WAYS TO GIVE
 Karl Krienke taught physics and mathematics at Seattle Pacific University for 44 years. His wife, Reita, was an elementary and preschool teacher. Read how they gave creatively. |
GIVING REAL ESTATE OR OTHER PERSONAL PROPERTY
Donating property or securities directly to Seattle Pacific University may carry some very attractive tax benefits. Take a moment to read about them, then give us a call at (206) 281-2702 or email us today. We'll discuss the options with you and help you determine if this means of creative stewardship is a good fit in your circumstance.
Keeping the Whole Gift to Give as You Wish
Imagine you're mailing a present to a loved one. One delivery company promises to deliver your gift free. The other company says it will keep one-third of your gift as pay. Does it matter which company you choose? Of course it does! You want your entire gift to arrive safely.
The same holds true in giving appreciated property. How the gift is "delivered" can be as important as the gift itself. Unless care is taken, up to one-third of a donation may go to the IRS, but there are easy ways to sidestep this problem.
As you know, the federal government claims a portion of nearly all income, including the appreciation of your investments and property. So if you intend to donate real estate that has increased in value, the IRS will claim a portion of the profits when you sell your property. The same holds true for stocks that have appreciated in value. When you cash in, so does Uncle Sam.
Yet this tax doesn't need to diminish your charitable giving. The answer is simple: don't sell. Donate the property or securities directly to SPU. Because the University is tax exempt, it can sell the property or stock tax-free. This saves you the paperwork of selling while substantially increasing the size of your gift. And because SPU receives the full market value, your charitable deduction will be substantially larger than if you had sold the property yourself.
There are several options for giving appreciated property or stock. Below are a couple of examples of how this might work in a real life situation. Please bear in mind that the dollar amounts listed are for demonstration purposes only. Tax laws change yearly so please contact us for a free consultation and discuss your plans with your financial or tax consultant.
Life Estate Agreements
Donating your home to SPU doesn't always require a moving van. Through a life estate agreement, you can transfer the title of your home or property to SPU and retain full rights to enjoy the property for life. You are responsible for upkeep and entitled to profits from any business or farm on the property.
Even though you remain in the home, the IRS offers you a charitable deduction for the full property value in the year of the donation. Further, your home is protected from creditors. No future medical bills or unforeseen crises can cause eviction. Best of all, you'll have the satisfaction of knowing that a place which was so special to your family will benefit another special place -- SPU. Consumer Protection Disclaimer
A Gift of Real Estate
Karl B. owns a duplex rental in the Seattle area. Lately, the assessed value of the land has skyrocketed, and so have his property taxes. Rent income barely covers his costs. In addition, managing tenants and maintaining the duplex is growing tiresome. He wants to enjoy retirement with his wife, not spend it mending plumbing. Karl decides that now is the time to fulfill two dreams: 1) to set up an endowed engineering scholarship in memory of his grandfather, and 2) to leave the duplex behind, get into his R.V. and head to the Grand Canyon.
Karl discusses his plans with one of SPU's gift planning experts. The gift planning officer asks Karl whether he needs a giving plan that offers supplementary retirement income. No, Karl answers, he doesn't really need the extra income, and prefers to see the engineering scholarship launched right away. The giving officer explains that Karl needn't bother with selling the house or dealing with tenants. By giving the duplex directly to SPU, Karl will even avoid the capital gains tax of $14,250 on the property's appreciation.
He originally bought the duplex for $50,000 and it's now worth $145,000. If Karl were to sell the property himself, he would be left with only $130,750 to establish the scholarship fund. But if Karl donates the property directly to SPU, the entire value would go toward engineering scholarships and he would receive a charitable deduction for the full $145,000. Consequently, his charitable deduction of $145,000 is $14,250 larger than if he had sold the property himself and donated the after-tax profits. Each year now, Karl can take a charitable income tax deduction equal to 30 percent of his adjusted gross income and carry over the remainder of the $145,000 total deduction for up to five years.
