1. Many donors, particularly the elderly, appreciate the tax benefits and the simplicity of making
a gift of real property to "ABC CHARITY", as opposed to the task of managing or selling the
property themselves.
2. Some donors prefer to make a gift of real property with the understanding that "ABC
CHARITY" will sell it at the earliest logical opportunity and use the proceeds to establish an
endowed fund.
3. Any gain on the sale of property donated to "ABC CHARITY" is not taxed to the donor, provided
the property was not subject to a binding agreement to sell created prior to the gift. Also, the
sale of the property by "ABC CHARITY" is generally tax-free.
B. TAX ISSUES
1. Long-term capital gain property (held for more than one year) is deductible at its fair market
value up to 30 percent of Adjusted Gross Income (AGI).
2. Depreciation taken on long-term capital gain real property, to the extent it exceeds
straight-line depreciation, may be "recaptured" and taxable as ordinary income to the donor.
3. A donor may elect to deduct the "cost basis" of the gift property up to 50 percent of AGI, rather
than deduct the fair market value of the property (subject to a limitation of 30 percent of AGI).
4. Short-term capital gain real property (held for less than one year) is deductible at cost,
subject to the 50 percent of AGI limitation.
5. A donor must file an IRS Form 8283 with his or her tax return and obtain an independent
appraisal to substantiate the charitable deduction for real property in excess of $5,000 in value.
6. A subsequent sale of the property within two years of the date of the gift must be reported to
the IRS by "ABC CHARITY" on Form 8282.
C. POLICY AND PROCEDURES
1. "ABC CHARITY" will not hold real property in excess of two years simply to circumvent IRS tax
reporting requirements.
2. The "ABC CHARITY" Real Estate Checklist (see section D below) must be completed to help
determine whether acceptance of the gift is prudent.
3. Gift acceptance must be approved by the Vice President for Development and the Vice
President for Finance and Administration.
4. Acceptance of debt-encumbered property by "ABC CHARITY" is unlikely if the loan exceeds
50 percent of the property value. Acceptability will be determined on a case-by-case basis.
5. All real property gifts must be carefully reviewed for undisclosed contingent liabilities. Note
that liability for environmental contamination or toxic waste, particularly with oil and gas
properties, may be imposed upon any individual or organization in the chain of ownership, even
if the damage or contamination occurred prior to their ownership. This "innocent liability" may
be avoided by showing reasonable efforts were made to ensure the property was free of
contamination. Liability may be extended to all types of property interests, including split or
undivided interests (such as royalties, surface rights, subsurface rights, leasehold interests,
and working interests).
6 "ABC CHARITY" staff must also review all gifts of residential property (with the assistance of a
professional consultant when appropriate) to determine the need for an environmental audit.
An "ABC CHARITY" Environmental Checklist must be prepared in each case. The expense of
an environmental audit by a licensed professional may not be required as further evidence of
"innocent liability" if the Environmental Checklist does not identify any risks of toxic
contamination.
7. A comprehensive environmental audit is required for non-residential property, such as gifts
of farm or ranch land, commercial and industrial property, undeveloped realty, and all gifts of
any interest in mining or oil and gas properties. The audit must be performed by a properly
licensed or certified professional (e.g. geologist or hydrologist). He or she will conduct either a
preliminary, intermediate, or extensive environmental audit as may be required to demonstrate
due diligence and care in accepting the property as free from contamination. This should be
documented properly for legal purposes. In certain cases a donor may be required to execute
an indemnity agreement before the gift can be accepted.
8. A current independent appraisal and a preliminary title report should be obtained, preferably
at the donor's expense, to confirm value and ownership of the property.
9. A survey should be obtained if there is any question regarding boundaries, easements, or
access to the property.
10. Generally, the donor should not place terms or restrictions on the property regarding its use
or subsequent sale by "ABC CHARITY". Restrictions must be considered by the appraiser for
purposes of valuation and must be approved by "ABC CHARITY" prior to acceptance.
11. "ABC CHARITY" must secure adequate insurance coverage for the property.
12. Shortly after acceptance, "ABC CHARITY" will seek to sell donated real property which it
does not plan to use as part of its charitable activities. A timely sale will minimize contingent
liabilities, maintenance, and other costs.
13. "ABC CHARITY" will not accept, without Board approval, a gift involving real property that
makes the "CHARITY" a principal in a real estate partnership, joint venture, or business activity
in which the "CHARITY" participates fully in the risks of operation and has more than limited
liability for the conduct of the business (e.g. as a general partner, principal in a joint venture, or
as an owner of a "working interest").
14. The Director of Gift Planning should advise the donor to comply with IRS Form 8283
reporting requirements for non-cash gifts (other than publicly traded securities) in excess of
$5,000 in value. An authorized representative of the Office of Development should execute the
donee acknowledgment section of Form 8283 and return it so that it may be filed with the
donor's federal income tax return. The authorized representative should note the appraised fair
market value reported on the form by the donor and respond appropriately to any discrepancy or
irregularity. Note, however, that signing the form on behalf of the "CHARITY" as donee does not
represent concurrence in the appraised value of the donated property.
