I say, it’s better to give and receive. You can both give and receive by using the federal income tax charitable deduction.
A gift to a qualified charitable organization may entitle you to a charitable contribution deduction against your income tax if you itemize deductions. Assuming the gifts are deductible, the actual cost of your gift is reduced by your tax savings.
Charitable Deduction Tax Savings
The charitable deduction can result in significant tax savings regardless of which bracket you’re in, although the bracket does change the savings. For example, assume a donor in the 33% tax bracket gives a donation of $100 to her favorite qualified charitable organization. The charity receives the full gift of $100, but, for the donor, the actual out-of-pocket cost of the gift is only $67, and the donor saves $33.
Let’s make these assumptions for all tax brackets and see the savings which result:
|Bracket of Gift||Donation||Savings||Actual Cost|
This is a good deal for you and a good deal for your favorite causes. So why not consider using the charitable deduction?
One common is excuse is that the charitable deduction requires you to be extremely organized in maintaining records. Generally speaking, the greater the deduction, the more detailed the records you are required to keep. Yet, this organization is made a little bit easier when fully understanding the deduction.
Charitable Deduction: Basics of Substantiation
Here’s a simple explanation of IRS record keeping rules for the charitable deduction:
- Gifts of less than $250 per donee — you need a cancelled check or receipt
- $250 or more per donee — you need a timely written acknowledgement from the donee
- Total deductions for all property exceeds $500 — you need to file IRS Form 8283
- Deductions exceeding $5,000 per item — you need a qualified appraisal completed by a qualified appraiser
Wait, you ask, is it really that simple? Actually, no, not really. Let’s go through these categories and dig deeper.
Substantiation Requirements for Monetary Gifts less than $250
A federal income tax deduction for a charitable contribution in the form of cash, check, or other monetary gift is not allowed unless the donor substantiates the deduction with a bank record or a written communication from the donee showing the name of the donee, the date of the contribution, and the amount of the contribution.
Meaning of “Monetary Gift”
For this purpose, the term “monetary gift” includes the common ones you think of when thinking of the term–gifts of cash or by check. But monetary gift also includes gifts by use of:
- credit card;
- electronic fund transfer;
- online payment service;
- payroll deduction; or
- transfer of a gift card redeemable for cash.
Definition: Bank Record
Again, to claim the charitable deduction for any monetary gift, you need a bank record or written communication from the donee. The term “bank record” includes a statement from a financial institution, an electronic fund transfer receipt, a cancelled check, a scanned image of both sides of a cancelled check obtained from a bank website, or a credit card statement.
Definition: Written Communication
The term “written communication” includes email. Presumably it also includes text messages. But, again, the written communication, whether paper or electronic, it must show the name of the donee, the date of the contribution, and the amount of the contribution.
Substantiation of Gifts of $250 or more
For any contribution of either cash or property of $250 or more, a donor must receive contemporaneous written acknowledgment from the donee. Two keys here: “contemporaneous” and “written acknowledgement” both have very specific meanings in this context.
Requirements of written acknowledgment
The written acknowledgment must include:
- The date of the gift and the charity’s name and location.
- Whether the gift was cash or a description of the non-cash gift.
- A statement that no goods or services were provided by the organization in return for the contribution, if that was the case.
- A description and good faith estimate of the value of goods or services, if any, that an organization provided in return for the contribution.
- A statement that goods or services, if any, that an organization provided in return for the contribution consisted entirely of intangible religious benefits, if that was the case.
For a written acknowledgment to be considered contemporaneous with the contribution, a donor must receive the acknowledgment by the earlier of: the date on which the donor actually files his or her individual federal income tax return for the year of the contribution or the due date (including extensions) of the return.
Non-Cash Gifts of more than $500
If you make a total of more than $500 worth of non-cash gifts in a calendar year, you must file Form 8283, Noncash Charitable Contributions, with your income tax return.
