Blog Switch Official

I have finally switched over to another blog format/website. I will no longer be posting on this site. Rather, all new posts will be on the following site:

http://theplannedgivingblog.wordpress.com/

Please check out the new site and sign up for email updates from that one!

Thank you again for reading!

Best regards,

Jonathan

Wealth transfer stuff

Please check out this post on my new blog about the alleged Wealth Transfer.

http://theplannedgivingblog.wordpress.com/

I am redirecting readers to this new site because it lets me post documents (like a chart or an outline) and it doesn't cost me anything to run my email subscription.

Just getting everyone ready for the eventual shut down of this site in favor of the new Word Press one.

Best regards,

Jonathan

Planned Giving Lesson of the Week - To Start (or Keep) a CGA Program or Not?

I struggle often about gift annuities ("CGA") - are they all they are cracked up to be (for nonprofits)?

Even before the market crash last year, various state regulatory struggles have made it more and more difficult to operate widespread, multi-state or national gift annuity programs.

Throw in market volatility and other investment uncertainty, and if you start to understand how pension investment/risk management should be handled, you really have to wonder whether it is worthwhile for charities to start new CGA programs or for smaller ones to continue stagnant ones?

This is coming from a guy who is paid to setup/run/oversee CGA programs and has done the licensing in New York, New Jersey, California, Florida, and lots of other places for multiple jobs and clients.

At the past planned giving group meeting in NYC this week, I was the moderator for a panel on CGAs with 2 panelists being from large established CGA programs and one being from a large investment/administration provider.

The panelists were terrific, exposed the audience to some of the higher levels of planned giving experiences out there. But, my question did not get directly addressed.

The answer to my ongoing question of whether CGA programs are worth it or not for many charities actually started to come to me during the networking, drinking stale diet coke session before the luncheon.

It was a conversation with an old friend, who is at a charity which myself and my firm had lost out to on a bid to provide planned giving consulting. Two years after we lost the bid, and they were already bringing in $1 million plus in CGAs a year. What were they doing? Two direct mail letters a year to an approx. 100,000 database of potential planned giving prospects (this is a well established national emergency aid charity that had just never gone heavily into planned giving but was already receiving a significant percentage of bequest revenue).

Then the panel started. The biggest institution represented was mailing 1.8 million CGA "solicitation" pieces a year. The other institution was marketing CGAs consistently to 137,000 members - no age overlay but likely that most were age appropriate.

I hope you are getting the message. Building a successful CGA program is numbers game. In the scheme of things, as great as your PGCalc/Crescendo illustrations look, most potential planned giving prospects will overwhelmingly not commit to irrevocable gift arrangements - people just don't part easily with their money.

But, if you have the numbers, I mean really large numbers of prospects and you commit to marketing intelligently to those prospects, you will close gifts and more than justify this "pain in the ass" CGA program.

Is there a magic number? No. And, of course it costs plenty of money to market to a 100,000 plus database. You better think about whether this database of prospects are really prospects.

And, what if you are raising a lot of money from a small amount of donors? Let's say a few thousand (like I hear in conversations all the time). Is a CGA program for your institution? Probably not, or at least not until you build large numbers of annual/direct mail donors into your database.

To be continued. Have a great weekend.

Finally - Charitable Insurance Fiasco Makes the NY Times

Thanks to David Moss who forwarded this story to me from the New York Times.

It is a must read for any fundraising professional who gets approached with any insurance deals that are too good to be true (as 99.9999% of them are):

http://www.nytimes.com/2010/02/13/education/13oklahoma.html?scp=2&sq=pickens&st=cse

This stuff is just rotten - and I remember clearly that the Oklahoma State plan was the poster child for this stuff!

See my older posts under insurance schemes.

Check out my white paper on planned giving

For my firm (Changing Our World, Inc.), I just finished writing a white paper/introduction pamphlet on planned giving. Here is the link to see and download it (a 12 page booklet)

http://theplannedgivingblog.wordpress.com/the-planned-giving-book/

I thought this would be a good time to start introducing email subscribers to my mirror blog on Wordpress. I called this one The Planned Giving Blog (http://theplannedgivingblog.wordpress.com/). Eventually, I plan to switch completely to the Wordpress site. For now, I post identical pieces on both sites.

Why the change? Wordpress lets me link actual documents (like the white paper I hope you will check out). And, I actually have to pay for the email subscription service that you all have (right now only a few dollars a month but it's free for me on Wordpress).

