Planned Gift Design Services

soft launch PG 103

9/3/2020

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.

jack straw on hiatus

8/24/2020

[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.]

Friends,

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.

Russ Willis

comments submitted on proposed 642(h) regs

6/18/2020

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.

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plus ça change

5/5/2020

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.

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comments submitted on proposed dark money regs

12/8/2019

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.

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comments submitted on proposed clawback regs

2/21/2019

In the end, despite what a couple of Joint Committee staffers told me about who understood what when the statutory language was being hammered out and what the revenue estimates did or did not assume about clawback, I decided to go ahead and submit comments opposing the proposed regs. Full text appended, and this will get a brief mention in the next issue of Jack Straw.

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newsletter pre-launch

12/27/2017

As the subject line suggests, this post announces my intention to start an online newsletter analyzing current developments in the law -- both tax and nontax -- concerning the transfer of private wealth in this country. From my particular perspective, of course, which one might call idiosyncratic.

The working title is Jack Straw. While this was, or may have been, a pseudonym of one of the leaders of the Peasants' Revolt of 1381, the context in which I have selected this name has more to do with what the chancery courts used to call the "feoffee to uses" -- the "straw man" or "straw party," employed to facilitate certain transfers of property. A person of no independent significance, in other words. Maybe that guy from Wichita.

I intend to write up state court decisions as well as decisions of the Tax Court and various federal courts, formal and informal guidance from IRS, proposed regulations, pending legislation.

Not everything, by any means. Just a few selected items that happen to catch my attention. No doubt there will be some focus on the ongoing scramble among the states to abrogate the rule against perpetuities, to promote self-settled spendthrift trusts, and to facilitate decanting as a mechanism for changing the dispositive terms of an irrevocable trust.

But probably I will focus mostly federal tax law. Right now I am watching for a decision from the 10th Circuit federal appeals in Green. A district court in Oklahoma allowed a trust to claim an income tax charitable deduction under section 642(c) at fair market value for a contribution of property which had been purchased with prior years' income. The government argued the deduction should be limited to adjusted basis, as the appreciation had not been recognized. Oral argument was November 13.

Meanwhile, oral argument before the 9th Circuit in Dieringer should be coming up in March. The Tax Court disallowed an estate tax charitable deduction for a bequest of closely held stock to a private foundation, to the extent the value reported on the 706 exceeded the discounted price at which the corporation later redeemed the stock.

Also watching for briefs in RERI Holdings, for which a notice appeal from the Tax Court to the DC Circuit was filed just the other day. The facts of this case are more complex than I care to summarize here. The curious can glance through Notice 2007-72, published just as IRS getting ready to issue the notice of deficiency, identifying the contribution of a "successor member interest" in a limited liability company as a transaction of interest. Suffice it for the moment to say the taxpayer put together a rather elaborate structure to support a claimed income tax deduction of thirty million plus, but after almost ten years of litigation the court entirely disallowed the deduction on a reporting technicality.

I am thinking the newsletter will be fortnightly, if there is enough material to sustain that frequency. Maybe a couple or three short articles in each issue, with the occasional commentary by Jack Straw himself -- an alter ego who can be rather outspoken in his efforts to demystify the legal profession -- and occasionally a long-form piece, similar in scale to two articles I placed recently in Tax Notes, linked here and here.

So for example in the first issue, sometime in January 2018, I am planning a fairly lengthy piece on the recent decision in Hodges v. Johnson, No. 2016-0130 (N.H. 12/12/17). The New Hampshire supreme court affirmed a probate court order setting aside a decanting that would have had the effect of disinheriting several beneficiaries of a discretionary trust.

The Hodges ruling might be seen as a setback to a sustained lobbying effort on the part of a handful of bankers and lawyers over the past dozen or so years to advance legislation to make New Hampshire "the most attractive legal environment in the nation" for private trusts. The decision is probably "wrong," for reasons articulated in a dissenting opinion, but unless the court grants a motion for rehearing, it might be necessary for these folks to go back to the legislature yet one more time.

I will be distributing a version of this text by e-mail to a roster of potential subscribers, and I will be asking the recipients not only to spread the word, and to let me know if they see anything I might want to write up, but also to offer any technical suggestions as to how this project might best be presented. I am considering Wordpress, but it might be simpler to just add a tab to this site.