You’ll only have to fill out Section A of Form 8283 if:
- the gifts are worth less than $5,000, or
- you’re giving publicly traded securities (even if they’re worth more than $5,000).
Otherwise, you’ll be required to fill out Section B of Form 8283 and all that entails.
Non-Cash Gifts of more than $5,000
If you donate property worth more than $5,000 ($10,000 for stock in a closely held business), you’ll need to get an appraisal. The information goes in Section B of Form 8283, Noncash Charitable Contributions.
An appraisal is required whether you donate one big item or several similar items which have a total value of more than $5,000. For example, if you give away a hundred valuable old books, and their total value is more than $5,000, you’ll need an appraisal even though you might think you’re really making a lot of small gifts. The rule applies even if you give the items to different charities.
Requirements for “qualified appraisal” and “qualified appraiser”
Again, non-cash gifts of more than $5,000 in value, with limited exceptions, require a qualified appraisal completed by a qualified appraiser. The terms “qualified appraisal” and “qualified appraiser” are very specific and have detailed definitions according to the IRS.
A qualified appraisal is a document which is:
- Made, signed, and dated by a qualified appraiser in accordance with generally accepted appraisal standards;
- does not involve prohibited appraisal fees; and
- includes certain and specific information.
Let’s further examine each of these four requirements.
Appraiser Education and Experience Requirements
An appraiser is treated as having met the minimum education and experience requirements if she is licensed or certified for the type of property being appraised in the state in which the property is located. In Iowa, for a gift of real estate, this means certification by the Iowa Professional Licensing Bureau, Real Estate Appraisers.
Further requirements for a qualified appraiser include that they:
- Regularly performs appraisals for compensation;
- demonstrates verifiable education and experience in valuing the type of property subject to the appraisal;
- understands they may be subject to penalties for aiding and abetting the understatement of tax; and
- not have been prohibited from practicing before the IRS at any time during three years preceding the appraisal.
Also, a qualified appraiser must be sufficiently independent. This means a qualified appraiser cannot be any of the following:
- The donor;
- the donee;
- the person from whom the donor acquired the property [with limited exceptions];
- any person employed by, or related to, any of the above; and/or
- an appraiser who is otherwise qualified, but who has some incentive to overstate the value of the property.
Timing of Appraisal
The appraisal must be made not earlier than 60 days prior to the gift and not later than the date the return is due (with extensions).
Prohibited Appraisal Fees
The appraiser’s fee for a qualified appraisal cannot be based on a percentage of the value of the property, nor can the fee be based on the amount allowed as a charitable deduction.
Specific Information Required in an Appraisal
Specific information must be included in an appraisal, including:
- A description of the property;
- the physical condition of any tangible property;
- the date (or expected date) of the gift;
- any restrictions relating to the charity’s use or disposition of the property;
- the name, address, and taxpayer identification number of the qualified appraiser;
- the appraiser’s qualifications, including background, experience, education, certification, and any membership in professional appraisal associations;
- a statement that the appraisal was prepared for income tax purposes;
- the date (or dates) on which the property was valued;
- the appraised FMV on the date (or expected date) of contribution;
- the method of valuation used to determine FMV;
- the specific basis for the valuation, such as any specific comparable sales transaction; and
- an admission if the appraiser is acting as a partner in a partnership, an employee of any person, or an independent contractor engaged by a person, other than the donor, with such a person’s name, address, and taxpayer identification number.
Appraiser’s Dated Signature and Declaration
Again, a qualified appraisal must be signed and dated by the appraiser. Also, there must be a written declaration from the appraiser she is aware of the penalties for substantial or gross valuation
The charitable deduction can result in significant tax savings. But, substantiation rules, as you’ve seen, can be complicated. Almost all Iowans have a unique estate plan, so be sure to contact the appropriate professional for personal advice and counsel.
Feel free to contact me any time to discuss how to maximize your charitable gift. I offer a one-hour free consultation, without any obligation. I can be reached any time at my email, firstname.lastname@example.org, or on my cell, 515-371-6077.
