What Can be Given and in What Form?
By Ken Sloane
(Part 3 in a 10-part series, Beyond the Budget, by Donald Joiner and Ken Sloane.)
What follows is for general information only. For specific guidance related to tax needs, we advise that you consult a tax professional knowledgeable in charitable giving or your denominational foundation.
The first type of gift the church is accustomed to receiving is cash. A gift of cash is very simple to make and does not need to have the intervention of a broker or attorney. However, a cash gift may not be the best gift for the donor to make. There can be significant income tax advantages to gifts of other assets. In many cases, the added tax advantage of another type of gift will allow the donor to make a gift larger than he or she may have thought possible.
A common planned gift is a gift of appreciated securities. The significant advantage to the donor is that the tax deduction for the charitable gift is based on the market value of the securities on the date they are given over to the control of the church. For the church, there is the advantage that the tax savings may allow the donor to make a larger gift. By transferring any appreciated property to the church, there is no capital gains tax for the donor, and the tax deduction is based on the fair market value of the stock at the time of transfer to the church. It should be noted that a church is exempt from capital gains tax.
Example of Tax Advantage of a Gift of Appreciated Stock
- Current Fair Market Value of Stock - $10,000
- Cost Basis of Stock - $2,000
- Capital Gain if Sold by Donor - $8,000
- Capital Gains Tax at 20 percent - $ 1,600
If the stock were sold by the donor and proceeds donated to the church, the resulting tax deduction would be reduced by the capital gains tax of $1,600. If, however, the donor gifted the stock without selling it, there would be a charitable deduction of $10,000 plus a capital gains tax savings of $1,600, making the net cost of the gift $8,400.
To complete such a gift, the donor provides the church with a stock power of attorney, a letter indicating the stock and the stock certificate are to be given to the church, and rights are transferred to the church. If the stock shares are held electronically, the process is streamlined. In the case of the gift of a bond, the process is similar; however, a bond power of attorney is used instead of a stock power of attorney. In most cases, it is better to sell the stock upon receiving it instead of holding it for a higher price. In many cases, a denominational foundation can assist with the sale of the stock at a lower commission than is attainable by the church.
The gift of closely held stock is another good gift to the church. In making this gift, the donor not only escapes any capital gains tax, but the donor also has the advantage of using the process to pass the holding on to the next generation. The corporation can value the stock by a repurchase agreement that enables the church to sell the stock back to the corporation. In some cases, the church can sell the stock back to the corporation over time and take a note from the corporation. This provides income to the church while the company is accumulating the funds necessary to repurchase the stock. The interest on the note can also result in a tax deduction for the corporation.
Gifts of real estate can be a bit more complex. Occasionally, a church may receive a gift of real property as a bequest that, though it may look like an asset, is really a liability. This is most often true when the real estate has an unoccupied building sitting on it. The liability for taxes, insurance, and marketing the property can be quite costly. Another often overlooked area of concern is that of environmental issues. A former owner of the land may have polluted the land or subsoil in some way. The church should have a phase one environmental evaluation to protect itself from any future liability for clean-up. Even asbestos shingles on a home can potentially be a source of clean-up expense.
Nevertheless, a gift of real estate to a church that is in need of land to expand or provide additional parking space can be a very attractive offer. The donor needs to secure an appraisal of the gift by a qualified appraiser. By transferring the property to the church, there is no capital gains tax to the donor, and the tax deduction is based on the fair market value of the property at the time of the transfer to the church.
Churches that are seeking property may encounter individuals who want to sell property to the church at a price less than the appraised value. This situation is one in which the transaction is part gift and part sale. The transaction is known as a bargain sale in the tax code, and it provides a tax deduction to the owner of the property for the difference between the sale price and the appraised value. If any capital gain is involved, this is prorated based on the ratio between the sale price and the appraised value.
