eGiftLaw Newsletter

November 10, 2008

Dear Professional Advisor,

Greetings from University of Northern Colorado Foundation. I am pleased to share with you the latest news from Washington, tax law updates, PLRs, Case Studies and timely articles. We provide this weekly eNewsletter and web site to our professional advisor friends as a free service. Please feel free to call me at 970-351-1380 if I can run a proposal or be of assistance to you.

    University of Northern Colorado Foundation

November 10, 2008   

  GiftLaw Weekly eNewsletter - November 10, 2008

• WASHINGTON HOTLINE
  • Who Saves the Most On Taxes?
• PLR THIS WEEK
  • PLR - 200843037 Termination and Transfer of Assets to SO will Not Jeopardize Exempt Status
• CASE OF THE WEEK
  • Decide Now, Deduct Now but Give Later
• ARTICLE OF THE MONTH
  • IRA to Testamentary Gift Annuity

WASHINGTON HOTLINE

Tax Quote of the Week

"Put not your trust in money, but put your money in trust."

- Oliver Wendell Holmes Sr.

Who Saves the Most On Taxes?

On October 31, 2008, the Joint Committee on Taxation published an explanation of the federal tax expenditures. The hundreds of tax expenditures in the federal budget include several major tax benefits. The top three tax benefits were the health exclusion, retirement and fringe benefits and home mortgage deductions.

The top seven benefits and the cost (in billions of dollars) to the Federal Government are as follows:

The health exclusion cost is the tax-free benefit to the employee, but is deductible to the employer. Retirement and other fringe benefits are generally deductible for the employer and not taxable to the employee until paid out.

Home mortgage interest is deductible on personal residences. The earned income tax credit is refundable and assists lower income families with jobs. State and local taxes are deductible on the federal return.

The charitable deductions include gifts of cash up to 50% of income, appreciated property gifts up to 30% of income and various other types of gifts such as enhanced deductions for corporate gifts of inventory.

Finally, the Medicare benefit includes the value of Part A hospital benefits, Part B medical care benefits and Part D prescription drug benefits. The portion of Medicare benefits provided by the government is not taxable to the individual.

Editor's Note: While the incoming Congress and President have not yet drafted plans to make major changes in these areas, Sen. Max Baucus (D-MT) sent a letter this week to President-elect Obama. Sen. Baucus, Chair of the Senate Finance Committee, plans to introduce major healthcare reform legislation in early 2009. The legislation will follow several "key principles" identified by Sen. Baucus as "universal coverage...sharing the burden...controlling costs...prevention...shared responsibility."


Tax Changes Coming in 2009 and 2010

In January, a new Congress with a larger Democratic majority in the House and Senate and President-elect Obama will take office. With the economic uncertainty, the initial focus will be on economic stimulus. However, Speaker Nancy Pelosi (D-CA) indicates that a tax bill will also be forthcoming.

Taxes are nearly certain to undergo substantial changes within the next two years. At present, the following tax provisions are scheduled to be modified after 2010.

Editor's Note: By late 2009 it is highly probable that Congress will act to modify the estate tax provisions. The current Democratic proposal is to extend the $3.5M exemption and the 45% tax rate.


IRS Requires Charities to Report CRT Sales

In Notice 2008-99; 2008-47 IRB 1 (31 Oct 2008), the IRS issued a new reporting requirement for certain sales of charitable remainder unitrust interests.

Assume that a donor creates a charitable remainder trust and contributes appreciated property to the trust. The charitable remainder unitrust or annuity trust qualifies with a minimum 10% charitable deduction and therefore can sell the appreciated property and reinvest with no recognition of capital gain by the donor. Following the sale and reinvestment of the assets in a money market fund or similar investment, the donor and the charity sell the entire trust to a third party.

The charity receives its 10% or greater actuarial value and the donor claims that his or her approximately 90% value received has a "stepped-up" basis to the value of the money market fund. Therefore, the donor reports no capital gains tax, even though he or she may have received approximately 90% of the value and the initial basis of the contributed property could have been very low.

The donor claims that the requirement under Sec. 1001(e)(3) to use zero basis for sale of a remainder interest is not applicable because the entire trust has been sold to a third party.

In the Notice, the IRS stated that this is now a "transaction of interest" and therefore subject to the reporting requirements under Sec. 6111 and Sec. 6112. For charities that enter into transactions after October 31, 2008, and other parties that are involved in a similar transaction after November 2, 2006, there now is a requirement for reporting under Reg. 1.6011-4. Failure to report by the charity or the other party would subject the entity to a potential penalty under Sec. 6707A. The potential penalty is $10,000 for an individual and $50,000 for a charity or other entity.

Editor's Note: This use of the unitrusts to permit a donor to give 10% of the property and supposedly avoid all capital gains tax on the remaining 90% is a distant cousin of the accelerated unitrust. Like the accelerated unitrust, charitable reverse split dollar and other strategies to reduce tax through technical applications of the code and regulations never contemplated by the drafters, this transaction is high risk. With the charitable reverse split dollar plan, despite claims by highly qualified and expert tax counsel, the Tax Court quickly determined a method to negate the tax benefits of the transaction. There was substantial ensuing litigation between donors and the professional advisors.


