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Russell James, J.D., Ph.D., CFP® is a professor in the Department of Personal Financial Planning at Texas Tech University. He holds the CH Foundation Chair in Personal Financial Planning and directs the on-campus and online graduate program in Charitable Financial Planning. Additionally, he is an adjunct professor at the Texas Tech University School of Law where he teaches Charitable Gift Planning. He graduated, cum laude, from the University of Missouri School of Law where he was a member of the Missouri Law Review. While in law school, he received the United Missouri Bank Award for Most Outstanding Work in Gift and Estate Taxation and Planning. He also holds a Ph.D. in consumer economics from the University of Missouri, where his dissertation was on charitable giving.

Prior to his career as an academic researcher, Dr. James worked as the Director of Planned Giving for Central Christian College in Moberly, Missouri for 6 years and later served as president of the college for more than 5 years, where he had direct and supervisory responsibility for all fundraising. During his presidency the college successfully completed two major capital campaigns, built several new debt-free buildings, and more than tripled on-campus enrollment.

Dr. James has over 150 publications in academic journals, conference proceedings, and books. These predominantly focus on statistical analysis and experimental research related to gifts, estates, and property. He has been quoted on charitable and financial issues in a variety of news sources including The New York Times, The Wall Street Journal, CNN, MSNBC, CNBC, ABC News, U.S. News & World Report, USA Today, the Associated Press, Bloomberg News and The Chronicle of Philanthropy.


Visual Planned Giving - Chapter 16 - Private Foundations and Donor Advised Funds

Wednesday, February 28, 2018

In the sixteenth chapter of Visual Planned Giving: An Introduction to the Law & Taxation of Charitable Gift Planning, author Russell James discusses private foundations and donor advised funds ("DAF"), which hold money and distribute grants to public charities. They allow financial advisers to receive compensation for managing private charitable wealth. Private foundations hold more assets and make more charitable distributions than other planned giving vehicles. However, DAFs are growing rapidly, due to the relative ease of opening an account, and ability to distribute funds over time.

The Code presumes charitable organizations are private foundations, unless they can show they are public charities. A charitable organization can avoid private foundation status in three primary ways:

  1. It can carry out traditional charitable activities, such as operating a school, hospital, or place of worship.
  2. It can receive widespread financial support, which occurs when persons who individually give 2% or less of the total support ("small donors"), make up one-third of the charity's support. This is an objective, safe harbor. More subjective rules allow a charity to meet a 10% test, if it intends to receive attract more public support.
  3. It can receive one-third of its support from small donors, income from memberships and charitable operations.

Establishing a private foundation involves creating a legal entity, either as a corporation or trust, and filing Form 1023 with the IRS. Once granted, tax-exempt status is typically retroactive if the Form was filed within 27 months of the entity's formation. All private foundations require ongoing administration in the form of accounting, record keeping, state and federal tax filings, and minutes of meetings. Unlike other charitable entities, private foundations pay a tax on investment income at a 1.4% rate under the new TCJA. Typically, the foundation must distribute at least 5% of its net investment assets each year.

Deductions for gifts to private foundations are subject to lower income limitations. Instead of the 50% limit for cash contributions (now 60% under the TCJA), and the 30% limit for appreciated property, gifts to private foundations are limited to 30% and 20% of adjusted gross income, respectively. There is an exception for private "operating" foundations, which have the same income limitations as public charities. Private foundations file Form 990-PF, instead of Form 990 filed by other tax exempt entities.

Because private foundations are often controlled and funded by a single family, and not subject to the oversight of a public charity, the Code has strict rules designed to prevent insider benefits and ensure the accomplishment of charitable purposes. The Code refers to insiders as disqualified persons, and defines these individuals with broad strokes. Directors, officers, and trustees are disqualified persons, and so are donors who have given more than 2% of the foundation's total contributions in any one year. Additionally, the donor's ancestors, descendants, spouses, spouses of descendants, and any organization in which disqualified persons hold at least a 35% interest fits within this definition.

The self-dealing rules prohibit disqualified persons from selling, exchanging, leasing, transferring, or loaning money, goods, services, property, or facilities to the foundation, unless this occurs as a gift. These rules prevent even a bargain sale between the foundation and the disqualified person. Self-dealing transactions result in a 10% tax on the transaction amount for the disqualified person, and an additional 5% on the foundation manager. If the foundation does not correct the transaction within 90 days of an IRS notice, a second-tier tax of 200% on the disqualified person, and 50% on the foundation manager, applies. However, the foundation can hire a disqualified person to provide investment advice, legal, tax, accounting, banking, or administrative services, if compensation is reasonable. Moreover, the foundation can reimburse board members for the expenses of attending meetings. Private foundations also face penalties if they own too much of a corporation's stock, make overly risky investments, or make grants for non-charitable purposes, such as political campaigns.

