Planned and Endowment Giving Gifts that Help Now

Planned and Endowment Giving: Gifts that Help Now Philip M. Purcell, JD Ball State University Foundation ppurcell@bsu. edu Copyright 2012@All rights reserved. .

Planned Gifts that Help Now Charitable Pledges Outright Gifts of Non-Cash Property Bargain Sales Charitable Endowments and Donor Advised Funds • Charitable Lead Trusts • •

Charitable Pledges • A commitment to make a gift during life and/or at death. • Can include a single payment or multiple payments during life and/or at death. 3

Planning Charitable Pledges • Signed commitment. • Current outright and planned or deferred giving options. • Auditors may verify pledges. • Pledges cannot be paid from donor advised funds. 4

Special Considerations for Property (Non-Cash) Gifts 5

Opportunity of Property Gifts Plan Assets Retirement 11% Stock and Bonds 22% Life Insurance 8% Other 3% Real Estate 27% Business Interests 24% Cash 5%

Sources of Property Gifts Intangible Personal Property: Stock, Bonds Real Property: Residential, Commercial, Farmland Tangible Personal Property: Equipment, Collections, Artwork 7

Value of Property (Non-Cash) Gifts for Charitable Deduction Purposes • The charitable deduction for a gift of all three types of donated property is the fair market value of the property with some exceptions. • See IRS Publication 561, Determining the Value of Donated Property. 8

How Donors Claim a Deduction for Gifts of Non-Cash Property • The donor must complete IRS Form 8283. • If the deduction claimed is over $5, 000, then a qualified independent appraisal is required for any type of non-cash property except gifts of publicly traded stock. • If the charitable organization sells the donated property within three years, then it must file an IRS 8282 form reporting the sale price. 9

Requirements for Gift Receipts 1. Name of recipient organization. 2. Dollar amount of cash contribution. 3. Description (not value) of non-cash contribution. 4. Date of the gift. 5. Statement that no goods or services were provided in return for the gift, if such is the case. 6. Description and good faith estimate of value of goods or services, if any, provided in return. 10

Helpful Resource • IRS Publication 1771 • Available at www. irs. gov

Understanding Capital Gains Tax • Applies to all kinds of property: intangible and tangible personal property and real estate. • “Cost basis” is value originally paid for property. • Property is “appreciated” when its current fair market value is greater than cost basis. • When appreciated property is sold, capital gains tax is paid on the difference (profit) between the selling price and the cost basis. 12

Two Tax Benefits for Gifts of Appreciated Property 1. Income tax deduction for the property’s current fair market value. 2. Avoid capital gains tax. If charity sells appreciated property, neither charity nor the donor owes capital gains tax with some exceptions such as pre-arranged sales or gifts of S stock. 13

Intangible Personal Property Gifts 14

Opportunity of Intangible Property Gifts: Stocks, Bonds, Business Interests Plan Assets Retirement 11% Stock and Bonds 22% Life Insurance 8% Other 3% Real Estate 27% Business Interests 24% Cash 5%

Stock – Two Types Publicly Traded: Traded on a public exchange such as the New York Stock Exchange or NASDAQ. Privately Held: Not traded on a public exchange. Includes family business stock, S corporation stock. 16

Determining the Charitable Deduction Value of Donated Stock • The value of donated publicly traded stock for purposes of the income tax charitable deduction is the average of the high and low values of the stock on the date of the gift multiplied by the number of donated shares of the stock. • The value of donated privately held stock is determined by a qualified independent appraisal. See IRS Publication 561: Determining the Value of Donated Property. 17

Depreciated Stock: Double Deduction • Donor may sell depreciated stock and receive an income tax deduction for the loss. • Then donate all or part of the cash from the sale proceeds. • Receive another income tax charitable deduction for the cash gift! 18

Other Types of Intangible Personal Property • • • Bonds: Corporate, Treasury, Other Mutual Fund Shares Partnership Interests Life Insurance Retirement Plan Assets 19

Tangible Personal Property Gifts • Equipment • Software • Stamp, Coin or Other Collections • Artwork 20

Special Rule for Gifts of Tangible Personal Property • Unless the property itself is used in the work of your organization (not the cash from the sale of the property), then the donor’s income tax charitable deduction is limited to the lesser of: donor’s cost basis and current fair market value – not the property’s fair market value. • Example: Gift of artwork for a charity auction – or for which there is no programmatic use of the art – then deduction limited to lesser of basis or FMV. 21

Special Rule for Gifts of Ordinary Income Property • Sale of this property generates income taxed at ordinary tax rate, not capital gain tax rate. • Examples: inventory, artwork by artist. • Donor’s income tax charitable deduction is limited to the lesser of: donor’s cost basis and current fair market value – not the property’s fair market value.

