Donors Guide to Gift Giving

One of the “special” sources of cash for charitable gifts is retirement accounts. Withdrawals for persons age 59½ to age 70½ are optional; they are mandatory for persons older than age 70½. There are no upward limits on the amount that may be withdrawn.

Some people may find that they might not need all of the funds in their retirement plans. As such, a donor may wish to direct some of the funds withdrawn from their IRA to a charitable purpose. The Charitable Rollover provision has historically provided an annual exclusion from gross income up to $100,000 for qualified charitable distributions from an IRA. Therefore, individuals who have reached 70½ years of age can donate up to $100,000 to charitable organizations directly from their IRA, without incurring any income tax on the distribution. Originally enacted as a temporary two-year measure, the provision was extended in two-year increments through December 31, 2013. The IRA Charitable Rollover provision expired on December 31, 2013, but an extension of the provision has passed in the House and is currently waiting for approval by the Senate. Should the bill be enacted retroactively without changes, it will only apply to those distributions made directly from an IRA to a charity or charities.

Gifting through a charitable IRA rollover is not the only way an individual can give to St. James’ using their retirement accounts; they may designate St. James’ Episcopal School as the specific or contingent beneficiary of an individual retirement account. Other types of qualified pension plans may also permit beneficiary designation.

The donor retains the right to funds in the account as needed. Thus there is no federal income tax savings allowed. At the death of the donor, all or a portion of the unused funds in the account will pass to the school and, as such, will be exempt from any applicable federal estate taxes.

NOTE: Retirement property is possibly one of the most attractive ways to make a gift to charity as much of the asset may be lost to estate and income taxes if it were left to your heirs.

When a donor is contemplating an outright gift, she or he should consider a gift of long-term appreciated securities with unrealized gains. Such gifts are deductible at the full fair market value and the unrealized gain is not taxable to the donor. Since the securities are donated rather than sold, capital gains taxes from selling the securities no longer apply. The more appreciation the securities have, the greater the tax savings will be.

It is possible to make a gift of tangible personal property to St. James’ Episcopal School; however, use of the property must be related to the specific mission of the school. Further, it must be held for more than one year in order for the donor to deduct the appraised fair-market value. If the use of gifted property is unrelated to the school’s tax-exempt purpose – or if it has been held for less than one year – the charitable deduction is limited to the donor’s cost basis rather than fair-market value. It is the donor’s responsibility to determine the value of the gift, not the school’s. Any gift estimated at more than $5,000 requires a qualified appraisal by the IRS.

Gifting tangible personal property works well if:

• The donor has a low basis in an that which has appreciated significantly
• The asset is related to the tax-exempt purposes of the school
• The donor needs a charitable deduction for current income tax purposes

A parcel of real estate may be gifted to St. James’ Episcopal School, generating a current income tax deduction for the fair-market value of the property as established by a qualified appraisal. As is the case with highly appreciated securities, the gift of highly appreciated property to the school means that the unrealized gain is not taxable.

A bargain sale is a sale of property (house, condominium, apartment building, farm, empty lot, etc.) to St. James’ Episcopal School for less than the fair-market value of the property. For example, an individual with a piece of property having a fair-market value of $200,000 may choose to sell that property to the school for $100,000, thereby gifting a portion of the property to St. James’. The donor is making a charitable gift equal to the difference between the fair-market value of the property and the selling price. There are capital gains implications on the “non-gifted” portion of the transaction. Gifts of mortgaged property are, in effect, bargain sales.

Gifting property through a bargain sale works well if:

• The donor has a low basis in a parcel of real estate which has appreciated significantly
• The donor wishes to recover some, or all, of his or her investment in the property
• The transfer is structured so that the charitable deduction on the “gift” portion of the transfer offsets, or exceeds, the capital gains tax on the “sale” portion

It is possible to make a gift of an existing life insurance policy by transferring all rights of ownership to St. James’ Episcopal School, and designating the school as the beneficiary. This gift may yield a substantial deduction for income tax purposes. The deduction is equal to the policy’s replacement value or the donor’s basis in the policy, whichever is less. If premiums remain to be paid on the policy and the donor chooses to make those payments, a current income tax deduction is allowed for each premium payment made to the school.

When St. James’ receives an existing life insurance policy, it has the option of retaining the policy until the death of the donor, terminating the policy and taking the current cash surrender value, or taking out a loan against the policy and repaying that loan at the time of death of the donor.

Gifting an existing life insurance policy works well if:

• The original purposes for which the insurance was secured (e.g., mortgage protection, insuring tuition payments, etc.) are no longer relevant
• The policy has been paid up, or the donor can continue making premium payments (for charitable deductions)
• There is a high cost basis or replacement value for the policy
• The donor needs a charitable deduction for current income tax purpose

Charitable lead trusts have a simple premise, but the rules and regulations governing them are complex. Cash, marketable securities, and (in some cases) income-producing real estate may be placed into a lead trust that provides income from earnings to the school for a specified term of years. At the end of the term of years, the assets in the trust revert to the donor or to the individual(s) designated by the donor. Donors use lead trusts for one of the following three purposes:

• To accelerate an income tax deduction for future charitable gifts into the current year (qualified grantor trust)
• To pass property to heirs at reduced transfer tax cost (qualified non-grantor trust)
• To make charitable gifts beyond the federal income tax charitable contribution ceilings (qualified non-grantor trust)

If the CLT is a “grantor” lead trust (where the donor is the owner of the trust), there is an income tax deduction for the present value of the future income stream to charity at creation of the trust, but there is income tax liability to the grantor on the trust’s income and capital gains. If the CLT is a “non-grantor” trust (the donor does not own the trust) there is no current deduction. However, a non-grantor trust is an excellent way to transfer wealth to heirs, as there can be substantial gift/estate tax savings with a lowered tax cost to beneficiaries. This vehicle is particularly appropriate for donors with very large estates.