Given the complicated rules surrounding private foundations, some donors opt for the simpler method of using a DAF. A DAF is a separate account, hosted by a public charity, from which the donor can make grant recommendations. The charity has legal control over the assets, and could choose to ignore the donor's advice. Functionally, this rarely happens if the donor recommends a valid charity, since the charity sponsoring a DAF does not want to discourage future gifts.

Mr. James has created a set of 65 videos for his Complete Charitable Planning Training Series, to help his readers understand Chapter 16 and the entire book.

Visual Planned Giving - Chapter 15 - Donating Retirement Assets

Wednesday, February 21, 2018

In the fifteenth chapter of Visual Planned Giving: An Introduction to the Law & Taxation of Charitable Gift Planning, author Russell James explains how retirement accounts and charitable giving are logical bedfellows. Retirement accounts consist of more than one-third of household financial assets. Thus, they represent a significant source of charitable gifts.

Retirement accounts have three stages. Early distributions, which occur before age 59 ½, are subject to a 10% penalty. At age 59 ½, these penalties no longer apply, but the donor must pay taxes on the distributions. Stage two begins at age 70 ½, when donors must take at least a minimum distribution each year, or pay penalties. Ideally, a donor age 70 ½ or older who does not need the income, and would like to make a gift to charity, would simply make a "qualified charitable distribution." With this technique, the donor does not receive a charitable income tax deduction, but the distribution is not included in gross income, and the amount gifted to charity reduces the required minimum distribution. This is preferable to a withdrawal and corresponding gift, which may not provide a perfect offset due to income limitations on charitable gifts. Stage three occurs at death. While gifting from retirement accounts during life can have negative consequences, making gifts of retirement assets at death almost always proves beneficial. Because retirement assets are subject to gift, estate, generation-skipping and income taxes at death, the value transferred to beneficiaries is almost always significantly less than face value. Exempt organizations do not pay these taxes, and so donors who wish to benefit charity posthumously, should give retirement assets. We should note the participant's spouse must approve the beneficiary designation with ERISA retirement accounts, but not with a traditional or Roth IRA.

Retirement planning and charitable planning can also coincide through the conversion of a traditional IRA to a Roth. In both vehicles, assets grow tax free, but unlike a traditional IRA, no taxes are owed on distributions from a Roth, because contributions are made with after-tax dollars. Conversion to a Roth IRA results in income taxes on the amount of the conversion, less any basis in the traditional IRA. This generates an immediate spike in taxable income, which can be offset through a charitable gift. Thus, a donor who is planning a Roth conversion could have heightened interest in utilizing a planned giving strategy such as a CRT, CGA, pooled income fund, or remainder deed. Additionally, a donor who generated a large deduction through one of these tactics, and has unused deductions, can "pull" income into the current year with a Roth conversion, and utilize the deduction before it expires.

Given the amount of household wealth invested in retirement accounts, charitable planning with them should not be overlooked. A basic understanding of this area will help donors avoid potentially disastrous mistakes, and enjoy favorable tax consequences.

Mr. James has created a set of 65 videos for his Complete Charitable Planning Training Series, to help his readers understand Chapter 15 and the entire book.

Visual Planned Giving - Chapter 14 - Life Insurance in Charitable Planning

Wednesday, February 14, 2018

In the fourteenth chapter of Visual Planned Giving: An Introduction to the Law & Taxation of Charitable Gift Planning, author Russell James delves into how life insurance can be used as a charitable planning tool, usually to replace wealth, make an outright gift to charity currently, or endow charity at the donor's death. Wealth replacement is the most common, since many charitable giving techniques can significantly reduce a donor's estate. To compensate, a donor can use the tax savings from making a gift, to purchase life insurance to benefit heirs. The donor effectively transfers assets outside of his or her estate, and replaces these assets with insurance, which is not included in his or her estate. Typically, to keep insurance on the donor's life outside of his or her estate, advisors recommend creating an ILIT to hold the policy.

The ILIT also works for donors without taxable estates. A donor wishing to leave farmland, or a principal residence to charity, can execute a retained life estate deed, and use the savings from the immediate deduction to purchase life insurance to benefit the heirs who will not receive the property at his or her death. A donor may also consider using an ILIT to benefit children in conjunction with a CRT. If the income payments from the CRT continue after the donor's death, they are included in his or her estate. On the other hand, an ILIT can use the death benefit to purchase annuities for the donor's children, which provides the same result, but with no estate taxes. The donor can pay premiums through gifts to the ILIT. By granting the beneficiaries of the trust a right to withdraw the gifted amount "Crummey powers," the gift qualifies for the annual exclusion. This allows the donor to pay premiums without exhausting his or her lifetime exemption.