My main concern though is for readers switching over to the new site and its email subscription. If you try it, make sure you choose daily or weekly updates. Otherwise, you might be subject to multiple emails a day (any time I change the site).

Thanks again for reading and spreading this blog.

Best regards,

Jonathan Gudema

Interesting Articles on Madoff

For those who are interested in my previous posts regarding Madoff and clawbacks against charities (check out Madoff posts) , here are some interesting articles about this now old story.

This first article is really interesting - about how lawyers on behalf of net-winners from Madoff's scheme are fighting to be treated as victims! It's hard not to feel sorry for them but how could you take away recovered funds from the net-losers of the fraud!

http://dealbook.blogs.nytimes.com/2010/02/03/in-court-challenges-of-madoff-trustees-plans/

What is interesting about this next article, is that it is only in the 5th paragraph that it mentions a side point that Madoff stole $325 million from a friend as executor of his estate.

Who would have thought that a little theft of $325 million wouldn't get much prominence? Well, I guess if you are in the business of stealing billions, what's another few hundred million?

The real irony is that Madoff was only stealing back false profits from his own fraud, presumably to keep the fraud going a little further. Apparently family of the deceased friend didn't disagree (they settled with Picard).

http://online.wsj.com/article/SB10001424052748703410004575029762424298880.html?mod=googlenews_wsj

Too Many People in My Contacts Folder Going To Jail

Pretty depressing Monday morning when you find out that a very well respected tax lawyer, formerly from Ernst and Young ("E&Y") no less, is off to jail.

This would be the 3rd person in my outlook contacts folder heading off to a federal penitentiary for various white collar crimes this year.

Why a post? I am going to quote from the TaxGirl blog (http://www.taxgirl.com/ernst-young-partners-found-guilty-on-all-counts/) from where I got the story. I clicked through to the story from my email thinking I was going to see interesting stuff about E&Y - not a favorite of mine for various reasons.

Here is the quote from TaxGirl:

As part of their scheme, Coplan, Nissenbaum, Shapiro and Vaughn helped clients manufacture losses within the tax shelters. The four then solicited opinion letters from law firms that claimed that the tax shelter losses or deductions would “more likely than not” survive IRS challenge, or “should” survive IRS challenge. The IRS claimed that the four defendants were aware that the transactions did not meet those standards.

As I read this paragraph closely, it dawned on me that these former E&Y guys, all headed to the big house, relied on the age-old idiocy of the vaunted law firm opinion letter to justify their tax fraud schemes.

In other words, a letter from a law firm backing up some questionable tax avoidance scheme is absolutely worthless.

Why I am reporting this to the nonprofit world is that this is the typical proof of one of those newfangled get rich quick charitable schemes out there. It usually involves insurance, your donors lives, etc.. And, they always have a letter from a law firm explaining that the scheme is fine.

Well, the only letter that counts is a letter from the IRS - a private letter ruling. Period. Never be fooled by any promoter, of any scheme that is any bit questionable or risky, with one of these law firm letters. It doesn't matter which law firm. They are all garbage and if the promoters really feel that they have a worthwhile plan, they should go to the IRS for their opinion.

This is just a pet peeve of mine since I have had to sit through so many garbage meetings and presentations on such ridiculous plans. And, the next time one those idiots shows me an official law firm blessing letter, I am going to pull out this case and shove it down their throats (not literally, of course).

Maybe this week will get better, please G-d!

Pledge Enforcebility: Don't Try This at Home

I am a major fan of irrevocable bequest pledges (another $1+ million one closed last week for a client:) - with the strong caveat to be careful!

Anyway, the topic is really pledges, enforceable or not. If enforceable, what about when the donor dies?

I just wrote a white paper on this general topic (which I will post soon), and plan to also write on the sub-topic of using pledges for bequest intentions.

But, as a preview for my blog readers, check out this bequest story:

http://www.crainsdetroit.com/article/20100120/FREE/100129999#

In short, a NY charity is "suing" (or, probably more like filing a claim in the probate court and forcing the court to overrule the executor's decision to deny the claim) the estate of late Detroit Pistons owner Bill Davidson on an unpaid "pledge" of $5 million.

There are a bunch of stories in the press on this one but only the linked article got a little further into the facts. If I were the judge, I would want to see the written pledge agreement. I would also want clear proof beyond a piece of paper that the charity put this binding obligation on their books, provided sufficient recognition in exchange for the promise, really relied on these funds to their detriment...

