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A “Need to Know” Glossary for all Medical Professionals
Staff Writer’s
For most medial professional’s, charitable giving can either be a financial planning goal or an economic tool to achieve other goals more effectively.
When charitable giving is viewed as a financial goal it becomes a very personal matter to the physician, much like an individual’s other lifestyle choices.
For some doctors, charitable giving is a way of showing gratitude for their well-being. For others, it is a matter of social status. Still some physicians approach charitable giving as a discipline of their religious or philosophical view of life.
Nevertheless, various charitable giving techniques are available to meet a physician’s unique financial planning requirements. These techniques generally fall into two broad categories: current gifts and planned or deferred gifts.
Current gifts are rather simple techniques that can be completed at or near the current moment.
Planned or deferred gifts are generally complicated transactions that are to be completed in the future.
Use of a particular charitable giving technique will depend largely on the doctor’s capacity to understand and evaluate complex alternatives – strength of donative intent – as well as his/her current and future cash flow needs, types of assets owned, strength of charitable intent, and income and estate tax considerations.
Glossary of Terms
5% probability rule: In general, charitable income tax deductions are disallowed when there is greater than a 5% chance that a noncharitable beneficiary will live long enough to exhaust the charity’s remainder interest. Charitable remainder unitrusts are exempt from this rule [Rev. Rul. 77-374].
Bargain sale: A sale of property to a charity for less than the property’s fair market value [Regs. §1.1011.2].
Charitable gift annuity: An arrangement under which a donor makes a gift to a charity in exchange for systematic payments of income for a period of time [Regs. §1.170A-1(d)].
Charitable income trust: A trust created by a donor doctor that provides for income payments to a charity for a period of time, after which the remainder is paid to a non-charitable beneficiary. Payments to the charity are limited to the amount of income earned by the trust [Rev. Rul. 79-223].
Charitable lead trust: A trust created by a donor that provides for payments to a charity for a period of time, after which the remainder is paid to a non-charitable beneficiary. Payments to the charity are either a fixed amount annually or a fixed percentage of the value of assets in the trust at the beginning of each year. Payments are not limited to the amount of income earned by the trust [IRC §664(a)].
Charitable remainder trust: A trust created by a physician-donor that provides for payments to a non-charitable beneficiary for a period of time, after which the remainder is paid to a charity. Payments to the non-charitable beneficiary are a fixed amount annually. Payments are not limited to the amount of income earned by the trust [IRC §664(a)].
Charitable remainder annuity trust (CRAT): A trust created by a physician-donor that provides for payments to a non-charitable beneficiary for a period of time, after which the remainder is paid to a charity. Payments to the non-charitable beneficiary are a fixed amount annually. Payments are not limited to the amount of income earned by the trust [IRC §664(d)(1)].
Charitable remainder unitrust (CRUT): A trust created by a physician-donor that provides for payments to a non-charitable beneficiary for a period of time, after which the remainder is paid to a charity. Payments to the non-charitable beneficiary are a fixed percentage of the value of assets in the trust at either the beginning or the end of each year, depending on the trust agreement. Payments are not limited to the amount of income earned by the trust [IRC §664(d)(2)].
Donative intent: The inclination of a physician-donor to make a gratuitous gift to charity.
Income in respect of a decedent: Amount due and payable to a decedent at his or her death because of some right to income. Examples of income in respect of a decedent include salaries, retirement benefits, annuity payments, interest, dividends, rents, and deferred gain on an installment contract, earned but not received by the decedent before his or her death [IRC §691(c)(2)].
Insubstantial rights: Rights to the use of donated property that is retained by a physician-donor when the retained rights do not interfere with the donee-charity’s unrestricted use or full ownership of the donated property [George v. U.S. 11/30/61, DC-MI].
Pooled income fund: A fund that commingles property gifted by several donors, where each donor designates a non-charitable person to receive income for life and a charity to receive the remainder interest [Regs. §1.642(c)-5].
Private foundation: A tax-exempt organization under IRC §501(c)(3) that does not enjoy a broad base of public support [IRC §§508, 509].
Public Charity: A tax-exempt organization under IRC §501(c)(3) that enjoys a broad base of public support [IRC §509(a)(2)].
Qualified appreciated stock: Stock for which a market price quotation is readily available and that would generate a capital gain if sold [IRC §170(e)(5)].
Qualified charity: An organization described in IRC §170(c). Gifts to these organizations can be deducted by donors for income, gift, or estate tax purposes.
Qualified conservation contributions: A restriction on the use of real property, a remainder interest in real property, or a physician-donor’s entire interest in real property that is given to a qualified charity for conservation purposes [IRC §170(f)(3)(A)].
Quid pro quo: The expectation by a physician-donor that he or she will receive a bargained-for benefit in exchange for a gift to a charity [Rev. Rul. 76-185].
Reduction rules: Exceptions to the general rule that gifts to charity are deductible to the extent of the fair market value of the donated property [IRC §170(e)(1)(A)].