For the moment, at least, there will be no paywall.

just saying

12/20/2014

In the closing days of the lame duck session, the 113th Congress extended the charitable IRA "rollover" retroactively through the end of the year. Those who had not already made MRDs over to charities anticipating the extender were given about two weeks to act.

Much gnashing of teeth in the nonprofit sector over this, and some considerable disappointment the thing has not yet been made permanent.

And there is a longer term agenda to increase the limit on the amount that can be "rolled over," presently 100k, and to allow taxpayers as young as 59.5 to use the device to contribute tax-deferred funds to split interest trusts.

I have an entire rant pent up somewhere about how the sector betrays an appalling cynicism by focusing so narrowly on tax benefits for high-income donors. But here I just want to let the bare facts speak more or less for themselves.

The mechanics

How the charitable IRA "rollover" works is this. You are age 70.5 or older, therefore you are taking minimum required distributions from your IRA. These are taxed as income at let us say 39.6 pct. Also, you are making contributions to (c)(3) organizations.

You could claim those contributions, up to fifty pct. of adjusted gross income, as itemized deductions. And/or, whenever Code section 408(d)(8) happens not to have expired, you could direct the trustee to make distributions from the IRA directly to charity.

These would not be reportable as income, and while they would also not be deductible, they would not count against your fifty pct. limitation. But they would count toward your minimum required distribution.

Under what circumstances might you want to do this.

One, maybe you do not itemize. Two, maybe you have already maxed out the fifty pct. limit. Or three, maybe taking the MRDs into income would push you over the threshold where the "Pease" limitation on itemized deductions kicks in, and/or the 3.8 pct. Medicare surtax on net investment income.

Let us look at each of these in turn. And to keep it simple, we will look at joint filers. But first some basic data.

Calendar 2012 filing data

Of 53.7 million joint filers for calendar 2012, about 25.9 million itemized, slightly under half. Of these, 22.8 million claimed charitable contribution deductions, aggregating 142.9 billion, or an average of 6.3k per return. State and local taxes paid averaged 13.6k per joint return, and mortgage interest averaged 11.2k.

Altogether, 37.4 million filers claimed charitable deductions in 2012, aggregating 199.3 billion, or an average of 5.3k per return. Clearly, joint filers made up the bulk of these numbers. Nearly one-quarter of joint filers had adjusted gross incomes between 100k and 200k.

Fewer than 2.5k returns reported itemized deductions triggering the "Pease" limitation. Most of these were just above the threshold, but almost all of the dollar value was on returns reporting adjusted gross income of ten million or more. Ten million.

About 13.2 million taxpayers took taxable IRA distributions in 2012, aggregating 230.8 billion, or about 17.5k per return. Of these, 7.8 million were joint filers, reporting taxable IRA distributions aggregating 157.4 billion, or about 20.2k per return.

It is not until you get into income ranges above one million that you see IRA distributions averaging above 100k per return. In 2012 there were 11.4 million joint filers over age 65. Only 69k reported income over one million, about six-tenths of one pct. Some apples in among the oranges here, but you get the general idea.

What about nonitemizers

The standard deduction for 2014 for joint filers is 12.4k. Oh, and since we are talking about people over age 65, another 1.2k each, total 14.8k.

Of 97.2 million filers who claimed the standard deduction in 2012, well over half had adjusted gross incomes below 25k, less than 200 pct. of the federal poverty level for a family of two.

But about 10.8 pct. were in the 50k to 75k range, and another 4.7 pct. were in the 75k to 100k range, so let's suppose we are talking about those guys. Dick and Jane, both in their 70s, taxable income on the edge between the 15 pct. marginal rate bracket, which tops out at 73.8k, and the 25 pct. bracket, which tops out at 148.85k.

Add back the 14.8k standard deduction and two personal exemptions at 3.95k each, we are looking at AGI right around 96.5k.

Absent whatever they might want to give to charity in the form of an IRA "rollover," their itemized deductions are less than 14.8k. Not much medical expense in excess of 7.5 pct. of AGI, not much in the way of deductible state and local taxes, not much or any home mortgage interest.

