3 Ways to Use Your Retirement Benefit Plans to Help Your Favorite Charities

Retirement Benefit plans helping charity

Much of Iowans’ wealth can be found in retirement benefit accounts, like IRAs, 401(k)s, 403(b)s, and so on. Funds from retirement benefit plans can be easy and tax-savvy ways for you to support your favorite causes and organizations!

IRA Charitable Rollover

The Individual Retirement Account (IRA) charitable rollover allows individuals aged 70.5 years of age and older to donate up to $100,000 from their IRAs directly to charities, without having to count the distributions as taxable income. This gift transfer is called a qualified charitable distribution (QCD).

To be clear, there are two threshold requirements to take advantage of the IRA charitable rollover. The first is that to be eligible you must be 70.5 years of age or older. An important nuance to note is the required annual distribution is based on the year the participant reaches age 70.5, not the day they reach that age.

The second threshold requirement is the IRA charitable rollover applies to IRAs only. Under the law, charitable gifts can only be made from traditional IRAs or Roth IRAs. The IRA charitable rollover does not apply to 403(b) plans, 401(k) plans, pension plans, and other retirement benefit plans.

What about younger donors, or people who have different, unique, kind of retirement benefit plans? There are at least a couple of good alternatives to consider.

Retirement Benefit Plans and Charitable Giving

Required Minimum Distributions

Generally, an account holder must start taking Required Minimum Distributions (RMDs) after age 70½. And, sometimes, much younger folks must take RMDs when they inherit a retirement benefit account. If you’re already having to take RMDs, why not use those funds to support your favorite charity?

There is a (pretty severe) tax penalty if you withdraw funds from a retirement benefit plan too early. But, generally speaking, individuals over 59½ years of age may withdraw funds from retirement plans without any penalty. So, in such cases, a donor can withdraw funds, make a gift with these funds, and then claim an offsetting federal income tax charitable deduction. Keeping in mind that every donor’s situation is unique, in the clear majority of such cases, a charitable gift made in this manner would at the least be tax neutral for the donor.

Back to School Math Lesson: Wonderful Numbers of the IRA Charitable Rollover

Beneficiary Designations

No matter what age, no matter what type of retirement benefit plan, there is a very easy way for you to help your favorite charity. Simply name the charity as the beneficiary!

It’s been my experience that many folks don’t consider or realize they can make a meaningful gift by naming a nonprofit as the beneficiary of IRA, 401(k), 403(b), or another plan. This is simple and does not require drafting a will or testamentary trust. (It is true that if the account holder is married, the spouse should be informed and may have to consent to gift).

Don’t Forget About Beneficiary Designations

Keep Beneficiary Designations Current

This is a good time for a  reminder to check your beneficiary designations not only on your retirement benefit plan but on ALL such accounts or funds. Savings accounts, checking accounts, mutual funds, stock portfolios, annuity contracts—all these have beneficiary designations (also sometimes called “payable on death” or “transfer on death”). Are your beneficiary designations current? Or is there an ex-spouse still named as a beneficiary on your IRA? Make sure to keep your beneficiary designations current, and while doing so, consider naming our favorite nonprofits as beneficiary. Your gift could make a tremendous difference.

6 Simple Tips for Beneficiary Designations

Contact Me

Of course, there’s always much more to be discussed when it comes to charitable giving. I would love to hear your ideas and charitable giving goals. Don’t hesitate to contact me by phone at 515-371-6077, or email, Gordon@gordonfischerlawfirm.com.

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Donate Your House & Keep the Keys: Retained Life Estate

Victorian House

Your most valuable asset? Most would say their home.

Could your home benefit your favorite charity? Yes, and with a retained life estate, you can give away your house, keep the keys, and get a current tax deduction.

Under a retained life estate, the donor irrevocably deeds a personal residence or farm to charity, but retains the right to live in it for the rest of his/her life, a term of years, or a combination of the two. The term is most commonly measured by the life of the donor, or of the donor and the donor’s spouse.

When the term ends, typically when the last of one or more tenants dies, the charity can either keep the property for its own use, or sell the property and use the proceeds as designated by the donor.

Keep in mind that donating a personal residence doesn’t mean it has to be the donor’s primary residence. It can be a vacation home or any other structure the donor uses as a residence. A farm can include raw farm land, as well as farmland with buildings on it.

tractor on farmland

The blog post dives in deep to the details of what makes the retained life estate a viable and valuable charitable giving tool. If you’re a donor exploring this option, or a nonprofit leader looking for more information on how to facilitate this type of gift, read on and then contact me to discuss your individual situation.

Definitions

Again, the donor irrevocably deeds a personal residence or farm to charity, but retains the right to live in it for a certain term, such as the life or lives of individuals, term of years, or a combination of the two. At the end of the measuring term, all rights to the real estate are transferred to the charity. In this scenario, the donor is called the “life tenant,” who has a “life use” of the real estate, and is transferring a “remainder interest” to the charity. The charity is called the “charitable remainderman.”

