Here are four ideas for using life insurance as a charitable tool:

1.  Name Charity as the beneficiary of an existing life insurance policy

Donor can name Charity as beneficiary of an existing life insurance policy. Simple! Also, it’s revocable; Donor can always change her mind.

Tax treatment. In this scenario, there can’t be an income tax charitable deduction. At death, the death benefit may possibly be included in the estate, but if so, the estate receives an offsetting estate tax charitable deduction.

2.A.  Assigning ownership of an existing term policy

Donor can transfer ownership of a policy to Charity, and Charity can then name itself as beneficiary of the policy. Donor can make donations in the amount of premium payments, and Charity can then pay the premiums.

Tax treatment. Income tax charitable deduction for the gift of such a policy is limited to value on date of gift; very likely to be negligible. However, Donor would be entitled to charitable deduction for donations made to Charity to cover premium payments, subject to the usual charitable deduction limits.

2.B.  Assigning ownership of an existing whole life policy

If Donor transfers ownership of an existing whole life policy or other nonterm policy to Charity, Donor is making a gift of the cash surrender value of the policy to Charity for which an income tax charitable deduction should be available (subject to the usual charitable deductions restrictions).

Premium still due. As with the term policy, if Donor intends to continue paying the premiums, donations to Charity can be made each year which Charity can use to pay the premiums. These annual donations also would qualify for income tax deductions, subject to the usual restrictions for charitable contributions.

Paid up policy. Of course, if Donor gifts a single-premium or paid up policy there will be no future payments due, thus eliminating the need for annual contributions to cover additional premiums.

3.  Offsetting a gift of [other] property.

Suppose Donor has assets she would be willing to gift to Charity, but is concerned such a gift might reduce the inheritance of Donor’s family, an option might be to use life insurance to “offset” the gift. Donor can give assets to Charity now, while purchasing life insurance with a face value equal to the value of the charitable gift and naming her estate (or family members directly) as the beneficiary of the new policy. The benefit to Donor is that she receives an income tax deduction for the charitable gift. In addition, if a properly structured insurance trust is used to purchase the new policy on Donor’s life, Donor’s heirs may end up better off than if they had received the original assets given to charity, as the insurance proceeds will not be included in Donor’s taxable estate.

4.  Funding a Charitable Remainder Trust

Going a step further, a Charitable Remainder Unitrust (CRUT) can be created to which appreciated assets could be contributed. The CRUT would pay Donor a fixed amount each year until Donor’s death, after which the assets remaining in the CRUT would be distributed to Charity. Donor could use all or a portion of the annual CRUT distributions to fund the insurance policy placed in the insurance trust, thereby offsetting the reduction in Donor’s estate created by the charitable gift.

5.  Issues to consider re gifts of life insurance

5.A.  Irrevocable?

If Donor wishes to retain ownership of the life insurance policy and simply name Charity as beneficiary, the beneficiary designation should not be irrevocable or Donor will lose the ability to change the designation if desired.

5.B.  Absolute assignment

When transferring ownership of a policy to Charity, in order to remove the policy from Donor’s taxable estate and receive an income tax charitable deduction for the value of the policy, Donor must make an absolute assignment of the policy to Charity and cannot retain any incidents of ownership over the policy after the transfer. The value of the gift for income tax deduction purposes also must be considered, and it may be necessary to obtain a valuation of the policy from the insurance company to verify the deduction.

5.C.  No loans

Donor should generally not transfer a policy with an outstanding loan. This could result in the loss of the income tax deduction for the gift and may also trigger bargain-sale rules resulting in a taxable gain and/or ordinary income to Donor.

5.D.  Consult your own advisor

All Iowans are unique and face unique legal and tax challenges. Consult your own professional advisor for advice.

Famous Irish writer Oscar Wilde said, “I have the simplest tastes. I am always satisfied with the best.” Here are a few of my best ideas about stretching your charitable dollar.

Why not give now, rather than later?

Let me tell you about my imaginary friend, Aideen O’Murphy. Aideen intends to donate to charity eventually, at death through her will and estate plan. But why not give now? Aideen can have more say about use of gifts while she’s alive, and also feel the joy that comes with helping worthy causes. There are also positive tax benefits for Aideen to give now rather than later.

Faith and begorrah: double federal tax benefit

Gifts of long-term capital assets, such as stock, real estate, and farmland [where leprechauns may live!], can receive a double federal tax benefit. First, Aideen can receive an immediate charitable deduction off federal income tax, equal to the fair market value of the stock, real estate, or farmland.

