Gifts And Charitable Gifts

<div class="Section1">There are exceptions to the disallowance rule for certain transfers involving charitable gift annuity contracts ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="607">607</a>) and charitable remainder trusts.<a href="#_ftn1" name="_ftnref1">¹</a><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&sect;&nbsp;170(f)(10)(D), 170(f)(10)(E).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Generally, no. If the insured has any incident of ownership in the policy at the time of death, the proceeds are includable in the insured’s gross estate, but a charitable deduction is allowable for their full value.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> If, however, the law in the state of the donor’s domicile does not recognize that a charity has an insurable interest in the life of the donor, complications may arise. In some states, a charity may not have an insurable interest with respect to a newly issued insurance policy given to the charity or for a policy applied for and issued to the charity as owner and beneficiary. If the charity does not have an insurable interest and the insurer or the insured’s estate raises the question of lack of an insurable interest, the insured’s estate may be able to recover the proceeds (or the premiums paid). The proceeds are includable in the insured’s estate to the extent that the proceeds could be received by the insured’s estate. No charitable deduction may be allowed if the executor recovers the proceeds for the estate or if the executor were to fail to recover the proceeds and the proceeds passed to charity.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC §§ 2042(2), 2055; <em>Commissioner v. Pupin</em>, 107 F.2d 745 (2d Cir. 1939); <em>McKelvy v. Commissioner</em>, 82 F.2d 395 (3d Cir. 1936).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     <em>See</em> Let. Rul. 9110016 (revoked by Let. Rul. 9147040 when state law was amended to permit an insured to immediately transfer a newly purchased life insurance policy to charity).<br /> <br /> </div>

<div class="Section1"><br /> <br /> While the IRC generally disallows a charitable deduction for gifts of less than the donor’s entire interest in property, it does permit limited exceptions to this rule. One of these is a gift of an “undivided interest” in property. This means that the donor may give less than his entire interest and still take a charitable gift deduction if he gives “a fraction or percentage of each and every substantial interest or right” he owns in the property.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> In a letter ruling, the IRS took the position that a gift of a life insurance policy to a charity was deductible even though the donor retained the right, exercisable in conjunction with the donee charity, to change the charitable beneficiaries. The IRS reasoned that by sharing the right to change charitable beneficiaries, the donor had given an undivided interest in the right he retained and thus the gift came within the exception to the rule against deducting partial interest gifts.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 170(f)(3)(B)(ii); Treas. Reg. § 1.170A-7(b)(1)(i).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     Let. Rul. 8030043.<br /> <br /> </div>

<div class="Section1">Where the primary beneficiary has an annual, limited, noncumulative right of withdrawal, the beneficiary has made a gift to contingent beneficiaries when the beneficiary fails to exercise the right. A lapse of the right is subject to gift tax only to the extent that the right to withdraw exceeded the greater of $5,000 or 5 percent of the value of the proceeds at the time of lapse ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="205">205</a>).<a href="#_ftn1" name="_ftnref1">¹</a><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&nbsp;2514(e).<br /> <br /> </div></div><br />

<div class="Section1">If the gift qualifies as a present interest gift ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="218">218</a>), each spouse&rsquo;s annual exclusion ($18,000 in 2024, $17,000 in 2023 and $16,000 in 2022) can be applied to reduce or eliminate the gift tax. Thus, $18,000 in 2024 (2 &times; $18,000) can be subtracted from the value of the contract given and from premiums paid by the donor as gifts in subsequent years (so long as the spouse consents each year) in computing taxable gifts for years in which the gifts are made. The consenting spouse&rsquo;s unified credit also can be applied against any gift tax imposed on the spouse&rsquo;s gift where the gift is in excess of the allowable exclusion or is a future interest gift. (<em>See also</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="214">214</a>.)</div><br />

<div class="Section1">The IRS has ruled that a gift to charity of the annuity portion of a split-life contract is not deductible because it is a gift of less than the donor’s entire interest in property.<a href="#_ftn1" name="_ftnref1">¹</a> The IRS reasoned that the donor, prior to making the gift, exercised the right to purchase the annual term insurance and, thus, the donor had retained a right in the property. Furthermore, the donor’s subsequent annual cash contributions equal to the annuity premiums were treated by the IRS as given in exchange for the charity’s continued election to allow the donor to renew the term life insurance. Thus, the donor continued to retain the right to purchase the annual term insurance. Because the donor retained a right, the donor’s gift of the annuity portion was of less than the donor’s entire interest in the property.<a href="#_ftn2" name="_ftnref2">²</a> The ruling did not clearly deal with the deduction of the annual cash contributions and some commentators believe they might be deductible. However, the reasoning of the IRS – that the annual contributions were in exchange for the continued right to renew the term insurance – suggests that the donor’s entire interest in the cash contributions was not given.</div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     <em>See</em> IRC § 170(f)(3).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     Rev. Rul. 76-1, 1976-1 CB 57.<br /> <br /> </div>

<div class="Section1">A charitable organization that pays premiums after December 17, 1999, on a life insurance, annuity, or endowment contract in connection with a transfer for which a charitable deduction was not allowable is subject to a penalty tax equal to the amount of premiums paid.<a href="#_ftn1" name="_ftnref1">¹</a> The IRS has indicated that other penalties may be imposed on charitable organizations involved in charitable split-dollar plans.<a href="#_ftn2" name="_ftnref2">²</a></div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 170(f)(10)(F).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     Notice 99-36, 1999-2 CB 1284.<br /> <br /> </div>