In Iowa, Spouses Can’t Disinherit Spouses
Can Monica, my wife, disinherit me? In a word, no.
Assuming a valid marriage in Iowa, a spouse cannot disinherit a spouse. Even if a spouse wants to do so, even if that’s the spouse’s true intent—nope.
What if in a legal will, the first-to-die spouse includes the following clause:
“I acknowledge that I have a spouse, named Gordon Fischer, who is not provided for in this will. It is my specific intention to not provide for my spouse Gordon Fischer under the terms of my will.”
Even with a clear clause like this, I, Gordon, am not disinherited. Why is this so?
Statutory “Forced Share”
An Iowa statute allows spouses to take a “forced share” against the will. In short, the surviving spouse has a choice; the spouse can inherit any property bequeathed to him/her under the will, OR the spouse can take a forced share. So, even if a will leaves nothing for the surviving spouse, the surviving spouse can take a forced share against the will.
Under Iowa law (specifically, Iowa Code § 633.238), a surviving spouse that elects against the will is entitled to:
- One-third of the decedent’s real property;
- All exempt personal property that the decedent held; and,
- One-third other personal property of the decedent that is not necessary for payment of debts and other charges.
In other words, a surviving spouse can choose (elect) after your death to basically ignore your will or trust that doesn’t provide for said surviving spouse, and take approximately one-third of your estate.
For example, if you left your entire estate to your children and not your spouse, your spouse can say, “You know, I don’t like this at all. I’ll take one-third of my dead spouse’s estate. Thank you!” And, pretty much just like that, boom, the surviving spouse can do so.
Oral Agreement to Disinherit
What if Monica and I talk about this matter and come to an oral agreement. Something like this:
Monica: I want to disinherit you. Should you be the surviving spouse, you should get nothing.
Gordon: Wow. That hurts. But if that’s what you want honey, I agree.
Is this agreement enforceable? No, for several reasons. First, it’s not written and oral agreements are generally unenforceable. Also, it doesn’t and can’t displace the plain language of an Iowa statue which allows a spouse to elect a forced share against the will, and gain one-third of the estate. You can’t orally agree to ignore a statute’s clear intent!
Written Agreement to Disinherit
But what if Monica asked me to agree, in writing, to not take a spousal share? Say, we write up a formal contract stating I’m essentially not getting anything under Monica’s will, no how, no way. I also agree in the contract that under no circumstances will I take a statutory share.
Would such a written contract be enforceable? No.
While Iowans have a great deal of freedom to contract, just like the above oral agreement example, you can’t contract in direct opposition to a clear statute.
Also, interestingly, Iowa courts have ruled postnuptial agreements are not enforceable.
Postnuptial agreements are written contracts between spouses that are executed after the couple has married (as opposed to the prenuptial agreements you usually hear about). Iowa courts have struck down postnuptial agreements for nearly a century, since 1912 when the Iowa Supreme Court first found postnuptial agreements to be of no validity. In re Kennedy’s Estate, 135 N.W. 53 (Iowa 1912).
But Monica, it’s OK. Very likely you’ll be the surviving spouse anyway.
Beyond just your spouse, it’s important to have an updated estate plan to define all of your beneficiaries and wishes for your estate following your death. Have questions or need more information? Feel free to reach out any time. You can contact me by email at Gordon@gordonfischerlawfirm.com or give me a call at 515-371-6077.
I’m proud to be an active Rotarian. I’m also proud to be an Iowa lawyer.
And, I am proud of the singular, perhaps even unique, mission of my law firm. The mission of Gordon Fischer Law Firm is to promote and maximize charitable giving in Iowa.
To achieve this mission, I help individuals, families, and businesses with estate planning that ranges from simple wills to complex trusts. I assist nonprofits reach their philanthropic goals. I guide donors in increasing their charitable giving.