Real Estate Gifts 23

Opportunity of Real Estate Gifts Plan Assets Retirement 11% Stock and Bonds 22% Life Insurance 8% Other 3% Real Estate 27% Business Interests 24% Cash 5%

Gifts of Real Estate • Primary residence • Vacation home • Farmland • Undeveloped land • Commercial property • Rental property 25

Benefits of Real Estate Gifts • Source of major gifts since real estate represents a significant proportion of personal wealth. • May be sold quickly to generate cash, or held for a separate revenue stream from rental income. • May be held and used for office, storage or other benefits. 26

Benefits to Donors of Real Estate Gifts • You or your loved ones no longer worry about real estate upkeep, taxes and insurance. • Income tax deduction equal to the property’s fair market value. • Avoid capital gains tax due to appreciation. • Remove value from taxable and probate estate. • Sale of donated property cannot be prearranged or else capital gains tax is owed. 27

Real Estate: Due Diligence is Key! Real Estate Gift Acceptance Policies and Procedures Checklist: 1. Environmental Review. 2. Debts, Liens, Encumbrances. 3. Property Tax and Zoning. 4. Appraisal and Marketability. 5. Deed and Title Insurance. 6. Final Approval by your Board. 28

Bargain Sales • Purchase of land or other assets by charity for a price less than fair market value. • Part sale and part gift! • The difference between the sale price and the fair market value of the property represents a gift. 29

Benefits of a Bargain Sale for Charity and Donor Benefit to Charity: 1. Purchase of property (real estate or other property) for discounted price less than fair market value. 2. Payments can be made in installments. Benefits for Donor: 1. Cash from the sale. 2. Income tax charitable deduction using 8283 form and qualified independent appraisal. 3. Donor escapes portion of potential capital gains tax.

Charitable Endowments • Donor offers gift and charity accepts it with a restriction that the gift be used for a charitable endowment. • Endowments are invested to provide annual current support to charity in perpetuity. 31

Uses and Types of Endowments • Operating subsidy for on-going support or for program expansion (e. g. , scholarships, faculty chairs, staff positions, maintenance costs for facilities, equipment, supplies, etc. ) • Independence from economic, governmental, and political forces • Hedge against inflation and the market • Improvement of the balance sheet • Replacement for other income sources • Leverage for bond-rating capacity, mortgages or loans for new buildings, equipment purchases, etc. , and • Enhancement of institutional prestige and permanence, encouraging further support by outright and especially planned gifts Sec. 3, 112

Three Models Endowment Funds 1 2 Within Charity Foundation Created by Charity 3 Charity Community Foundation

How is an Endowment Created? 1. Cash or property is donated with a designation that it be used for endowment. 2. Donated while donor is alive and/or at death through a planned gift such as a bequest in a will. 3. A best practice is that it be stated in writing and signed by the donor with an endowment agreement, a letter or planned gift such as a will. 4. Donations given to an endowment campaign appeal also create permanent endowment gifts. 34

Management of Endowments 35

Investment of Endowments • The board of directors is responsible. • Experts can be hired to advise your board on the best investment strategies. • Investment management must be done from the perspective of intergenerational equity: spending for current needs balanced with long term for future needs, accounting for inflation. • Uniform Prudent Management of Institutional Funds Act (UPMIFA) is applicable law. 36

Spending from Endowments • • Spending calculated as a percentage of annual value. Not required to spend a minimum amount. Determined by the board of directors. Take into account fee policy for endowment. 37

Donor Advised Funds Donor Advised Fund Charity 1 Gift Donors Charity 2 Income Tax Deduction 38

Legal Control • Legal control rests with the board of the directors of the charitable organization that holds the fund. • Donors recommend grants from the fund. 39

Cautions with Donor Advised Funds • Income tax deduction when the gift is made to the donor advised fund. • Grants to qualified charitable organizations or charitable purposes. • Pledges cannot be fulfilled from a donor advised fund. • Donors cannot receive personal financial benefits from grants paid from donor advised funds. 40

Charitable Lead Trust: One Type of Split Interest Gift • In general, no charitable • income tax deduction for a gift in which the financial interest in cash or an asset is “split” or shared between the donor and charity. Exceptions allowed for some planned giving techniques such as the lead trust.

How Charitable Lead Trusts Work nt e m s Charity 1 Pay Gift Payme nts Donors At end of trust term, the principal is given to individuals named by donor Charity 2

Benefits to Donor from a Charitable Lead Trust • Pass wealth to loved ones at reduced or eliminated gift or estate tax cost. • Passing specific property (farm, business interests) to heirs. • Some types of lead trusts offer an income tax charitable income tax deduction.

Benefits to Charity from Charitable Lead Trusts • Annual payments to charity from the lead trust similar to a donor advised fund. • Lead trusts tend to be few in number but of large dollar value when established, so the payments can be for significant amounts. 44