Applicable Federal Rate of 3.6% for November - Rev. Rul. 2008-50; 2008-44 IRB 1 (17 Oct. 2008)

The IRS has announced the Applicable Federal Rate (AFR) for November of 2008. The AFR under Sec. 7520 for the month of November will be 3.6%. The rates for October of 3.8% or September of 4.2% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2008, pooled income funds in existence less than three tax years must use a 4.8% deemed rate of return. Federal rates are available by clicking here.

PLR THIS WEEK

PLR - 200843037 Termination and Transfer of Assets to SO will Not Jeopardize Exempt Status

A and B are public charities described in Secs. 509(a)(1) and 170(b)(1)(A)(vi) of the Code. C is classified as a supporting organization under Sec. 509(a)(3). As part of a reorganization, A and B agreed to terminate their operations and transfer all funds to C. The funds to be transferred to C included funds restricted for a specific program F, which was administered by A and unrestricted funds. C intended to comply with any restrictions on funds to be used only for the purposes permitted by F. A, B and C requested a ruling that the termination of A and B and the distribution of assets to C (and acceptance of those assets by C) with or without restrictions would not jeopardize A and B's exempt status under Sec. 501(c)(3) of the Code.

The Service ruled that the transfer of funds by A and B to C furthers Sec. 501(c)(3) purposes because the unrestricted and restricted funds held by A and B were previously used for Sec. 501(c)(3) purposes and will be used by C for Sec. 501(c)(3) purposes. B's transfer was in accordance with Reg. 1.501(c)(3) - 1(b)(4) of the Regulations, which provide that an organization's assets will be considered dedicated to an exempt purpose if upon dissolution such assets are distributed for one or more exempt purposes. The Service noted further that the restructuring of A and B and the transfer of assets to C will not adversely affect C's exempt status under Sec. 501(c)(3). C will respect restricted funds in a way that is consistent with its exempt purposes and use the unrestricted funds to further its own exempt purposes under Sec. 501(c)(3) of the Code.


To view the full PLR Click Here.

CASE OF THE WEEK

Decide Now, Deduct Now but Give Later

Carol Garcia is CEO, President and Founder of Widgets, Inc. After many years of blood, sweat and tears, Widgets, Inc. has become a very strong and established corporation. As a result, Carol has slowly cut back her long hours at the office and has been spending more time with her family and personal endeavors. One such endeavor is her philanthropic goals.

Carol is actively involved with many local charities. She has made major contributions to at least six local charities in the past three years. Not surprisingly, she has more tax deductions than she can handle (i.e., she has reached her AGI limits and has numerous carry-forwards). So even if Carol decided to make a 'nondeductible' gift this year, she has not even begun to consider what charity she should benefit. Given the short amount of time left in the year and her excess charitable deductions, Carol regretfully decided not to make a gift this year.

Taking into account the time constraints and Carol's AGI limitations, how could Carol make a gift next year, yet receive a tax benefit for doing so this year?


To view the solution to this Case of the Week Click Here.

ARTICLE OF THE MONTH

IRA to Testamentary Gift Annuity

IRAs and pension plans have grown dramatically in aggregate size during the past decade. Even with the reduction in value due to the stock markets, Federal Reserve data suggests that there is over $3 trillion in IRAs and over $12 trillion in cumulative qualified plans.

The cumulative balance in IRAs and other qualified plans will also increase during the next decade as a result of the Sec. 408 Final Regulations. Under these regulations, minimum distributions are relatively low. The minimum distribution rules under Reg. 1.401(a)(9)-5 use a distribution schedule that assumes that there is an IRA owner and a beneficiary 10 years younger. In addition to this assumption, the final regulations use a mortality table with longer life expectancies.

As a result of the mortality table and the two-life expectancy calculation, the minimum distribution will be substantially below the IRA growth rate until individuals are in their mid to late 80's. For example, if the IRA earns 7% per year, the balance will increase until age 86 under the Uniform Table.

A very favorable rule within these regulations is that the designation of a charity or charitable trust will not affect the minimum distribution. Thus, it is possible to select a charity, a charitable trust or a charitable gift annuity as the designated beneficiary of an IRA. This designation will not affect the ability of the IRA owner to take the same minimum withdrawals.


To view the full Article of the Month Click Here.

Note: Case studies, articles, commentary and other materials in the GiftLaw system are included solely as educational information. Articles and editorial comments are offered as an educational service to friends of this organization, and may not always reflect our official position on any issue. Since case studies or articles may not always reflect the current AFR or tax law, it may be necessary to run any illustration with a current version of Crescendo to obtain updated information. If professional services are required, all persons shall consult with their qualified professional advisors. Tax Quotes are courtesy of Jeffery L. Yablon, Washington, D.C.

© Copyright 1999-2008 Crescendo Interactive, Inc.

    University of Northern Colorado Foundation

November 10, 2008   

Thank you for your interest in gift planning. To access any of this updated GiftLaw information, please select our web page by clicking here.


Cordially yours,

George O. Pickell
Director of Planned Giving
E-mail: George.pickell@unco.edu
Phone: 970-351-1380
University of Northern Colorado Foundation

http://www.uncalumni.org/Foundation



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