Tax Details

What has Congress done?  (Or how could they just sit by and do nothing?)  I hear different versions of this question from a wide variety of people.  One article on a planned giving website starts with, "It's an extraordinarily uncertain time –".  One boilerplate publication sent by nonprofits ends with, ". . . the estate tax litigation over 2010 law may last for the next decade."  Some people in our profession may be trying to fan the flames of hysteria.  Do you want to be one of them?  Does hysteria encourage anybody to put together a good estate plan?

Here's the short version of what happened, in plain English:

A law was passed in 2001 that gradually decreased the federal estate tax through 2009.  That law stipulated that if no future laws were passed – and professionals in the field all expected that Congress would pass a new law in those intervening 9 years – the federal estate tax would go away in 2010, and return to much higher levels in 2011.

This fall I attended several meetings with local planned giving committees and a national conference where we discussed what we would do when new estate tax legislation was passed.  Very few people thought that there would be such gridlock that nothing would be passed.  But that gridlock prevailed, and on January 1, no new law had been passed, and the federal estate tax was "accidentally" repealed.

Because of this, at the moment there is no federal estate tax.  Therefore people with large estates who die between January 1, 2010 and the date of any new estate tax law might (or might not) be able to leave estates that are not subject to federal estate tax.  Congress might pass a new law to tax people who die during the rest of the year, might try to make the law retroactive on people who died earlier in the year, might not pass any estate tax law this year, or might not pass any estate tax law next year.  Anybody’s guess is just that – a guess. 

So . . . what should you be telling your donors? 

1. Our charity has an important mission.  You have supported us during your lifetime with generous gifts.  Please consider supporting us through your gifts from your will and/or trust. 
2. The federal estate tax did not change for anyone with an estate of less than $3.5 million, or for couples with good planning and total estates worth less than $7 million.  So if your estate is smaller than that, there’s no excuse to wait until Congress fixes the wild gyrations in tax rates.  (If Congress does nothing, the estate tax will apply to any estate of more than $1,000,000 starting January 1, 2011.) 
3. The repeal of the federal estate tax only impacts large estates left by people who die while it is repealed.  If Congress passes a law that is retroactive, the repeal may not help any estates.  But whether or not you die in that window, you need a good will.

(VirtualGiving websites have been updated with 8 points that encourage donors to consider a gift to the specific charity.)

This is not a time for charities to give donors a new excuse to sit on their hands by declaring that things are "extraordinarily uncertain." Wise leaders and responsible charities will let their donors know that it is vitally important to have an up-to-date will and estate plan this year, just like it has always been important. Let’s motivate our donors to do the right thing. Let’s refrain from trying to scare them, which might only cause them to wait for Congress to act.

People choose to support your charity because they love what you do or because they are grateful for the services you provide.

It depends on the asset used to fund the gift, whether the gift was made during the donor's lifetime or at death, and whether the donor retained an income interest from the gift.  Here are the guidelines:

• Outright, lifetime gifts of cash, or of assets like securities held by donors for more than 1 year ("long-term capital gain property"), are deductible at fair market value.
• The charitable deduction for a gift that returns income to donors and/or other beneficiaries, such as a charitable gift annuity or a charitable remainder trust, is the fair market value of the gift asset minus the present value of the income interest retained.
• Revocable gifts that will be paid to your organization upon the death of the donor do not generate an income tax deduction. Therefore, donors do not receive a deduction for including a charitable bequest when they write their will, for naming you the beneficiary of a life insurance policy, or for designating your organization to receive the remaining balance of their retirement plan.

Yes, but -- the IRS does not permit taxpayers to offset their entire adjusted gross income (AGI) in one year via a charitable deduction.  Accordingly, these restrictions are in place:

• If donors use cash or short-term capital gain property (stock or other assets held for less than one year*) to fund their gift, they can apply their deduction up to 50 percent of their AGI in the year they make their gift. *Remember: the charitable deduction for short-term capital gain property is the donor's cost basis in the property, not its fair market value.
• If donors use long-term capital gain property for their gift, they can apply their deduction up to 30 percent of their AGI that tax year.
• All of a donor's charitable gifts for the tax year are added together and the total is applied against those percentage limitations.
• A charitable deduction in excess of the percentage limitation may be carried over and used up through five tax years after the gift was made. In other words, donors have six years to fully use a charitable deduction.

(If Donor had used cash instead of stock to fund her gift, her $40,000 deduction could have been applied against 50 percent of her AGI ($50,000) and thus claimed entirely in this tax year.)

If your organization can use the property to further your tax-exempt functions (also known as putting it to a "related use"), the deduction is the fair market value of the asset.  However, if you cannot use the property, or if the donor instructs you to liquidate it and use the cash proceeds, the deduction will be limited to the donor's cost basis in the asset.

Note:  The broader your organization's charitable functions, the more "related uses" can be found for gifts of personal property.  A college, a library, a museum and a hospital, for instance, could all put a painting to good use, even if it wasn't the same use.  Non-profits with more narrowly focused missions, on the other hand, may be hard-pressed to find a use for a proposed gift of personal property.]   

Except for publicly traded securities, gifts of property worth $5,000 or more ($10,000 for shares of closely held stock) held by donors longer than 1 year must be appraised in order to establish their fair market value (and thus the charitable deduction donors may claim for the donation).  Appraisals must be obtained by the donors and not the recipient charity, and must also be obtained for the purpose of valuing the gift (in other words, insurance appraisals are not acceptable).  Donors are required to get their appraisal not earlier than 60 days before they make their gift, and not later than the due date for the tax return on which they are claiming their deduction.

First, the donor receives a charitable income tax deduction for the full, fair market value of the assets contributed, minus the present value of the income interest retained.

Second, if the donor uses appreciated property to fund the gift, no upfront capital gains tax is applied to the transfer, meaning that the entire amount donated can be put to work earning income for the donor.

(Our handy Planned Giving Pocket Guide describes all planned gifts.)

You've come to the right place.  Purchase The Ultimate Quick Reference Planned Giving Pocket Guide that also comes with a fold-out "cheat sheet" titled When How and Why to Plan a Gift. At $24.95, it's a bargain. (Quantity discounts for staff, board members and volunteers.)