If Dick and Jane are completely typical for their income bracket, again using 2012 figures, their taxable IRA distributions would be 13.125k. If they took this into income and then contributed some or all of it to charity, a portion of the deduction would be "wasted" until they hit the 14.8k threshold.

You gotta do a little math there to find out how much you can take into income versus how much you want to put into the "rollover" to get the maximum benefit. I have a four-function calculator here.

So that is one scenario. What about the 50 pct. contribution limit?

Maxing out the fifty pct. limit

So here we are supposing Dick and Jane have already given somewhere around 48.25k to charity, which of course would make them very unusual in this bracket. But in a moment, when we are looking at the "Pease" limitation and the 3.8 pct. Medicare surtax on net investment income, this might make more sense.

In any event, if Dick and Jane took the MRDs in above the line, yes it would increase AGI and raise the limit, but they could only give about half to charity without having to carry some forward. The carryforward is wasteful in the sense you are paying tax today on something you will be deducting next year. The time value of money or something.

Crossing the thresholds

The threshold for imposing the 3.8 pct. Medicare surtax on net investment income is 250k for joint filers, near the lower end of the 33 pct. marginal rate bracket. If Dick and Jane have both retired, it may be unrealistic to assume their net investment income is less than the amount by which their adjusted gross might exceed the surtax threshold.

So as a practical matter their marginal rate is 36.8 pct., even though any distributions they take from IRAs are not literally subject to the surtax.

The AGI threshold at which the "Pease" limitation begins to reduce itemized deductions for joint filers is 305.05k in calendar 2014. So let us put Dick and Jane right at that edge, solidly in the 33 pct. marginal rate bracket, with at least 55.5k of net investment income. The floor for the 35 pct. bracket is 405.1k for joint filers.

At this income level, incidentally, average taxable IRA distributions are more in the neighborhood of 50.1k.

Again, the "Pease" limitation reduces itemized deductions by the lesser of three pct. of the amount by which AGI exceeds the threshold or eighty pct. of itemized deductions otherwise allowable. In effect, if Dick and Jane are itemizing, each additional dollar of income over 305.05k is taxed at 33.99 -- actually, at 37.79 pct., because of the surtax --, while itemized deductions reduce taxable income by only 33 pct.

So if Dick and Jane took 50.1k in MRDs into income above the line and contributed all of it to charity, assuming itemized deductions already exceeded 14.8k, they would end up paying an additional 2.4k in tax, roughly. Again with the four-function calculator.

Obviously it gets a little more complicated when you are at the edge of the next marginal rate bracket.

Let us say Dick and Jane are sitting right at 405.1k before taking MRDs. Again, assuming enough net investment income that the 3.8 pct. surtax will apply to every additional nickel. We are still in an income range where the average taxable IRA distribution is 50.1k.

Here the marginal rate above the line would be 39.394 pct., with the "Pease" limitation effectively taxing each additional dollar as 1.03, while itemized deductions would reduce taxable income by only 35 pct. So if Dick and Jane took the entire IRA distribution above the line and contributed it all to charity they would pay an additional 2.487k in tax, roughly.

Half of one pct. of their gross income.

Some closing thoughts

The Joint Committee on Taxation estimates reinstating the charitable IRA "rollover" retroactively for 2014 will cost 239 million in revenue in 2015 alone. I recognize the JCT's methodology is not quite this simple, but even assuming everyone is in the 39.6 pct. marginal rate bracket, this would suggest at least 603.5 million in contributions that would otherwise not have been made or would at least to some extent have been made from otherwise taxable distributions. Taxable IRA distributions in 2012 totaled 229.0 billion.

The tax policy behind allowing you to defer recognition of wages you put into an IRA, and of the return on those deferrals, is to encourage you to save for retirement. Not to create an inheritance. When you turn 70.5 you have to start taking the money out over your projected life expectancy, 24.7 years, and paying income tax.

To the extent you do not need the money, the tax incentive is inefficient. But we have created a sweet cottage industry for planners to "stretch" IRAs over the lives of whomever.