Charitable giving through a life insurance policy can be as simple as the insured naming the charity as a beneficiary. This does not result in an immediate income or gift tax deduction. Gifting a life insurance policy to charity entails more complexity. Because cashing in the policy usually results in ordinary income tax on the appreciation in value of the policy, the gift is limited to the donor's basis. However, calculating the donor's basis is an unsettled issue. Obviously, it includes the premiums paid for the policy. IRS would argue this number is reduced by the "cost of insurance" because the donor has received the benefit of coverage. This position is inconsistent with the treatment of life insurance when money is received from the insurance company. IRS does say basis is reduced by the cost of insurance when the owner sells it to a third party. Accordingly, it seems the basis for gifts would likewise be reduced.

Determining the fair market value of a gifted policy also presents difficulties, since very few policies are newly issued, or fully paid up. Moreover, IRS prohibits standard valuation approaches when the insured has a terminal illness. Policies with outstanding loans are not good candidates for gifting to charity, because the split-dollar regulations eliminate the charitable deduction, and such gifts are subject to the bargain sale rules.

Using life insurance allows donors of relatively modest means to fund large posthumous bequests. However, unless the donor dies unexpectedly, the charity must wait a long time to receive the death benefit, and inflation will erode the purchasing power of the gift. Furthermore, a donor may fail to make premium payments, either because of declining interest in the charity, or a loss of financial capacity. Simply giving the premium payments to the charity to invest could result in a more impactful gift.

Mr. James has created a set of 65 videos for his Complete Charitable Planning Training Series, to help his readers understand Chapter 14 and the entire book.

Visual Planned Giving - Chapter 13 - Charitable Lead Trusts

Wednesday, February 7, 2018

In the thirteenth chapter of Visual Planned Giving: An Introduction to the Law & Taxation of Charitable Gift Planning, author Russell James explains charitable lead trusts or CLTs and the rules governing them. While CRTs pay the donor first with the remainder passing to charity, CLTs pay the charity first, with the remainder passing to the donor's selected beneficiaries. CLTs are typically used to generate estate and gift tax deductions. Though they are less common than CRTs, donors usually fund CLTs with larger amounts of the assets. Because the charity is the income beneficiary, CLTs cannot offer variations such as the NIMCRUT or Flip-CRUT. A CLT is not a tax-exempt entity, unlike a CRT.

There are two types of CLTs: the grantor CLT, and the nongrantor CLT. The former allows for immediate income tax deductions, while the latter does not. Because the CLT is not a tax-exempt entity, the income tax deduction for transfers to a grantor CLT is limited to 30% of adjusted gross income, or 20% if funded with appreciated property. The grantor CLT is frequently used to accelerate deductions in situations where the donor will have an income spike, such as with the sale of an appreciated asset or a Roth IRA conversion. The negative to the grantor CLT is income earned by the trust during its existence is taxed to the donor, and there are no income tax deductions for distributions to charity. On the other hand, the nongrantor CLAT does not generate an immediate income tax deduction, but the income is taxed to the trust, and the trust is permitted to deduct distributions to charity.

The typical CLT reduces estate taxes. However, a grantor CLT can be structured for a donor to take an immediate deduction for gifts to charity, with the remainder reverting to the grantor. Because the donor is treated as the trust's owner, he or she receives an income tax deduction when the trust is created, but is taxed on the trust's income. The trust's assets are owned by the donor for gift and estate tax purposes.

One variation on this design is to create a CLT combining the benefits of the grantor and nongrantor CLT, where the CLT is a grantor trust for income tax purposes, but not for estate tax purposes. For example, a donor could retain the right to substitute other property for the trust's property, resulting in grantor trust treatment for income taxes, but not for gift and estate taxes. This gives the donor an immediate deduction, allows trust assets to grow more quickly because the income is taxed to the donor (not the trust), and keeps the remainder out of the donor's estate.

A grantor CLT does not have issues with unrelated business income tax, because all income is taxed to the donor. Moreover, it can hold S-Corporate shares. The nongrantor CLT cannot do so, and its distribution deduction is limited (and thus the trust may be taxed) when it distributes unrelated business taxable income to a charity.

Mr. James has created a set of 65 videos for his Complete Charitable Planning Training Series, to help his readers understand Chapter 13 and the entire book.