Naturally, my membership in Rotary and the mission of my law firm intersect perfectly when it comes to supporting the Rotary Foundation. The Rotary Foundation does so much good both here at home and around the world.
As the Rotary Foundation states on its website, the Foundation “taps into a global network of Rotarians who invest their time, money, and expertise into our priorities, such as eradicating polio and promoting peace. The Foundation grants empower Rotarians to approach challenges such as poverty, illiteracy, and malnutrition with sustainable solutions that leave a lasting impact.”
As a Rotarian, and as a lawyer, I wanted to share some of my expertise to allow Rotarians to give even more generously, so the Rotary Foundation can continue to do, and perhaps even expand, their great work.
TYPES OF CHARITABLE GIVING
It’s easiest to understand charitable giving by looking at it in two broad categories: giving during lifetime (called inter vivos transfers), and giving at death (testamentary transfers). There is a third category which lawyers call “split interest gifts”—tools that can be used during life or by operation of a will (such as, charitable gift annuities and charitable remainder trusts).
Read on to learn more about testamentary gifts made through your estate plan. Then we’ll talk about charitable giving during your lifetime. Finally, we’ll discuss two special philanthropic tools that can both be used during life and at death.
CHARITABLE GIVING THROUGH YOUR ESTATE PLAN
Estate plan is set of legal documents
An estate plan is simply a set of legal documents to prepare for the event of your death or disability. Note I said “estate plan,” and not “will.” While these terms are often used synonymously, they are not at all the same thing. An estate plan is a set of legal documents, and a will is just one of those documents, albeit an important one.
Six “Must Have” Estate Planning Documents
There are six documents that should be part of most everyone’s estate plan. Plus, you should keep these documents updated and current. Also, don’t forget about assets with beneficiary designations, such as savings and checking accounts, and retirement benefit plans. For many Iowans, that’s enough— keeping six documents and assets with beneficiary designations current.
I’ll just briefly touch on five of the six documents, before we dive into your will and charitable gifting to the Rotary Foundation.
Estate Planning Questionnaire
You should begin with an estate planning questionnaire. (Like this one on my website.) An estate plan questionnaire is an easy way to get all of your information in one place, and it should help you understand and prioritize estate planning goals.
Powers of Attorney
A power of attorney for healthcare designates someone to handle your healthcare decisions for you if you become unable to make those decisions for yourself. This essentially gives another person the power to make medical decisions on your behalf.
The power of attorney for financial matters is similar, only your designated agent has the power to make decisions and act on your behalf regarding your finances. This document gives your agent the authority to pay bills, settle debts, sell property, or anything else that needs to be done if you become incapacitated and unable to do this yourself.
Disposition of Personal Property
Another useful document is the disposition of personal property. This is where you get to be specific about items you want people to have, say, your eldest daughter getting your wedding ring, or your nephew getting your baseball card collection.
Disposition of Final Remains
Yet another helpful document is the disposition of final remains, where you get to tell your loved ones exactly how you want your body to be treated after you pass away. This could include details on burial or cremation, and what type of service(s) you want.
Where there’s a Will, There’s A Way to Help Rotary Foundation
Now let’s get to the will. With your will, you’ll be answering four major questions:
- Who do you want to have your stuff? A will provides orderly distribution of your property at death per your wishes. Your property includes both tangible and intangible things. (An example of tangible items would be your coin collection. An example of an intangible asset would be stocks.)
- Who do you want to be in charge of carrying out your wishes as expressed in the will? The “executor” is the person who will be responsible for making sure the will is carried out as written.
- Who do you want to take care of your kids? If you have minor children (i.e., kids under age 18), you’ll want to designate a legal guardian(s) who will take care of your children until they are adults.
- What charities do you want to support with your estate assets? Which of your favorite causes do you want to support at death, like the Rotary Foundation?
Four Types of Bequests
Charitable gifts in a will are called “bequests.” Generally speaking, there are four types of bequests.