As I mentioned at the top of this piece, some players in the nonprofit sector have been lobbying to increase the limit on the charitable IRA "rollover" to at least 500k, maybe chuck it altogether.

The average IRA balance for taxpayers aged 70 and over is less than 200k. If at age 70.5 your minimum required distribution is 100k, this means you have 2.47 million in the account. If your minimum required distribution is 500k -- well, again I would refer you to the four-function calculator.

A word or two about the "Pease" limitation

12/2/2013

As part of its campaign to lobby Congress "to preserve the charitable tax deduction in its current form," the Alliance for Charitable Reform has urged that the deduction be excluded from the overall limitation on itemized deductions, which ACR calls a "hidden tax" that "covertly chips away at the charitable deduction."

The words "hidden" and "covertly" have to do with something called "tax salience," which we will return to a bit later.

I have issues with the campaign more generally, but on this particular point the ACR is simply wrong. The "Pease" limitation has little or no effect at all on the charitable deduction.

What it is

For purposes of the present discussion, we will assume the marginal rate at which the charitable deduction reduces an individual's income tax actually provides a significant incentive. The literature on this question is mixed at best, but let's just take it as a given.

Section 68 of the Internal Revenue Code, the so-called "Pease" limitation, reduces the amount a higher income taxpayer may claim in itemized deductions. The limitation was first enacted in 1990 as a temporary measure, with the stated purpose of increasing the progressivity of the income tax. The income threshold was $100k. The limitation was made permanent in 1993 and indexed for inflation.

The first of the Bush tax cuts, enacted in 2001, included a mechanism phasing the limitation out over four years, from 2005 through 2009. The limitation was reinstated as part of the thirteenth hour "fiscal cliff" compromise legislation enacted in January, 2013, but with considerably higher income thresholds.

So there was a three year interval during which the limitation did not apply.

How it works

The "Pease" limitation reduces a taxpayer's itemized deductions by the lesser of three pct. of the amount by which her income exceeds a stated threshold, or eighty pct. of itemized deductions otherwise allowable.

Eighty percent sounds scary. But how does the math actually work.

To start with, what are the thresholds. For 2013, the limitation kicks in at $250k for a single taxpayer, $275k for a head of household, $300k for joint filers, and $150k for married taxpayers filing separately. These figures are adjusted annually for inflation, and will be marginally higher in 2014.

My purpose here is to illustrate some basic principles, so rather than do the math eight or ten times, let's just look at joint filers, using the 2013 thresholds. Single taxpayers tend to skew young, and fewer than one pct. have taxable income above the "Pease" threshold. Something to keep in mind.

A married taxpayer filing jointly with taxable income of $300k in 2013 is in the middle of the 33 pct. marginal rate bracket. The bracket floor for the 35 pct. bracket is $398.35k, and the bracket floor for the 39.6 pct. bracket is 450k. These figures are also adjusted annually for inflation.

In 2011, the last year for which data is available, fewer than 7.5 pct. of joint filers reported adjusted gross income above the $300k threshold. Nearly all of these filers itemized, and nearly all itemizers claimed at least some amount as a charitable deduction.

Total amounts claimed for charitable contributions in 2011 aggregated about one-fifth of all deductions claimed, and were roughly equivalent to amounts claimed for home mortgage interest and for taxes paid.

Data from 2010 focusing specifically on higher income taxpayers breaks this down a little further, showing that for more than half of taxpayers with adjusted gross incomes of $200k or more, the deduction with the largest tax effect was for taxes paid, and among that group the second most significant deduction was for mortgage interest paid, with the charitable deduction a distant third.

The charitable deduction was the most significant deduction on only about eight pct. of returns in 2010, and among that group the second most significant deduction was for taxes paid, with mortgage interest a distant third.

The point being, we need to keep in mind that higher income taxpayers claiming charitable deductions will generally also be claiming deductions for home mortgage interest and/or state and local income taxes and/or property taxes. Often these will moot the question whether the "Pease" limitation has any effect on the rate at which charitable contributions are deductible.

The math itself

So again, to keep the math simple, let's suppose a couple with adjusted gross income of half a million, some distance into the top marginal rate bracket and $200k above the "Pease" threshold, meaning itemized deductions might be reduced by as much as $6k. At a marginal rate of 39.6 pct., this would result in an additional $2,376 in income tax.

