Why is this Topic Important to Wealth Managers? This blogticle reviews the general requirements for the deductibility of donations for federal income tax purposes. Our goal is to provide information for wealth mangers to stay current on relevant topics including charitable contributions.

The Internal Revenue Code allows for deductions for federal income tax purposes of contributions or gifts made to or for the use of an organization that qualifies as a federally tax-exempt organization. [1]

For a charitable contribution to be deductible, the charity must receive some benefit from the donated property; [2] and  the donor cannot expect to receive some economic benefit (aside from the tax deduction) from the charity in return for the donation. [3]

However, a charitable deduction is not allowed for any contribution of a check, cash, or other monetary gift unless the donor retains a bank record or a written communication from the charity showing the name of the charity and the date and the amount of the contribution. [4]

Charitable contributions of $250 or more (whether in cash or property) generally must be substantiated by a contemporaneous written acknowledgment of the contribution supplied by the charitable organization. [5]

For contributions of property other than money, the taxpayer is generally required to maintain a receipt from the donee organization showing the name of the donee, the date and location of the contribution, and a description of the property. The value need not be stated on the receipt. [6]

A deduction for a contribution of property with a claimed value exceeding $500 will generally be denied to any individual, partnership, or corporation that fails to satisfy the property description and appraisal requirements. [7]

However, there are two exceptions to the general rule. Under the first exception, the appraisal requirements, for property valued at more than $5,000 and at more than $500,000, do not apply to readily valued property, such as cash and publicly traded securities. Under the second exception, the general rule does not apply if it is shown that the failure to meet the requirements is due to reasonable cause and not to willful neglect. [8]

As a general matter, in order for contributions to be deductible, the organization must qualify at the time of the contribution. Thus, it is the responsibility of an organization receiving contributions to ensure that its character, purposes, activities, and method of operation satisfy the qualification requirements under the Code in order for grantors and contributors to have the assurance that their contributions at the time made are deductible.

Generally, Publication 78 lists organizations that have received a ruling or determination letter from the IRS stating that contributions by grantors or contributors to the listed organization (or to the listed central (or parent) organization and those local (or subordinate) units covered by the group exemption letter) are deductible as provided in § 170.

Moreover the law has been interpreted so that grantors and contributors may generally rely on an organization’s ruling that the organization is described until the IRS publishes notice of a change of status (for example, in the Internal Revenue Bulletin or Publication 78), unless the grantor or contributor was responsible for, or aware of, the act or failure to act that results in the organization’s loss of public charity status. [9]

Tomorrow’s blogticle will discuss insurance topics related to estate and gift tax planning.

We invite your opinions and comments by posting them below, or by calling the Panel of Experts.

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[1] See IRC Sec. 170.

[2] See Winthrop v. Meisels, 180 F.Supp. 29 (DC NY 1959), aff’d 281 F.2d 694 (2d Cir. 1960).

[3] See Stubbs v. U.S., 70-2 USTC ¶9468 (9th Cir.), cert. den. 400 U.S. 1009 (1971).

[4] IRC Sec. 170(f)(17), as added by PPA 2006.

[5] IRC Sec. 170(f)(8)(A).

[6] Treas. Reg. §1.170A-13(b)(1).

[7] IRC Sec. 170(f)(11)(A)(i).

[8] IRC Sec. 170(f)(11)(A)(ii).

[9] See generally Temporary Regulations §§ 1.170A-9T(f)(5)(ii) and 1.509(a)-3T(e)(2), 73 Fed. Reg. 52,528 (Sept. 9, 2008).

Why is this Topic Important to Wealth Managers? This blogticle presents an overview of the credit shelter trust. Given the $5 million estate and gift tax exemption, along with the portability of the spousal credit, and wealth managers and clients alike are asking how this will affect estate plans. We thus review the credit shelter trust so as to provide information for decision making regarding client estate plans given the new estate and gift tax legislation.