Life insurance has become a popular gift in the last few years. If the donor has a life cash value insurance policy that is no longer needed, it can be a good source of giving to the church. Yet, asking congregation members to buy new policies and name the church as both owner and beneficiary is seldom a strategy that is worthwhile for the church. When giving an existing policy, the donor is entitled to the replacement cost of the insurance as the charitable tax deduction for the gift. If premiums are still due, the donor can make a gift to the church to pay the premiums and deduct the amount paid each year as a charitable gift.
One of the latest and most productive forms of planned giving is that of retirement plan assets. Properly structured, using a charitable remainder trust as a beneficiary of an IRA or other pension plan may have the potential to significantly decrease the estate and income tax payable to beneficiaries. A charitable remainder trust is an excellent way for a donor to feel a sense of satisfaction in having made a gift while having also provided a secure income for a beneficiary.
Owners of IRA accounts will have to make mandatory withdrawals at age 70½. As many of the contributions to an IRA are made pre-tax (contributions were deducted from taxable income in the years they were made), there will be a tax liability on those withdrawals, unless the withdrawals are donated to a church or other charitable cause. This can be a source of special gifts or an increase of regular offerings.
Personal property gifts can be a little tricky. If the property given is for the specific use of the church and is related to the church’s tax-exempt purpose, then it is possible for the donor to receive a significant tax advantage for making such a gift. (An example of this type of gift would be a gift to the church of a grand piano for use in the sanctuary.) If, however, the gift of a collectible or other item is made to the church, and the gift is not specifically related to the church’s tax-exempt purpose, then the donor is entitled only to an income tax deduction of his/her cost basis or the market value of the item if it is less than the actual cost basis. (An example of this type of gift might be a coin collection or similar collectible.)
One of the most confusing areas in the tax code is the gift of time. If a plumber donates time to the church, that gift is not tax deductible. Yet, if he pays his workers to work at the church or provides the material necessary to complete the job, wages paid to employees and the cost of the materials provided to the church for the repairs are deductible.
A planned gift may be given at any time. It may be a gift that is made in one's lifetime, or it may be a gift that is given through one's estate. There is often a tax advantage to giving planned gifts. Though this seldom is the primary motivation for giving planned gifts, the tax advantage has a significant role to play in determining the size of the gift and when the gift is given. Because the gifts tend to be out of one's accumulations, some have felt that planned gifts tend to be given by individuals who are over the age of 55.
All these factors enter into determining when a planned gift is made and who is most likely to make a planned gift. Younger people may feel it most appropriate to provide for a planned gift in their will, while older individuals may find more advantages to making such gifts while they are still living. In the past few years, planned gifts have been increasing among people between the ages of 35 and 55. Therefore, do not discount the potential for gifts to be given by younger individuals.
Gifts By Will (Bequests)
The most common form of a planned gift is one that is made in an individual’s will. Therefore, the church needs to take the lead in educating people about the importance of planning their estate. Many pastors have witnessed the needless difficulties that can arise when people have failed to establish a plan for those they have left behind. Encouraging estate planning will not only ensure that family concerns are met, but it will also provide an opportunity to emphasize the Christian perspective of lifelong stewardship.
Gifts that are given to the church in the form of bequests can be for a specific dollar amount or for a percentage of the estate. Many attorneys have said that most individuals are willing to make gifts to their church through their estate plans, but few have ever been asked to consider such gifts. Bequests to the church may have specific tax advantages that can actually increase the size of bequests to individuals. This would occur when the estate taxes were reduced as a result of a credit given to the estate for a charitable gift. Since the taxes are reduced, there would be more assets available to distribute among the non-charitable beneficiaries. A gift to the church from a person’s estate is a wonderful expression of faith and an opportunity to perpetuate lifelong Christian influence.
A gift may be given so that it will provide significant benefits to an individual while that person is still living. Such gifts are sometimes referred to as life-income gifts. The basic concept is that the asset given is irrevocably transferred to the control of a trust or charitable institution. Depending upon the form the gift takes, the donor then receives fixed or variable income for life or the life of a spouse or other individual. Life-income gifts can be an excellent way to accomplish many goals at once.
