The Art of Non-Cash Charitable Giving

1. The Art of Non-Cash Charitable Giving September 22, 2011 Richard M. Horwood Horwood Marcus & Berk Chartered

2. Why Donate Non-Cash Assets? • 83% of Americans give to charity annually • Many individuals donate to charity due to personal charitable goals and the accompanying tax advantages • Cash gifts are not always easy to accomplish • Non-cash property may be an individual’s most significant asset, for example: • Securities and Business Interests • Real Estate • Art, Antiques and Collectibles • IRAs • Life Insurance

3. Why Donate Non-Cash Assets? • Charities are increasingly accepting non-cash gifts • For Tax Year 2008, 23 million individual taxpayers itemizing deductions reported $40.4 billionin deductions for non-cash charitable contributions • Fulfill personal charitable goals and financial goals • Two different approaches: • During lifetime, avoid gain realization by contributing the asset to a charity and obtaining an income tax deduction • On death, avoiding estate tax

4. The Current Charitable World

7. Aspects of Charitable Giving • Types of Charities • Public Charities • For example: churches, hospitals, governmental units, American Red Cross, libraries, community museums • Private operating foundations, pass-through foundations, donor-advised funds, and pooled-fund foundations • Private Non-Operating Foundations • Example: Bill and Melinda Gates Foundation

8. Aspects of Charitable Giving • Types of Deductions • Basis Deduction • Fair Market Value Deduction • Considerations: • Securities and Business Interests: control, buy/sell agreements • Real Estate: mortgages, economic and environmental factors • Art, Antiques and Collectibles: authenticity, physical condition, extent of restoration • Deduction Limitations • Limits the percentage a donor may deduct from his or her contribution base (adjusted gross income)

9. Aspects of Charitable Giving • Deduction Limitations for Charitable Contributions

10. Securities and Business Interests • Publicly Traded Securities • May include stocks, bonds or mutual funds • Great incentive to contribute rather than sell • Avoid Federal and state income taxes on gain • Example: Illinois resident with appreciated securities • But not securities held at a loss • C-Corporation Stock • Deduction generally equal to fair market value of stock (except private non-operating foundations) • No tax on gain • Charity will want exit strategy • No prearranged purchase • Review shareholder agreement

11. Securities and Business Interests • S-Corporation Stock • Ensure charity is permitted S Corp shareholder • Three negatives • Deduction generally equal to fair market value of stock less recapture/ordinary income items (except private non-operating foundations) • Charity subject to UBTI on S Corp income • Charity subject to tax on gain from stock sale • Alternative: Have S Corp gift assets to charity

12. Securities and Business Interests • LLC and Partnership Interests • Deduction generally equal to fair market value less any ordinary income gain (except private non operating foundations) • Charity subject to UBTI on trade or business income • Private Foundation Issues • Self dealing? • Diversification? • Excess business holdings?

13. Real Estate • Gift of unencumbered real estate to public charity • Charitable deduction equal to the fair market value of the real estate • If private foundation, donor may deduct his or her basis • Qualified appraisal required if the real estate is valued at over $5,000 • Real Estate Encumbered by a Mortgage • Must reduce contribution deduction by the mortgage • Unrelated Business Taxable Income (“UBTI”) • Debt-financed property will often result in UBTI (gross income from an unrelated trade or business)

14. Real Estate • Contributing a Partial Interest in Real Estate • Retain a life estate in a personal residence and gift the remainder interest to a charitable organization • Caution! • Difficult to sell real estate after contributing a partial interest • Conservation Easement • Limits the use of the land to protect its conservation values • Donor continues to own and use land, and the donor retains his or her right to sell or pass land on to heirs • Example: easement with rare wildlife may prohibit land development • IRS sets forth permissible conservation purposes • Typically can deduct the fair market value of the easement

15. Art, Antiques and Collectibles • The Related Use Rule • If a charity uses an art object for a purpose related to its tax-exempt status, the donor may deduct the FMV of the object (assuming the object is capital gain property), if not, the donor’s deduction is limited to his or her basis • Applies to all tangible personal property • Use does not have to be immediate