The unlimited marital deduction is “superficially” attractive. The wealthier spouse doesn’t have to worry about estate tax erosion of assets transferred to a surviving, less wealthy spouse. But what about the second death? The unified credit and portability may be sufficient in some cases to shelter the estate, but not always. Therefore, some affluent families benefit from the split-estate (A-B Trust) concept in marital deduction planning. The benefits arising from the use of such instrument are nevertheless being questioned by wealth mangers given the new estate and gift tax exemption amounts.

While the marital deduction provides a tremendous tax benefit at the first death, it largely postpones the estate tax on the qualified property until the second spouse dies. Since most clients are anxious to conserve as much of the estate as possible for succeeding generations, proper estate planning considers the effects of the combined estate tax on both spouses’ estates and takes steps to keep death taxes at a minimum in the survivor’s estate as well as at the first death.

For many years the testamentary credit shelter trust has been a standard element in estate planning for married persons. These trusts, created upon death and funded to the extent of the decedent’s applicable exemption amount, still represent a vast potential market for the sale of life insurance. Life insurance on the life of the surviving spouse can be a highly suitable asset for credit shelter trusts. This discussion focuses on the advantages of life insurance as an asset of a credit shelter trust notwithstanding the increased gift and estate tax exemption amount and spousal portability.

Significant advantages can be achieved by widows and widowers and their heirs who are beneficiaries of credit shelter trusts (established upon the deaths of their respective spouses), through the purchase by the credit shelter trust of insurance on the life of the surviving spouse.

One of the appealing aspects of investing credit shelter trust assets in life insurance is that when the trust is ultimately distributed to children (or other heirs) after the death of the surviving spouse, the property will have achieved, in effect, two successive step-ups in basis subsequent to the death of the first spouse.

In summary, it works as follows: Consider a spouse with appreciated assets who dies. The appreciated assets are transferred by the decedent’s will to a credit shelter trust, taking a stepped-up basis equal to the market value at which they were included in the gross estate. Assume that before the assets appreciate further in value some portion is sold by the trustee at no taxable gain. The proceeds of the sale are used to purchase an insurance policy on the life of the surviving spouse. When the surviving spouse dies, the death benefit will be received by the trust income tax free under I.R.C. §101. Thus, in effect, the property that was received by the trust with a stepped up basis upon the death of the first spouse will have grown to an amount equal to the insurance death benefit by the time the second spouse dies. This second increase in value (occurring between the death of the first spouse and the death of the second spouse) is not subject to income tax, because of Code §101, and thus, there has effectively been a second step-up in basis for the increased asset amount eventually received by the couple’s heirs.

Next week’s blogticles will present discussion related to estate planning generally.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

Why is this Topic Important to Wealth Managers? This blogticle concludes our weeklong series on the unified estate and gift tax as well as the portability of the spousal credit. This week we discussed the estate and gift tax in detail so that wealth managers are well prepared to address client planning needs.

How the DSUEA will be treated after 2012 is uncertain, but wealth managers should consider the possible ramifications of the returning sunset and how it may affect your clients’ estate planning. As we have seen Congress may extend the sunset date, revert the rules to a prior act in time, or treat the DSUEA as if it never existed.  Not surprisingly because there are currently no provisions to address the consequences if the law is not renewed in 2013, long term planning uncertainty still exists in the gift and estate tax area.

On the one hand, if Congress extends the DSUEA, then bypass trusts will likely remain unnecessary for estate tax purposes. Spouses will have the continued opportunity to utilize the DSUEA and take advantage of its many benefits, such as making gift transfers to heirs or establishing trusts that take full advantage of the increased exemptions.