Necessary: Detailed Gift Agreement

When a retained life estate is used for charitable purposes, for protection of both the donor and the charity, a detailed gift agreement should be worked out. Lots of legal issues should be resolved, regarding a wide variety of responsibilities, including [but hardly limited to]:

  • real estate taxes;
  • liability and casualty insurance;
  • utilities;
  • maintenance and minor repairs;
  • remodeling and major repairs;
  • process for evaluating leases and lessees, should life tenant rent farmland;
  • rights of charitable remainderman to enter and inspect farmland with proper notice given;
  • procedures for removal of the personal property of the life tenant upon the end of the tenancy; and
  • a comprehensive dispute resolution process.

Let’s address several of these items further.

Liability and casualty insurance

Presumably, a donor would want to maintain insurance. The charity may want to consider adding life estate properties to its master insurance list. Also, the charity may want the life tenant to provide the charity an annual certification that appropriate insurance is in place and that premiums have been paid.

Maintenance and repairs

The life tenant is generally responsible for expenses customarily borne by the donor of real property, such as routine maintenance. However, expenses for improvements which benefit, or even might benefit, the charitable remainderman, can and should be addressed in the gift agreement. For example, capital improvements which will last beyond the life tenant’s use of the property, such as a new barn, will benefit both the life tenant and the charitable remainderman. Again, this needs to be handled by agreement between the parties.

Repair center sign

Process for evaluating leases and lessees

The life tenant retains all “beneficial lifetime rights” in the property, which includes, for example, the ability to rent the property and receive rental income. The well-drafted gift agreement should establish responsibilities for property management and maintenance by lessees. The charity, as remainder interest owner, has a huge interest in making certain the real estate is appropriately maintained. It is therefore not uncommon in gift agreements for the charity to have a right of approval over parties who would lease the real estate, and by what terms.

Comprehensive dispute resolution process

The relationship between the donor and the charity can change over time for any number of reasons. Having an agreed-upon and formal process for resolving disputes in place from the outset, should help if issues arise. All parties should consider adding in the agreement a mandatory mediation or arbitration clause.

mediation discussion

Options for flexibility

Should there be a change, such as the life tenant no longer wanting to live in the residence, a life estate provides several options for flexibility. Let’s discuss the most common alternatives.

Joint sale

The donor and the charity can enter into a joint sale. Under a retained life estate, the real estate is owned in part by the donor and in part by the charity. Just as with any other type of joint ownership, the parties can agree together to sell and divide the proceeds.

Gift of life estate

How we live typography paper

The donor could decide to donate the life estate to the charity. In such an event, the charity would then own both the remainder value and the life estate and could sell the farmland (if applicable). The donor would receive a charitable deduction for the gift of the remainder interest.

Charitable remainder unitrust

Another alternative: the donor could contribute his/her life interest to a charitable remainder unitrust [CRUT]. Since a life interest is a valid property interest, if the donor transfers his/her entire retained ownership into the CRUT, they’ll receive a charitable deduction for a gift of appreciated property.

No pre-arranged obligations

Under these alternatives, there can be no pre-arranged binding obligation to select any one of possible options. If a binding obligation exists, the charitable deduction will be denied.

Federal income tax charitable deduction

A federal income tax deduction is permitted for the present value of the remainder interest. As with all charitable contributions, the tax deduction for gifts involving appreciated property is limited to 30 percent of the donor’s adjusted gross income [AGI]. However, any unused portion can be carried over for up to five additional years.

For gifts of a remainder interest in real estate, the donor is entitled to a charitable deduction in an amount equal to the net present value of the charitable remainder interest. The computation is performed under guidelines described in Treas. Reg. § 1.170A-12 and is based on the following factors:

  • the fair market value of the property [including improvements] on the date of transfer;
  • the fair market value of depreciable improvements attached to, or depletable resources associated with the property on the date of transfer;
  • the estimated useful life of the depreciable improvements;
  • the salvage value of the depreciable improvements at the conclusion of their useful life;
  • measuring term of the agreement [if measured by the life of one or more individuals, the date of birth of the individuals]; and
  • the Applicable Federal Midterm Rate [in effect for the month of transfer or during either of the two preceding months].

Let’s look at two additional factors:

Measuring terms

As discussed earlier, retained life estates are most commonly measured by the lifetime of one or more individuals; however, life estates can also be measured by a term of years, or by the longer of the life or lives of individuals and a term of years, etc.

If the life estate is measured by one or more lives, the individuals must be in being at the time the life estate is created. If the life estate is measured by a fixed term of years, there is no minimum or maximum term for federal tax purposes.

Applicable Federal Midterm Rate

The Applicable Federal Midterm Rate [AFR] in effect for the month of the life estate gift is used as the interest component for present value computation purposes. At the donor’s election, the AFR in effect for either of the two months preceding the life estate gift can be substituted. This is an obvious opportunity for good planning.

In short, the lower the AFR, the higher the charitable deduction. Historically speaking, then, this is a very positive time for life estates.

Cautionary note

This article is presented for informational purposes only, not as tax advice or legal advice.

All individuals, families, businesses, and farms are unique and have unique legal and tax issues. If you are considering a retained life estate you certainly should speak with a trusted legal professional. Same goes if you’re a nonprofit leader looking facilitate the gift of a retained life estate. I’m happy to help; reach out to me at any time via email (gordon@gordonfischerlawfirm.com) or by cellphone at 515-371-6077.