I don't pretend to know the legal standard in Michigan on pledge enforceability. In New York, you better have at least given him naming recognition for the pledge.

Anyway, the Crain's story mentions a contingency to the "pledge" that a number of other families needed to be on board before the pledge would be a real pledge. But, if that contingency is not in the written agreement, and the charity really has a clear, written agreement, I don't blame them for suing. I wish them luck, though.

The point of this piece, and future ones on the topic, is that it is a good idea to think about what a judge someday will want to see to enforce a pledge (in the absence of being in the will or other testamentary device). Partially, it depends on the law of the state in which the donor resides (and where his/her estate will be probated). If the state courts held that you need "consideration", you better make sure you gave the donor something and leave proof of it (pictures, of course) in the file. If the state uses the "detrimental reliance" theory, you better show that you really relied on this gift, to your financial detriment.

The other point you should be getting is that legally enforceable pledges, ones that you might actually go after someday, are not necessarily appropriate for high quantities of gifts. It's the special ones.

Advanced Planned Giving Topic: Lead Trust Options in 2010?

If you are not a glutton for planned giving technical stuff, you might want to skip this one. Attorney Martin Shenkman, quoted in the Forbes Article, posted a huge commentary on 2010 estate planning questions. Here is a link to it:

http://www.laweasy.com/t/20100107062914/2010-estate-tax-repeal---is-it-real~#_Toc250556915

For charitable planners, here is a very complicated, interesting take on the remote possible use of Lead Trusts for some tax advantages in 2010 from the above Shenkman web piece:

Lead Trust (CLT) Planning Under Repeal

Charitable Lead Trusts (CLTs) could present an interesting opportunity. Maybe! With a CLT you can gift a large sum of money to your children and reserve a periodic payment to a charity for an intervening period. This charitable interest reduces the value of the gift to your children dramatically. Under 2009 law you cannot set up a CLT for grandchildren unless it is structured as a unitrust. This means the charity gets a percentage of the value of the CLT assets each year, instead of a fixed amount. That squeezes some of the “vig” out of the plan. The reason for this had been that you cannot allocate GST exemption to a CLT using annuity payments (called a CLAT). Well, if there is no GST tax can you now do CLATs for grandchildren since there is no GST tax? Some practitioners suggest formula clauses to divide the CLT assets depending on the outcome of future tax legislation. Other advisers suggest using a disclaimer so that if the law becomes clear within 9 months of funding the children can disclaim and the CLT remainder can go to grandchildren if the GST tax is not re-enacted, or if re-enacted is not retroactive. Other advisers are looking for Advil.

More on Estate Tax Repeal

The media is slowly waking up to the issue I raised in my previous post. There appears to be a major "opportunity" in estate planning by the use of gifting to grandchilden this year.

Here is a good Forbes article - which surprisingly quotes an attorney already guiding clients to take advantage of this loophole:

http://www.forbes.com/2010/01/09/estate-tax-congress-gst-personal-finance-rich-grandma-gifts.html

I am always comforted when others pickup on the same things I am screaming about - it shows that I am not so nuts.

2010 - The Year of Gifting to Grandchildren

As my readers should have figured out by now, my methods of investigation are pretty simple: I keep digging until I find something.

Between preparing an estate planning update presentation (for clients and whoever else invites me - hint, hint!), and my own obsession with the new state of estate taxes, I finally uncovered the major loophole in the 2010 law.

2010 Estate Planning Loophole: Gifting to grandchildren with or without Dynasty Trusts!

Let's start from the beginning.

Laws, as well written as they might be, tend to always leave an inch of unintended room. This particularly applies to the estate and financial planning sector. Clever planners figure out the gaps in the law, and then rush get as much through with whatever advantages they can grab. Then Congress wises up and closes it down.

Short history of generation skipping taxes. Planners at some point figured out that wealthy families could avoid a ton of estate and gift taxes by skipping a generation (ie...gift to your grandchildren instead of your children). It was such a massive loophole in the wealth transfer tax system that in 1976 Congress started imposing the Generation Skipping Tax ("GST"). They eventually made it so onerous - causing close to an 80% loss to taxes in the worst tax years - that individuals generally would only gift to their grandchildren up to their lifetime GST exemption (generally the same or near the lifetime estate tax exemption - which had been $3.5 million in 2009).