Creating a charitable lead trust works well if:

• The donors’ estates are in excess of the amount sheltered from estate taxes (see chart).
• The donor has a highly-appreciated asset (or an asset for which considerable appreciation is expected in the future)
• The donor wishes to provide annual cash for use by the school over a period of several years
• The donor wishes to transfer assets to his or her heirs at a lowered tax cost or have the assets returned

Bequests

The most common method of deferred charitable giving is that of a bequest; i.e., a gift through one’s will. Cash, securities, retirement assets, real property, or personal property can be left to St. James’ Episcopal School for its use. Bequests can be given for general purposes, or they may be designated for some specific area of the school. There are three common formats for bequests:

• The Specific Bequest 
  “I give and bequeath the (sum or description) of my estate to St. James’ Episcopal School, Los Angeles, California, a California not-for-profit corporation, for its general use and charitable purposes.”
• The Residuary Bequest
  “I give and bequeath (all or %) of the rest, remainder, and residue of my estate to St. James’ Episcopal School, Los Angeles, California, a California not-for-profit corporation, for its general use and charitable purposes.”
• The Contingent Bequest
  “In the event that (my spouse or my children) shall not survive me, then I give and bequeath (sum or description of property) of my estate to St. James’ Episcopal School, Los Angeles, California, a California not-for-profit corporation, for its general use and charitable purposes.”

Donors are encouraged to notify the school of such a bequest intention either by providing a copy of the appropriate section of his or her will or by completing a “bequest intention commitment.”

Estate Note

An estate note is an irrevocable pledge, legally binding against the donor’s estate. The donor provides the school with a designated sum or a specified percentage of his or her estate at the time of death. The donor has the option to reduce the estate note with outright gifts during his or her lifetime or with some other irrevocable future gift commitment.

NOTE: Testamentary gifts make up over 80% of all future gifts due primarily to the fact that they are revocable. This ability to change a will is very important to mature adults because of four primary fears: (1) unexpected emergencies without enough savings or insurance; (2) dying too soon and not having enough accumulated for surviving loved ones; (3) living too long and running out of assets; and (4) catastrophic illness.

Charitable Remainder Trust

Cash, marketable securities, or real estate may be placed into a charitable remainder trust. The trust can be established during the lifetime of the donor or through the donor’s will. When the trust is created, the donor determines a fixed payout percentage of trust assets as valued annually (unitrust) or a fixed payout dollar amount (annuity trust). When the trust matures, at the death of the last non-charitable beneficiary, at the end of a specified term of years (not to exceed 20 years), or a combination of lives and term of years, St. James’ Episcopal School is the ultimate beneficiary.

For charitable remainder unitrusts, annual trust payments to the beneficiary (or beneficiaries) will vary depending on the value of the trust assets. For charitable remainder annuity trusts, annual trust payments will be a fixed amount dependent on the founding assets. An immediate charitable deduction is available to the donor, based on the payment rate, the federal mid-term rate, and the length of time the trust is projected to be in existence.

Individual Retirement Account (IRA) and/or other Pension Plan Beneficiary

An individual may designate St. James’ Episcopal School as the specific or contingent beneficiary of an individual retirement account. Other types of qualified pension plans may also permit beneficiary designation.

The donor retains the right to funds in the account as needed. Thus, there is no federal income tax savings allowed. At the death of the donor, all or a portion of the unused funds in the account will pass to the school and, as such, will be exempt from any applicable federal estate taxes.

NOTE: Retirement property is possibly one of the most attractive ways to make a gift to charity, as much of the asset may be lost to estate and income taxes if it were left to your heirs.

Life Insurance

A new life insurance policy may be gifted to the school. The school becomes both owner and beneficiary of the policy. Subsequent premium payments made by the donor are tax deductible.

NOTE: As an individual’s children mature, family protection may no longer be needed. When the mortgage is paid off, mortgage insurance is no longer needed. When a business interest is sold, life insurance held for business reasons is no longer needed. And if assets have been accumulated for retirement, life insurance may not be needed. If a person finds themselves in this situation, they can simply direct that St. James’ Episcopal School be named as the first, second, or last beneficiary.

Retained Life Estate – Gifting Your Home and Living There, Too

Donors may choose to gift their residence, recreational home, or farmland and retain a “lifetime interest” in the property. Ownership of the property is transferred to the school, but full use and control of the property are retained by the donor. An income tax deduction, based on the property’s current market value and the life expectancy of the donor(s), is allowed; however, while living on the property, the donor still must cover real estate taxes, maintenance, and insurance. Any capital improvements are tax deductible. Upon the death of the donor(s), the “lifetime interest” of the donor(s) is terminated, and the full use and control of the property are transferred to the school.