First there was the guy who wanted to donate his banana tree to charity–he insisted that it was worth $35,000, but demanded that the charity’s staff dig the “gift” up out of his yard. (They didn’t.) Then there was the lady who wanted to donate $5,600 worth of amethysts, which, upon appraisal, turned out to be worth about $50. (Oops.) Another gentleman wanted to donate a seat on a mercantile exchange–fortunately, the charity accepted this one, because the seat turned out to be worth a whopping $1.4 million. Yet these unusual gifts aren’t the half of it: Although you may hear more about charitable contributions of cash and securities, there are plenty of people eager to donate all kinds of things: antiques, stamp collections, beach houses, gun collections, wine cellars, horses, cars, timberland. “We even had people who tried to donate cemetery plots,” laughs Penny Marlin, a Miami-based planner who once worked as the endowment director for the Greater Miami Jewish Federation.
Giving non-cash, non-securities gifts can have immense benefits to your clients and their favorite charities; donations of real estate, although complicated, can be particularly effective. But these contributions can require some extra legwork on your part. Do you know how to help your clients make such gifts properly, and do you know what resources are available to help you do so?
Robert Reed admits he doesn’t know a thing about horses. So when one of his clients, an avid equestrienne, came to him asking for help in donating one of her older jumping horses to a local college, Reed’s first response was to panic. Then he started to do some research. “I’m a comprehensive planner, so all sorts of strange things cross my desk,” he says cheerfully.
Issue number one–whether or not the donation was a good idea at all–was fairly easy to answer. The client wanted to buy a new horse to replace the aging one, “and we’re talking forty grand here [to buy a new horse], so we were going to have to cash out some of her investments,” says Reed, an advisor with Reed Financial Planning in Columbus, Ohio. “It seemed smart to try to write off some of those gains with a charitable donation.” Besides, the client liked the idea that her horse would be looked after and ridden regularly at the college, rather than trucked off to a glue factory at the earliest possible opportunity.
The next step was to address whether the donation would be “for the use of” or “for the benefit of” the receiving organization. “A donation ‘for the use of’ has to have something to do with the charity’s purpose, whereas a donation ‘for the benefit of’ does not,” says Reed. “For instance, if I gave an oil painting to the Boy Scouts, they’re going to sell it and keep the money, so that’s ‘for the benefit of.’ If I gave them some land in the country where they could hold campouts–or if I gave my oil painting to the Metropolitan Museum of Art–then those gifts would be ‘for the use of.’” Why is this important? Clients making donations “for the use of” a charity can deduct the fair market value of their gifts, while clients donating gifts “for the benefit of” a charity can only deduct their original cost basis.
“This is a very big deal,” says Penny Marlin, currently of Lubitz Financial Group in Miami, “because if someone has a highly appreciated asset, they want to get a maximum deduction for their donation.” (This rule, she adds, only applies to gifts of “tangible property”–artwork, collectibles, horses, cars, etc–and not to gifts of cash, securities, or real estate.) In the eyes of the IRS, the “for the use of/for the benefit of” distinction is usually determined by how long the charity keeps the gift before selling it: If they keep it for more than two years, it’s “for the use of,” and if it’s sold within two years, it’s “for the benefit of.” The real lesson is that “if you’re going to donate something weird, donate to an organization that has a use for weird stuff,” says Reed with a laugh. “If you’re cleaning out Granny’s house after she’s died and you’re going ‘What the hell is this?’ don’t just give it to Goodwill: Google it, and find out if there is a museum of that item somewhere that would accept it. For one thing, they’ll be able to value it properly, and you’ll be doing something good, and you’ll get a full deduction for it, too.”
In the case of the horse donation, the charitable recipient, Otterbein College, planned to use the horse in its horseback riding classes for students. Since the primary purpose of the university is to educate students, the gift was deemed “for the use of” the institution, and the client got a tax deduction for the full fair market value of the horse. Still, just to be safe, Reed asked the college to confirm this in their thank-you letter. “My rule with the IRS is to back up everything with a piece of paper, so their thank-you note said, ‘Dear Mrs. Jones, thank for your donation of your horse to our horseback riding educational program,’” he says.
And who determines the fair market value of the horse? For any donation of tangible property worth more than $5,000, donors must get written appraisals from qualified, objective, non-interested parties, according to IRS Publication 526, “Charitable Contributions” (available for download at www.irs.gov). “The onus is on the donor, not the charity, to substantiate the value,” says Marlin. “The charity is obligated to issue a receipt that says they received the gift, but they don’t ascertain the value. If you donate a 1998 Lexus, the receipt will say, ‘Thank you for the 1998 Lexus, model number 123ABC,’ period–without any reference to its value.”
Even if the gift isn’t worth $5,000, other documentation is generally needed, according to IRS Publication 526. For donations of more than $250, the donor must get a written acknowledgment of the gift, including a description of the donation. For gifts of more than $500, the donor must fill out Section A of Form 8283 and file it with his tax return.
Who Is the Recipient?
Another issue to consider is the type of organization that is receiving the donation: i.e., is it a public charity, or a private (family or corporate) foundation? Donors of tangible property (such as Reed’s client’s horse) given to a public charity (such as the college) can deduct up to 30% of their adjusted gross income (AGI) each year, while donors of tangible property to private foundations can only deduct up to 20% of their AGI in a given year, says Neil Brown of Burkett Financial Services in West Columbia, South Carolina. (By contrast, donors of cash or securities to public charities can deduct up to 50% of AGI, and donors of cash or securities to private foundations can deduct up to 30% of AGI.)
Donors can carry over their tax deductions from year to year, but deductions can only be carried for a total of five years, and the most recent deductions get “used up” first. For instance, explains Brown, if you have an income of $100,000 per year and you donate a $50,000 painting to a public charity this year, you can deduct 30% of your AGI this year ($30,000) and carry over the remaining $20,000 to next year. However, if you donate another $50,000 painting to a public charity next year, your $30,000 deduction for next year has to be used first, and your $20,000 from this year gets carried over for another year. “You’ve only got five years to use it, and if you’re not paying attention and you keep making charitable contributions, you have a possibility of losing that carryover,”
Donors should also be aware that a donation of tangible property to a public charity yields a deduction equal to the fair market value of the item, while a donation of the same item to a private foundation will yield only a cost basis tax deduction for the donor, says Bryan Clontz, a planner with Bryan Clontz and Associates and a consultant with Charitable Solutions, LLC, both based in Atlanta. “That’s why you’ll never see anyone giving those items to a private foundation,” he says. “It never happens.”
For truly large gifts, donors can consider making a “split-interest gift,” in which the gift is sold by the charity and the proceeds are split into two pots: one to support the charity’s work, and one to pay a lifetime income stream to the donor. To determine the donor’s tax deduction, the future value of the gift must be calculated using a formula involving the donor’s life expectancy, the rate of income the donor wishes to receive, and the Adjusted Federal Rate, says Marlin. True, making this type of gift will decrease the donor’s tax deduction, both because of the income stream coming out of the gift and the fact that the charity has to sell the item to fund that income stream, making it a donation “for the benefit of” the charity. “But on the other hand, this is a way to turn a non-income producing asset–say they have a lot of valuable jewelry and no one to leave it to–into an income, and they’ll get income based on the value of the jewelry, even though the deduction may be less,” says Marlin. “From a planning perspective, you have to ask: What is more important to them? Do they need the tax deduction? Or do they need an income stream for life?”
Getting Specific: Land Donations