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Final Four: 4 AMAZING Tax Breaks for Iowans on Charitable Gifts

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2019 taxes

Minneapolis, Minnesota may have the Final Four, but Iowa has such generous tax benefits for charitable gifts. In fact, in Iowa, donors can receive four amazing tax benefits for charitable gifts. Your March Madness bracket may be busted already, but these benefits are ones you can bank on.

Appreciated, long-term property

For donors and potential donors, the ideal asset for charitable donations will depend on a whole range of factors. But, when donating to charity, one type of asset to seriously consider is appreciated, long-term property. Common examples of such property would include publicly traded stock, real estate, and farmland. First, a couple of terms to be clear on:

  • Appreciated: simply means increased in value.
  • Long-term: property held for more than one year (e.g., 366 days).

Give now, rather than later

The four tax benefits I’ll outline are only available when the charitable gifts are made during a lifetime. It’s been said, “You should be giving while you are living, so you’re knowing where it’s going.” Many Iowans have philanthropic intentions to donate to their favorite causes eventually, usually at death through their estate plan, will, and testamentary trust. Why not give now? You can have more say about your charitable gifts while you are still alive, and also feel the joy that comes with helping the causes you care about most. Again, there are also lots of good tax reasons for giving now rather than later. 

fan of dollars

Benefits of gifting appreciated, long-term property

While not celebrated as much as the Final Four, there are four genuinely exciting tax benefits for charitable gifts of appreciated, long-term property. 

Double Federal Tax Benefit

When you gift appreciated, long-term property (ALTP) to a charity during lifetime, you may receive a double federal tax benefit. First, you can receive an immediate charitable deduction on your federal income tax, which is equal to the fair market value of the property. Second, assuming, of course, you have owned the property for more than one year, when you donate the property, you avoid the long-term capital gain taxes you would have owed if you sold the property.

Let’s look at a concrete example to make this clearer. Pat owns appreciated, long-term property (such as stocks, real estate, or farmland) with a fair market value of $100,000. Pat wants to use the property to help favorite causes in the local community. Which would be better for Pat–to sell the property and donate the cash, or give the property directly to favorite charities? Assume that the property was originally purchased at $20,000 (basis), Pat’s income tax rate is 35%, and the capital gains tax rate is 20%. 

ALTP table

Note: This table is for illustrative purposes only. Only your own financial or tax advisor can advise your personal situation on these matters.

Again, a gift of appreciated, long-term property, made during your lifetime, is doubly beneficial. You receive a federal income tax charitable deduction equal to the fair market value of the property. You also avoid the capital gains tax. In Iowa, there is even a greater potential benefit. You may receive a 25% state tax credit for such charitable gifts, lowering the after-tax cost of your gift even further.

25% Endow Iowa Tax Credit

Under the Endow Iowa Tax Credit program, gifts during lifetime can be eligible for a 25% tax credit. There are three requirements to qualify.

  1. The gift must be given to, or receipted by, a qualified Iowa community foundation.
  2. The gift must be made to an Iowa charity.
  3. The gift must be endowed—that is, a permanent gift. Under Endow Iowa, no more than 5% of the gift can be granted each year. The rest is held by and invested by a local community foundation.

Let’s look again at the case of Pat, who is donating appreciated, long-term property per the table above. If Pat makes an Endow Iowa qualifying gift, the tax savings are very dramatic:

donating altp

Note: This table is for illustrative purposes only. Only your own financial or tax advisor can advise your personal situation on these matters.

Pat gave a significant and generous gift to a charity of $100,000. But using the Endow Iowa Tax Credit, coupled with the federal income tax charitable deduction and capital gains savings, the after-tax cost of the gift of $100,000 is less than $20,000. Plus, because the gift was endowed, it will be invested by Pat’s local community foundation and will presumably grow through its investment. Thus, it will continue benefiting the charities Pat cares about most!

Note again Pat’s huge tax savings. In this scenario, by giving appreciated, long-term property during lifetime, Pat receives $35,000 as a federal charitable deduction, avoids $16,000 of capital gains taxes, and gains a $25,000 state tax credit, for a whopping total tax savings of $76,000.

25 Days of Giving: Basics of the Endow Iowa Tax Credit Program

Gift Tax Considerations

Yet another benefit: charitable gifts are exempt from federal gift tax. In fact, charitable contributions made to qualifying charities are not the only deductible on itemized tax returns, but you may also deduct the value of your charitable donations from any amount of gift taxes you owe.

Areas of Caution

Going back to our example, this is a great deal for Pat and a great deal for Pat’s favorite causes. But, could anything go wrong with this scenario? There are a few areas of caution.

Latest Iowa Lawyer Mag Article: Charitable Giving Strategies Under the Revised Tax law

Charitable Deduction Capped

The federal income tax charitable deduction is capped. Generally, the federal charitable deduction for gifts of an appreciated, long-term property is limited to 50% of your adjusted gross income (AGI) to public charities and 30% of AGI to private foundations. You may, however, carry forward any unused deduction amount for an additional five years.