Visual Planned Giving - Chapter 12 - Charitable Remainder Trusts

Wednesday, January 31, 2018

In the twelfth chapter of Visual Planned Giving: An Introduction to the Law & Taxation of Charitable Gift Planning, author Russell James explores charitable remainder trusts (or "CRTs") and the rules governing each. CRTs offer both a wide range of benefits to correspond with a donor's goals, and significant tax savings. They differ from CGAs because they are created by the donor, not the charity. The charitable remainder beneficiary of the CRT may not even know of its existence until it receives a check for the remaining assets after the death of the last income beneficiary. CRTs can last for one or more lives in being, or a term of years, not to exceed 20. To qualify as a CRT, the present value of the charitable remainder must be at least 10% at the creation of the trust.

There are two types of CRTs, the Charitable Remainder Annuity Trust (or "CRAT") and the Charitable Remainder Unitrust (or "CRUT"). Like a CGA, the CRAT pays a fixed sum to the annuitant each year. One difference is the annuity payments in the Charitable Remainder Annuity Trust are backed by the trust's assets, not the charity's assets. Thus, if the trust's assets are exhausted due to poor investments or the income beneficiaries' longevity, payments will cease. On the other hand, if a charity goes bankrupt, it won't be able to make the CGA payments.

Because the CRT is a tax-exempt entity, it can receive appreciated assets, sell them without incurring taxes, and make new investments. Income taxes will only be realized when the donor receives distributions. This leaves the CRT with more money to invest, which results in a higher income payout to the non-charitable beneficiary in the case of a CRUT, or a longer stream of annuity payments in the case of a CRAT. Ultimately, charity receives a larger sum upon the death of the last to die of the income beneficiaries due to the tax-exempt nature of the trust. CRTs offer flexibility not available with other forms of planned giving. Regardless of the complexity, one fundamental purpose is to swap a remainder interest for a charitable deduction, and avoid taxes on the sale of the appreciated assets.

Some donors may be concerned with a premature death of all income beneficiaries, which would result in few income payments to the family unit. These donors typically consider using the income tax savings generated by the deduction to purchase life insurance to benefit heirs.

Income payments are taxed on a "worst in, first out" basis. Distributions are made first from ordinary income, second from capital gains (net short-term capital gain and then net long-term capital gain), third from tax-exempt income, and finally, fourth from a tax-free return of principal. If the CRT receives unrelated business income, it is subject to a 100% tax on this income.

In addition to the 10% remainder test, CRATs must pass a 5% probability of exhaustion test. Because income payments do not decrease when the trust asset value drops, as with a CRUT, there is a greater chance of the CRAT running out of funds. If the trust was exhausted, the donor would receive a charitable deduction, even though nothing passed to charity. Accordingly, a CRAT will be disqualified unless the chances of exhaustion of corpus are lower than 5%. With very low 7520 rates, CRATs will only qualify for the oldest donors. Fortunately, in 2016, IRS provided an alternative solution. A CRAT failing the 5% test, will nonetheless qualify, if it requires termination, with all remaining assets passing to charity, whenever the assets fall to an amount less than 10% of the present value of the initial contribution.

Mr. James has created a set of 65 videos for his Complete Charitable Planning Training Series, to help his readers understand Chapter 12 and the entire book.

Visual Planned Giving - Chapter 11 - Retained Life Estates (Remainder Interests) in Homes & Farmland

Wednesday, January 24, 2018

In the eleventh chapter of Visual Planned Giving: An Introduction to the Law & Taxation of Charitable Gift Planning, author Russell James gives an overview of retained life estates in homes and farmland. The charitable gift of a remainder interest in a home or farmland allows a donor to use the property for the rest of his or life, while at the same time allows a donor to enjoy an immediate tax deduction. As such, it is very attractive for a donor who intends to gift the property in his or her will, since a donor does not obtain an income tax deduction if he or she makes a gift at death. However, unlike a gift through a will, which can be revoked if the donor changes his or her will; a gift of a remainder interest is irrevocable. Therefore, it differs from a bequest gift in another important way. Once the gift is made, the charity owns the remainder interest. The charity could wait until the donor's death to own the full home, or could sell the remainder interest immediately to an investor. Coordinating the tax savings with payment of life insurance premiums through an Irrevocable Life Insurance Trust can allow for heirs to receive money in place of the property they would otherwise inherit. Combining these methods allows for both the charity and heirs to receive more, especially with taxable estates.

Any home owned will qualify for a remainder gift if the donor uses it as a residence. Even second homes, vacation homes, and boats qualify if they meet the residence test. The deduction for a gift of a residence is more complicated, and will result in a smaller gift, because IRS presumes the residence will depreciate over the donor's life. The Code does not define the useful life of the house over which it will be depreciated. The donor can get an opinion from an appraiser or an engineer. Alternatively, IRS examples use 45 years.

