United Way of the Ozarks

TAX CONSIDERATIONS IN MAKING GIFTS TO UNITED WAY OF THE OZARKS

Richard Owensby This article is intended to suggest to you some possible alternative methods you might follow in making gifts to United Way of the Ozarks ("United Way"), which can result in tax savings to you or to your estate. When income tax and estate tax savings are considered, the actual cost to you or to your estate is reduced without making any reduction in the benefits provided to United Way.

CONTRIBUTIONS DURING LIFETIME

A. Contributions To United Way Are Deductible. If you contribute to United Way, and if you itemize your deductions, (as opposed to electing to take the standard deduction), then you are permitted to deduct the amount of your contribution for state and federal income tax purposes. Generally, contributions to United Way are permitted to be deducted up to 50% of the contributor's "contribution base" for the year that the contribution is made. In the event that the contribution exceeds the 50% limitation, then it is permissible to carry forward any unused portion of the contribution so that it can be deducted in future years, up to a total of five years.

B. Tax Rates For Year 2002. The amount of the income tax benefit to you will depend upon your income tax bracket. The federal tax rates for the year 2002 are as follows:

	10%	15%	27%	30%	35%	38.6%
Bracket	Bracket	Bracket	Bracket	Bracket	Bracket	Bracket

Married	$0 -	$12,001 -	$46,701 -	$112,851 -	$171,951 -	Over
Filing Joint	$12,000	$46,700	$112,850	$171,950	$307,050	$307,050
Returns

Single	$0 -	$6,001 -	$27,951 -	$67,701 -	$141,251 -

Individuals	$6,000	$27,950	$67,700	$141,250	$307,050	Over
						$307,050

In addition, the State of Missouri imposes a tax on one's income. Income is taxed at the state level at the rate of Six Percent (6%) on amounts of taxable income which exceed the sum of $9,000.00 and at a lesser rate on amounts up to $9,000.00.

C. Gifts In Kind. Typically, when contributions are made, individuals think in terms of contributing money. An alternative to that, however, is a contribution in kind. By contributing "property," rather than money, it is oftentimes possible for United Way to benefit more than the actual cost of the contribution to you, when the amount of income tax savings is taken into account.

Here is how the tax savings works when contributions are made in kind:

If you are the owner of an asset which has appreciated in value over the years, such as shares of corporate stock, and if you were to sell those shares in order to obtain funds to give to United Way, then you would have to pay tax on the gain (which would be the difference between your original cost of the shares, compared with the amount you received from the sale of them). On the other hand, if you were to contribute the shares themselves to United Way, you would be entitled to receive a tax deduction for the full value of the shares as of the date of the gift without being taxed on any of the gain. Then, United Way could sell those shares at their fair market value and pay no tax on the gain for the reason that United Way is a tax-exempt entity. As a result, United Way would receive the benefit of the full value of the shares, and you would have an income tax deduction for the same amount. The amount of gain attributable to the appreciation of the corporate stock would not be taxable either to you or to United Way.

When making contributions in kind, the general rules are as follows:

Contributions where fair market value of asset is deductible. There are some detailed complicated rules in this area of the tax law. However, generally, you may deduct the fair market value of contributions of real estate, intangible personal property and "related use" tangible personal property, provided that you have held the asset for a period of more than one year. Intangible personal property includes assets such as shares of stock. Tangible personal property is something that you can touch and feel, such as a car, antique or artwork. "Related use" tangible personal property would include an item which can be used in carrying out the functions of United Way, such as, for example, office furniture and equipment used in the United Way office.
Contributions where deduction is limited to cost basis in asset. For some types of assets, the amount of your deduction would be limited to your basis in the asset, which is normally your original cost of it, rather than any appreciated value as of the date of the contribution. These kind of assets would include assets which, if sold, would result in ordinary income to you, rather than capital gain. For example, your deduction would be limited with respect to capital assets which you have owned for one year or less, for a contribution of inventory items used in your trade or business, and other ordinary income items. Also, for tangible personal property which is unrelated to the purposes of United Way, your deduction would be limited to your cost basis in the asset.

D. Internal Revenue Service Publications. The Internal Revenue Services publishes helpful information on these subjects which can be obtained free of charge by calling toll free 1-800-829-3676. Or, publications and forms can be downloaded off the internet by searching Internal Revenue Service on the world wide web. Some of these publications are:

Publication 526 Charitable Contributions.
Publication 561 Determining The Value Of Donated Property.
Publication 544 Sales And Other Dispositions Of Assets.
Publication 551 Basis Of Assets.
Form 8283, with instructions, Non-Cash Charitable Contributions.