Tax Talk: Federal & State Differences on the Charitable Deduction Limitation

Endow Iowa Capped

Endow Iowa Tax Credits are also capped both statewide and per individual. Iowa sets aside a pool of money for Endow Iowa Tax Credits and it is first come, first served. In 2018, approximately $6 million in tax credits were available annually through Endow Iowa. This means it’s not only is it important to make your gift but to fill out and return your Endow Iowa application as quickly as possible. Donors who do not receive tax credits in the year the gift is made will be first in line for the new supply of the next tax year’s credits. (Here’s the 2019 Endow Iowa Tax Credit Application.)

There is also a cap on Endow Iowa tax credit per individual. Tax credits of 25% of the gifted amount are limited to $300,000 in tax credits per individual for a gift of $1.2 million, or $600,000 in tax credits per couple for a gift of $2.4 million (if both are Iowa taxpayers). (Since the inception of the Endow Iowa Tax Credit Program, Iowa Community Foundations have leveraged more than $215 million in permanent endowment fund gifts!)

IRS Requirements for Non-Cash Gifts

Additionally, to receive a charitable deduction for non-cash gifts of more than $5,000, you need a “qualified appraisal” by a “qualified appraiser,” two terms with very specific meanings to the IRS. You need to engage the right professionals to be sure all requirements are met. A notable exception to the appraisal requirement is appreciated long-term, publicly traded stock.

Gifting Publicly Traded Stock to Charity? Here’s how to Assess Value

Advice Needs to be Individualized

Finally, all individuals, families, businesses, and farms are unique and have unique tax issues. This article is presented for informational purposes only, not as tax advice or legal advice. Make a fast break to consult a legal professional for personal advice.

All of this can be a bit confusing as you’re working out your planned giving strategy. Do not hesitate to contact me and we can work together to maximize your tax-wise giving.

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Latest Iowa Lawyer Mag Article: Charitable Giving Strategies Under the Revised Tax law

open magazine

The April 2019 issue of The Iowa Lawyer magazine is out and I’m happy to say that it includes Gordon Fischer Law Firm’s latest piece on smart charitable giving strategies and tools under the amended tax code that went into effect in 2018. Entitled “April Showers Bring…Charitable Giving Strategies Under the Revised Tax Law” the article overviews the increased federal income standard deduction and its potential impact on charitable giving. It also highlights planned giving options like donor-advised funds, the IRA charitable rollover, and Endow Iowa Tax Credit. Scroll to page 17 to read more.

Iowa Lawyer April 2019

Also in the Iowa State Bar Association’s publication are stories on Big Law practice in the state, Iowa’s business specialty court system, and workman’s compensation claims involving hearing loss, among others.

If you’re interested in reading GFLF’s previously published articles in past editions, click here to scan through the archives.

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Sweet Sixteen: 16 Reasons Charitable Gift Annuities Are Great Tools for Philanthropic Giving

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The #SweetSixteen is a time of celebration for teams which made the elite group. Similarly, with charitable gift annuities (CGAs), donors can experience the joy of giving to their favorite causes. But, unlike making the Sweet Sixteen, CGAs aren’t hard, they are relatively easy to understand and execute. Also unlike the Sweet Sixteen, CGA donors don’t have to be part of an elite group; all donors, regardless of income, or class, or status, can enjoy the many benefits CGAs offer.

ABCs of CGAs

A CGA is easy to understand, about as easy as a fast break lay-up. A CGA, put simply, is a contract. Specifically, a CGA is a contract in which a charity agrees to pay a fixed amount of money to one or two individuals for their lifetime(s), in return for a transfer of assets (such as, say, cash, stocks, or farmland).

A person who receives payments is called an “annuitant” or “beneficiary.” After the annuitant(s) die(s), or the term of the contract ends, the charity keeps the remainder of the gift.

ABCs of CGAs: Basics of Charitable Gift Annuities

Sixteen Sweet Benefits of a CGA

Before we go deep into CGAs, I’ve listed 16 key advantages of CGAs.

  1. CGAs are simple to execute.
  2. CGAs are (relatively) easy to understand and explain.
  3. CGAs avoid management responsibilities.
  4. CGAs may be executed during lifetime (called an inter vivos transfer), or by operation of a will (called a testamentary transfer).
  5. CGAs allow a donor to provide a consistent stream of income for others.
  6. CGAs pay lifetime income to one or two individuals, part of which is (most often) a return of principal and free from income tax.
  7. CGAs provide an immediate income tax charitable deduction for the donor for the gift portion.
  8. When appreciated property (such as stock or real estate) is provided to fund a CGA, and the donor is an annuitant, some of the capital gain is spread over the donor’s life expectancy, and the rest is never recognized because it is attributed to the gift portion.
  9. Depending on all the circumstances, CGAs can possibly save a donor taxes on Social Security benefits.
  10. The income payout from CGAs can begin immediately or can be deferred.
  11. The income payout from CGAs is guaranteed.
  12. The income payout from CGAs is fixed (e.g., same amount is paid each payment period).
  13. The charity’s obligation to make the income payout is backed by the general assets of the charity.
  14. For some donors, especially in today’s low-interest environment, CGAs may present an attractive alternative to CDs.
  15. In certain situations, CGAs can supplement retirement income.
  16. CGAs provide the joy of giving to your favorite causes.

basketball court with ball in hoop

Three More Points on the Scoreboard—Three Types of CGA Agreements

1. Immediate Gift Annuity

Under an immediate gift annuity, the annuitant(s) start(s) receiving payments at the start/end of the payment period immediately following the contribution. Payments can be made monthly, quarterly, semi-annually, or annually.