Basically, the GST had been what I call a penalty tax. Congress' goal - prevent this type of end run around the transfer tax system.

Flash forward to 2010. Not only is there not GST, but the maximum gift tax rate this year is 35% (down from 45% in 2009 and going up to 55% in 2011). Remember, the GST tax rate was the same as the gift/estate tax rate.

Here is an easy example (not precise but helpful in understanding the opportunity here): Donor exceeds GST exemption by making a $1 million gift in 2009 to his grandchildren. Assume this taxpayer has used up his lifetime gifting exemption and is already in the highest gift tax bracket. The tax on this gift would have been $697,500! (and this isn't taking into account state estate taxes!) Net gift to grandchildren - $302,500.

What if same scenario happen in 2011? Total gift and GST taxes of $797,500 - and only $202,500 left for the grandchildren. There is your 80% tax!

What about 2010? Total gift tax of $350,000, remaining gift to grandchildren: $650,000.

Compare the three years for this imaginary $1 million gift to grandchildren:

2009 - $302,500 net gift after taxes;
2010 - $650,000 net gift after taxes;
2011 - $202,500 net gift after taxes.

Get the picture.

This is not just one of those little loophole's in the tax code; this is the Lincoln Tunnel.

I mentioned above use of Dynasty trusts. These trusts apparently take advantage of any GST planning to maximize avoidance of estate, gift and GST taxes for future generations. Too complex for this post - but probably the preferred vehicle for taking advantage of this year off in the GST without handing over the keys to the Ferrari to an 18-year-old.

The major question attorneys will need to address is the risk that Congress actually does what it says it planned to do: retroactively reinstate both the estate and GST taxes.

What would be the legal risks involved? Could the IRS impose a retroactive law that would effectively raise a tax from 35% to 80%?

Something tells me that the government has to live with its laws. The law today is a 35% tax on any generational wealth transfers. If you make the gift and pay the tax, how can Congress claim you should have known that we were really meaning to tax you at 80% (but we couldn't get our act together in December).

Still, it's risky and litigation costs could be tremendous.

Estate Tax Chaos: Article on What You Need to Know for 2010

Check out this good article by Deborah Jacobs on CBS Moneywatch.com. It is a great overview of the personal planning issued individuals may face this year.

http://moneywatch.bnet.com/retirement-planning/article/estate-tax-what-you-need-to-know-for-2010/378294/

It is also a good overview for planned giving professionals wondering how to leverage the current estate tax situation for their planned giving programs.

Planned Giving and Fundraising World in State of Confusion Over Estate Tax Repeal

We have finally made it to the day everyone said would never come. For nine years – since the passage of EGTRRA in 2001 (whatever that stands for) – every speaker, writer, expert in the area of estate planning told us that Congress would never let this happen.

What day? What’s so dreaded about the estate tax repeal?

Truth be told: it is not the lack of estate taxes in 2010 that is so dreaded. It is the feared return of the Carryover Basis and what that would mean to planning and estates in 2010.

Let’s start over again. Planned giving professionals should always be on the lookout for new tax planning opportunities to encourage giving – during life or in one’s estate.

Are there any opportunities here – with the estate tax repeal of 2010 – for gift planners?

Not an easy question to answer.

Firstly, the repeal is only for one year. Even if there are some charitable planning advantages in 2010’s law, they will be gone before we know it.

Secondly, contrary to the rantings of the so-called Anti-Death Tax lobby, the repealed estate tax is not good for charitable giving. It may not be so bad, especially if bequest donors don’t get to their attorneys in time to change their wills. But, it is definitely not a law that would encourage more charitable bequests. More likely the opposite since it may encourage people to drop charities from their wills.

Thirdly, and the point of this article, charitable tax planning opportunities generally exist when there are tax savings reasons for giving to charity. Are there tax savings opportunities in 2010 as a result of the estate tax repeal?

This takes us back to the beginning of the article: Carryover Basis.

When Congress passed the so-called Estate Tax Repeal, they had to make up the projected loss in revenue from somewhere. So, sneaky Bush administration officials came up with a great idea: Let’s tax capital gains at death in the year of the estate tax repeal to make up for some of the lost revenue on paper from the repeal. Hocus pocus if you ask me.

Up until 2010, the U.S. had not seen in modern times (maybe ever) a tax on capital gains at death except for one year – 1976 – and it was repealed because of the confusion and challenges it caused. The first quote I found on the internet summed it: Legal scholar Lawrence Zelenak called the short unhappy life of carryover basis "one of the greatest legislative fiascoes in the history of the income tax."