Second, assuming Aideen owned the asset for more than one year at the time the asset is donated, Aideen can avoid long-term capital gain taxes which would have been owed if the asset was sold.

Let’s look at a concrete example to make this clearer. Aideen owns shares of stock in Shamrock, Inc. [let’s pretend it’s a publicly traded U.S. stock] with a fair market value of $10,000. She wants her stock to help her favorite causes. Which would be better for Aideen – to sell the stock and donate the cash, or give the stock directly to her favorite charities? Assume the stock was originally purchased at $2,000 (basis), Aideen’s income tax rate is 39.6%, and her capital gains tax rate is 20%.

NOTE: ABOVE TABLE IS FOR ILLUSTRATIVE PURPOSES ONLY. ONLY YOUR OWN FINANCIAL OR TAX ADVISOR CAN ADVISE IN THESE MATTERS.

Again, a gift of long-term capital assets, such as stocks, real estate, or farmland, made during lifetime, can be doubly beneficial. Aideen can receive a federal income tax charitable deduction equal to the fair market value of the asset. Aideen can also avoid capital gains tax.

In Iowa, however, there is even more potential tax benefit. Aideen can also receive a 25% state tax credit for gifts made during lifetime, lowering the after tax cost of charitable gifts even further.

Saints preserve us: 25% Iowa tax credit

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

First, the gift must be given to, or receipted by, a qualified Iowa community foundation (there’s a local community foundation near you).

Second, the gift must be made to an Iowa charity. For example, to receive Endow Iowa tax credits, Aideen couldn’t give directly to National Public Radio, but she could give to Iowa Public Radio.

Third, 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, your community foundation. Clearly, this final requirement is a major restriction. Still, in exchange for a 25% state tax credit, it must be seriously considered by Aideen and other Iowa donors.

If Aideen makes an Endow Iowa qualifying gift, the tax savings are very dramatic. There are potentially huge tax benefits for donating long-term capital gain assets, such as stocks, real estate, and farmland, while claiming the Endow Iowa Tax Credit:

NOTE: ABOVE TABLE IS FOR ILLUSTRATIVE PURPOSES ONLY. ONLY YOUR OWN FINANCIAL OR TAX ADVISOR CAN ADVISE IN THESE MATTERS.

Note well Aideen’s significant tax savings. In this scenario, by giving stock during lifetime, Aideen receives $3,960 as a federal charitable deduction, avoids $1,600 of capital gains taxes, and gains a state tax credit for $2,500, for a total tax savings of $8,600. Put another way, Aideen made a gift of $10,000 to her favorite charity, but the out of pocket cost of the gift to her was less than $2,000.

This is a great deal for Aideen and a great deal for Aideen’s favorite causes. But could anything go wrong with this scenario? There are four areas of caution.

 Cautionary Notes

The federal income tax charitable deduction is capped. Generally, the federal charitable deduction for gifts of stock, real estate, and farmland is limited to 30% of adjusted gross income. A taxpayer may, however, carry forward any unused deduction amount an additional five years.

Additionally, records are required to obtain a federal income tax charitable deduction. The more the charitable deduction, the more detailed the recording requirements. For example, to receive a charitable deduction for certain 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.

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’s available on a first-come, first-served basis. In 2014, approximately $6 million in tax credits was available annually through Endow Iowa. So encourage clients to submit applications now, as tax credits often run out towards year end. Endow Iowa also has a cap per individual. Tax credits of 25 percent 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.

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. Consult a professional for personal advice.

Gordon Fischer Law Firm, P.C. is dedicated to promoting and maximizing charitable giving in Iowa. Gordon can be reached by phone at 515-371-6077; by email at gordon@gordonfischerlawfirm.com; and through his website at www.gordonfischerlawfirm.com.

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#Ireland

#Irish

#clover

#leprechaun

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TAX CONSEQUENCES OF THE GIFT OF YOUR HORSE TO CHARITY

Introduction

Today the Preakness is being run, so what about a gift horse? You could sell your horse and donate the proceeds; then we’re talking about a cash gift. But if you’ve owned the horse more than two years, the horse could be treated as a long-term capital asset. [Generally speaking, you only have to own property for more than one year to claim long term capital gain status, but horses must be owned for more than two years.]

Basic requirement

To receive a deduction, make certain the organization you choose to receive your horse is certified by the IRS as a charitable organization. You can check out the organization with a search on the IRS website here.

The concept of “related use”

Has the value of your horse increased or decreased since you purchased the horse? If the value has decreased, then the use of the horse by the nonprofit to which you donated the horse does not matter, most probably. If the value of your horse has increased, however, the doctrine of “related use” kicks in.

