Thou Shalt Not …
As gift planners, it’s important for us to know what type of assets work best with certain gift vehicles. Then we can give solid recommendations to the donors and avoid giving them harmful advice.
4. Thou shalt not recommend the donation of inappropriate assets.
Some assets, although necessarily complex, are still appropriate for planned gifts; however, others are inappropriate in nearly every situation. Assets that can be unsuitable for lifetime gifts due to the tax problems they pose are IRAs, commercial annuities, savings bonds and qualified retirement plans.
Since IRAs and retirement plans typically are funded with pre-tax income, withdrawals are considered taxable income to the account owner. Further, with commercial annuities and savings bonds, any appreciation over the original cost basis is also considered taxable income when withdrawn or cashed.
Moreover, unlike gifts of appreciated securities where the long-term capital gain is avoided when given to charity, if these assets are used to fund a lifetime gift, the taxable event is unavoidable. When a donor uses these assets to make a lifetime charitable gift, he still pays income tax, even if the asset is given to charity.
The same theory holds true if the donor keeps these assets during her lifetime and gives them away after death. If the donor leaves these assets to heirs, the heirs must pay the income tax. Again, the taxable event cannot be avoided.
Charitable bequests of these same assets are more appealing. Leaving a savings bond, commercial annuity, IRA or retirement plan to charity at death avoids the taxable event as the nonprofit benefits from a zero- income tax bracket. The donor’s estate becomes eligible for an estate tax charitable deduction, reducing potential estate taxes more.
What about the donor’s heirs? With the stepped-up cost basis available on inherited assets such as real estate, estate planners say that when deciding which assets people should leave to heirs and which to leave to charity, real estate is better for heirs, while IRAs and savings bonds are better for charitable causes.