Gifting Real Estate as an Exit Strategy for 1031 Exchange Investors
Many people have had a long history of success with buying and selling real estate through the favored tax strategy of the 1031 exchange. In short, Sec. 1031 of the tax code allows taxpayers to exchange “like-kind” investment property without the recognition of capital gain, as long as the property being purchased is worth as much as or more than the one being sold. This tax-code provision does not eliminate the recognition of capital gain entirely, but merely defers that recognition until a later date. Consequently, investors can continue “trading up” for many years as they buy and sell real estate for business or investment purposes, all the while enjoying significant appreciation undiminished by taxes.
Of course, an investor may choose to hang on to their 1031 exchange properties until his or her death and to bequeath the properties to heirs. When the heirs receive the properties, they do not “inherit” the investor’s low-cost basis in the properties. Rather, they receive a “stepped-up” cost basis that is equal to the fair market value of the properties when the investor died. This eliminates the recipient’s need to pay tax on all the capital gain the investor had accrued over the years.
But what happens when an investor is ready to retire from the real estate investment business? Understandably, the investor wants to be through with all the management worries associated with holding investment properties, but the investor also doesn't want to give up the income being eared from the properties. If investors choose to simply sell their 1031 exchange real estate holdings one final time with no subsequent like-kind purchases, they will owe capital gains tax on a potentially huge amount of appreciation. Is there another option they should consider?
For those who are charitably minded and want to continue receiving income while also saving taxes, a charitable remainder unitrust may be the answer. Here’s how it works:
- You transfer highly appreciated assets such as 1031 exchange property to a charitable remainder unitrust, which is administered by a trustee of your choice. You may serve as trustee if you like, or, to free yourself from management worries, you can appoint a bank or a charity such as the Seattle Pacific Foundation to serve as trustee. The trustee sells the assets at full market value and because the trust is tax-exempt, no capital gains tax is owed on the sale.
- The trustee reinvests the proceeds of the sale in assets that produce income, such as stocks and bonds.
- For the rest of your life, or for a term of years not to exceed 20, you or your designated beneficiary will receive a regular income or “payout” from the trust’s assets. Your payout will be for a fixed percentage (typically 5–7 percent) of the trust’s assets as they are revalued annually. With the charitable remainder unitrust there is the potential of larger payments over the years when the market does well and the trust assets grow, and this can provide a hedge against inflation. Each year you will receive a Schedule K-1 form telling you how your trust payments will be taxed (typically, partly as ordinary income and partly as capital gain income, although possibly partly tax-free as well).
- You are entitled to an income tax charitable deduction in the year of the transfer, in recognition of the fact that what remains of the trust’s assets when it ends will pass to the charity(ies) you have named. If you are unable to use the entire deduction in the year of the gift, you can carry any unused portion over into the following year as many as five times.
- So long as you and your spouse are the only beneficiaries of the trust, your estate pays no taxes on the assets you have transferred to the trust since they will pass to charity at the end of the trust term.
- You will have the satisfaction of knowing that your gift will help a charity like SPU have the funding it needs to carry out its mission in the future.
If you prefer the idea of fixed and guaranteed lifetime payments, you can also transfer 1031 exchange property to a charity in exchange for a charitable gift annuity. The gift annuity got its name because it is a “gift” to charity and an “annuity” that is paid to the donor and/or someone the donor designates. The gift annuity contract, in which the charity agrees to pay you and/or another beneficiary a fixed annuity each year for life, is backed by all of the assets of the charity. In this type of gift the charity also sells the property for full market value and pays no capital gain tax on the sale. As with the unitrust, you receive an income tax charitable deduction for the “gift portion” of the transaction. And each year you will receive a Form 1099-R telling you how your annuity payments are to be taxed. (Payments will be taxed partly as ordinary income and partly as capital gain income, and part may also be a tax-free return of principal).