Before 2010, all capital gains property in one’s estate would receive a “step-up in basis.” In other words, the code essentially wiped clean any capital gains at death – no surprise since the same asset was facing upwards of a 55% estate tax.

In 2010, there is a step-up in basis for up to $1.3 million in each estate for appreciation on capital assets. Additionally, surviving spouses receive an extra $3 million exemption on appreciation of capital assets, before having to start paying capital gains taxes.

Before 2010, surviving spouses generally never paid any estate tax – there was what we called the marital estate tax exemption. Either the government figured it wouldn’t look good to force widows to sell their mansions to pay estate taxes, or it is just easier to go after an estate when the surviving spouse is dead – less trouble.

Now, surviving spouses might be in for a big surprise once their $3 million of stepped up basis is exceeded. Time for widows to pay some taxes!

There are a lot of potential twists to the 2010 estate tax system. How is the $1.3 million of free capital gains allocated among appreciated assets? How does the surviving spouse allocate his or her $3 million of free capital gains?

My question is: how will people prove that the asset they inherited received some of the free step-up in basis? Will surrogate courts issue certificates indicating how much step up in basis certain properties receive?

Questions for executors of estates: what if we can’t prove the cost basis for this stock that has split and/or merged umpteen times? Ask the IRS and they will tell you that without proof of basis, it is assumed to be zero (i.e. pay capital gains on 100% of the value).

What about estate plans that didn’t anticipate the estate tax repeal? Unintended consequences such as surviving spouses effectively being cut out of their late spouses’ estates because the will or trust called for all assets not affected by estate tax to pass to children or others?

What about Credit Shelter Trusts? These are designed to lock away the federal estate tax exemption amount in a trust, typically income to surviving spouse with limited right of principal invasion, remainder to children. This year, there might be no need for this type of trust – maybe the kids should get the money outright?

The questions go on and on. Congress claims that they want to retroactively undo the estate tax repeal – before the 9 month filing deadline for decedents’ estate tax returns. Watch Congress push off until September 1, 2010, for a last minute attempt at fixing this mess before the estates that pulled the plugs on January 1, 2010 have a chance at zero estate tax. My prediction: 2011 will come and federal estate taxes will return to 2001 levels of $1 million exemption and highest federal estate tax bracket of 55% - and they can blame George Bush for that one.

Charitable Planning

The short answer to my original question (Are there any charitable planning opportunities in the estate tax repeal?) is no. Even if many people will be paying more in taxes via the carryover capital gains tax, I can’t see any logical way to promote gifting to avoid a one year tax – one at a relatively low rate of 15%.

You could try to make the case that Charitable Remainder Trusts should become very popular as devices for avoiding this one year carryover basis capital gains tax. I wouldn’t bother.

Attorneys might tell their clients to designate highly appreciated items in their estate to charities. The challenge would be whether the estate can sell the asset on behalf of the charity or would the charity be forced to accept the item for the capital gains tax to be avoided? This could make for some interesting questions in dealing with valuable tangible property or art – not so fun for nonprofits not equipped for owning these types of things.

What should we be doing?

Educating is the key. Any time we, planned giving professionals, have the opportunity to educate our donors about estate planning; it’s an opportunity to provide a needed service and a soft sell of bequests and other planned gift options.

Plan a seminar with a top estate planning attorney. My guess is that these types of presentations will draw standing room only crowds.

Find an article that is informative about the challenges of estate planning under the current scheme. Include it in your planned giving newsletter. Just make sure you send it out before Congress changes its mind and retroactively changes the 2010 law.

Most planned giving dollars are from bequests – period. So why do we planned giving people spend so much time promoting various complex giving arrangements? The answer is that we need something interesting to put out there – get people’s attention, get their minds thinking. Even if at the end of the day most planned giving prospects will only include you in their will (and probably not tell you), planned giving marketing would go stale quickly if all we ever speak about is bequests.

That’s the business. We market all of the fancy stuff, give people something to think about, and most go with the simple, least challenging option.

And, this new world of estate tax repeal certainly gives us interesting, thought provoking material to communicate with our donors. Even if we don’t have any exciting new charitable tax savings to announce.

