Also posted on this subject on LinkedIn.
The most current version of my "storm warnings" slide deck on Dickinson and Fairbairn, updated for the July 19 roundtable meeting of the NACGP Leadership Institute.
Also posted on this subject on LinkedIn.
Had a short paper under that title published this morning on Bloomberg Tax Daily. Subject the nonfungible token as the subject of a charitable gift, question is it a "collectible," for which the deduction would be limited to adjusted basis, answer no because it is not "tangible."
Attribution copy below in .pdf, also a pending submission to SSRN.
Back in November we wrote up the Tax Court decision in Dickinson for the Jack Straw, focusing on the argument IRS was actually making, which was not made all that clear in the text of the opinion. Still mystified why IRS did not take an appeal.
Phil Purcell over at PG Today asked me to turn this into an article for that publication. Linked below are the text as submitted and as it appeared in print.
Also linked is the slide deck I used on a joint presentation with Kate Crary at Gadsden Schneider & Woodward for the charitable planning and orgs group of the RPTE section of the ABA.
That deck has since been expanded to include a discussion of the pending litigation in Fairbairn v. Fidelity Charitable. We will be using a version of that deck in a webinar I am co-presenting tomorrow and again on Thursday with Bryan Clontz at Charitable Solutions, LLC.
A couple of years ago I threw together a webinar for Lorman on planning for intergenerational transfer of a vacation home. This was an orphaned topic for them, created years earlier by someone who had moved on to other projects. But they wanted to repeat it, and somehow they found me.
And obviously it is not within my usual scope. My skillset, yes, but not my wheelhouse. Or whatever is the jargon.
But I did it, and learned a thing or two along the way about qualifying the transfer of a nonvoting interest in a family limited partnership for the gift tax annual exclusion.
And then more recently the folks at WealthCounsel picked up on it and asked me to flesh this out into an article for their quarterly. Which just came out today. Enjoy.
[copy also posted to LinkedIn]
Got something in my e-mail inbox the other day from Crescendo Interactive inviting me to propose a paper for the 2021 iteration of their "practical planned giving conference," which they are hoping to do live in Orlando next September. The 2020 conference is already up and running virtually, and the sessions this year are free. You might want to check it out.
Much of the programming is focused on fundraising and stewardship, but there is room for the occasional foray into tax tech, so I went ahead and pitched an idea for a talk at next year's conference. Here is the pitch:
Outside the Box: the Nonqualified Lead Trust
With 7520 rates at historic lows, the charitable lead annuity trust can yield a steep discount on the remainder gift to noncharitable beneficiaries. If we are funding the trust with closely held stock, it may not be possible to meet the 60 pct. exception to the prohibition against excess business holdings. But there is a workaround. If the lead interest does not qualify for a gift tax charitable deduction, and if we render the gift of the income interest incomplete, we can still discount the remainder gift while avoiding the private foundation excise tax regime altogether. Let's take an hour or so to examine the nonqualified lead trust.
Okay, well, they allowed only one paragraph. I had to pack a lot into a small space. At slightly greater length, the pitch might have looked more like this:
Most of us are aware that a split-interest trust that is holding amounts for which an income or gift tax charitable deduction has been allowed is to that extent subject to the private foundation excise tax regime. And many of us are aware that there is an exception to the prohibition against excess business holdings in the case of a charitable lead annuity trust, where the present value of the unexpired annuity stream is not more than 60 pct. of the value of the trust corpus. If we are trying to leverage the present value of a remainder gift to noncharitable beneficiaries, we are unlikely to meet that exception, at least at the front end.
But what if, thinking outside the box, we were to not claim the gift tax charitable deduction? Or what if we structured the payout as something other than a fixed annuity or unitrust, so that it would not qualify?
We could still discount the remainder gift by the present value of the "income" stream, and by reserving a power to direct the payout to charities we could render the "income" gift incomplete.
And so on.
Obviously these ideas are not original with me, but they are not discussed all that often, and as a result these strategies may be underutilized where they could do some good.
I did touch on the nonqualified lead trust briefly in the closing slides of the lead trust session of a series of narrated slide decks I recently completed -- what they call "asynchronous webinars" in continuing education speak -- comprising a complete, somewhat advanced course on tax-advantaged charitable gift planning techniques.
These are gathered under the collective title "PG 103: stuff every gift planner should kinda know" and posted to a storefront tab on this site. I am in conversation with CFRE International to get these cleared for continuing education credit for their certificate holders.
