Dear Colleague,

Welcome to the inaugural edition of Gift Planning Update, an in-house publication of the Advancement department of the Jewish Home of San Francisco. The goal of these ongoing communications is to provide up-to-date charitable planning information for California practitioners.

On a personal note, I am gratified to be the Home's first full-time gift planning professional. With my legal background and 25 years in the field of charitable gift and tax planning, the Home is able to offer free consultation and information services to professionals, such as you, to assist you in serving your clientele and our donors. I should note that the Jewish Home does not perform legal work on behalf of individuals; donors are encouraged to independently consult qualified professional advisors to assist them in their charitable estate planning.

The use of a formula clause to limit federal estate tax (or gift tax) liability was at issue where an estate's asset value was increased after an IRS review. In Christiansen v. Cmr., No. 08-3844, 2009 U.S. App. LEXIS 24932 (8th Cir. Nov. 13, 2009), aff'g , 130 T.C. 1 (2008), the 8th Circuit affirmed a Tax Court ruling that where the "charitable lid" disclaimer language referred to values "as finally determined for federal estate tax purposes," the charitable deduction could be increased beyond the amount initially claimed. The 8th Circuit affirmed the analysis of the Tax Court that "the Commission fails to distinguish between events that occur post-death that change the actual value of an asset or estate and events that occur post-death that are merely part of the legal or accounting process of determining value at the time of death." (pp. 3-4 of opinion)

The "as finally determined" language in a disclaimer has subsequently been applied to federal gift tax regulations as well. Petter v. Comr., T.C. Memo, 2009-290. An excellent analysis of both cases by Roger A. McEowen, director of the Iowa State University Center for Agricultural Law and Taxation may be found at http://www.calt.iastate.edu/eighthcircuit.html.
 

The general rule is that is a taxpayer may take an itemized income tax deduction for charitable gifts up to 50 percent of the modified adjusted gross income (MAGI) for cash gifts or 30 percent of MAGI for gifts of appreciated assets. Gifts in excess of those amounts may be carried forward for five additional years.

The amount carried forward must, however, be used as soon as you are eligible to use it. In Gregory A. Maddux et ux. v. Commissioner; T.C. Summ. Op. 2009-30; No. 8072-08S (4 Mar. 2009), the taxpayers delayed a year in taking their carry forward charitable deduction even though they were eligible to use some of the carry forward amount in a prior year. The court held that any carry forward amounts not claimed when first eligible were lost.

Thus, "use it or lose it" would now appear to apply to carry forward charitable deduction gifts.

Direct gifts to charities from retirement plan assets have traditionally been subject first to income tax recognition of the distributed amount. Through legislation that expired on December 31, 2009, the direct gift of IRA assets by individuals 70½ and older were distributable without the recognition of income by the donor. (Note: Because no income is recognized in this transfer, there is also no corresponding charitable deduction.) Prior to 2009, the additional impetus to make these gifts was that the charitable gift could satisfy the individual's required minimum distribution (RMD). Congress's decision to suspend RMD during 2009 eliminated the "extra" reason for donors to give.

As of this writing, the Tax Extenders Bill has passed the House and is pending in the Senate. If adopted in its current form, the RMD will be reinstated but the benefits of direct charitable gifts will continue. Therefore, donors wishing to maximize the value of current gifts may find IRA gifts particularly attractive. Note, however, that the benefit is applicable to direct gifts only and will not apply to split-interest instruments or donations to donor-advised funds.
 

Eight years was apparently not long enough for Congress to deal with the phase out of the federal estate tax. Although there is no consensus for a permanent estate-exemption amount or rate, Congressional leaders have indicated that whatever they pass this year will be made retroactive to January 1, 2010. Litigation is bound to occur due to its effect on those individuals who died in the period between January 1 and that date of the act's passage.

Regardless of the final terms of the act, there are a couple of things we know about its impacts on charitable giving.

First, the unlimited estate tax charitable deduction appears to be safe. Therefore, individuals who wish to make charitable gifts, either by dollar amount or percentage of the residuary estate, will continue to receive the best possible tax treatment.