- Pecuniary Bequest: A gift of a fixed or stated sum of money designated in a donor’s will. An example: “I give the sum of $10,000 (ten thousand dollars) to Rotary Foundation.”
- Specific Bequest: A gift of a designated or specific item in the will. The item will most likely be sold by the organization and the proceeds would benefit that nonprofit. An example: “I give my Grant Wood painting to Rotary Foundation.”
- Residuary Bequest: In legal terms, a “residue” of the estate is what is left of the estate after payment of debts, funeral expenses, executors’ fees, taxes, legal, and other expenses incurred in the administration of the estate, and after any gifts of specific assets or specific sums of cash. The estate residue would include all property, both personal and real estate. A residuary clause is a provision in a will that passes the residue of an estate to beneficiaries identified in the will. An example: “I give all of the residue of my estate to the Rotary Foundation.”
- Contingent Bequest: A gift in a will made on the condition of a certain event that might or might not happen. A contingent bequest is specific and fails if the condition is not made. An example: “I give the sum of $10,000 (ten thousand dollars) to my niece, Jane Smith, if still living. If my niece fails to survive me, I give the sum of $10,000 (ten thousand dollars) to the Rotary Foundation.”
Which type of bequest to the Rotary Foundation should you choose? It really depends on your personal circumstances. Consult your individual estate planner for specific advice.
CHARITABLE GIVING DURING LIFETIME
It’s been said, “you should be giving while you are living, so you’re knowing where it’s going.” Many Rotarians have intentions to donate eventually to the Rotary Foundation, often, as we’ve been discussing, at death through their estate plan. But why not give now? You can have more say about your gifts while you are still alive, and also feel the joy that comes with helping the cause you care about most. There are also lots of good tax reasons for giving now rather than later.
Imagine Rotarian Jill Donor, wanting to help her favorite nonprofit. When asked for a charitable gift to the Rotary Foundation, Donor agrees and immediately reaches for her checkbook, or goes online to donate with a debit/credit card.
It’s noble for Donor to give. However, consider this question: should Donor give cash? Or, does Donor own other non-cash assets which might be more tax-savvy? Can Donor be even more generous in support of her favorite cause, while lowering her out-of-pocket costs for charitable gifts?
Also, keep in mind that cash is only a small sliver of Donor’s overall assets and net worth. Even putting aside tax benefits, couldn’t Donor give more to the Rotary Foundation by looking at her much more robust non-cash assets? Let’s explore some non-cash gift options.
Appreciated, Long Term, Publicly Traded Stock
All sorts of non-cash assets can be used for charitable gifts to the Rotary Foundation, but for several reasons, appreciated, long-term, publicly traded stock is a wise choice. It’s convenient to give, you can save money on capital gains taxes you would have paid had you sold the stock, and it’s easy to value.
Endow Iowa Tax Credit
All Iowans should be aware of the Endow Iowa Tax Credit. Endow Iowa allows donors who give qualifying charitable gifts to receive a whopping 25% state tax credit. I have some illustrations showing what great tax savings can be realized by use of the Endow Iowa Tax Credit.
IRA Charitable Rollover
The federal law known as the IRA Charitable Rollover allows individuals aged 70½ and older to donate up to $100,000, tax free, from their IRAs directly to Rotary Foundation. There are two threshold requirements. First, you must be age 70½ or older. Second, the retirement plan account must be an IRA. Want more details? This blog post digs in.
Retirement Benefit Plans
For those not yet 70 ½ and/or who don’t have an IRA, but another type of retirement plan, think about this. Sometimes owners’ retirement benefit plans must make what are called Required Minimum Distributions, or RMDs. Since you must withdraw RMDs, anyway, why not give the money to a worthy charity like Rotary Foundation?
For those who don’t yet have to make RMDs, remember that after age 59 ½, generally you can make withdrawals from your retirement benefit plan without any tax penalty. If indeed there’s no penalty, and you make a charitable gift from your retirement benefit plan, you can presumably take an income tax charitable deduction. This should therefore be a “wash” for tax purposes.
