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Wednesday, May 1, 2024
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Case Studies |
The Philandering Philanthropist, Part 3 of 4
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Case:
John Doe, 77, is a self-made man. Deserted by his parents at a young age, John grew up in a boys' home and on the streets. At the age of 17, he moved to Texas to chase oil and women. With his street smarts and gritty determination, John made millions in the oil business as an arrogant and risk-taking maverick. His fortune with women, however, was not nearly as successful. In fact, John was married - and divorced - four times. To this day, John still claims it was "all their fault" and remains bitter toward his ex-wives. Yet, he continues to date and currently has several "girlfriends." Also, John has six children, but unfortunately, does not have any ongoing relationship with them. He contends that his children are spoiled and ungrateful because he gave them too much while they were growing up. More likely, John's poor relationships stem from the lack of any family structure in his youth and the minimal amount of support given to him as a child.
John does have one love, though: his love for the Home for Wayward Boys that raised him. It is the one and only good memory from his childhood. It was his only family as a child. As a result, he has publicly supported the boys' home throughout his life and privately supported many of the people who touched his life while there.
Although his hours are nominal, John continues to draw a salary of $300,000 as CEO and President of his company. John's estate of $10 million consists of a $5 million closely held C corporation, a $2.5 million ranch, a $2 million IRA and $500,000 in personal property (i.e., Cadillac, art collection, antique gun collection, jewelry, etc.). John intends to leave his entire estate to the boys' home at his death. However, he would also like to make a major contribution now, so he can see the effects of his gift during his life.
Question:
John wants to know which assets he should give now and which assets he should give at death. John wants to know how to structure his gifts in order to make the best taxwise decisions.
Solution:
As a general rule, gifts of tangible personal property during life produce a charitable contribution deduction equal to the donor's cost basis in the property. However, when the tangible personal property is used for a purpose related to the charity's exempt purpose, no reduction is necessary. Here, the Home for Wayward Boys purpose is to provide shelter and care to youths. If the Home for Wayward Boys were to receive personal property from John and planned to use that property to further its purpose, it would constitute a related use. Accordingly, John's charitable contribution deduction would be based on the fair market value instead of his cost basis.
Here, John's tangible personal property consists of a Cadillac, art collection, antique gun collection and jewelry. All of these items are unlikely to be deemed a related use for a boys' home. Personal property items that may be deemed a related use are beds, furniture and clothing. Consequently, John's gift of his personal property other than those that can be put to related use would produce a charitable deduction equal only to his cost basis in the property. (Ed.: The fact that the proceeds from the charity's sale of John's personal property would be used to further the charity's exempt purpose does not alter the result.)
However, if John leaves the same property to the boys' home at his death, his estate will be entitled to a fair market value charitable estate tax deduction, which should fully offset any potential estate tax liability on the donated property. In addition, John would not lose possession or enjoyment of his cherished Cadillac and gun collection during his life. As a result of the income tax reduction rules and the loss of use associated with a current gift, John opts to make a bequest of his personal property to the boys' home. Happily, John then instructs his attorney to include the appropriate bequest provision in his will.
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