2. Deferred Gift Annuity

Under a deferred payment gift annuity, the annuitant(s) start(s) receiving payments at a future time, the date chosen by the donor, which must be more than one year after the date of the contribution. As with immediate gift annuities, payments can be made monthly, quarterly, semi-annually, or annually.

3. Flexible Annuity

Under a Flexible Gift Annuity (also known as a Deferred Payment Gift Annuity), the donor need not choose the payment starting date at the time of her contribution. The annuitant (who, remember, may or may not be the donor) can choose the payment starting date based on their retirement date or other considerations.

Jump Ball—Choosing Start Date of Deferred CGA

Under an immediate gift annuity, annuity payments begin no later than one year after the initial contribution.

A deferred gift annuity allows the donor to delay the start date of annuity payments. This delay will increase the annuity amount when payments begin and result in a larger income tax charitable deduction which is available in the year of the contribution (subject, as are all charitable donations, to Adjusted Gross Income (AGI) limits).

A deferred gift annuity can produce current tax savings during high-earning years while creating a supplemental retirement income. Generally, the donor sets a date for the deferred gift annuity to begin. However, the IRS approved a deferred gift annuity which did not specify a fixed starting date for the annuity payments [IRS Ltr. Rul. 9743054].

March Madness Inspired: 64 Charitable Gifts of Non-Cash Assets

Don’t Foul Out—Charities Issuing CGAs Must Follow Certain Rules

CGAs are an exception to the general rule that charities cannot issue commercial insurance contracts. As such, charities which issue CGAs must comply with several rules. The basics of the rules may be simplified as follows:

  • The present value of the annuity must be less than 90 percent of the total value of the property transferred in exchange for the annuity. In other words, the charitable interest must be at least 10 percent.
  • The annuity cannot be payable over more than two lives, and the individual(s) must be alive at the time the gift annuity is set up.
  • The gift annuity agreement cannot specify a guaranteed minimum, nor a maximum, number of annuity payments.
  • The actual income produced by the property transferred in exchange for the gift annuity cannot affect the amount of the annuity payments.

Four Point Play—Tax Advantages

In basketball, a four-point play is a rare occasion when a player makes a three-point shot while being fouled. Similarly, it is rare for a charitable gift to offer four potential tax advantages to donors, as the CGA does. The CGA can have a positive effect on the donor’s charitable deductions, income taxes, capital gains taxes, and gift taxes.

slam dunk with a basketballFederal Income Tax Charitable Deduction

A CGA is considered part gift and part sale, as the donor contributes property in exchange for annuity payments from the charity. The donor who itemizes deductions on her taxes may take an income tax charitable deduction for the gift portion (i.e., the value of the transferred property minus the present value of the annuity).

This income tax charitable deduction is subject to the same limits as an outright gift of cash or property. For example, if cash is transferred for the CGA, the limitation of the deduction is 50 percent of the donor’s AGI. Or, if long-term capital gain property is transferred the limitation is 30 percent of AGI. Any deduction in excess of the applicable percentage limitation may be carried forward for five years.

What recordkeeping is required for charitable deduction?

Taxation of Payouts

The annuity payments by the charity under a CGA are treated for income tax purposes as follows:

  1. Tax-free return of principal
  2. Long-term capital gain
  3. Ordinary income

Let’s break each of these categories down.

Tax-Free Return of Principal

A portion of each payment received by the donor, or another annuitant, is a tax-free return of principal until the cost of the annuity is fully recovered when the annuitant reaches life expectancy. Put another way, a portion of the payments is considered to be a partial tax-free return of the donor’s gift, which are spread in equal payments over the life expectancy of the annuitant(s).

The assumed cost of the annuity does not include the gift portion of the transaction. The donor’s cost basis must be allocated between the gift and sale portions in accordance with the respective proportions of the value of the property transferred.

Long-Term Capital Gain

When a taxpayer sells long-term, appreciated property, such as stocks or real estate, she generally pays capital gains on the appreciation. If long-term, appreciated property funds a CGA, a portion of each payment will be taxed as long-term capital gain. This will reduce the income tax-free return of the principal portion of the annuity payments.

Under general tax rules, long-term capital gain is recognized in the year the property is sold. Capital gain is recognized only on the sale portion of the transaction and with the basis allocation previously described. However, with a CGA, the donor may spread the gain over life expectancy, assuming either a sole annuitant or the donor has another individual named as a survivor annuitant. It’s obviously beneficial for a donor to be able to defer capital gains taxes.

Case Study for St. Patrick’s Day: Save Some Green on Gifts of Long-Term Capital Assets

Ordinary Income

After the capital gain and tax-free portions of the annuity payment have been determined, the balance of the payment will be taxed as ordinary income.

Gift and Estate Taxation

If the donor is the sole annuitant, there are no gift or estate tax issues because both the annuity is her own and the annuity terminates at death. If the donor names anyone other than herself as an annuitant, gift and estate tax issues may arise.

