Another year has come and gone. Christmas is over and a New Year dawns. It’s time to put away the stockings and the tree. We all feel fortunate to have given and received. While the memories of the season of giving are still fresh in our memories, it’s a great time to reflect upon last year’s developments on the topic of the taxation of trust and estate charitable giving.
In this article, we look back at some of the more notable trust and estate cases of 2015 in which the deductibility of charitable donations was an issue. What happens when an amount set aside for charity never finds its way to the intended recipient? Can a trust take a fair market value deduction for appreciated property donated to charity? How do we value the charitable remainder interest of a trust designed to distribute the lesser of net income or a fixed percentage of the value of assets? These are some of the questions addressed in the following cases determined last year.
Estate of Belmont v. Commissioner 144 TC 6 (2015)
When an Intended Charitable Contribution Fails
In 2007, Eileen S Belmont died. Through her will she directed that the residue of her estate be donated to charity. Among her residue was a condominium in which her brother resided. In 2008, her estate filed an estate return claiming a $219,580 charitable deduction. Upon Belmont’s death, her brother filed a legal action asserting a life estate in the condominium. After a protracted legal battle, the estate was so depleted of its assets it could no longer afford to make the charitable donation for which it had already taken a charitable deduction. The Internal Revenue Service (“IRS”) denied the charitable deduction to which the estate argued that it remained entitled.
Internal Revenue Code (“IRC”) Section 642(c)(2) and the related regulations allow for a deduction for any part of the gross income of an estate set aside for charity, provided under the terms of a will and the circumstances the possibility the plans to donate will fail are negligible. Siding with the IRS, the court held because of the risk of litigation the probability the gift set aside would not be conveyed was more than negligible. Hence, the court affirmed the denial of the taxpayer’s charitable deduction.
Mart T. Green v. United States of America 2015 PTC 396 (2015)
When the Fair Market Value of a Gift Can Be Deducted
In December 1993, Mart T. Green and spouse formed a trust. From 2002 to 2004 the trust purchased and in subsequent years donated to charity an assortment of property acquired from various states across the country. Between the date of purchase and subsequent donation the acquired property appreciated in value substantially. The funds used to acquire the property came exclusively from and was traceable to the gross income of the trust. The trust claimed a fair market value deduction for the charitable contributions.
Citing IRC Section 642(c)(1), which restricts charitable deductions to donations includable in trust and estate gross income, the IRS argued that only the adjusted basis of the property donated was eligible for deduction. According to the IRS, fair market value included unrealized appreciation; value assignable to principal and excludable from gross income. The IRS also argued property acquired from gross income in one year and donated in another year does not qualify as a donation from gross income. The court found for the taxpayer on all scores. The court held fair market value should be utilized to determine the deduction for charitable donations of property traceable to gross income. The court also held property acquired from gross income in one year and donated in another, still qualifies as a donation from gross income, thus eligible for a charitable deduction.
Schaefer v. Commissioner 145 TC 4 (2015)
How to Value a NIMCRUT
In February 2006, Arthur Schaefer formed two trusts. The trust instruments required the trustee to distribute to Schaefer’s sons the lesser of an amount equal to 10%/11% of the trusts’ assets or the trusts’ net income. Whenever trust net income exceeded 10%/11%, the trustee was directed to make an extra distribution to compensate for years when the trust yielded insufficient income to pay the amount based on the fixed percentage. Any assets that remained after the sons’ income interest expired were to go to charity. Trusts of this sort are known as NIMCRUT’s.
Generally, a taxpayer is permitted to take a charitable deduction for establishing a NIMCRUT, provided the charitable remainder is at least 10% of the net fair market value of the assets contributed to the trust at the time of contribution. As more trust assets are paid out to non-charitable beneficiaries (as a consequence of a high payout rate or long payout term) less remainder interest is available to be donated to charity. This truism is reflected in charitable remainder interest values.
The IRS argued, in essence, the value of the remainder interest of the NIMCRUT should be based only on the fixed percentage in the trust instrument. The estate, recognizing such a ruling would render the remainder interest value too low, argued an alternative, statutory, “7520”, rate must be used. The court found in favor of the IRS.
Conclusion
While 2015 has come and gone, it leaves behind a treasure trove of estate tax planning guidance and tips on charitable giving. To maximize a deduction for a charitable gift of appreciated property consider the guidance of Mart T.Green. Remember a gift must be traceable to trust and estate gross income and pursuant to a will. However, the year such a gift is made need not be the same as the year to which the gross income is traceable. When setting aside an amount to be donated to charity, be sure to mitigate any foreseeable risks of litigation that could prevent the intended gift from reaching the beneficiary. Those interested in a NIMCRUT, should take note of the guidance provided in Schaefer when designing the payout provisions of the trust.
If you have any questions or would like to discuss this matter further, please contact a member of Withum’s Private Client Services Group by filling out the form below.
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