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.
Kathleen Stephenson
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.
In June, the Senate Finance committee — which oversees the Internal Revenue Service’s regulation of tax-exempt organizations — released a draft staff report suggesting many drastic changes in the law that governs charities. Sen. Charles Grassley (R-Iowa), the chairman of the committee, announced at press time that he intended to introduce bipartisan legislation this fall to incorporate some of these changes. Here is a condensed look at some of the more wide-ranging, proposed changes.
In the past few years, there have been numerous issues concerning the details of how a charity should benefit from a donor’s life insurance policy. A new life insurance-based plan provides a benefit to charities in the form of cash payment or significant future income — without the charity being required to invest any money.
Such plans need to be carefully evaluated by charities because they raise a significant number of tax issues. This column serves as a brief outline of the plan and the issues that should be considered by a charitable organization before going forward.
Most donors know that if they want to make a contribution of property to a charitable organization, they must establish the value of the donated item in order to claim it as a deduction. And knowing what is necessary to support a claim might encourage a donor to actually make the donation.
This column is a brief review of the requirements governing donations of property, other than publicly traded securities, having a value in excess of $5,000.
As donors prepare their federal income tax returns this and every year, one question looms: Can their tax-deductible gifts be substantiated?
The Internal Revenue Code has specific provisions under IRC 170 (f)(8) that govern when and how donations must be substantiated. Failure to comply with these rules could prohibit a donor from making a deduction.
While the goal of any good fundraiser is to raise funds, it’s important to know that not all gifts are created equal. For instance: An alum gives his cattle ranch to his college or a patron gives the controlling interest of her business to the local art museum. These gifts might be of great value, but they also might have unexpected income-tax consequences for the receiving organizations.