16. Art, Antiques and Collectibles • Related Use Issues • Donate art to a museum (display v. storage) • Donate art to a university (library for study v. hall for display) • Donate art to a hospital • Verification Requirements • Requirements increase if claimed value is over $250 • Qualified appraisal required if valued at over $5,000 • Qualified appraisal must be attached to tax return if valued at over $500,000 • Strict v. substantial compliance

17. Art, Antiques and Collectibles • Fractional Interest in Tangible Personal Property • Contribute an undivided portion of an art object • Example: Donor contributes a 25% interest in a painting to an art museum • Subsequent contribution deductions are limited to lesser of the fair market value at the time of initial contribution or at the time of the subsequent contribution • Possibility for recapture

18. Individual Retirement Accounts (“IRAs”) • How to continue giving to charitable causes without sacrificing your retirement security • A donor over the age of 70 ½ may contribute up to $100,000 directly from an IRA to a charity • No charitable deduction, but avoid ordinary income taxes • Caution! No direct transfer if under 70 ½ • Designate a charity as a beneficiary • Avoid income tax and receive an estate tax deduction • Designating multiple beneficiaries

19. Charitable Trusts • Charitable Remainder Trusts (“CRT”) • An irrevocable tax exempt trust • Pays an annual stream of income to a non-charitable beneficiary for one life, two lives or a term of years • Assets remain in the CRT at the end of the trust term and pass to charity • Balance charitable goals and heirs’ inheritance • Use life insurance as “make up” to heirs • Charitable Lead Trusts (“CLT”) • No current charitable deduction (unless a grantor trust) • Remainder, if any, to non-charitable beneficiaries

20. Charitable Gift Annuities • Donor may transfer assets to a charity and in return the charity will make the annuity payment to one or more individuals for their lifetimes • Allows donor to retain income interests and deduct the fair market value for the contribution • Caution! • UBTI issues may arise

21. Life Insurance • Must contribute the entire policy to receive maximum tax benefits • No immediate income tax deduction for the mere payment of premiums for a policy with a charity named as beneficiary where the donor still maintains the ability to change the beneficiary • Payment of additional premiums

22. Example One: Paperweight Collector • Separate objects not subject to fractional interest rules • Gift to museum - “related use” • Importance of gift acceptanceagreement • Collector enjoys sharing his passionduring lifetime

23. Example Two: Matching Gift • Client funds departmental program at a university with publicly traded stock and closely held business interests • School to obtain donors to match dollar for dollar • Consequences of matching funds • Matching funds fall short? • University discontinues program? • Benefits • Client involvement in program • Charitable deduction • Leveraging gift through match

24. The Importance of a Gift Acceptance Agreement • May outline the terms of a contribution so that the donor and charity agree on how the contribution will be used • Have a clear understanding of the donor’s purpose and the charitable organization’s requirements • Common problem gifts: • Ambiguous Gifts • Overly Restrictive Gifts • Naming Rights Gifts • Large Gifts • Testamentary Gifts with Current Recognition

25. Example Three: Residence with Substantial Acreage • Retain substantial land and gardens surrounding the estate during lifetime • Fund new music auditorium on college campus • Yearly charitable contribution from client to cover bond interest costs for college • College able to book gift towards Capital Campaign and build the auditorium now • Upon death of donor, college receives gift of land that can be sold

26. Example Four: New York Puzzle • Background: Client has substantial interests in commercial real estate, investment portfolio, an IRA, paid-up life insurance and an art collection • Goal: Contribute 10% of assets to charity and lessen taxes (during lifetime or at death)

27. Example Four: New York Puzzle • During Lifetime • Commercial real estate and investment portfolio • Options for valuation discounting and freezing • Consider using formula clause (see Hendrix) to reduce valuation risk • Life Insurance • Cover capital campaign pledge • On Death: • All assets, including the IRA and art collection, are options • Use of disclaimers provides flexibility

28. Conclusion: Delivering Value • For the client: Tax savings and the ability to give more • For the advisor: Tell them something they don’t know • For the charity: More giving options = more giving As you leave today… think about someone who will benefit from the combination of your creative planning and their passion.

29. Thank you!