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Sunday, May 5, 2024
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Case Studies |
A Charitable Gift or AGI Limitations... Which is more Important?
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Case:
Marvin McLaughlin recently received a planned giving mailing from a college in Illinois which he has supported for a number of years. The mailing caught his eye because the primary thrust of the piece was a discussion on the benefits of charitable remainder trusts. Since he had some appreciated real estate, he decided to send in the response card with the question - "Do you ever get to San Diego?" Upon receiving the card, the charity contacted Marvin by phone and asked him if he wouldn't mind answering some questions since the only information in the charity's database on Marvin was his name, address and his giving record (which indicated contributions of $1000 per year for the past ten years). Marvin stated that he was 75 years old, married and was interested in "that charitable trust idea" discussed in the latest mailing. The funding asset would be a 32-unit apartment building located in central San Diego worth about $2.5 million. The charity was very excited about the prospects of a charitable trust and told Marvin that "Yes, they do get to San Diego." A trip was scheduled expeditiously by the Major Gifts Officer.
The meeting with the Major Gifts Officer, Crystal Maxwell, took place at Marvin's home overlooking the ocean. After a tour of the home, Marvin directed Crystal to his study where she was introduced to his CPA. The CPA had a copy of Marvin's personal balance sheet showing assets totaling in excess of $7.5 million. Crystal was also shown a market analysis of the apartment building prepared three months earlier by a local real estate agent. It showed a market value of $2.3 to $2.7 million, operating statements of the building with annual net income of $175,000 and full occupancy of the building with 36-month leases. She was also shown an offer for the purchase of the apartment building for $2.5 million and a copy of a prenuptial agreement with his present wife, indicating they maintained separate assets.
Question:
Even though the CPA spent a good deal of time discussing the financial aspects of the property with Crystal, the key moments came in talking with Marvin. While he enjoyed good income from the property, Marvin was tired of all the management hassles. Collection of rents, property maintenance, and potential liability claims which were becoming too much for him to handle. Since he had originally contacted the college regarding the funding of a charitable remainder trust, Crystal asked him whether or not he had any further questions on how a charitable trust works and its benefits. Marvin stated that he had discussed the ins and outs of the charitable trust with his CPA and he felt he was ready to fund the trust with the apartment building. Crystal was very pleased with Marvin's decision and asked him what the college should do with the final distribution of the funds from the trust. With tears in his eyes, he quietly indicated that he wanted to create a professorship in the name of his first wife.
One question remained to be answered in the CPA's mind. Would Marvin be able to write off the charitable income tax deduction? A one-life charitable remainder unitrust with a 7.5% distribution percentage based upon a value of $2.5 million would result in a charitable deduction of almost $1.3 million. Given the 30% AGI limitation, there was no way Marvin could write off the deduction over the required 6-year period. Therefore, the CPA suggested a gradual distribution of partial interests in the property over several years.
Solution:
Marvin appreciated the concerns of his CPA, but he decided to make the gift as follows - an undivided 1/3 interest was transferred to the college as an outright gift on December 15th that year to fund the professorship. The remaining 2/3rds interest was transferred on January 3rd to fund the charitable remainder trust. The CPA was right - there was no way that Marvin could use the entire charitable deduction, but that was not his goal. He honored the memory of his first wife, avoided the hassles of property ownership and maintained the level of income he desired.
After the balance of the property was transferred to the trust on January 3rd, the charity placed the property on the market. Shortly thereafter, no less than five offers were received on the property. After six weeks of negotiating, the decision was made to sell the property for $3,000,000 to the buyers who had made the original offer. Therefore, the professorship was funded immediately with $1,000,000 and the trust was funded with $2,000,000. Marvin was pleased to see all of his goals fulfilled. Even though non-tax benefits motivated this gift, he decided to heed his CPA's advice to transfer the property to the seminary over a two-year period. While he was not able to write off the charitable deductions in full over the carryover periods, Marvin was able to spread the deductions into one additional year.
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