A charity may have concerns about accepting a gift of a remainder interest in a personal residence. If the donor fails to maintain the property, the remainder value may decline. Common law rules require the life tenant to pay for maintenance, insurance, and taxes on the property. Failure by the life tenant to do so gives the holder of the remainder interest the right to go to court and compel payment. Understandably, most charities prefer to avoid court, so they often require a donor to sign an agreement saying he or she will pay for these items. The donor could also make improvements to the residence, increasing its value. IRS letter rulings indicate these constitute additional charitable gifts.

Mr. James has created a set of 65 videos for his Complete Charitable Planning Training Series, to help his readers understand Chapter 11 and the entire book.

Visual Planned Giving - Chapter 10 - Gifts of Partial Interest

Thursday, January 18, 2018

In the tenth chapter of Visual Planned Giving: An Introduction to the Law & Taxation of Charitable Gift Planning, author Russell James explains gifts of partial interests. Donors are not allowed a deduction for a retained partial interest gift, which occurs when a donor splits up the ownership rights in property, gives some to charity, and keeps others. One example is when a donor allows a charity to rent a building at no cost. While the charity has the right to use the property, the donor retains ownership. If a donor gives the title to a vehicle or other tangible personal property to a charity, but keeps the right to use it for one year, no deduction is allowed until the donor's rights expire.

Generally, the donor must give all his or her rights, or there is no deduction. There are important exceptions to the general rule, such as charitable remainder trusts, charitable lead trusts, pooled income funds, charitable gift annuities, and retained life estates. These gift vehicles are subject to extensive rules prohibiting self-dealing.

While a donor cannot divide up rights in property, keep some, and give some to charity, a donor can divide the property itself. A donor who gives an undivided fractional share of an asset is entitled to a deduction. For example, a donor who splits up a parcel of land, and gives one-half to charity, while keeping the other, is entitled to an immediate deduction. The concern with a retained partial interest is not present in this scenario because the donor has no rights over the land given to charity. The undivided fractional share exception allows for creative planning. If a donor gifts a remainder interest in a residence to charity (an exception to the partial interest rule), the donor could then give the charity the right to use the residence for 11 out of 12 months. This gift is an undivided interest in all the rights the donor still owns.

If the donor makes a gift of a fractional interest undivided share in tangible personal property, the charity must obtain full ownership of the asset at the earlier of ten years or the donor's death to be entitled to a deduction. If the donor violates these rules, the deduction is recaptured as ordinary income. The donor must pay taxes on this amount, plus interest and a 10% penalty.

Mr. James has created a set of 65 videos for his Complete Charitable Planning Training Series, to help his readers understand Chapter 10 and the entire book.

Visual Planned Giving - Chapter 9 - Taxation of Charitable Gift Annuities

Wednesday, January 10, 2018

In the ninth chapter of Visual Planned Giving: An Introduction to the Law & Taxation of Charitable Gift Planning, author Russell James builds upon the previous chapter covering the charitable gift annuity, addressing the tax implications to the donor and the annuitant(s) when a gift annuity is made. Establishing a CGA is a simple task; figuring out the tax consequences is not.

The donor's income tax deduction is based on the projected amount passing to charity at the time of the gift (the "present value" of the remainder interest), not the actual amount when the last annuitant dies. A portion of each annuity represents a return on investment, which is not taxed, and also imputed earnings on the gift, which is taxed as ordinary income. If the donor gives appreciated property, in addition to some portion of the annuity being a return on investment and imputed interest, the donor will also recognize long-term capital gain ratably over the life of the annuity. If an annuity is funded with appreciated property and is payable to someone other than the donor, the donor will recognize capital gain immediately, rather than ratably.

The rules get more complex if the annuity is funded with mortgaged property, since the bargain sale rules apply to CGAs. Further, the calculations become more convoluted when the donor gives appreciated, unrelated use property, which is deductable at cost basis, instead of fair market value.

In addition to income tax consequences, there may be gift tax and generation-skipping tax implications, assuming the annuitant is not the donor, particularly if the annuity payments exceed the gift tax exclusion for gifts of a present interest.

Mr. James has created a set of 65 videos for his Complete Charitable Planning Training Series, to help his readers understand Chapter 9 and the entire book.