Because the gift is irrevocable, a life-income gift provides many current tax benefits. These benefits assist in increasing the size of the gift given and can also play a role in providing increased current income for the donor as well. The reduction or elimination of capital gains tax can also be a significant benefit to the gift giver. There may even be estate and inheritance tax advantages that will ultimately provide benefits to the family of the donor.
When the income beneficiaries of a life-income gift die, the remaining principal of the gift is available for use by the church. By creating a life-income gift, an individual has the satisfaction of knowing that he/she has responded to the ministry needs in a significant and specific manner. Depending upon the income needs of the donor, a life-income gift can be in many forms.
Unitrusts and Annuity Trusts
A charitable remainder trust can be established to take advantage of potential growth in the value of the assets in the trust and thus potentially provide more income to the individual over that person’s life.
This type of life-income gift is known as a charitable remainder unitrust (CRUT). The donor places assets into the trust, and the trustee invests the assets. Each year, the trust is revalued, and the donor receives a stated percentage of the value of the trust. This type of arrangement has many advantages for the donor. A younger donor can have the trust invested for growth in his/her working years and then managed for income in retirement years. Additional contributions can be made to the trust from time to time. All gifts to the trust provide a current income tax deduction as well as escaping any capital gains tax.
Another type of life-income gift is in the form of a guaranteed dollar payment to the donor each year. This is known as a charitable remainder annuity trust. Once established, no additional deposits can be added to the trust; however, it provides an income tax deduction in the year the trust is established and the security of knowing the income payment will remain constant over the life of the beneficiaries.
One of the oldest forms of life-income gift is the charitable remainder gift annuity. In this arrangement, a gift is given to the church and, in a contractual arrangement, the church agrees to pay, to the beneficiaries of the gift, a stated percentage of the original gift. The rate of return is determined by the age of the beneficiaries at the time of the gift. The donor gets a tax deduction in the year of the gift. A portion of the income paid to the donor each year can be tax free. Unlike the unitrust and the annuity trust, any capital gain on the assets used to fund the gift annuity is prorated and reported to the donor over the donor's life expectancy.
Gift annuities can be structured so that the payments to the beneficiary are deferred for a period of years. This enables a higher annuity payment to be made to the donor. This type of gift has been popular with younger donors who seek to make a charitable gift and to provide for retirement income as well.
Many denominational foundations are available to assist the local church in offering gift annuities. This enables the church to be relieved of the burden of tax reporting and complying with various state and federal regulations. It also enables the donor lo feel more secure that the gifted assets are being professionally managed.
Pooled Income Funds
This form of life-income gift enables a donor to invest smaller amounts into a common investment pool. The income to the donor varies each year with the investment experience of the fund. A charitable deduction is available at the time of the gift, and additional amounts can be added to the pool. Except in the case of a large church, the pooled income fund would most likely be managed by a denominational foundation. If none of these options is available, in some cases a community foundation will have a pooled fund that is available to use and still benefit the church.
An often-overlooked form of giving is a revocable gift. This is a gift that is not yet completed, and therefore, is still under the control of the donor. For this reason, there is no tax advantage to this type of giving; however, there is the advantage that the gift will be made if the donor does not revoke it. An example of this is a Totten trust. This is accomplished by an individual registering a bank account, a certificate of deposit, or other asset in the name of the individual owner and then the words, "in trust for _____ Church." The asset can be used at the discretion of the owner in any manner. If the owner dies without changing the account, the asset passes to the church.
Whether a gift is given in the form of a bequest, an outright gift, or a remainder from a life-income gift, it can be given with restrictions on its use or in an unrestricted manner. A well-thought-out policy by the church can greatly assist in guiding the donor to make gifts that will not decrease in their usefulness over time. Gifts designated “for education” are more appropriate than those to support a specific Sunday school class that may cease to exist.
Ken Sloane is the Director of Stewardship & Generosity for Discipleship Ministries of The United Methodist Church.