Regarding the gift tax, if the donor names another person as an annuitant, the gift is the value of the annuity. An exception exists for a spouse under the gift tax marital deduction. Another alternative to avoid gift tax: the donor could retain the right to revoke when the named annuitant has a survivor interest.

Regarding the estate tax, if the donor names another person as an annuitant, the remaining value in the annuity is considered part of the donor’s estate. An exception exists for a joint annuity using only the donor’s life as the measuring life. Of course, there is also an estate tax marital deduction available if surviving annuitant is a spouse.

Low-Interest Rates = Higher Tax-Free Income

The Applicable Federal Rate (AFR) selection decision is more nuanced for gift annuities than for other planned gift tools. A donor who wants to maximize their deduction will select the highest rate available, but this reduces the overall value of the annuity and increases the amount of the charitable gift. Conversely, a donor who wants to maximize the income tax-free portion of the annuity payments will select the lowest available rate.

When the Clock Runs Out—Testamentary CGAs

If carefully planned, it is possible to arrange a CGA through a will. The IRS approved a testamentary gift annuity in Ltr. Rul. 8506089. It is crucial that both the bequest amount and annuity payout are made clear by the terms of the will.

A donor should engage an expert estate planning expert to handle the careful drafting needed for a testamentary CGA. A donor, together with his estate plan professional, should address two issues:

  1. What if the designated annuitant(s) predecease(s) the testator? (The testator is the person who makes the will).

The donor may want to specify a contingent annuitant or provide for an outright bequest to the charity.

2.    What about the payout rate?

The donor could (or should) leave the charity some flexibility in the payout rate, to assure the 10 percent minimum charitable interest requirement can be met in the future.

March Madness: A Charitable Giving Take on the Bracket

Winning Point

Donors and nonprofits can both score big with CGAs and this charitable tool can be a slam dunk for all parties!

The mission of Gordon Fischer Law Firm, P.C. is to promote and maximize charitable giving in Iowa. I offer training on complex gifts, like CGAs, for nonprofit boards, staff, and stakeholders. Contact me for a free one-hour consultation; I can always be reached at Gordon@gordonfischerlawfirm.com or at 515-371-6077.

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March Madness: A Charitable Giving Take on the Bracket

basketball court with ball in hoop

Talk to anyone finalizing their bracket before the NCAA tournament tips off today with the first half of the First Four games and there are many different approaches—statistics and rankings; gut instinct; fan favorites; taking advice from computer simulations; and simply, the random dart throw.

For me, I would love if I could slate the Iowa Hawkeyes to win, but pure bias isn’t a great way to build a bracket, so I decided to take a different approach. Based on the mission of my law firm–to promote and maximize charitable giving in Iowa–I decided to incorporate that into my approach for this year’s NCAA tournament bracket. I compiled a list of the 68 colleges and universities’ endowment sizes and then built off our bracket off of that. So, the winner of each round has the greater endowment of the two teams which brings us to a clear winner. An unconventional way of bracketing? Sure. Totally plausible? Why not!

ncaa bracket 2019.Of course, I totally recognize that there’s no way that the size of a higher education institution’s endowment translates directly into athletic excellence. Would I pick Yale off the top of my head? Probably not. But, there is something to be said that charitable giving reaps benefits beyond the immediate, so maybe this isn’t such a shot in the dark!

3 Things #SelectionSunday Can Teach You About Estate Planning

While we’re at it, this is also a good opportunity to review what a college endowment actually is. No doubt you’ve heard of this term related to charitable giving before, but what is it actually?

Endowments: A Short Explanation

A college or university endowment fund invests charitable donations (of money or other assets, like stocks) with the goal of growing the principal amount. There are restrictions, limits, and particular details associated with endowments (but those deserve their own full blog post). In turn, the funds’ spending amounts can be spent on scholarships, facilities improvements, hiring talented personnel, and paying outstanding debts and expenses. Undoubtedly, colleges and universities foster planned giving programs and cultivate dedicated donors to continue to grow their endowments and thus grow their institution’s capabilities.

basketball game players

So, maybe the GFLF bracketing style isn’t so farfetched. The bigger the endowment could equate to greater scholarships (in both quantity and quality) or nicer athletic facilities which could translate into attracting more talented student-athletes.

How does your bracket stack up in comparison? I’d love to talk basketball or, better yet, about smart charitable giving to your favorite higher education institution could fit with your giving goals. Contact me in between the tournament games via email or by phone (515-371-6077)

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Tax Talk: Federal & State Differences on the Charitable Deduction Limitation

charitable contribution money

Spring ushers in so many great things: baseball season, blooming flowers, and baby animals. But, it also brings tax season (which can be a metaphorical rain cloud or rainbow depending on your personal situation). The Tax Cuts and Jobs Act, passed at the end of 2017, ushered in many federal changes that affect both estate planning and charitable giving. I’ve blogged about many of the provisions that can impact your estate planning (and why you should definitely review any existing estate plan), but what about some of the aspects of the new tax law that impact charitable giving? Because we’re not all tax attorneys or CPAs, let’s take this piece by piece and first explore the charitable deduction limitation increase for cash gifts and how it differs under federal and state law.