The eighty pct. limitation would kick in only if claimed deductions were less than $6k. Again, if the couple have any substantial mortgage interest or state or local income and/or property taxes, the "Pease" limitation will have zero effect on the deductibility of their charitable contributions.

Or to take it up a notch, let's suppose a couple with adjusted gross income of $2.3 million -- well into the 39.6% rate bracket, and $2 million above the "Pease" threshold, meaning itemized deductions might be reduced by as much as $60k, resulting in additional tax at 39.6 pct. of $23,760.

Here, the eighty pct. limitation would kick in if claimed deductions were less than $60k, which sounds a bit more likely. But let's note a few things.

First, when we are talking about joint filers with adjusted gross income over $2 million, we are talking about just over one-sixth of one percent of all joint filers. Among itemizers, who comprise not quite half of all joint filers, we are talking about less than a third of one percent. Fewer than a hundred thousand couples, nationwide.

In the $2 to $5 million income range, contributions averaged a little under $100k per return in 2011. These figures are not broken out by filing status, so we can suppose the number is a bit higher among joint filers. Home mortgage interest averaged a little under $28.5k per return, and taxes paid averaged almost $224k, of which the lion's share was state income tax.

But okay, let's suppose a couple who own their house outright, or rent, in a state that has no income tax. Every nickel by which their itemized deductions are reduced is coming out of their charitable contributions.

What effect does (or should) this have on their inclination to give? Again, setting aside the literature that says income tax incentives for charitable giving are not all that strong anyway. And setting aside the fact that higher income taxpayers tend to give to private colleges, art museums, and donor advised funds, rather than to soup kitchens and homeless shelters.

An economic analysis

I am about to get all counter-intuitive on you, so bear with me. And actually, this reasoning was set out very clearly in a report by the staff of the Joint Committee on Taxation in 2001 in preparation for a Senate Finance Committee hearing on the proposal to phase out the "Pease" limitation.

This is the takeaway: the amount by which the "Pease" limitation reduces the tax benefit of an itemized deduction is determined not by the amount of the deduction itself, but by the amount by which income exceeds the threshold.

In other words.

If our couple is in the 39.6 pct. marginal rate bracket, and they are itemizing deductions, each additional dollar of income is taxed as though it were a dollar and three cents, bringing their marginal tax rate to 40.79 pct. Or maybe less, if the total of itemized deductions does not bring them to the eighty pct. limitation. Each dollar they contribute to charity still generates a deduction of 39.6 cents, the nominal marginal tax rate.

In a way, this is somewhat akin to the proposal that has appeared in each of the Obama administration's budgets, to cap the rate at which itemized deductions reduce taxable income at 28 pct., though there are now three brackets above that rate. And of course, ACR has been vocal in opposing this proposal as well.

What is "hidden" here is not an impairment of the tax benefit of the charitable deduction, but rather an increase in the marginal tax rate for high income itemizers, who supposedly can afford it. Progressivity, in other words. Nothing is "covertly chipping away" at the deduction itself, which remains intact.

A closing thought on "salience"

"Tax salience" has to do with whether a mechanism of the tax code is sufficiently visible to function effectively as an incentive or disincentive a taxpayer's behavior.

While the "Pease" limitation is not intended to discourage taxpayer spending on deductible items, and an economic analysis shows it should not, it seems to have a perverse "salience" that somehow allows ACR to mount an ostensibly credible campaign to exclude the charitable deduction from its reach.

As with so many public policy matters, the discussion is easily dominated by demagoguery.

the very occasional blogger

The text here used to say,

"In my 'day job,' I do not often have an opportunity to articulate some of my more contrarian views."

With the launch of the Jack Straw Fortnightly back in January 2018 that is no longer the case. This blog remains "very occasional," however, and functions primarily as a place to post news releases.

soft launch PG 103

jack straw on hiatus

comments submitted on proposed 642(h) regs

plus ça change

comments submitted on proposed dark money regs

comments submitted on proposed clawback regs

newsletter pre-launch

just saying

A word or two about the "Pease" limitation

the very occasional blogger

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