Visual Planned Giving - Chapter 8 - Introduction to Charitable Gift Annuities

Thursday, January 4, 2018

In the eighth chapter of Visual Planned Giving: An Introduction to the Law & Taxation of Charitable Gift Planning, author Russell James gives a brief overview of the charitable gift annuity or CGA. This charitable vehicle is a contract between the issuing charity, and the donor, in which the donor makes a gift to charity; in exchange, the donor and/or his designees receive payments for life. The payout is limited to one or two (but not more than two) annuitants, for their lives, with the remainder passing to charity. CGAs provide the donor with an immediate tax deduction equal to the present value of the annuity interest to be paid to the annuitant(s). This income interest must be less than 90% of the value of the gift; otherwise, the annuity will be subject to UBIT rules. In addition, IRS could treat the CGA as a commercial annuity, which could jeopardize the tax exempt status of the charity. Stated differently, the annuity will not qualify as charitable if the payment rates are calculated to return less than 10% of the present value of the gift to the charity when the annuitants die. The American Council on Gift Annuities recommends rates for charities, which are calculated to return 20% of the present value to the charity. Due to the relative simplicity of establishing a CGA, many charities will make them available for as low as $5,000.

CGAs are popular with older donors, who may fear outliving their money. By offering the donor fixed payments for life, the CGA can mitigate these concerns. Furthermore, they offer more certainty than other planned giving options like a charitable remainder trust, because they are not affected by market volatility. Nevertheless, CGAs are not risk-free. Most states do not regulate gift annuities, so the charity could receive the annuity funds, and spend them immediately. This may result in the charity being unable to meet its payment obligations in the future, or the charity could actually go bankrupt. Additionally, inflation may reduce the purchasing power of the fixed annuity payments. In short, advisers should investigate the financial health of the charity recommending a gift annuity.

Many charities offer variations on the traditional annuity. For example, a donor can opt to defer the income payments for several years, which results in larger sums when the annuity begins. Another popular option, dubbed the "college gift annuity," involves a donor naming a child or grandchild as the annuitant, with payments running for 4 years starting at age 18.

A charity incurs risk when offering gift annuities to donors. If donors outlive their life expectancy, the charities may receive a much smaller, or even nonexistent, benefit. Donors with charitable gift annuitants live longer, on average, then the IRS life tables. The charity can manage this risk by purchasing a commercial annuity on the donor's life, which essentially insures the annuity, but this reinsurance can be expensive.

Mr. James has created a set of 65 videos for his Complete Charitable Planning Training Series, to help his readers understand Chapter 8 and the entire book.

Visual Planned Giving - Chapter 7 - Bargain Sale Gifts

Wednesday, December 27, 2017

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.

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

Wednesday, December 20, 2017

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.

Visual Planned Giving - Chapter 5 - Valuing Charitable Gifts of Property

Wednesday, December 13, 2017

In the fifth chapter of Visual Planned Giving: An Introduction to the Law & Taxation of Charitable Gift Planning, Russell James emphasizes the distinction between cash and noncash gift of property. Cash gifts are simple to make and value, compared to noncash gifts of property. Charitable gifts of property can be valued at their cost (or adjusted basis), their fair market value, or nothing. Some of these complex rules are reactions to real or perceived abuses, making them more of a mix, and less of a coherent set. Advisors must understand these rules to avoid damaging the expectations of donors who expect to receive a deduction for the property's fair market value.

One common method for valuing donated property is to use the cost basis, which is usually the amount the donor paid for the asset. Cost basis is not used to value property if the property's basis exceeds its fair market value; the donor must use the lower of basis or FMV. Cost basis is reduced by depreciation deductions (creating a so-called "adjusted basis"), and this fact makes calculating a property's basis more difficult. If a donor makes a gift of depreciated property, the charitable deduction may be reduced by any depreciation deductions taken. For example, when a sale of the property donated to charity would have been ordinary income if the donor had sold it, rather than making a gift, the donor can only deduct the cost basis (adjusted for depreciation taken). The cost basis valuation also applies to any property held for one year or less. If this property was sold for a profit, it would be short-term capital gain. The only type of noncash property which can be deducted at fair market value is long-term capital gain property. Still, several circumstances exist where long-term capital gain will be valued at cost basis. Gifts of appreciated property to private foundations, unless they are "qualified stock," are valued at cost basis. In addition, gifts of tangible personal property, receive cost basis treatment, unless the charity will use the property for its exempt purposes. A gift of artwork, for example, will be valued at cost basis, unless the recipient charity is an art museum or otherwise displays the art (rather than selling and liquidating it).

Due to abuses, Congress has, from time to time, changed these rules for certain types of property. Gifts of clothing and household items can only be deducted if they are in good condition or better. If a donor gifts a vehicle, including a boat or plane, he or she cannot deduct more than the charity's sale price (unless of course the car is used in furtherance of the charity's exempt purposes). The Code limits deductions of taxidermy property to the costs of stuffing the animal. Congress allows taxpayers to deduct their cost basis in gifts of intellectual property, plus a share of the income over the next twelve years. Thus, the donor receives an immediate deduction, and then a deduction equal to a share of the income going to charity for the next twelve years.