Second, there is the possibility that some appreciated assets will no longer receive a step-up in basis to date of death (or alternate valuation date) value. If that occurs, the gift of appreciated assets in an estate would have the same benefit of current appreciate asset gifts, viz. there will be a full charitable deduction of the gift without the recognition of gain by the estate.

In order to obtain this favorable tax treatment, you may wish to consider using language similar to that used to satisfy gifts from income in respect of a decedent (IRD), and include sequential distribution language. The following is an example of how that language might appear.

I have made the charitable gifts described in this instrument because I firmly believe the not-for-profit organizations should be sustained by individuals who support their charitable purposes. I also believe that where tax law support of these gifts is available, those tax laws should be utilized to the maximum amount legally allowed.

Therefore, notwithstanding any language within this instrument to the contrary, this instrument shall be construed so that the charitable gifts meet the formal deduction and/or exemption requirements of every qualifying income, fit, estate, or other federal, state, or local tax laws pertaining to charitable contributions which become applicable because of my death and as my estate has been finally determined for federal estate tax purposes.

With the exception of charitable gifts which are made from specifically earmarked assets within my estate, all charitable gifts provided for in this instrument shall be satisfied from assets includable in my estate for tax purposes, in the following order:

1. First, from all property classified as Income in Respect of a Decedent for federal estate tax purposes in connection with my estate;
2. Second, from all property that would otherwise be subject to forms of federal taxation other than federal estate and gift taxes in connection with my death;
3. Third, from other property in my estate which is subject to federal estate or gift taxes; and
4. Fourth, from other assets in my estate.

“No contest” provisions are losing most of their effectiveness with respect to any wills or trusts that became irrevocable after January 1, 2001. The new Probate Code Sections 21310-21315 now expressly reject no contest clauses and will find them enforceable only in the following types of contests, noted in Section 21311(a):

     (1) A direct contest that is brought without probable cause.
     (2) A pleading to challenge a transfer of property on the grounds that it was not the transferor's property at the time of the transfer. A no contest clause shall only be enforced under this paragraph if the no contest clause expressly provides for that application.
     (3) The filing of a creditor's claim or prosecution of an action based on it. A no contest clause shall only be enforced under this paragraph if the no contest clause expressly provides for that application.

No contest clauses have been notably problematic in do-it-yourself documents. This is yet another reason why the Jewish Home encourages donors to engage the services of a qualified professional in their estate planning.

Estate-planning documents have historically included the grant of authority to handle financial matters and make healthcare decisions during lifetime. California's Advance Health Care Directive was effective to express general health preferences.

Effective January 1, 2009, the Physicians Orders for Life-Sustaining Treatment (POLST) form has allowed individuals to express specific wishes to a healthcare provider related to end-of-life care, including a specification of particular kinds of treatment that the individual wished to either receive or not receive. At the Jewish Home, we are starting to see completed POLST forms included with an individual’s admission documents. The approved California form can be accessed at http://www.emsa.ca.gov/pubs/pdf/ApprovedPOLSTForm.pdf.

When donors advise us that they have remembered the Jewish Home in their will, trust or other charitable instrument, they are automatically enrolled in the Carob Tree Circle. Membership benefits include periodic special recognition events, listing on the permanent recognition plaque erected at the Home, and early notification of news and initiatives that are especially meaningful to individuals who have done visionary planning.

Professional advisors assisting our donors with their charitable estate plans are urged to use some variation of the following language to remember the Home:

I give [the sum of $_______ or _______percent of my residuary estate] to JEWISH HOME & SENIOR LIVING FOUNDATION, a nonprofit public benefit corporation organized under the laws of the state of California, located at 302 Silver Avenue, San Francisco, California 94112-1510, whose federal tax identification number is 02-0724278. This gift is to be held, managed and/or distributed for the charitable purposes of the Foundation.

The Jewish Home respects the confidential relationship between attorney and client. Nonetheless, we appreciate notification once the Home is included in documents. This information will be kept confidential and recognition of individuals is only made upon their consent.