Can't Believe 2010 Estate Tax Repeal Happened

Pretty amazing that for 9 years straight, all of the experts in the estate planning field have been saying and writing that Congress would never let the estate tax repeal really happen.

But we made it to Jan. 1 and now former President Bush can brag to his wealthy friends that he saved them a lot of money and saved their farms and small businesses, too. As long as they die in 2010, of course. Come 2011, those same friends of Mr. Bush might be cursing him - or least their children.

And, the experts were saying all along that Congress would never let "carryover basis" ever come into effect again. Apparently the accounting headaches created by the law over trying to figure out decedents' original purchase prices is an even greater worry than the loss of revenue.

Here is another good overview on the topic for those obsessed with this issue like me:

http://money.cnn.com/2009/12/31/pf/taxes/estate_tax_extension/index.htm?cnn=yes

Have a happy day off from work! (yesterday for those on the email lists)

WSJ article: GETTING PERSONAL: IRA Charitable Rollover Comes With Risks

For those who don't have subscriptions to the WSJ, here is the article mentioned in my previous post:

* DECEMBER 29, 2009, 2:44 P.M. ET

GETTING PERSONAL: IRA Charitable Rollover Comes With Risks

By Shelly Banjo
A DOW JONES NEWSWIRES COLUMN


NEW YORK (Dow Jones)--Donors who have tapped their individual retirement accounts for charitable donations under a popular temporary tax break may be in for a surprise come tax season.

In some states, distributions from a charitable IRA rollover may not be tax-free, as many charities have indicated in their promotional materials.

While these distributions escape federal taxes, they may be subject to income tax by states that don't allow charitable deductions and count IRA distributions as taxable income. Other states are facing delays in incorporating federal tax rules into state law.

In New Jersey, where taxpayers with an income between $500,000 and $1 million face a 10.25% rate, donors may pay more than $10,000 in state taxes for a $100,000 charitable IRA rollover. Donors who don't factor in extra income from an IRA distribution may mistakenly be bumped into a higher tax bracket.

Pushing for Congress to extend the IRA-giving provision, financial advisers and charities laud the extra tax break for generating an extra $140 million for charity since it was enacted in 2006.

Taxpayers ages 70 1/2 and older are typically required to make annual distributions from their retirement accounts (though distributions for 2009 were suspended). The distributions are included in their federal adjusted gross income and are taxed as such. The charitable IRA rollover lets taxpayers make donations directly to charitable organizations from their IRAs without counting them as income and paying federal taxes on them.

State taxes are a different story, says Eric Abramson, an estate and charitable planning adviser in Paramus, N.J.

"There can be a cost on the state income-tax level, and for a large gift it could mean a substantial income-tax hit. It's important to bring this to the client's attention and make sure the cost is quantified and handled appropriately," he says.

Overlooking state taxes could have wider implications for national charities such as the American Red Cross or United Way, where donations are already suffering from the strained economy.

"The last thing nonprofits need is to face the wrath of an angry donor who wasn't informed," says Jonathan Gudema, a planned giving consultant with Changing Our World Inc., a fund-raising and philanthropy consulting firm.

Many organizations, including The College of New Jersey and Overlook Hospital Foundation in Summit, N.J., state clearly in marketing materials that benefits apply only at the federal level.

"We find many of our donors are willing to pay the small price that this might increase their income taxes to reduce the assets held in a retirement plan," says Kenneth Cole, senior director at Overlook. "In some cases, IRA assets are the only funds they have to make a charitable gift."

Other charities have steered clear of handing out financial advice altogether.

"Legally and ethically we can't put ourselves in the position to dispense financial advice," says Ted Mills, associate director of gift planning at Princeton University. "We tell our donors twice or even three times to review any important decisions with financial advisers."

(Shelly Banjo is a Practice Management and Getting Personal columnist who writes about wealth management and philanthropy; she covers topics including the business of financial advisers, investment strategies and charitable giving. She can be reached at 212-416-2242 or by email at shelly.banjo@dowjones.com.)

(TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at TalkbackAmericas@dowjones.com. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments.)

Planned Giving in the news - WSJ reports on NJ Taxing of IRA Charitable Rollover Gifts

I am feeling a bit like the grinch.

I totally missed this issue of New Jersey taxing IRA charitable rollover gifts for 4 years. Then I hear a top attorney mention it in passing, put it on my blog, a conversation with a nice WSJ reporter (thanks for the quote!).... My guess is that there will be people paying taxes that might have just been overlooked - now that the Wall Street Journal reported on it.