The Code imposes severe penalties for taxpayer who overstate the value of charitable gifts of property. A 20% penalty applies for property valued 50% higher than its true value. This escalates to 40% for property valued more than twice as high as the true value, and 75% when there is a gross misstatement resulting from fraud. If the valuation was based on a qualified appraisal, the donor made a good-faith investigation, and the over-valuation was not more than twice the value, there is no taxpayer penalty. Appraisers also face penalties for overvaluing charitable gifts. If the valuation was more than 50% greater than the true value, the appraiser's penalty will be the greater of $1,000, or 10% of the tax underpayment, but no more than 125% of the appraisal fee.

Mr. James has created a set of 65 videos for his "Complete Charitable Planning Training Series," to help his readers understand Chapter 5 and the entire book.

Visual Planned Giving - Chapter 4 - How to Document Charitable Gifts

Wednesday, December 6, 2017

In the fourth chapter of Visual Planned Giving: An Introduction to the Law & Taxation of Charitable Gift Planning, author Russell James outlines how to keep credible records of all gifts. Documenting charitable gifts is an essential, although less than glamorous, area of charitable planning. A lack of proper documentation can result in a total loss of the charitable deduction even if the taxpayer does not overstate the gift. Gifts of cash under $250 only require a proof of the gift, which can come in the form of a canceled check, credit card statement, or note from the charity. For a gift of cash exceeding $250, the donor must have a note from the charity indicating the amount, and stating no goods or services were provided in return for the gift, or if any were provided, a description and value of the items. The documentation requirements are based on individual, not cumulative, gift amounts.

IRS imposes different documentation requirements for noncash gifts, depending on the size of the gift, and the potential for abuse. These procedures must be complied with strictly, or the taxpayer can lose the entire deduction, even if the valuation of the gift is correct. Gifts of property under $250 must be substantiated with a receipt from the charity with the date, donor, location, and description of the property. Additionally, the donor must have reliable records proving the property's value. For gifts of property over $500, the donor must include the information mentioned, plus Form 8283. Next, for gifts of property over $5,000, over than publicly traded securities, donors must obtain a qualified appraisal. The donor must have in their possession all the above items, and include a summary of the qualified appraisal on Form 8283. Lastly, with gifts of property over $500,000, or gifts of artwork exceeding $20,000, the donor must include the entire qualified appraisal with the return. The lower limit for artwork recognizes the difficulty in valuing artwork, and the potential for abuse.

Mr. James has created a set of 65 videos for his "Complete Charitable Planning Training Series," to help his readers understand Chapter 4 and the entire book.

Visual Planned Giving - Chapter 3 - Elements and Timing of a Charitable Gift

Wednesday, November 29, 2017

In the third chapter of Visual Planned Giving: An Introduction to the Law & Taxation of Charitable Gift Planning, author Russell James delves into several nuances and specifics on charitable giving. A fundamental issue for advisors working with charitable donors is to understand the consequences of the gift's timing. A promise to make a gift, is simply an instruction to a donor's agent to make a gift. That promise can take different forms, one which allows the donor to control or retake the funds, or to a charity with instructions for it to go to a specific person, but this is still just a promise. A charitable gift is not made until the donor delivers valuable property to the charity, or the charity's agent. Even a legally enforceable pledge is not a gift until the donor fulfills it. The timing of a completed gift plays out in several important, real-life ways. For example, a donor who mails a check to charity, has made a gift when the enveloped is placed in the Post Office mailbox, because USPS is considered the charity's agent. Interestingly, a private delivery service would not qualify. A donation made by credit card is effective immediately, even if the donor ultimately does not pay the balance on the credit card. On the other hand, a check which bounces is not a gift, because the check is not valuable property. While a gift to a specific person is not deductible, donors can restrict gifts to a class or category of persons.

Some types of restrictions of charitable gifts do not interfere with the charitable deduction. Under state law, donors can generally retain the right to have their donation returned if the funds are not used for the charitable purposes expressed in the gift agreement. This serves only to ensure funds are used for the organization's purposes, and is deducted just like an unrestricted gift. C-Corporations which are subject to a 10% limitation on charitable gifts, are allowed a 2.5-month lookback for gifts, if the Corporation's Board has already discussed doing so. This allows the corporation to make a gift after it has determined its net income for the year.

Mr. James has created a set of 65 videos for his "Complete Charitable Planning Training Series," to help his readers understand Chapter 3 and the entire book.