D. "ABC CHARITY" REAL ESTATE CHECKLIST AND ENVIRONMENTAL CHECKLIST (attached)
1. Avoiding the burden of property management is often a donor's initial motivation for selling
valuable assets to charity at a reduced price.
2. A bargain sale is an excellent way for a donor to generate immediate liquidity. It involves
transferring semi-liquid assets at a reduced price for a lump sum or periodic payment from the
charity.
3. A bargain sale in exchange for periodic payments appeals to many donors as a way to
supplement their retirement income. They transfer valuable assets to charity at a reduced price
in exchange for installment payments over a period of years.
4. The tax savings from the income tax charitable deduction is an added incentive. (See the Tax
Issues section below.)
5. Income taxation of the sale portion can be spread by receiving payment in installments.
Another alternative is to postpone any taxation by transferring the asset to charity in exchange
for "like kind property" of lesser value.
6. The income tax charitable deduction for the gift portion may be taken in the year of the gift,
even if the donor receives installment payments for the sale portion.
7. A bargain sale with a fixed number of installment payments to the donor may be preferable to
transferring valuable assets in exchange for gift annuity payments which terminate at the
annuitant's death.
B. TAX ISSUES
1. The donor's desire to make a gift should be clearly documented in a letter or other written
statement. This helps to clarify that the "gift" was not merely a negotiated discount in the sales
price.
2. The gift portion of a bargain sale to "ABC CHARITY" qualifies for the charitable income tax
deduction. The deduction equals the difference between the fair market value and the reduced
price. For tax purposes, the transaction is thus part sale and part gift to charity.
3. To determine if there is a taxable gain on the sale, the donor's cost basis is allocated for tax
purposes between the sale portion and the gift portion of the transaction.
4. The outright transfer of debt-encumbered property to charity is treated as a bargain sale by
the IRS, as if the donor had received cash for the amount of "debt relief."
5. A donor must file an IRS Form 8283 with his or her tax return and obtain an independent
appraisal to substantiate the charitable deduction for non-cash gifts (other than publicly traded
securities) in excess of $5,000 in value (or $10,000 for closely held stock).
6. A subsequent sale of the property within two years of the date of the gift must be reported to
the IRS by "ABC CHARITY" on Form 8282.
C. POLICY AND PROCEDURES
1. In certain cases it may be preferable for the donor and the "ABC CHARITY" unit purchasing
the bargain sale property to negotiate directly to determine the terms of the sale. Other "ABC
CHARITY" representatives may want to avoid acting as middlemen, or brokers, in the
negotiation process. For example, the Office of Development may have confidential or "inside"
information regarding the donor's financial affairs and motives, and the donor is likely to
misunderstand the role of the Office of Development if it is involved in the negotiations.
2. Appropriate "ABC CHARITY" approval of the terms should be obtained from department
heads, directors, deans, the purchasing department, the Office of Development and the Office
of Finance and Administration as may be appropriate (and to comply with any "ABC CHARITY"
Purchasing Department procedures).
3. A bargain sale must also satisfy all "ABC CHARITY" policies and procedures for outright gifts
of real or personal property.
4. It is often desirable to have the donor sign a "letter of understanding" outlining the terms and
conditions of the gift, possible tax consequences, and cautions regarding a subsequent sale of
the property by "ABC CHARITY". This is most useful when donated personal property must be
put to a general or specifically related charitable purpose to qualify the deduction for special
income tax treatment.
5. The Director of Gift Planning should advise the donor to comply with IRS Form 8283 reporting
requirements for non-cash gifts (other than publicly traded securities) in excess of $5,000 in
value. An authorized representative of the Office of Development should execute the donee
acknowledgment section of Form 8283 and return it so that it may be filed with the donor's
federal income tax return. The authorized representative should note the appraised fair market
value reported on the form by the donor and respond appropriately to any discrepancy or
irregularity. Note, however, that signing the form on behalf of the "CHARITY" as donee does not
represent concurrence in the appraised value of the donated property.
6. "ABC CHARITY" will not delay a subsequent sale of the gift property simply to avoid the IRS
reporting requirement on Form 8282 for gift assets sold within two years of the date of the gift.
7. Finding funds to purchase valuable assets at a discount may be difficult for "ABC CHARITY"
unless the "CHARITY" would be interested in the purchase as part of its normal course of
business.
1. Many different types of valuable assets may be sold through a unitrust to provide income for
life or a period of up to 20 years to the donor or the donor's designate. Later, when the trust
terminates, the trust assets can benefit the donor's favorite charitable program at "ABC
CHARITY".
2. Generally the sale of valuable assets through a unitrust will avoid the capital gains tax on any
appreciation, reduce or avoid estate taxes, and eliminate the need to probate assets placed in
the trust.
3. The transfer of assets to a unitrust is deductible in part for income tax purposes.
4. Sale of valuable assets through a unitrust is often more beneficial than either keeping the
assets or transferring them in a taxable sale. The unitrust enables an individual to be
philanthropic while also meeting his or her own retirement or other needs with
inflation-sensitive income payments.
5. Many donors choose to use some of the tax savings and cash flow from the unitrust to
replace the gift asset for family and heirs.
