Kathleen A. Stephenson is of counsel with the Philadelphia office of Pepper Hamilton LLP.
A donor owns property that he rents to third parties — property that a charitable organization could use to house its offices or one of its programs. The donor would like to benefit a charity and claim a federal income- and gift-tax deduction for the donation but doesn’t want to part with the property. What options are available?
The rate of return that determines income earned on trust assets — term interests, life interests, annuities and remainders — is established through IRC Code Section 7520. Published each month by the IRS based on the previous month’s weighted average market yield for marketable treasure obligations of the same duration (short-term, mid-term and long-term), this rate is 120 percent of the “applicable federal rate” for mid-term obligations with semiannual compounding.
Stock options are a source of significant wealth — both the options themselves and the stock acquired upon the exercise of the option can be valuable assets. But stock options do not always lend themselves to effective charitable giving. They’re subject to complex taxation rules and, to a lesser extent, rules under the Securities Exchange Act of 1934. It’s important to understand when and to what extent these assets make effective charitable gifts.
As noted in an earlier column, a charitable remainder trust (CRT) is a valuable tax-planning tool. However, Revenue Procedure 2005-24, issued on March 30, adds new rules to CRTs to address the problem of spouses “electing against the will,” which can arise in certain states.
A basic tenet of a CRT is that only the unitrust or annuity trust payment may be made to a non-charitable recipient.
We have previously looked at charitable remainder trusts and their role in philanthropic giving. Now let’s look at the other side of the coin: charitable lead trusts. While a charitable remainder trust combines a present non-charitable interest with a remainder interest that passes to charity, a charitable lead trust is a charitable interest followed by a non-charitable remainder.
With a charitable lead trust, the organization doesn’t have to wait until the expiration of the non-charitable interest but rather receives the interest at the start. As with remainder trusts, there are requirements governing lead trusts.
As a general rule, inherited assets are not subject to federal income tax. But if a beneficiary receives a gift before the death of the donor, it is considered “Income in Respect of a Decedent” and will be subject to income tax in the hands of that beneficiary.
There are many of these IRD assets: savings bonds, lottery winnings, IRAs, etc. Since these assets carry income tax burdens, they’re excellent candidates for charitable giving.