For more information on gifting 1031 exchange property through charitable remainder unitrusts or gift annuities, please contact the Seattle Pacific Foundation at 206-281-2702 or email us today.
Gift of a personal residence or farm with a retained life estate
For someone who wants to make an end of life gift to SPU and receive some benefit now, one option is to enter into a retained life estate arrangement. This is where you transfer the title of your home to SPU but retain the right to live in the home for the rest of your life. The added benefit of gifting your home in this way rather than leaving the home to charity in your will is that you receive an immediate income tax deduction for the present value of the future gift of your home.
The donor of the home is still responsible for paying the mortgage, taxes, and all normal maintenance of the property during his or her lifetime, and there are many options to choose from should the donor need to move from the home one day.
Example:
Mary, age 74, purchased her home 30 years ago. It was appraised for $500,000. The land was worth $200,000 and the buildings $300,000. The appraiser considered it to have a useful life of 40 years and a salvage value of $30,000. Mary wanted to continue living in the home for the duration of her life and assure that it then go to Seattle Pacific University. She also wanted to reduce her taxes.
Mary decided to give the property to SPU subject to a retained life estate. Her income tax charitable deduction was $271,253. Assuming her federal income tax marginal rate is 33 percent, she will save approximately $89,513 in taxes in the year of the gift and for up to five carry-over years.
Bargain Sales
Many SPU supporters would like to donate real estate or investments, but need to keep some of the money for personal finances. With help from a Seattle Pacific gift planning expert, a customized giving plan can be created to allow you to retain a specified portion of the profits.
One option is called the "bargain sale." The donor sells a property to the University for less than the fair market value, and receives a charitable deduction for the difference. Selling a $100,000 home for $50,000 would yield a charitable deduction for the $50,000 "bargain." If the home was originally purchased for less than $50,000, the capital gains tax would be computed according to the profit received by the donor. The portion of the total capital gain given to the University is not taxed.
Partial Interest
Another option is to donate partial interest to the University. SPU becomes owner of a specified percentage of the property's value. The donor receives a charitable deduction in the year of the gift, plus his or her share of the profits when the property is sold.
Example: Janet R. wants to sell her $120,000 home and move to a Florida condominium for her retirement years. She would like to donate some of the proceeds to SPU and keep $50,000 to help purchase the condominium. She bought the house for $30,000 10 years ago. Janet calls a gift planning officer at SPU and asks, "Isn't there a way to give SPU some of the value of my home?"
"Of course," the officer answers. "There are two ways. You can either sell the house to us at a bargain price or give us a partial ownership of the house before selling." In the first scenario, Janet sells the house to SPU for $50,000, pays the capital gains tax of $3,000 and saves $19,600 due to the charitable deduction she receives (based on her 28 percent income tax bracket.) Those three figures combined mean she has $66,600 to help fund her condominium. In the second scenario, she grants Seattle Pacific a 58 percent ownership of the house. Then SPU assists with selling the house for the best possible price. She receives a charitable deduction of $69,600, which in her 28 percent tax bracket saves her $19,488 in taxes. She also receives her share of the profit when the home is sold — $50,400. And, because she owns only 42 percent of the home, her capital gains tax owed will be just $5,670. These three figures combined give Janet $64,218 to help purchase her new condominium.
Gifts of Personal Property Other Than Real Estate or Stocks
Gifts needn't be as large as a home to be significant. Donations of such property as rare coins, baseball cards, boats, antiques, equipment, or artwork can result in a charitable deduction. The size of the deduction depends on how the gift will be used.
Related use: If SPU uses the item as it was intended (e.g., a sculpture is displayed permanently in the University gallery) and the donor has owned the item for at least one year, a charitable deduction is taken for the gift's fair market value.
Unrelated use: If the property is put to an unrelated use (e.g., a necklace is donated with the intent that it be sold to benefit SPU), the charitable deduction is for the lesser of the fair market value or the original purchase price of the item (cost basis.)
Explore All The Giving Options |