Also, keep in mind: you can make a very meaningful gift simply by naming the Rotary Foundation as beneficiary of an IRA, 401(k), 403(b), or other retirement plan. Giving retirement assets in this way is quite easy. Simply contact the institution holding your retirement plan, request a change of beneficiary form, fill the form out completely and correctly, and return the form. Typically naming a beneficiary in this way does not require drafting or amending a will or trust.
“SPLIT INTEREST” GIFTS
A “split interest” gift is when a donor makes a gift to a qualified charity, like the Rotary Foundation, but retains the right to a portion of the gift. Typically, the gift is divided into lifetime income and asset value at death. The majority of donors retain income during their lifetime.
There are two split interest gifts which might be greatly helpful to donors wanting to support the Rotary Foundation. Let’s discuss each briefly.
Charitable Gift Annuity
A Charitable Gift Annuity (CGA) is a contract. It’s a contract that combines the benefits of an immediate income tax deduction and a lifetime income stream. Also, your future taxable estate will be reduced for the remainder value of the property transferred to charity.
A CGA is an arrangement in which you make a gift of cash, or other property, in exchange for a guaranteed income annuity for life. This is similar to buying an annuity in the commercial marketplace, except that you can claim an immediate charitable tax deduction for the excess of the value of the property over the value of the annuity, based on IRS tables. The charity must receive at least 10% of the initial net value of the property transferred in order for you to claim a charitable deduction for a portion of the purchase price.
There’s much more to say about CGAs. I wrote an article detailing more specifics, as well as their benefit, check it out here.
Charitable Remainder Trust
A charitable remainder trust (CRT) provides a unique opportunity for donors to retain lifetime income from property while obtaining a current income tax deduction (or estate tax deduction) for the remainder interest which will pass to charity.
Charitable remainder trusts are often appealing to donors with appreciated assets, producing little or no income, such as real estate or securities. This is because the assets can be sold without capital gains tax and invested to provide a higher income stream.
A CRT separates the current interest and future interests in property and disposes of each differently. Income from trust assets is paid to at least one non-charitable beneficiary (often, the grantor or the grantor’s family) for a certain period. The payments can be made for the non-charitable beneficiary’s lifetime (or joint lives for multiple beneficiaries), or over a fixed period of up to 20 years. When the non-charitable beneficiary’s interest ends, the trust assets pass irrevocably to a charity. I’m doing a deep dive into CRTs with a three-part series, you can read the first post, here.
SUM IT ALL UP
What all this means is that you, dedicated Rotarian, have a treasure chest of choices when it comes to making charitable gifts that can have an impact. Charitable giving can, and should, be a mutual positive situation that benefits the Rotary Foundation as well as the donor. Of course, this is just the tip of the iceberg. I would love to start a conversation with you about your estate planning and charitable giving goals. Feel free to reach out at any time; you can find me by email at Gordon@gordonfischerlawfirm.com or by phone at 515-371-6077. Or just grab me at Rotary Lunch!
Gordon Fischer has been an active and accomplished Iowa lawyer for more than 20 years. Gordon received his law degree, summa cum laude, from Southern Illinois University. After law school, Gordon clerked for the Iowa Court of Appeals. He then joined the Des Moines firm of Bradshaw, Fowler, Proctor & Fairgrave, P.C. He became a partner and gained a reputation for skilled and conscientious litigation in all areas of law, with a focus on employment. In 2013, Gordon left the firm to become Vice President of Gift Planning Strategies for the Community Foundation of Greater Des Moines, where he helped donors plan and achieve their philanthropic goals. In 2014, he received the Chartered Advisor in Philanthropy designation from The American College of Financial Services.
Gordon serves his community and his profession in a variety of ways, on boards and commissions and as a mentor and hands-on volunteer, and through his involvement as a Rotarian. At Gordon Fischer Law Firm, P.C., he blends his legal expertise and commitment to the charitable sector and those who support its work.