Supporting Organizations: A tax-exempt entity that is established by an individual or small group of donors for the purpose of supporting a public charity.
Remainder interests: Property rights that can be enjoyed only after prior rights have terminated.
Undivided interests: Rights that joint owners share in the entirety of a property as opposed to rights they enjoy to segregated pieces of a property.
For related information: www.HealthDictionarySeries.com
Additional info: http://www.jbpub.com/catalog/0763745790/
Note: Feel free to send in your own related terms and definitions so that this section may be updated continually in modern Wiki-like fashion.
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Filed under: Estate Planning, Glossary Terms | Tagged: Estate Planning |
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Small Charities May Regain Lost Exemptions
On the May 17 filing deadline for charities, an estimated 200,000 smaller organizations had not filed the required Form 990-N e-postcard. These organizations (except churches, which are not required to file) no longer qualify as tax-exempt and gifts to them are not deductible.
If an organization does not file either Form 990 or, for those with receipts of $25,000 or less, the Form 990-N e-postcard, then the organizations exempt status terminates after three years. That deadline occurred for many organizations on May 17 of this year.
Even with a major communications effort on the part of the IRS, a significant number of smaller organizations did not know about the deadline. Therefore, IRS Commissioner Douglas Shulman indicated that the IRS may permit some organizations to receive retroactive reinstatement of their exempt status.
He promised an IRS revenue procedure in the near future and noted, “The guidance will offer relief to these small organizations and provide them with the opportunity to keep their critical tax-exempt status intact.” He also suggested that any small organization that had not yet done so should immediately file the Form 990-N e-postcard.
Linda
Editor’s Note: IRS Exempt Organizations Division Director Lois Lerner had previously indicated that any organization losing its status would be required to refile IRS Form 1023 and pay a fee. It now appears that the IRS will issue guidance that allows organizations (with reasonable cause) to file late and retain exempt status. However, organizations should not rely on the promise of future lenience and counsel to these smaller organizations should urge their leaders to file immediately.
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Using Charitable Gifts in Business Planning – The C Corporation
There are various forms under which an individual or group of people can choose to establish a business. One such form is a corporation. There are two different types of corporations: a C corporation and an S corporation. Unlike other business structures, a C corporation is a taxable entity that is separate from the individual or individuals who own it. A C corporation is frequently created to shield the shareholders from liability. While it is easy to establish a C corporation without recognition of gain, it is not as easy to transfer assets out of the corporation without tax. When a corporation distributes assets to its shareholders, the corporation must pay taxes on the gain in the assets. The shareholder in almost all cases will then pay taxes on the distribution.
A charitable remainder unitrust or “CRUT” is one method that can be used to bypass capital gain. Because a CRUT is tax-exempt, it can sell assets or stock without having to recognize any gain. There are two ways in which a CRUT can be established using a C corporation. The first is by the shareholder transferring stock to a CRUT and the second is where the C Corporation transfers some of its assets to the CRUT.
http://www.chslegacy.org/giftlaw/article.jsp?WebID=GL2007-1230&D=201008
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Charitable Giving Coalition Supports Deductions
On October 25 the Charitable Giving Coalition published a letter to both President Barack Obama and Governor Mitt Romney. The coalition emphasized the importance of maintaining charitable gift deductions in any future tax reform.
The coalition letter stated, “Any proposed cap would have long-lasting negative consequences on the charitable organizations upon which millions of Americans rely for vital programs and services.”
Both the President and the Presidential Nominee have proposed caps on itemized deductions that would impact charitable giving. President Obama proposed limiting the deduction benefit to 28% for individuals with higher incomes. This would reduce the tax savings for charitable gifts by major donors.
Governor Romney has discussed the possibility of a cap on itemized deductions at $17,000, $25,000 or $50,000. Charitable gifts above any cap would not be deductible.
The letter is published in the midst of a huge growth in the need for nonprofit services. The nonprofit Finance Fund reports that 85% of nonprofits had a higher level of requests for their services in 2011. According to Giving USA, donors gave $300 billion in 2011 to support charitable organizations. The future gift level may be significantly limited if there are caps on deductions. The Charitable Giving Coalition fears a “devastating impact on charities and nonprofits.”
The coalition notes that the charitable deduction is actually saving substantial governmental funds. One dollar in tax relief produces approximately $3 in public benefits. It is the most effective deduction because the services provided by nonprofits reduce potential expenditures by governmental organizations.
In 2011, nonprofits provided 13.5 million jobs and 9% of total wages. Many nonprofits are providing education, relief and medical research services. These nonprofits provide comprehensive support to those in need throughout America.
On December 4 & 5, staff of many nonprofits will gather in Washington, D.C. for “Protect Giving-D.C. Days.” Leaders of nonprofits throughout the nation will meet with members of Congress and support continuation of charitable deductions.
Children’s Home Society of Florida Foundation
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