If appreciated property is considered related to the nonprofit’s exempt purpose, the deduction is based on fair market value and available to the extent of 30% of the donor’s adjusted gross income. If property is considered unrelated to the public charity’s exempt purpose, the deduction is based on the lesser of fair market value and cost basis, and is available to the extent of 50% of donor’s adjusted gross income.

So, for example, if you donate your horse to a youth homeless shelter, so the youth can care for  the horses, my best guess would be that you can’t deduct the FMV, as the shelter’s charitable purpose does not really relate to or with horses. Donating the horse to a therapeutic horse riding center, however, should allow FMV deduction since horses are obviously used to fulfill the nonprofit’s major charitable purpose.

Valuation requirements

Donation of a horse, like any donation, requires substantiation if you want to claim a federal income charitable deduction. Here’s a simple explanation of IRS record keeping rules for the charitable deduction:

Gifts of less than $250 per donee — you need a cancelled check or receipt

$250 or more per donee — you need a timely written acknowledgement from the donee

Total deductions for all property exceeds $500 — you need to file IRS Form 8283

Deductions exceeding $5,000 per item — you need a qualified appraisal completed by a qualified appraiser

I provide details on substantiation requirements in a blog post here.

Conclusion

A gift of a horse of course could provide helpful tax benefits. But proceed with due care, as there are some tricky rules.

Gordon Fischer Law Firm, P.C. is dedicated to promoting and maximizing charitable giving in Iowa. Gordon can be reached by phone at 515-371-6077; by email at gordon@gordonfischerlawfirm.com; and through his website at www.gordonfischerlawfirm.com.

Please consider Gordon’s request for you to sign up for his free e-newsletter and encourage others to do the same. A quick and easy sign-up is here. Also, please forward the subscription page to any person or group you think might be interested.

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Introduction

You could sell your horse and donate the proceeds; then we’re talking about a cash gift. But if you’ve owned the horse more than two years, the horse could be treated as a long-term capital asset. [Generally speaking, you only have to own property for more than one year to claim long term capital gain status, but horses must be owned for two years.]

Basic requirement

To receive a deduction, make certain the organization you choose to receive your horse is certified by the IRS as a charitable organization. You can check out the organization with a search on the IRS website here.

The concept of “related use”

Has the value of your horse increased or decreased since you purchased the horse? If the value has decreased, then the use of the horse by the nonprofit to which you donated the horse does not matter. If the value of your horse has increased, however, the concept of “related use” kicks in.

If appreciated property is considered related to the nonprofit’s exempt purpose, the deduction is based on fair market value and available to the extent of 30% of the donor’s adjusted gross income. If property is considered unrelated to the public charity’s exempt purpose, the deduction is based on the lesser of fair market value and cost basis, and is available to the extent of 50% of donor’s adjusted gross income.

So, for example, if you donate your horse to a youth homeless shelter, so the youth can care for  the horses, my best guess would be that you can’t deduct the full value, as the shelter’s charitable purpose does not really have anything to do with horses. Donating to a therapeutic horse riding center I believe would allow full deduction since horses are obviously used to fulfill the nonprofit’s major charitable purpose.

Valuation requirements

Here’s a simple explanation of IRS record keeping rules for the charitable deduction:

Gifts of less than $250 per donee — you need a cancelled check or receipt

$250 or more per donee — you need a timely written acknowledgement from the donee

Total deductions for all property exceeds $500 — you need to file IRS Form 8283

Deductions exceeding $5,000 per item — you need a qualified appraisal completed by a qualified appraiser

I provide details on substantiation requirements in a blog post here.

Conclusion

A gift of a horse of course could provide helpful tax benefits. But proceed with due care.

Gordon Fischer Law Firm, P.C. is dedicated to promoting and maximizing charitable giving in Iowa. Gordon can be reached by phone at 515-371-6077; by email at gordon@gordonfischerlawfirm.com; and through his website at www.gordonfischerlawfirm.com.

Please consider Gordon’s request for you to sign up for his free e-newsletter and encourage others to do the same. A quick and easy sign-up is here. Also, please forward the subscription page to any person or group you think might be interested.

​Also, be social with Gordon. Please “like” Gordon Fischer Law Firm’s Facebook page, follow Gordon on Twitter, and connect with Gordon on LinkedIn and Google+. Links:

Facebook:

https://www.facebook.com/gordonfischerlawfirm

Twitter:

https://twitter.com/FischerGordon

LinkedIn:

​​https://www.linkedin.com/in/fischergordon

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