Here is the WSJ story:

http://online.wsj.com/article/BT-CO-20091229-706347.html?mg=com-wsj

Just to understand this issue, a NJ accountant confirmed for me that NJ does not defined adjusted gross income (AGI) in the same way the IRS does (Most states do follow the IRS in this regard). And, yes, NJ requires you to add any IRA withdrawals (qualified IRA charitable rollovers or not) to your NJ AGI. NJ state income taxes range from the 5% to 6% for medium to semi-high income earners. 8% to over 10% to higher earners ($150,000 to $500,000 and up).

So we are talking about real dollars out of donor's pockets. The one NJ charity I asked about this (who did promote it but carefully stated that it only avoided federal income tax) said they informed everyone and they had not problems.

I hope that's true - now that the cat is out of the bag. What I mean is that this quirk in New Jersey's tax law, which for all I know could be unique among the states, was relatively unknown. Maybe your accountant would have been aware of it but why would you need to tell him (all accountants are men, right?)? And, if there is not an automatic reporting mechanism from IRA custodians to NJ tax authorities (like there is to the IRS), how would anyone in the NJ taxing authority know to go after the tax if not voluntarily reported.

What I am getting at is that this quirk was ripe for everyone to ignore and not pay any state income tax on IRA charitable rollovers. If was an unknowing donor of such a gift, knowing that I get no new charitable deduction, I wouldn't bother telling my accountant.

But now, me, the grinch, stirs up the pot, the WSJ picks up the story, and now accountants in NJ will be on the look out for these "gifts" to add them to your NJ AGI.

Or maybe not.

Happy holidays!

New York Times - Great Editorial on Estate Tax Shenanigans

When I read an article or opt ed piece and I agree with every word, it deserves a post:

http://www.nytimes.com/2009/12/28/opinion/28mon1.html

This one is right on point about the impending estate tax repeal in 2010 and the political process. Nothing further needs to be said.

Planned Giving Articles - Et tu, New York Times?

I better start reading the New York Times because I am almost missed this one by about two months.

The link is below but here is my introduction:

It's about the National Heritage Foundation (NHF) bankruptcy situation. The article starts out bemoaning the fact that NHF had to take $25 million of its Donor Advised Fund (DAF) money to settle with its 107 gift annuitants. Then the article moves into a loose discussion about gift annuities. Check it out if it interests you but please see my after-article comments below

http://www.nytimes.com/2009/11/12/giving/12FUND.html?_r=1&scp=1&sq=national%20heritage%20foundation%20gift%20annuities&st=cse

I was asked by a friend today about a line in this article that made a board member nervous.

I am going to try and keep my comments ask kind as possible. The article's beginning leaves out one crucial legal fact: DAF money is considered from a legal point of view to be TOTALLY and COMPLETELY UNRESTRICTED. That's the deal - sorry DAF donors. If the charity runs into financial trouble (like NHF did), DAF money is TOTALLY AND COMPLETELY AVAILABLE. Period. If the DAF donor doesn't like it, then start a private foundation.

That is why the legal cases of most of NHF's DAF donors were thrown out of court. It doesn't excuse any fraud committed by NHF in obtaining those donations.

Secondly, my problem with this article is that it seems to be pitting DAFs as the good guy and CGAs (gift annuities) as the bad guy. Or maybe not. I actually know the author, and I think she is a great writer, but something tells me that the editors messed this one up. I really couldn't respond to the question I received this morning because I had no idea where the article was going.

Third point - this is a quote from the article:

Faced with shrunken endowments, charities are seeking to bolster giving by heavily marketing gift annuities, emphasizing the income stream they offer.

The article offers no proof of this statement and if you asked me, I would say the opposite. I think charities have slowed their CGA marketing out of fear of the liabilities they are dealing with. Getting new annuities is actually a good idea for a basically healthy program but it has nothing to do with NHF or the initial part of the story.

There was an interesting story there - it just never came out. It is interesting to note that DAF money was used to pay off CGA donors of a charity going into bankruptcy. What was also interesting was the fact the CGA donor mentioned actually received back $131,239 from his initial CGA gifts of $235,000.

Considering what Madoff investors, as well as other ponzi scheme investors, will receive, I think the NHF CGA donors did pretty well. I am guessing that this donor got to keep his initial charitable deductions. He was barely out of pocket if you think about it. The story should have been how CGA donors had a right to receive something in the bankruptcy - and obviously were in a decent place in the line.