6. A unitrust can be used to transfer control of a family business or to transfer property
management responsibility for problem assets.
7. Unitrusts are also used to increase cash flow, generate tuition payments for children or
grandchildren, or provide support for elderly or handicapped family members. At the same time
they create a sizeable future gift for "ABC CHARITY".
8. Unitrusts may allow donors to diversify assets tax-free while protecting them from creditors.
B. TAX ISSUES
1. Capital gains tax may be avoided when an asset is transferred to and later sold by the
trustee of the unitrust. The gift asset may also avoid federal estate and gift taxation if either the
donor, donor's spouse, or the donor and donor's spouse are the designated income
beneficiaries.
2. Three types of unitrusts are allowed:
a. An "ordinary" or "standard" unitrust which may deplete the principal to pay an income
beneficiary.
b. A "net income" unitrust which pays income beneficiaries from ordinary income (as defined in
the trust) and not from principal.
c. A "net income with makeup" unitrust which can make up any income payment deficits from
excess ordinary income earned in subsequent years.
3. Payments to income beneficiaries are generally taxable. The minimum payout allowed is 5
percent, at least annually. Payments may be set for life, or "a term of years" not to exceed 20
years.
4. A "term of years" trust may name as income beneficiary, an individual or class of individuals,
corporation, partnership, trust, or estate.
5. A charity may receive income payments if at least one individual is also an income
beneficiary.
6. The named income beneficiary must be alive when the trust is executed, unless the
beneficiary is included in a designated class (e.g., "donor's children") in a trust for a "term of
years." Pets do not qualify.
7. Income payments are based on a fixed percentage of the annual market value of trust assets
and will vary in amount as the value of the assets changes.
8. Payments to income beneficiaries must come exclusively from the trust assets and may not
be guaranteed by the charity.
9. Payments to income beneficiaries are taxed on the basis of the IRS rule that trust funds are
deemed to be dispersed in accordance with the following tiered order of distribution:
a. first from ordinary income;
b. then from capital gain;
c. then as other income (such as tax-exempt income); and
d. lastly, as a distribution of principal.
10. Under the above "four-tier system," when capital gain tax is avoided on the sale of an asset
through a unitrust and the proceeds are invested in tax-exempt bonds, the capital gain is
deemed to be distributed prior to any distribution of tax-free income.
11. In many cases, the donor may serve as trustee or choose to appoint (or remove) a
corporate or individual trustee. Transactions between the donor and the trustee, or the trustee
and certain family members, family corporations, and partnerships are prohibited as
"self-dealing."
12. Typically, the donor is entitled to an income tax charitable deduction in the year assets are
transferred to the trust, plus up to 5 carryover years. (However, the deduction for a transfer of
personal property is postponed until the termination of the life interest of the donor or the
donor's designated income beneficiary in the personal property, such as the sale of the
property by the trust.)
13. The income tax charitable deduction equals the present value of the remainder interest the
charity is expected to receive in the future, based on IRS tables and a floating monthly interest
rate.
14. The income tax charitable deduction is reduced to the extent of any income that would have
been recaptured had the asset been sold rather than contributed to the trust. This applies to
depreciable real property (to the extent the depreciation taken exceeds "straight line"),
depreciable personal property, inventory, accounts receivable, trade or business notes,
short-term capital gain property, certain copyrights, and other types of "ordinary income
property."
15. The transfer of mortgaged property to a charitable remainder trust is generally inadvisable
due to several potentially adverse tax consequences including disqualification of the trust. It
should not be done without a careful and thorough analysis.
16. Income or gain realized by the trustee on debt-financed assets may, under certain
circumstances, cause the trust to realize unrelated business taxable income (UBTI), thereby
subjecting all trust income to taxation for the entire year in question.
17. Unlike charitable remainder annuity trusts, additional contributions may be made by the
donor and others to a unitrust.
18. The named charitable remainder beneficiary may be changed to another charity if the trust
document reserves that right for the donor or the donor's designate.
C. POLICY AND PROCEDURES
1. The suggested minimum asset fair market value for establishing a unitrust is $100,000 (to
justify the donor's start-up costs for legal and accounting fees of perhaps $1,500 or more). A
lower minimum may be considered if the donor anticipates making future contributions to the
trust.
2. It is questionable whether "ABC CHARITY" should facilitate the creation of a unitrust which
generates a charitable deduction equal to less than 15 percent of the gift value. Participation
must be justified as cost-effective on a case-by-case basis.
3. "ABC CHARITY" representatives should not promote unitrusts as investment vehicles or
compare them to investment alternatives. A unitrust is a gift vehicle which generates income
payments and other tax benefits for a donor.
4. Generally, "ABC CHARITY" will not serve as trustee. Exceptions will be reviewed on a case by
case basis. Trustee fees should be paid by the trust and not by "ABC CHARITY".
5. Any proposals and tax calculations prepared by "ABC CHARITY" are for illustrative purposes
only. Final authority rests with a donor's tax advisor.
6. The final trust document must be prepared or approved by an attorney representing the
donor. "ABC CHARITY" representatives may provide sample documents to the donor and the
donor's advisors for preliminary discussion and review.