<div class="Section1"><br /> <br /> Yes.<br /> <br /> An outright gift of a life insurance policy to the donor&rsquo;s spouse qualifies for the gift tax marital deduction on the same basis as the gift of a bond or any other similar property.<a href="#_ftn1" name="_ftnref1">¹</a> The same should hold for subsequent premiums paid on the policy by the donor. An annual exclusion may be allowed instead of the marital deduction if the donee spouse is not a U.S. citizen. <em>See</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="157">157</a> for gift of policy in trust.<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>Kidd v. Patterson</em>, 230 F. Supp. 769 (N.D. Ala. 1964).<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> No.<br /> <br /> Under a survivor income benefit plan, an employer provides an income benefit for certain survivors designated by family or marital relationship to the employee. An employee does not make a gift of the survivor benefit at the time of death.<a href="#_ftn1" name="_ftnref1">¹</a> Note that neither Revenue Ruling 81-31 nor <em>Estate of DiMarco v. Commissioner</em> addressed whether an employee should be treated each year as (1)&nbsp;receiving compensation equal to the value of providing a death benefit or survivor income benefit to an eligible survivor if the employee died during the year, and (2) transferring such value to the eligible survivor. The use of the annual exclusion and the marital deduction might protect such a gift from any gift tax. (<em><em>See</em> </em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="100">100</a> for estate tax aspects and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="260">260</a> for income tax aspects.)<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 92-68, 1992-2 CB 257, revoking Rev. Rul. 81-31, 1981-1 CB 475 (in which the Service treated an employee as making a gift of the benefit from a death-benefit-only plan in the year of the employee&rsquo;s death); <em>Estate of DiMarco v. Commissioner</em>, 87 TC 653 (1986), acq. in result, 1990-2 CB 1.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Yes, subject to the limits on deductions for gifts to charities.<br /> <br /> The amount of any charitable contribution must be reduced by the amount of gain that would have represented ordinary income to the donor had the donor sold the property at its fair market value.<a href="#_ftn1" name="_ftnref1">¹</a> Gain realized from the sale of a life insurance contract is taxed to the seller as ordinary income ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="36">36</a>). Therefore, the deduction for a gift of a life insurance policy to a charity is restricted to the donor&rsquo;s cost basis in the contract when the value of the contract exceeds the premium payments. Thus, if a policy owner assigns the policy itself to a qualified charity, or to a trustee with a charity as irrevocable beneficiary, the amount deductible as a charitable contribution is either the value of the policy or the policy owner&rsquo;s cost basis, whichever is less ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="144">144</a>).<a href="#_ftn2" name="_ftnref2">²</a> It is not necessary, however, to reduce the amount of the contribution when, by reason of the transfer, ordinary income is recognized by the donor in the same taxable year in which the contribution is made.<a href="#_ftn3" name="_ftnref3">³</a> Letter Ruling 9110016, in which the IRS denied a charitable deduction when a policy was assigned to a charity that had no insurable interest under state law, was revoked after the taxpayer decided not to proceed with the transaction.<a href="#_ftn4" name="_ftnref4">⁴</a><br /> <br /> Premium payments also are deductible charitable contributions if a charitable organization or a trustee of an irrevocable charitable trust owns the policy.<a href="#_ftn5" name="_ftnref5">⁵</a> It is not settled whether premium payments made by the donor to the <em>insurer</em> to maintain a policy given to the charity, instead of making cash payments directly to the <em>charity</em> in the amount of the premiums, are gifts <em>to</em> the charity or merely gifts <em>for the use</em> of the charity. The difference is important when the donor wishes to take a charitable deduction of more than 30 percent of the donor&rsquo;s adjusted gross income. When the policy is merely assigned to a charitable organization as security for a note, the premiums are not deductible even though the note is equal to the face value of the policy and is payable from the proceeds at either the insured&rsquo;s death or the maturity of the policy. The reason is that the note could be paid off and the policy recovered after the insured has obtained charitable deductions for the premium payments. A corporation, as well as an individual, can take a charitable contribution deduction for payment of premiums on a policy that has been assigned to a charitable organization.<a href="#_ftn6" name="_ftnref6">⁶</a><br /> <br /> <hr><br /> <br /> <strong>Planning Point:</strong> For a number of reasons, including concerns over the rules limiting a tax deduction to the lesser of fair market value or basis and because of the uncertainty regarding tax consequences of premium payments made by the donor directly to the insurance company on a policy owned by a charity, it is generally preferable for a donor to make cash gifts to a charity and allow the charity to pay premiums on policies owned by the charity. It is important, however, not to require that the cash gifts be used for premium payments.<br /> <br /> <hr><br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&nbsp;170(e)(1)(A).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>See Behrend v. Commissioner</em>, 23 BTA 1037 (1931), <em>acq</em>. X-2 CB 5; <em>Tuttle v. U.S.</em>, 305 F. Supp. 484 (N.D.N.Y. 1969).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect;&nbsp;1.170A-4(a).<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp;&nbsp;&nbsp; Let. Rul. 9147040.<br /> <br /> <a href="#_ftnref5" name="_ftn5">5</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>Hunton v. Commissioner</em>, 1 TC 821 (1943); <em>Behrend v. Commissioner</em>, 23 BTA 1037 (1931); Let. Ruls. 8708083, 8304068.<br /> <br /> <a href="#_ftnref6" name="_ftn6">6</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 58-372, 1958-2 CB 99.<br /> <br /> </div></div><br />