the field of estate planning, I have come to believe there is a certain degree of truth in what the heckler shouted. However, our tax law structure has historically favored, and continues to benefit charitable giving. Therefore, the purpose of this first of two articles is to briefly provide you with an overview of certain basic charitable giving concepts, guidelines and tax consequences.
The law permits you may make gifts to charities either during your lifetime or at death. In either situation, such contributions have tax benefits. They may result in some form of current income tax deduction, may also reduce your federal estate tax burden and can be made free of gift tax. However, for you to receive any of the above tax benefits the gift must be made to a "qualified" organization. The Internal Revenue Service publishes a list of qualified charities in IRS Publication 78. As a general rule, a qualified charity must meet the following three (3) conditions:
- The organization must be operated for exclusively religious, charitable, scientific literacy or educational purposes,
- No part of the organization's earnings can benefit a private individual, and
- The organization cannot attempt to influence legislation or participate in political campaigns.
Most clients I work with, make annual gifts of cash to various charities. This form of transfer is generally the easiest to explain, provides immediate personal gratification as well as, an income tax deduction. As a general rule, federal law allows an income tax deduction to the extent of fifty percent (50%) of your "contribution base." For programs of this discussion, I will assume this contribution base is approximately equal to your adjusted gross income. Lifetime cash gifts in excess of fifty percent (50%) of your adjusted gross income may be carried forward and deducted over the next five (5) years. Thus the real cost of making a cash gift is dramatically reduced by the income tax charitable deduction.
Next to direct annual cash transfers, gifts of long term capital gain property (i.e. appreciated securities and real property) are most frequently utilized. These transfers allow you a charitable deduction equal to the asset's "fair market value" up to thirty percent (30%) of your adjusted gross income. A major benefit of making a gift of appreciated property is that you are able to transfer the value of its appreciation without first selling the property and recognizing capital gain.
In addition, you may also own tangible personal property and wish to gift it to a charity (i.e. a painting to an art museum). If the property is of a type generally retained by the museum for its purposes, you are permitted to receive a charitable deduction equal to its fair market value, subject to the thirty percent (30%) limit. However, there can be a loss of the full fair market value deduction if you are aware the charity plans to sell the asset. By comparison, ordinary income property and tangible personal property unrelated to the charity's mission are subject to rules that reduce the value of the deduction by as much as forty percent (40%) of the unrealized appreciation.
Please also understand that if you make a gift to charity and claim a deduction for the property (i.e. anything other than money or marketable securities) with a value in excess of $5000.00, you must obtain a qualified appraisal (Form 8283). Thereafter, you are required to attach a completed summary of the appraisal to your income tax return. The regulations clarify that a qualified appraisal is one that is prepared no sooner that sixty (60) days before the date of the contribution. Likewise, the IRS may always review such appraisals and make its own valuation determination.
In future issues we will continue our discussion of charitable giving and focus on "deferred giving", including split-interest Trusts (i.e. Charitable Remainder Trusts, Charitable Annuity Trusts, and Pooled Income Funds, etc).