Something about the whole article bothers me - is it only me? Isn't there lack of focus? No wonder a board member is pulling a quote from the piece to cause some trouble. It took me a few minutes to figure out what it was talking about.

Holiday Greetings - December 31, 2009

With all of the focus on health care, Congress will apparently let the estate tax lapse.

They also let the standard end of year tax extender fall off the radar, too. There goes the IRA charitable rollover, for now.

Oh well.

RE: the estate tax. Some victory against the death tax. What the idiots crying about the so-called death tax never say is this:

#1 - in 2010, estates will start paying capital gains tax on capital gains over $1.3 million (we had an unlimited step-up in basis at death until now). Who knows, maybe this will generate more money for the government than the dreaded death tax (at least it will tax less wealthier decedents). The government tried taxing capital gains at death in 1976, apparently it was a disaster from record a keeping point of view and was quickly repealed. The big problem is determine the basis (ie..the starting point for starting the cap gains tax on so-called profits). The rule is that if you can't determine the basis, you are supposed to assume a zero basis (ie...apply the tax to 100% of the value of the asset).

#2 - Impact on charitable bequests: Most charities receive their bequests these days from non-estate tax paying estates (ie..estates under the $3.5 million exemption). Sounds like the repeal of the estate tax won't affect charitable bequests. The only problem I see is that when you break down the estate tax filing numbers reported by the IRS, you find a very high percentage of annual bequest dollars coming from the larger, higher estate taxed estates. My theory: the $5 million+ estates do use attorneys in efforts to avoid estate tax; a lot of lawyers might advise their clients to not bother with their charitable bequests without the incentive to avoid estate taxes (at least for 2010). It will be interesting to see if there is an impact or not on the overall numbers for U.S. bequests.

#3 - At the rate Congress moves on this issue, January 1, 2011 will be here quicker than you think. Probably without an adjustment to the estate tax laws, and the law will revert back to 2001 law: $1 million exemption and highest bracket of 55%. In other words, with inaction, Congress will bring us back to the good old days where my dad might start worrying about estate taxes again. Not so bad for charities if you ask me - might fuel another growth period in planned giving.

I guess we are headed for bedlam in estate tax issues for a year or more.

To think I was able to write this while my 4 kids are all over me is a mystery! Please forgive the typos and enjoy the holiday break.

Jonathan

Planned Giving Legal Tidbits - Bequest Pledges

This post is one that I've been itching to write since last week. Please read it carefully and think it over (even if you are not a New York fundraiser - these discussions are always relevant and they at least give you something to ask counsel in your own state)

I mentioned in the previous Legal Tidbits post that pledge agreements in New York that involve naming recognition are legally enforceable, binding commitments. Technically binding out of one's estate, too. And, naming recognition would include a named scholarship in addition to an actual name on a plaque somewhere.

The follow-up question I had as a direct result of hearing this info is what about bequest pledges where the naming only takes place upon the receipt of the pledged funds at death?

Surprisingly, top notch counsel said that case law in New York supported what he termed a contract to make a will as also being a binding obligation upon the parties (namely the estate to pay the pledge).

In legal terms, we are looking for consideration (more simply understood as value exchanged) in a contract context. New York courts not only agree that receiving a named honor in exchange for a pledged gift is consideration to create a binding contract, but the courts agree that a pledge to include a charity in your will that creates an agreed upon naming honor when the bequest matures (gotta love planned giving talk) is also a binding agreement (albeit contingent on both sides fulfilling their promises).

What I am getting at is that in New York, a pledge agreement whereby the donor agrees in writing to include a charity in his or her estate plan in some form or another to receive a naming honor at the time funds reach the charity is ENFORCEABLE as a binding pledge (whether you are included in the estate documents or not).

Long sentences, I know, but you have to say wow.

Sign on the dotted line and it's a gift? One of my clients - closing this fall alone over $5 million of these - said they didn't plan to actually list these commitments on their books. Funny thing - from both the accounting and legal points of view, they should be on the books.

OK, I would advocate some substantiation - like are we really in the will or does this donor really have these assets or is there an estate fight brewing. I would keep these for older donors generally. But, they are not only good planned gifts, but they are bookable (at least at present value).

Stay tuned for part 2 about bequest pledges entitled Don't try these at home. Just a word of caution before you go out and have hundreds of folks sign up.