ATM Solutions, Credit Card Processors, Merchant Funders:
src="images/moreoptions.gif" width="108" height="15">
A list of all
trust officers and their bios
Trust
Services
for Individuals
Investment
Services
for Individuals
Christopher
Stoneman's
Articles about Estate
Planning
Trust Services
for Businesses
Investment
Services
for Businesses
Socially Aware
Investing Option
Trust &
Investment
Professionals
Trust &
Investment
Locations
Planned
Giving Association of Windham County
|
CHARITABLE GIVING
WITH UNCLE SAM AS YOUR PARTNER
PART TWO
by Christopher
G. Stoneman
In the last article we
focused on the complex income-tax treatment of charitable
gifts. This time we will briefly consider the estate- and
gift-tax ramifications of such transfers.
1. Estate tax. A
decedent's estate is allowed an unlimited deduction for
charitable gifts provided that they come within the far
less complicated requirements of the estate tax statute,
Section 2055 of the Internal Revenue Code.
In summary the basic rule
is that the gift must be a gift of property included in
the donor's gross estate and must also constitute a
transfer for "public, charitable, and religious
uses" (the caption given to the section). In
distinction from the income tax provision, there is no
"domestic organization" requirement (see
Article XI).
ExampleTeresa,
a United States resident, is a graduate of a Dutch
university to which she makes a lifetime gift. She
uses the charitable remainder annuity trust (CRAT)
mode, reserving a 7% interest in the trust for life,
with her alma mater to receive the trust property at
her death. Teresa will not be entitled to an income
tax deduction for her gift, since the charitable
beneficiary is a foreign organization. Her estate,
however, will be entitled to deduct the value of the
property passing to the university when she dies. If
someone else had established the trust there would be
no deduction at Teresa's death because the trust
(from which the charitable gift is made) would not
have been included in Teresa's gross estate.
For estate tax purposes a
charitable gift may take a variety of forms, notably the
following:
Examples
I give to THE
SOUTH WOODSTOCK MUSEUM the sum of $5,000
I give my
collection of first editions to THE HILLSDALE
LIBRARY, Hillsdale, New York
I give all
Windsor County real property owned by me at
my death to VERMONT LAND TRUST
Example
At the Grantor's death
the Trustee shall pay the sum of $10,000 to each of
the following organizations: AMERICAN RED CROSS,
AMERICAN CANCER SOCIETY, UPPER VALLEY COMMUNITY
FOUNDATION
ExampleSimon
establishes a trust for his son's benefit and gives
the son a general power of appointment over the trust
at his, the son's, death. Simon's son dies and
exercises the power to appoint the trust among his
three favorite charities, all of which meet the 2055
definition. Since the general power of appointment
causes the trust to be included in Simon's son's
estate, his exercise of the power as indicated
generates an estate tax deduction. Note that the same
result would have followed if Simon had gone on to
specify that if his son did not exercise the power of
appointment, the property would pass "by
default", as the saying goes, to a charity named
by Simon. Note also, however, that if Simon had given
his son a limited or "special" power of
appointment (e.g., the power to appoint the property
amongst family members and charities) and the son
exercised the power in favor of the same three
charities, there would no estate-tax deduction in the
son's estate since the "appointive"
property (i.e., the property subject to the power)
was not includible in the son's gross estate.
The designation of a
charity as beneficiary under a life insurance policy
ExampleJulio
insures his life for $100,000. As owner of the policy
he names his nephew as beneficiary or, if the nephew
dies first, the local church. Julio retains the right
to change the beneficiary, which means that the
insurance proceeds will be part of his gross estate.
The nephew predeceases his uncle. The insurance is
includible in Julio's gross (but not his probate)
estate but will be fully deductible.
In addition to the
foregoing, an estate-tax deduction may be claimed for a
split-interest gift provided that it satisfies the
statutory conditions. In this context a
"split-interest" gift is one which is partially
for a noncharitable beneficiary and partially for a
charity. The charitable remainder trusts which were
discussed in the preceding article are examples of
split-interests:
ExampleLeo
leaves the residue of his will to his trustee in
trust for an old army buddy for life and then, at his
buddy's death, to Catholic Charities. Leo's friend is
to receive 9% of the value of the trust determined
annually. The trust, in other words, is a charitable
remainder unitrust, or CRUT. This meets the statutory
requirement and entitles Leo's estate to a charitable
estate-tax deduction in an amount equal to the value
of the charitable interest determined as of the time
of Leo's death. If the noncharitable interest had
been fixed at 9% of the initial value of the trust,
it would have qualified as a charitable remainder
annuity trust, or CRAT.
In addition to the CRAT
and CRUT there is a class of eligible split-interest
trusts where the order of the interests is reversed and
the charity comes first. In this situation the law
requires that the charity receive an interest analogous
to the noncharitable beneficiary's interest in a CRAT or
the CRUT, as the case may be, and the noncharitable
beneficiary receives the remainder. Trusts of this kind
are known as "charitable lead trusts", or CLTs.
ExamplePierre
has five children, all of whom he considers to be
well provided for from other sources. In his will he
places the residue of his substantial estate in a CLT
for 20 years. An amount equal to 9% of the trust's
initial value is to be paid annually to the local
hospital of whose board of trustees Pierre is the
chairman. At the end of the 20-year period, the trust
ends and is then distributed to Pierre's then living
descendants per stirpes (see Article VI). Pierre's
estate receives an estate-tax charitable deduction
based on the value of the 20-year interest.
The charitable lead trust
is not anywhere near as commonly used a device as the
charitable remainder trust. Although it generates a
deduction "up front", so to speak, it requires
the noncharitable beneficiaries to wait out the trust
term before they receive their inheritance. If the
initial trust fund comprises the residue of an estate
and, as is commonly done, estate taxes are made payable
out of the residue, the use of a CLT will of course
increase the size of the after-tax residue, thereby
partially compensating for the delay in payment of the
noncharitable beneficiaries' remainder interests. Thus,
the CLT may be especially attractive in cases such as
Pierre's where it will not cause undue hardships for his
descendants to await the arrival of the silver spoon.
It is interesting to note
that unlike the income-tax charitable deduction the
estate-tax deduction does not distinguish between gifts
to publicly supported charities and those to so-called
private foundations (see Article XII). All that matters
is that the organization be organized and operated
exclusively for charitable, etc. purposes and,
accordingly, does not carry on political activities or
devote any substantial part of its energy to attempting
to influence legislation.
2. Gift tax. Much
of what has been said about the estate tax is equally
applicable to the gift tax charitable deduction (Section
2522). Split-interest gifts must conform with the
charitable remainder or lead trust rules. There is,
however, a "domestic organization" requirement
in the gift tax in the case of gifts by nonresidents to
charitable corporations (as distinguished from charitable
trusts, funds, community chests or foundations whose
domicile is apparently of no consequence to the tax
collector). More than one commentator has deplored this
inconsistency among the various definitions and asked why
there should not be a single definition of charity for
all of the various tax deductions with which the law is
concerned.
Christopher Stoneman
The complete list of
Christopher Stoneman articles is:
|