But let us take a minute to expand on the idea of the nonqualified lead trust. If my paper is accepted I am going to have to work all this up before next September anyway, so let's start taking notes.
in broad strokes
The object is to try to replicate some of the income and transfer tax benefits of a qualified nongrantor lead trust without triggering an excise tax on excess business holdings. At least some discount on the value of the remainder gift, in other words, but somehow avoiding application of section 4947(a)(2) by not holding amounts for which an income or gift tax charitable deduction has been allowed.
Maybe without having to meet a fixed annuity payout, which might have to be paired with staged redemptions, or maybe by borrowing from an "intentionally defective grantor trust" to meet the payout obligation, which would be self-dealing if the private foundation excise tax rules applied. We can work out those details later. What we are looking for here is the flexibility to make those decisions.
Code section 2522(c)(2) disallows a gift tax charitable deduction for a contribution to a lead trust unless the payout is in the form of a fixed annuity or a unitrust amount. So if we set up a lead trust instead paying, say, net fiduciary accounting income, the lead interest would not qualify.
The remainder gift would still be discounted, albeit not by nearly as much. In a low interest rate environment, a fixed annuity provides very strong leverage, a net income payout almost worse than none. Remainder values after a term unitrust are not affected by fluctuations in the 7520 rate.
getting into the weeds
Or perhaps we should hedge even this claim by saying the income interest to charity "should not" be treated, for purposes of section 2702, as having been "retained" by the settlor, within the meaning of reg. section 25.2702-2(a)(3). The remainder gift "should" be discounted, in other words, though we have no formal or informal guidance from IRS on the question.
But while we are forgoing the gift tax charitable deduction, we do not want to "waste" lifetime exclusion -- or worse, pay gift tax out of pocket -- on amounts that are in fact going to charity. So we would want to render the gift of the income interest incomplete, per reg. section 25.2511-2(c), until distributions are actually made, by reserving to the settlor a power to allocate among charitable distributees. Per section 674(b)(4), this would not trigger "grantor" trust treatment.
IRS did actually confirm this analysis in PLR 9742006. In the particular case, the settlor had also retained a testamentary power to alter the disposition to or among the remainder beneficiaries, rendering the entire gift incomplete.
More formally, in Rev. Rul. 77-275, IRS ruled that a settlor's reserved power to allocate income among charitable distributees would render the gift incomplete. The ruling did not expressly address the 674(b)(4) question, but since this was a pre-1988 "Clifford" trust, with a term of ten years and one month, the inference would be that this was not a "grantor" trust.
However, the reserved power would cause inclusion in the settlor's estate per section 2038(a), with no offset for the unexpired, nonqualified term. So, as in the case of a grantor retained annuity trust, it would be important to set the term well within the settlor's life expectancy. And to be prepared to accept the consequences of an early death.
As with any nongrantor lead trust, the nonqualified trust would be taxed as a "complex" trust, with an income tax deduction per section 642(c)(1) exactly offsetting current net fiduciary accounting income, potentially including any realized gains.
Although reg. section 1.642(c)-3(b)(2) requires that the charitable deduction be pro rated across various classes of income, thereby defeating any "ordering rule" that might otherwise purport to distribute items subject to higher rates first, reg. section 1.642(c)-3(c) does allow a deduction for distribution of realized gains, if the trust instrument includes these in the mix. So let's do at least that.
And then, if we are funding the trust with interests in a passthrough entity, we will have to deal with the fact that the income tax charitable deduction will be limited to the extent we are funding distributions with unrelated business taxable income.
If we are not claiming a gift tax charitable deduction, and if the only amounts for which income tax deductions have been allowed are no longer being held by the trust, we should not be subject to the private foundation excise tax regime. We need not concern ourselves with excess business holdings or with the prohibition on acts of self-dealing, notably including borrowing from or lending to the trust.
IRS has ruled privately to this effect twice. PLRs 201713002 and 201713003, identical verbatim, concerned a charitable remainder unitrust. PLR 200714025 concerned an ordinary "complex" trust in which the trustee had discretion to make deductible distributions to charity. In both instances, IRS agreed section 4947(a)(2) did not apply.
This is where we make the obligatory note that a letter ruling is not precedent, but applies only to the taxpayer who requested it.