Case Study for St. Patrick’s Day: Save Some Green on Gifts of Long-Term Capital Assets

Differences Between Federal and State Tax Laws

While federal law has made several modifications, Iowa has not conformed to most of the recent changes to the charitable contribution deduction for state tax purposes. Quite obviously, this can cause confusion when strategically calculating planned giving.

Under federal tax law, the charitable deduction limitation, specifically for cash contributions to certain public charities and private foundations, has increased from 50% to 60% of an individual’s adjusted gross income (AGI) for the year.

This increase does not apply for Iowa tax purposes, however. If an individual’s federal deduction for cash contributions to qualifying public charities and public foundations exceeds 50% of the taxpayer’s AGI for the year, the individual must recalculate the charitable deduction to apply the 50% limitation for Iowa purposes.

25 Days of Giving: Donation Bunching

If this is still a bit confusing, fear not. We can work out a plan so that you can meet your charitable giving goals in a tax-beneficial way for the tax years moving forward. I offer a free, no-obligation consult, so don’t hesitate to contact me.

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March Madness Inspired: 64 Charitable Gifts of Non-Cash Assets

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march madness basketball

Want to help make your favorite charity a winner? Encourage the charity to discuss the potential of charitable gifts of non-cash assets with donors. Donee charities can gain access to what has been called prospective donors’ “treasure chest” of non-cash assets. After all, the vast majority of a potential donor’s net worth will not be in cash, but in non-cash assets such as a home, retirement benefit plan, life insurance, etc.

Inspired by the start of NCAA March Madness, and the number of bracketed teams, here are 64 non-cash assets that could be used for charitable gifting.

Please note the alphabetized listing, I’m not recommending one gift over another, since so much depends on the individual circumstances of the donor.

airplane flying

  1. Airplanes
  2. Antique Automobiles
  3. Antiques
  4. Artwork
  5. Assets held by C Corporation
  6. Assets held by S Corporation
  7. Autograph Books
  8. Barn Doors
  9. Beach House
  10. Beanie Babies
  11. Boats
  12. Bonds
  13. Books
  14. C Corporation Stock
  15. Coin collections
  16. Comic books collection
  17. Commercial and residential real estate
  18. Condominiums
  19. Credit Card Rebates
  20. Depression-era Glass
  21. Dolls
  22. Enamelware
  23. Equestrian Ribbons
  24. Farmland
  25. Gold Bullion
  26. Grain
  27. Guitars
  28. Hedge Fund Carried Interest
  29. Historic Papers
  30. Installment Notes
  31. Intellectual Property
  32. Life Insurance
  33. Limited Liability Partnerships
  34. Livestock
  35. Marbles
  36. Mineral Rights
  37. MLB Team
  38. Mutual Funds
  39. Oil and Gas Interests
  40. Operating Partnership Units
  41. Paint-by-number Landscapes
  42. Painted Planks
  43. Paintings
  44. Patents
  45. Photographs
  46. Pooled Income Funds
  47. Racehorses
  48. Real estate
  49. Restricted Stock (144 and 145)
  50. Retained Life Estate
  51. Retirement benefits
  52. Royalties
  53. S Corporation Stock
  54. Sculpture
  55. Sculpture Garden
  56. Seat on New York Mercantile Stock Exchange
  57. Seats at Events
  58. Stamp Collection
  59. Stocks
  60. Tangible Personal Property
  61. Taxidermy
  62. Timber Deeds
  63. Vacation Home
  64. Vehicles

Vintage blue car

Pretty exhaustive list right? Like stamps and dolls, there are so many assets that you likely never even considered could be a charitable gift. And, that’s where I come in and can assist! If you’re a donor or donee nonprofit do not ever hesitate to contact me. I can always be reached at gordon@gordonfischerlawfirm.com and 515-371-6077.

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(Legal) Word of the Day: Quid Pro Quo

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pen on desk

You’ve probably heard it before on your favorite law show or movie court case, but do you know what “quid pro quo” actually means?

Quid pro quo (“something for something” in Latin) means an exchange of goods or services, where one transfer is contingent upon the other.

Quid pro quo can have different meanings in different areas of the law. For instance, we typically hear this phrase in relation to employment law. So, in the arena of philanthropy and nonprofits, what does quid pro quo mean?

A charitable donation is deductible to the extent the donation exceeds the value of any goods or services received in exchange. So what happens when you donate to your favorite charity and receive something tangible in return? This is the issue of “quid pro quo” in charitable gift law.

giving gift

Quid Pro Quo Example

If a donor gives a charity $100 and receives an opera ticket valued at $40, the donor has made a quid pro quo contribution. In this example, the charitable contribution part of the payment is $60. The donor is entitled to a charitable deduction for $60, but not the entire $100.

Both the donor and donee have a responsibility here. The donor, of course, can only deduct the cost of the donation less the value of the goods/services received. The charitable organization must provide their donors clear, written documentation of the value of donations.

In fact, in these quid pro quo situations, under IRS rules, the nonprofit must provide a written disclosure statement. This required written disclosure statement must both:

• Inform the donor that the amount of the contribution that is deductible for federal income tax purposes is limited to the excess of any money (and the value of any property other than money) contributed by the donor over the value of goods or services provided by the charity.

