testamentary gift Archives - Gordon Fischer Law Firm

Here on the GFLF blog we talk a lot about the transfer of property made at the time of death through estate planning tools like a will, disposition of personal property document, or a trust. Everyone needs an estate plan to most effectively and seamlessly transfer real property (think land and real estate) and personal property (think jewelry, art, all of your “stuff”) to the people and charities you care most about. These are all called testamentary gifts. (Think “last will and testament” if that makes it easy to remember.)

As you probably know all too well, you can also make gifts to other people during your lifetime. These are called inter vivos gifts if you want to be lawyerly with it. This one’s easier to think about because you’ve been giving gifts for holidays, birthdays, weddings, and anniversaries regularly. You can also make gifts while living of cash, real estate, land, stocks/bonds, and other non-cash assets to charitable organizations.

One specific type of inter vivos gift doubles down on the Latin–it’s called a gift causa mortis. This type of gift is made by the donor while they’re alive in the event of impending death. Causa mortis in Latin translates to “because of death.” Sometimes this type of gift is referred to as a deathbed gift. The most common kind of gifts causa mortis tend to be small, valuable and/or meaningful gifts like a wedding ring.

To make this more salient, consider the scenario where Abe was in a severe accident and is aware that he is going to pass soon. Abe turns to his son Bob, who rushed him to the ER, and tells him that he wants him to have his watch. He takes it and gives it to his son Bob and then gets rushed into surgery. This is a simple example of a gift causa mortis.

Now, with out amateur Latin lesson complete, let’s dive into the elements of the rules related to gifts causa mortis.

Elements of Gifts Causa Mortis

A valid inter vivos gift involves:

intent by the donor facing imminent to donate;
delivery of the gift; and
acceptance by the donor.

Delivery of the Gift

The gift must be delivered to the recipient. That’s easy if it’s something handheld like jewelry that you’re wearing, but what about anything that the donor doesn’t have on them personally? So long as the “delivery” is sufficiently symbolic, that will suffice if physical delivery at the time of the gifts is impractical.

Another Hypothetical

Let’s say a donor wanted to make a gift causa mortis of an antique piece of furniture to their niece. At the time the donor was residing in a hospice facility and very clearly toward the very end of her terminal illness. It would be impractical for the law to expect the dying donor to physical deliver the furniture to her niece. As long as the donor gave the niece a symbolic representation of the gift, such as writing out the details of the furniture’s location and details in the presence of a witness, it would likely be found valid upon the donor’s passing.

Another example that applies arose out of a case where a donor’s delivery was found to be valid where she signed the back of her car’s certificate of title to gift the automobile to her brother.

Can I Get a Witness?

To avoid post-mortem litigation by other heirs-at-law or the decedent’s estate’s executor, it’s preferable if the delivery of the gift is witnessed by a third party who can attest to the validity of the gift. Additionally, if there is an option for a piece of writing to be made out detailing the gifts and signed in the presence of a third party, that’s even better.

Revocable & Conditional

Gifts causa mortis are revocable, which means that the donor (the gift giver) can revoke the gift at any time (while still alive). This revocation can be completed unilaterally, with only the donor. This is different than an inter-vivos gift, which when completed, is completely irrevocable.

Gifts causa mortis are also conditional on the donor’s death, meaning the gift giver actually has to perish before the donee’s ownership is valid.

Taking it back to our story with Abe and his son Bob: if Abe gave his watch to Bob before surgery with the imminent expectation of dying soon, but ended up living through the surgery, the gift is no longer valid and automatically revoked. Of course, Abe could choose to make an inter-vivos gift to Bob if he decided to do so.

Additionally, if the recipient dies before the donor, then the gift is revoked and the beneficiary’s estate has no claim to the property.

Imminent Death

For a valid gift causa mortis, the donor has to die imminently…what constitutes “imminent death?” This has been debated in different cases. What’s clear is the gift giver doesn’t have to die immediately, like seconds after the gift is given. But, the donor must pass away from the danger or condition that was present at the giving of the gift. Plus, it doesn’t “count” if the donor has a fear that they might die at some vague point in the future.

Intervening Recovery

Additionally, there must be no intervening recovery between the gift and death.

Back to our hypothetical: let’s say Abe goes into surgery and survives from the injuries relating to his accident. At this point the gift of the watch is invalid. Abe may unfortunately go on and pass away from a different condition a few months later, but the previous gift causa mortis of the watch is not suddenly valid just because Abe eventually died.

What’s the Difference Between Gifts Causa Mortis and Testamentary Gifts?

Typically gifts causa mortis are informally made in the moment, are not planned to the same extent or formally written out like testamentary gifts. In the majority of states, gifts causa mortis are immediately transferred to the recipient’s ownership after death, whereas gifts made through a will or testamentary trust transfer ownership after the probate process is complete. Additionally, gifts causa mortis can only be made of personal property, not real property like your house or farmland.

How do Gifts Causa Mortis Fit into Taxes?

Similar to testamentary gifts, gifts causa mortis are taxed under federal estate tax law. The policy behind this is because the gifts aren’t complete until the donor’s passing. (Note well that the federal estate tax also applies to general inter vivos gifts made within three years of death. This means the value of such gifts is included in the estate in order to calculate the estate taxes.) It’s also worth noting that the federal estate tax applies to so few people now after the passage of the Tax Cuts and Jobs Act, so you don’t really to be concerned about this!