On the other hand, if Congress does not take action by 2013, the Bush tax cuts – and the modifications made by the Tax Relief Act of 2010 – will be treated as if they had never been enacted. Under the latter scenario, the estate tax would revert back to the 2001 level which amounts up to a $1 million exemption, with a maximum rate of 55%. Additionally, if no further action is taken before the end of 2013, the portability feature would no longer be available at that time. Thus, if the DSUEA ceases to exist after December 31, 2012, the bypass trust will likely once again become an integral part of the estate planning process.  In light of the new DSUEA concept, existing bypass trusts should be examined to determine whether the benefits of a bypass trust outweigh the loss of step-up basis that results from their use.

Series Summary

The increased estate and gift tax exemptions along with unification of the gift and estate tax created changes to the treatment of estate and gift taxes generally. The new law reinstated the estate tax but provides for an exemption of $5 million with a top tax rate of 35%. Moreover, the new DSUEA created an even higher combined exemption amount for some spouses. Thus, the provisions in the TRA of 2010 provide one planning route that may be examined as the optimal path for some married couples. As always with tax law, what is appropriate for each client should be determined on a case-by-case basis.

For more information on the implications of the new estate and gift tax in particular client situations please feel free to contact our panel of experts.

Next week’s blogticles will again address issues surrounding wealth management practice.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

Why is this Topic Important to Wealth Managers? This blogticle represents part four of five in a series on the unified estate and gift tax as well as the portability of the spousal credit. Most wealth managers are aware of the new changes to the federal estate and gift tax structure with the unification and increased exemption amount of five million dollars. This week we discuss the estate and gift tax in detail so that wealth managers are well prepared to address client planning needs.

Generally the purpose of a bypass trust is to fully utilize a deceased spouse’s exclusion amount which is now also accomplished by the statutory DSUEA. Thus, there is no need to preserve the first spouse’s exclusion amount since the surviving spouse’s estate will be able to utilize the first spouse’s exclusion amount without use of a trust. In short, the bypass trust is no longer usually necessary for estate tax purposes.

Both the DSUEA and bypass trust will fully utilize the first-spouse-to-die’s exclusion amount, so why not use an A-B trust arrangement? After all, Congress could eliminate the DSUEA in 2012 as easily as it introduced it in 2010. The A-B trusts are the marital deduction trust (A), and the credit shelter trust (B).

Yet there is a very good reason to think twice before using a bypass trust in 2011 and 2012 (and in later years if the DSUEA concept sticks around). Assets of the first spouse to die that are placed in a bypass trust do not receive a step-up in basis at the death of the second spouse; however, assets that pass untaxed in the second spouse’s estate due to the first spouse’s DSUEA will receive a step-up in basis, which can result in a very significant income tax savings when beneficiaries of the surviving spouse’s estate sell property received from that estate.

Although use of a bypass trust in 2011 and 2012 is unnecessary—and even counterproductive— for estate tax purposes, existing bypass trusts do not necessarily need to be eliminated from the estate plan. Estate tax “certainty” extends only through 2012, and the DSUEA may disappear when the next Congress takes its turn with the estate tax. If the DSUEA is eliminated, the bypass trust will again become an important tool for estate planning.

Rather than remove the bypass trust from the will, the trust can be dealt with if the testator dies in 2011 or 2012 through the use of disclaimers. If the standard A-B trust arrangement is kept in place while the DSUEA is in effect, and the surviving spouse is named as residual beneficiary of the trust, the gift to the bypass trust can be disclaimed and the surviving spouse will take the property. Then, at the surviving spouse’s death, the DSUEA component of the last-to-die spouse’s exclusion amount will capture the first-to-die spouse’s unused exclusion amount.