• Provide the donor with a good faith estimate of the value of the goods or services that the donor received.

Free Consultation

Thinking about making a donation or looking for guidance regarding gift acceptance at your nonprofit, no quid pro quo is required! I offer a free one-hour consultation, with absolutely no obligation. I can always be reached by email at Gordon@gordonfischerlawfirm.com, and by phone at 515-371-6077.

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YOU Are a Super Hero: Charitable Giving Through Estate Planning

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super hero comic book

You are a superhero. Seriously, you have the ability to change the world or, at the very least, your little corner of it. You can affect this level of change just by asking yourself one simple question: what causes would I like to benefit in my will?

Bequests to Charities in Your Will

Yes, that’s right. You can include the nonprofits you care about most in your will, leaving a legacy after you have passed on. And, it doesn’t cost anything extra! Just the assets you’re choosing to gift. You can include charities like your church, alma mater, a local cause, or an international organization in your estate plan. And, if you ask the charity you care about most, I’ll bet they’ll tell you that the result of your charitable bequest, no matter how big or small, can make a huge impact.

Terrible, horrible, no good, very bad idea of NOT having a Will

What About My Kids?

When folks come to me for estate planning help, a major reason they do so—perhaps even the single reason they do so—is to benefit their children. Parents often think, “I love Charity X, but of course, I love my kids even more, and I’ve got to take care of my family.” Of course, you do! And, of course, you should! But, ask yourself another question: How much is enough for my kids? If you have lots of assets, and/or your children are adults, and successful on their own, could you provide adequate support for your children and still also include a bequest to one of more charities?

superhero-costume-children

Let’s Talk

Invite the whole family to the kitchen table sometime (even if your kitchen table is a virtual one, via email) and talk about the distributions you want to make at death. Ask if including gifts to charity from your estate plan would be appropriate and acceptable to the kids. Perhaps it’s a charity the whole family supports. Perhaps this will be the beginning of a multigenerational cycle of giving.

Why not talk about it? This can be an especially productive conversation if you can explain that taxes are going to eat up a lot of one or more of the assets anyway, and this can be avoided by giving said asset(s) to charity (since charities are tax-exempt).

The Importance of Discussing Your Estate with Your Family

Life Insurance

Sometimes when parents give a major asset(s) to charity, and their kids’ inheritance takes a real hit, they’ll buy a new life insurance policy to make up the shortfall to the kids. Or, they may even buy a new life insurance policy and name the charity directly as a beneficiary. There’s also a very helpful kind of trust called an ILIT, that significantly increases the impact of life insurance. Without getting too complicated, let me give you the basics.

An ILIT is an irrevocable, non-amendable trust which is both the owner and beneficiary of one or more life insurance policies. Upon the death of the insured, the trustee invests the insurance proceeds and administers the trust for one or more beneficiaries.

(Legal) Word* of the Day: ILIT

What is the Role of an Estate Planner?

When it comes to estate planning, you’re thinking about so many different variables and scenarios, so what if you forget to factor in charity? Lucky for you, that’s why I’m here—to help you maximize charitable giving. That means determining how your generosity can not only help an organization make a difference but how you can maximize the financial and estate-related benefits from giving.

9 Reasons You Need a Lawyer to Write your Estate Plan

Studies Showed

A 2013 study* showed how lawyers, like me, can help charitable giving factor in estate planning. The scientifically-conducted research from the UK-based Behavioural Insights Team showed that when lawyers asked clients specific questions regarding charitable giving, the results were significant. Here are the results:

  • Control Group/Baseline

Lawyers who provided no reminder or inquiry to their clients about possibly benefiting a charity in their estate plan (bequests) resulted in 4.9 percent of those clients including a charity in their plans.

  • Test Group One

Lawyers who asked their clients, “Would you like to leave any money to a charity in your will?” resulted in 10.8 percent of their clients including a charity.

  • Test Group Two

Lawyers who said, “Many of our clients like to leave money to a charity in their will. Are there causes you are passionate about?” resulted in 15.4 percent of their clients including a charity. What a dramatic increase!

Here are the approximate dollar values associated with each group:

  • Control Group/Baseline

Average bequest $5,000

  • Test Group One

Average bequest $4,800

  • Test Group Two

Average bequest $10,200

Again, test group two gives a powerful example of the difference charity-minded estate planners can make.

In the study, there were a 1,000 people in each of the groups. That means that the “Test Group Two” raised over $1 million more than the control group.

volunteers taking selfie

What this means for you is that your lawyer plays an important role in reminding, guiding, and assisting you in your charitable giving so that you can use your superpower (giving through your will) to the fullest extent.

In 2017, $35.70 billion was contributed to US charities through bequests. Imagine if everyone worked with a lawyer with a strong focus on charitable giving! The impact could be incredibly transformative for the impact nonprofits can make in our communities.

Let’s Get Started

Harness your superpowers and get started with your legacy today. The best place to start is by filling out my Estate Plan Questionnaire. It’s easy, free, and there’s no obligation. It’s simply a document that gets you thinking and planning. Already have an estate plan, but want to update it to include the causes that are near and dear to your heart? Don’t hesitate to contact me.

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