Charitable Giving Provisions for Individuals, Pension Protection Act of 2006
By Michael O'Hara Peale, Jr.
Tax-Free Distributions from IRAs
Effective for a two-year period (January 1, 2006-December 31, 2007), distributions made from an IRA to a qualifying charity are excluded from the income of the IRA owner. The owner must have reached age 70½ to take advantage of this provision, and the amount excluded is limited to $100,000 per year. This provision removes a number of impediments that stood in the way of IRA owners who wanted to give all or a portion of their IRA to charity. Under the usual rules, a gift from an IRA to charity is treated as a taxable distribution to the owner, who then has to claim an itemized deduction for the gift. Treating the gift as a distribution has adverse tax consequences to the owner, including the possibility of the alternative minimum tax and the loss of itemized deductions and personal exemptions. And because the deduction is limited to 50% of the IRA owner's adjusted gross income, often the owner does not get a full deduction in the year of the gift.
These impediments are removed for qualifying owners by treating the distribution as an exclusion from income, rather than as a deduction. Because there is only a two-year window, you should consult with us if you would like to make such a gift and will be at least age 70 during 2006 or 2007, so we can help you obtain the maximum tax benefit.
Increased Deduction for Conservation Contributions
Taxpayers are allowed a deduction for the fair market value of certain partial real estate interests that are donated to charity for conservation purposes. Usually, these donations take the form of conservation easements, but they also include gifts of property without the mineral rights and gifts of a remainder interest in real property.
Under prior law, taxpayers could deduct such gifts only to the extent of 30% of their adjusted gross income in the year that the gift is made. The excess could be carried over for another five years.
Limits on Deduction of Cash Gifts
New recordkeeping requirements in the Pension Act will probably have the effect of disallowing a deduction for small gifts of cash. Under the Pension Act, any gift of money (by cash or check) may be deducted only if it is supported by a bank record or a written acknowledgement from the donee organization. This provision is effective for taxable years beginning after August 17, 2006, and may discourage small cash gifts, such as those to the Salvation Army.
Cut-Back on Deductions for Gifts of Tangible Personal Property
Under prior law, a donor of a gift of tangible personal property (i.e., other than cash, securities, or intellectual property) could deduct only the tax basis of the property (rather than its higher fair market value) if the donee charity did not use the property in its exempt function. This restriction is extended by the Pension Act to apply to property that is disposed of by the charity within the same year that it was received. In addition, if the charity disposes of the gifted property in a subsequent taxable year, but within three years of the gift, the IRS will recapture the tax benefit that the donor received in the year he made the gift. These adverse consequences can be avoided if the charity provides a certification that its original intended use of the property became impossible or infeasible.
Limitation on Contributions of Household Goods and Clothing
Many taxpayers take advantage of the charitable contribution deduction by making gifts of used clothing and household goods. Due to concern about abuses of this type of deduction, the Pension Act provides that the deduction will be allowed only if the donated clothing or household goods are "in good used condition or better." This provision is effective immediately. It is not clear what Congress meant by "good used condition or better" and it is expected that the IRS will be issuing guidance in this area.
Fortunately, the limitation on "good used condition" does not apply to gifts of food, art objects, jewelry, gems, or collections, as well as to individual items of clothing or household goods with a value of $500 or more that is supported by an appraisal.
Increased Penalties for Valuation Misstatements
Congress also used the Pension Act as an opportunity to reexamine the penalties imposed on taxpayer overstatements of the value of gifted property. The Pension Act reduces the threshold for imposition of the 20% and 40% tax penalties on valuation misstatements for charitable contribution purposes. The penalties are imposed when a taxpayer significantly overstates the value of contributed property. Formerly, the 20% penalty was imposed when the overstatement of value was 200% or greater, but that threshold is now reduced to 150%. Before the Pension Act, the 40% penalty was imposed when the overstatement was 400% or greater; that threshold is reduced to 200%. In addition, a new penalty is imposed on any appraiser who is responsible for the overstatement.
Importance of Properly Drafted and Executed Will
By George M. Riter, Esquire
If you do not have a Will at the time of your death, each state has established statutes known as intestate succession laws which will dictate how the property that you own will pass and to whom. These statutes can create problems since assets may pass to children or relatives that you do not intend to benefit. They do not take advantage of the current tax laws to minimize tax exposure at your death, as well as subsequent family deaths. Wills can be created in several ways. One is by a handwritten document which is signed and dated, but need not be witnessed, which is known as a holographic Will. In addition, Wills can be drafted and forms are available at certain stores, on the internet or software. The safe approach is to engage an experienced trust and estate lawyer to review your particular family and financial circumstances and draft the appropriate documents.
People often defer going to a lawyer to draft a Will because of their concern for costs and their mis-belief that they can do it just as well on their own and save expense and time.
However, if a person chooses to either not draft a Will or attempts to prepare one on their own, be it a holographic Will or through other sources, the chance for errors is increased. There is no error in the Intestate Succession Act and the rules governing assets are absolute; however, assets passing to minor children would need to be held in a guardianship account, a guardian would be appointed by the Court and guardian fees paid without the flexibility of a trust if a Will had been properly drafted addressing these issues. In addition, relatives that you may not have intended to inherit upon your death may become beneficiaries.
In a recent case, a father had written a holographic Will in which the father wrote that he wanted “… all proceeds from the money that is left and from all contents in the house …” to one child. However, the Will did not say to whom the house should go or every other assets that the father owned at the time of his death. Therefore, rather than having all assets pass to the one named child, the unnamed child also shared in the rest of the assets, which may not have been what the father had intended. This ambiguity lead to litigation and a court had to resolve the issues. With some frequency, when individuals create their own Wills, they address those assets that they have thought about and identify the individuals to receive them. However, by not including a “catch-all” provision to make sure that any and all other assets, not specifically given to an individual, are properly addressed, it results in confusion, with the potential need to look to the Intestate Acts of the various states, and perhaps litigation.
Bitter experience has taught many, many individuals that it is much more economical, tax-efficient and cost effective and beneficial for your family to have a properly written and executed Will in place in the event of your death. Please feel free to contact any member of the trust estate and private client group at Timoney Knox who can ably assist you.