Final Words on Gifts Causa Mortis

Gifts Causa Mortis or not, there is no substitute for an airtight, updated estate plan. If you have such a plan in place, there’s no need to try and meet all the elements and intricacies of gifts causa mortis.

None of us know when our time will come, and we may not have the opportunity to give away our prized possessions via causa mortis right before death. But, we can know that estate plans never expire and can give you peace of mind that your property will be pass to the people you intend without legal contest (which can arise from gifts of causa mortis).

No questions are dumb questions when it comes to the complex world of property and estates. Don’t hesitate to contact GFLF or schedule a free consult to get your estate planning needs and goals in order.

The Basics

A charitable gift annuity (CGA) is a contract in which a charity, in return for a transfer of assets, such as say, stocks or farmland, agrees to pay a fixed amount of money to one or two individuals, for their lifetime. A person who receives payments is called an “annuitant” or “beneficiary.”

For the entire term of the contract, the payments are fixed. A portion of the payments are 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).

Benefits of a CGA

There are at least six key benefits to a CGA:

A CGA provides an immediate income tax charitable deduction to a donor for the gift portion.

A CGA pays a lifetime income to one or two individuals, part of which is (most often) a return of principal and free from income tax.

The income payout from the gift annuity can begin immediately or can be deferred.

The charity’s obligation to pay the annuity is backed by the general assets of charity.

When appreciated property is provided, and the donor is an annuitant, some of the capital gain is spread over donor’s life expectancy, and the rest is never recognized because it is attributed to the gift portion.

A CGA is (relatively) simple to execute.

3 versions of CGA agreements

There are three versions of different CGA agreements depending on to whom the annuity is to be paid to:

A “single life” agreement (annuity paid to only one person for his/her lifetime)

A “two lives in succession” agreement (annuity paid to A, and then if B survives A, paid to B)

A “joint and survivor” agreement (pay annuity paid to two persons simultaneously, and at death of first annuitant, the survivor is paid full annuity amount). This is most commonly used for married couples who file joint tax returns and/or who live in community property states.

Types of CGA agreements

In addition to the three versions there are three main types of CGA agreements that determine when the payments are issued to the annuitants: immediate, deferred, and flexible.

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.

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.

Flexible Annuity

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

Charities That Issue CGAs: The Rules

NOTE: Gift annuities are an exception to the general rule that charities cannot issue commercial insurance contracts. As such, charities which issue gift annuities must comply with several rules, which may be simplified as follows:

The present value of the annuity must be less than 90% of the total value of the property transferred in exchange for the annuity. In other words, the charitable interest must be at least 10%.

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.

CGAs and Tax Considerations

Federal income tax charitable deduction

A charitable gift annuity is considered part gift and part sale, as the donor contributes the property in exchange for annuity payments from the charity. The donor who itemizes may take an income tax charitable deduction for the gift portion (i.e., the value of the transferred property less 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% of the donor’s AGI; if long-term capital gain property is transferred, the limitation is generally 30% of AGI.

Any deduction in excess of the applicable percentage limitation may be carried forward for five years.

Taxation of payouts

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

Tax-free return of principal
Long-term capital gain
Ordinary income

Let’s break each of these categories down.

Tax-free return of principal

A portion of each payment received by 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.

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

If property held for more than one year is transferred for a gift annuity, a portion of each payment will be taxed as LTCG. This will reduce the income tax-free return of principal portion of the annuity payments.

Capital gain is recognized only on the sale portion of the transaction and with the basis allocation previously described. Under general tax rules, long-term capital gain is recognized in the year the property is sold. However, with a charitable gift annuity, the donor may spread the gain over life expectancy provided the donor is the sole annuitant, or the donor and another individual named as a survivor annuitant.

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 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 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 the 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 split-interest 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.

Choosing start date of deferred CGA

Under an immediate charitable 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 both 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 always, to AGI limits).

A deferred gift annuity can, therefore, produce current tax savings during high-earning years while creating a supplemental retirement income. Generally, 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 [Ltr. Rul. 9743054].

Testamentary Gift Annuity

If carefully planned, it is possible to arrange a charitable gift annuity through a will. It is, of course, crucial that both the bequest amount and annuity payout are made clear by the terms of the will.

A donor considering a testamentary gift annuity should directly address three important questions:

What if the designated annuitant(s) predecease the testator? Donor may want to specify a contingent annuitant or provide for an outright bequest to Charity.
What if the charity no longer exists at death? Or, what if the charity is either unable or unwilling to accept the gift? The donor may want to name a contingent charitable beneficiary.
What about the payout rate? The donor should leave the charity some degree of flexibility in the payout rate, to assure the 10% minimum charitable interest requirement can be met in the future.

You may have many more questions regarding charitable gift annuities and your personal situation. Feel free to contact me any time to discuss how to maximize your gift. I offer a one-hour free consultation, without any obligation. I can be reached any time at my email, gordon@gordonfischerlawfirm.com, or on my cell, 515-371-6077.

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Back to School: Latin Lesson on Gifts Causa Mortis