Anyway, those are the broad outlines of the material I will be pulling together for the Crescendo conference. Regardless whether my proposal is accepted, I will be shaping this into a one-hour webinar, which will end up alongside the others on the storefront tab on this site.
Today we are doing a soft launch of a series of asynchronous webinars under the collective title "PG 103: stuff every gift planner should kinda know."
The intended audience are in house development folks, mostly nonlawyers, who have at least some occasion to talk with existing or prospective donors about various "planned" giving vehicles -- gift annuities, remainder trusts, etc.
But the material is pitched at a sufficiently advanced level, with citation to key rulings, court decisions, and sections of the tax Code and regulations, that lawyers should also find it useful. At this point we have not yet sought advance certification for continuing education credits.
The webinars attempt to situate the discussion of each of these vehicles within its tax policy context, so that the gift planner will have somewhat more than a basic understanding not only of the technical requirements -- what you might call "tax compliance" -- but also what are the policy objectives these requirements seek to accomplish. And what might the basic rules imply as the planner encounters novel situations
In my own experience (here reverting to the first person singular), a somewhat complex set of data points is much easier to remember if it is embedded in a narrative. Some version of this narrative is what we (again the editorial "we") intend to provide.
What makes this a "soft" launch is that we are putting the webinars up one at a time, somewhat out of sequence. Today's posting is a webinar titled "the gift annuity in context," which would actually be the second or third item in the completed sequence.
Alongside that webinar, we are also posting a freestanding item, not part of the PG 103 sequence, titled "charitable gifting incentives in the CARES Act," which we are offering for now on a "pay what you will" basis, in five dollar increments, from zero. From time to time we expect to post other items of this nature, i.e., special topics or recent developments.
[I sent the following a few weeks ago to the subscribers to the Jack Straw Fortnightly. Work on the text and slide decks for the PG 103 project proceeds apace, but I am still puzzling over the logistics of posting and paywalls. Now thinking more likely Dropbox than Patreon, so as not to require folks to commit to an ongoing subscription.]
The Jack Straw has always been casual in its adherence to a fortnightly schedule, but it is possible we will be even more sporadic in coming weeks.
I am turning my attention for the moment to the launch of a project I am calling "PG 103," which will be a series of webinars based on a 25k word text I wrote a couple of years back and have been updating since, covering pretty much the entire waterfront on the tax considerations that arise in charitable gift planning -- contribution limits, carryforwards, bargain sales, gift annuities, split-interest trusts, private foundation excise tax rules, etc.
The subtitle to the source text is "stuff every charitable gift planner should kinda know." The idea is to situate the various gift planning vehicles in their tax policy contexts, so that the planner can readily understand what are the rules and why those are the rules, and how to tweak these vehicles to meet the particular needs of the prospective donor and the recipient charity.
I am still working out the logistics, but probably these webinars will be hosted on Vimeo with a modest paywall through Patreon. There are about eight hours of content here, from which I could make seven or eight segments of an hour each, which could be made to qualify for continuing education credit. Probably a fair amount of research and maybe pre-certification to do here.
And/or I could break it down into smaller topics of about a quarter hour per, but presumably these would not qualify for continuing education credit. Along the way I might also produce some shorter pieces on recent developments, and some of these will not be paywalled.
I am a novice when it comes to this technology. Anyone who has some experience with putting up webinar series behind paywalls please feel free to offer suggestions, thanks.
The underlying text itself would probably make a good shelf reference. I will be looking at mechanisms for publishing this in book form. Again, anyone who has some experience in self-publishing please feel free to offer suggestions.
And again thanks to all of you for your support of the Jack Straw -- which, not to worry, will continue into the indefinite future, and will likely remain free of charge.
The Greystocke Project is submitting comments on the proposed regs that would clarify, at long last, that excess deductions on termination on an estate or trust are not per se miscellaneous itemized deductions in the hands of the distributees.
With the 7520 rate at a record low zero point eight pct. and the equity markets still not fully recovered from the recent crash, I was reminded of this piece I wrote back in 2009 for submission to the business journal in Portland. Probably time to dust it off and update the numbers. But I do like the anachronistic references to the 3.5 million transfer tax exemption and to 7520 rates in the six pct. range. Those were the days.
The Greystocke Project is submitting comments on the proposed regs to relieve exempt orgs other than (c)(3)s, 527s, and nonexempt trusts from the requirement to disclose their substantial contributors.
the very occasional blogger
The text here used to say,