Visual Planned Giving - Chapter 2 - A Super Simple Introduction to Taxes

Wednesday, November 22, 2017

In the second chapter of Visual Planned Giving: An Introduction to the Law & Taxation of Charitable Gift Planning, author Russell James gives a basic introduction to federal income taxes. Mr. James starts by breaking down the two largest forms of income tax, ordinary income and capital gains. As a taxpayer's income rises, so does their effective tax rate. Charitable income tax deductions reduce the amount of money subject to tax, and thus these deductions are more valuable to taxpayers with higher incomes.

Charitable income tax deductions are an itemized deduction, and so taxpayers who take the standard deduction cannot take advantage of it. Still, itemizers can benefit from planned giving by deferring recognition of income taxes.

A separate tax system applies to capital gains on the sale of investments. Capital gain consists of the sale price minus "basis." In general, basis is your cost of acquiring the property, less any allowance for depreciation or amortization. Taxpayers who hold stocks which have risen in value, or developed real estate, for which they have taken depreciation deductions, can face significant capital gains taxes if they sell. Donations of appreciated property provide very attractive tax benefits. The donor avoids paying the capital gains taxes which would have accrued if they sold the property. Furthermore, they can often receive a tax deduction based on the asset's fair market value. When the charity sells the property, it won't pay taxes. In short, a gift of appreciated property results in a much more significant gift than if the taxpayer sold the property, then donated the proceeds to charity.

Mr. James has created a set of 65 videos for his "Complete Charitable Planning Training Series," to help his readers understand Chapter 2 and the entire book.

Visual Planned Giving - Chapter 1 - Introduction: The Secret to Understanding Planned Giving

Wednesday, November 15, 2017

Russell James is truly a bright light in the charitable world. Not only is he a leading researcher and thinker in the area of charitable giving, but he is one of the most generous. He repeatedly offers the fruits of his efforts to our industry, for free. We are honored to present his book, Visual Planned Giving: An Introduction to the Law & Taxation of Charitable Gift Planning, to our readers.

In his first chapter, Russell emphasizes the complexity of planned giving. He identifies multiple issues that contribute to this complexity, including several different tax regimes, state law, federal law, appraisals, business entities, arcane documentation requirements, and more. However, at its core, planned giving can do two things; it can lower taxes, and trade a gift for income. Financial advisors, and fundraisers should keep these basic principles in mind when considering what planned giving can accomplish.

Due to the plethora of possibilities for trading a gift for income, the issues quickly become cluttered. A donor seeking to reduce taxes and/or trade a gift for income could utilize a CGA, CRUT, CRAT, Flip-CRUT, NIMCRUT, NICRUT, or PIF. However, the core concepts remain the same. Each one of these vehicles allows a donor to lower taxes, and trade a gift for income. The advisor or fundraiser should view these structures as options available to meet the donor's needs. In addition to meeting donors' income needs, planned giving can lower taxes. Lower taxes benefit the client, since gifts are cheaper; the advisor, because it provides value to the client, while maximizing the assets under management; and charity, because it makes large gifts more affordable.

Fundraisers should have a basic understanding of these gift vehicles. This may seem counterintuitive, since outright, cash gifts provide instant value to the charity, while the charity may have to wait many years to fully realize the donor's gift in a planned giving arrangement. However, only a small portion of a donor's assets consists of cash. Fundraisers who shun the complexities of planned giving in favor of cash gifts are asking for money out of the smallest bucket, since only a small fraction of assets consist of cash.

Planned giving is also an important tool for the financial advisor. Understanding these issues may help the financial advisor attract high net-worth clients, since those clients tend to do the most charitable giving. A variety of planning techniques, such as family foundations, donor advised funds, and CRTs, allow the advisor to continue to manage the funds. Moreover, because these entities are not subject to tax, the advisor has more assets under management than if the donor sold the asset, and reinvested the cash.

Mr. James has created a set of 65 videos for his "Complete Charitable Planning Training Series" to help his readers understand Chapter 1 and the entire book.

Visual Planned Giving - An Introduction to the Law & Taxation of Charitable Gift Planning

Wednesday, November 15, 2017

The book, Visual Planned Giving: An Introduction to the Law & Taxation of Charitable Gift Planning, is designed for fundraisers or financial advisors seeking to expand their knowledge about charitable gift planning. It addresses all of the major topics in planned giving law and taxation. Over 1,000 illustrations and images guide the reader through complex concepts in a visual and intuitive way. The knowledge comes from years of teaching Charitable Gift Planning at the graduate level. Russell James makes this topic accessible and enjoyable for the busy professional.