Importantly, beneficiaries will receive property covered by the DSUEA with a stepped-up basis, unlike property received from a bypass trust. [1]

Under the new estate tax regime, the estate’s applicable exclusion amount is equal to the basic exclusion amount plus the DSUEA.[2] More specifically, the Tax Relief Act of 2010 sets the DSUEA for a surviving spouse of a deceased spouse dying after December 31, 2010, as the lesser of: (A) the basic exclusion amount, or (B) the excess of – (i) the basic exclusion amount of the last such deceased spouse of such surviving spouse, over (ii) the amount with respect to which the tentative tax is determined under IRC Section 2001(b)(1) on the estate such deceased spouse.[3]

In sum, the DSUEA is “portable” in nature, meaning that it allows a surviving spouse to utilize his or her deceased spouse’s applicable unused exclusion amount.[4] It is also important to note that the portability feature does is not apply to the unused GST tax exemptions of a pre-deceased spouse.[5]

Tomorrow’s blogticle will continue our weeklong series on the gift and estate tax.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] Robert Bloink, Esq., LLM & Professor William H. Byrnes, Esq., LL.M., CWM, Selected Provisions and Analysis of the Tax Relief Act of 2010, 8, The National Underwriter Company (2011).

[2] IRC Sec. 2010(c).

[3] TRA of 2010 § 303(a)(4). See also IRC Sec. 2010(c)(4).

[4] TRA 2011 §303(a).

[5] U.S. Congress. Joint Committee on Taxation. General Explanation of Tax Legislation Enacted in the 111th Congress, 554 (JCS-2-11). Text from: Committee Reports. Available at: http://www.jct.gov/publications.html?func=showdown&id=3777 (last accessed April 6, 2011).

Why is this Topic Important to Wealth Managers? This blogticle, as part of our “How To” Series, discusses what is required to file for a non-profit status.  Provides wealth managers with the necessary information regarding the 501(c)(3) status of an organization. 

What are the tax procedures for requesting exempt status recognition? 

Generally, an organization seeking recognition of an exempt status is required to submit the appropriate application.  Specifically, an organization seeking recognition of exemption under § 501(c)(3) \ must submit a completed Form 1023.  

What fees are required by those requesting an exempt status?

Generally, an application for exemption under § 501(c)(3) includes a $400 fee for organizations that have had annual gross receipts averaging not more than $10,000 during the preceding four years, or new organizations that anticipate gross receipts averaging not more than $10,000 during the first four years. [1]

Application for exemption under § 501(c)(3) includes an $850 fee for organizations whose actual or anticipated gross receipts exceed $10,000 averaged annually.  For those seeking the $400 fee, the Service also requires the organization to sign a certification with their application that the receipts are or will be not more than the indicated amounts.

What information is mandatory for a substantially completed application to meet the requirements under the Tax Code with regards to non-profits under 501(c)(3)?

A substantially completed application, including a letter application, is one that generally includes:

(1) a signature of an authorized individual.

(2) includes an Employer Identification Number (EIN).

(3) includes a statement of receipts and expenditures and a balance sheet for the current year and the three preceding years (or the years the organization was in existence, if less than four years). If the organization has not yet commenced operations, or has not completed one accounting period, a substantially completed application generally includes a proposed budget for two full accounting periods and a current statement of assets and liabilities.

(4) includes a detailed narrative statement of proposed activities, including each of the fundraising activities of a § 501(c)(3) organization, and a narrative description of anticipated receipts and contemplated expenditures.

(5) includes a copy of the organizing or enabling document that is signed by a principal officer or is accompanied by a written declaration signed by an authorized individual certifying that the document is a complete and accurate copy of the original or otherwise meets the requirements of a “conformed copy”. [2]

(6) if the organizing or enabling document is in the form of articles of incorporation, includes evidence that it was filed with and approved by an appropriate state official (e.g. , stamped “Filed” and dated by the Secretary of State).

(7) if the organization has adopted by-laws, includes a current copy.

(8) is accompanied by the correct user fee. [3]

Tomorrow’s blogticle discusses additional changes wealth managers can expect in 2011.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

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[1] Rev. Proc. 2011-8. 

[2] Copy requirements outlined in Rev. Proc. 68-14, 1968-1 C.B. 768.

[3] Rev. Proc. 2011-9.