E. Split Interests Trusts. There are some more sophisticated estate planning techniques whereby individuals can make contributions to United Way, and, at the same time, receive substantial tax benefits and other benefits. Some of these techniques are:

Unitrust. This is a form of a "charitable remainder" trust whereby assets (including appreciated assets) can be transferred into trust under circumstances where the contributors retain the right to income from the trust for a period of years or for life. Then, upon the death of the contributors or the expiration of the term of years, the asset belongs to United Way. The tax advantages are: (a) if appreciated assets are contributed, then the contributors do not have to pay any tax on any of the capital gain, (b) in the year that the trust is established, the contributors receive an income tax deduction for the value of the interest of United Way, which can be carried forward and deducted on future tax returns, if necessary, and (c) upon the death of the contributors, the balance of the trust assets belongs to United Way, so those assets escape taxation in the contributorsՠestates for estate tax purposes.
Annuity Trust. An annuity trust is also a charitable remainder trust and is very similar to a unitrust. The difference is that in a unitrust, the value of the trust assets are determined on an annual basis in order to determine the amount of income payable to the contributors. On the other hand, in an annuity trust, the amount of income payable annually to the contributors is determined and remains the same thereafter during the term of the contributors' interest in the trust.
Charitable Lead Trust. This kind of trust is the reverse of the charitable remainder trust. In a charitable lead trust, a contributor provides for annual income to United Way for a period of time; then, after the expiration of that period, the balance of the trust comes back to the contributor or to a designated alternative beneficiary.

F. Bargain Sale. A bargain sale of property is where an asset is sold to United Way for an amount that is less than the fair market value of the property. In this kind of transaction, the contributor is treated as having made a charitable contribution in part and a sale in part.

G. Durable Power Of Attorney. A number of individuals may desire to make monthly or other periodic contributions to United Way for the rest of his or her lifetime, but might be concerned that some future incapacity or disability might prevent that desire from being carried out. If so, a durable power of attorney might be appropriate. Under Missouri law, it is possible to have a power of attorney which is "durable." A "durable" power of attorney means that an agent designated in the power can have the authority to act for an individual even if that individual were to become totally incapacitated or disabled (formerly referred to as becoming "incompetent"). The Missouri statutes governing durable powers of attorney require that the agent be specifically authorized to make gifts, in order to have the authority to do so.

CONTRIBUTIONS AFTER DEATH

A. Federal Estate Tax. There is a federal tax which is based upon the total value of one's assets which he owns as of the date of death and which exceeds the amount that is exempt in the year of death. The assets which are considered in determining whether the federal estate tax applies include virtually every asset in which the decedent owned any interest as of the date of his death. Whether one's estate is subject to the federal estate tax depends upon the year of death. During the following years, the amounts exempt are as follows:

Year Of Death	Amount Exempt
2002	$1,000,000.00
2003	$1,000,000.00
2004	$1,500,000.00
2005	$1,500,000.00
2006	$2,000.000.00
2007	$2,000.000.00
2008	$2,000.000.00
2009	$3,500,000.00
2010	All is exempt
2011	$1,000,000.00

If the value of a decedent's estate exceeds the amount exempt for the particular year of death, then it is necessary that a federal estate tax return be filed. On the federal estate tax return, certain deductions are allowed, including:

Any debts owed by the decedent are deductible and any costs and expenses of administering the estate may be deductible.
Assets left to a surviving spouse are deductible. This deduction is referred to as the "Marital Deduction."
Bequests left to charitable or religious organizations are deductible. Therefore, all bequests to United Way are deductible!

Once any estate tax is payable, then the tax rates are substantial and can be in the range of 50%, depending upon the total value of the estate. Therefore, if a decedent's estate is of sufficient size to generate estate taxes, then bequests to United Way can cost the estate substantially less than the amount of the benefits which accrue to United Way.

B. State Death Taxes. The Missouri inheritance tax was repealed effective January 1, 1981. Therefore, there is no longer any Missouri inheritance tax. There is, however, a Missouri estate tax, which is equal to the amount allowed as a credit on the federal return for any taxes payable to a state. If the amount of the federal estate tax is reduced as a result of charitable contributions, then there is a corresponding reduction in the amount of the Missouri estate tax.

C. Consider A Bequest To United Way In Your Will Or Trust. If individuals just thought about it, many would want their estate, or a portion of it, to go to charitable purposes, such as to United Way. Possibly you might want to consider United Way as an alternative or contingent beneficiary in your will or trust. For example, if you, your spouse and children were all deceased, then it might be your desire to leave a significant portion of your estate to United Way. Or, after the death of both you and your spouse, it might be your desire to leave a certain amount or a percentage of your estate to United Way, with the balance to be left to children or perhaps to others.

Of course, you can make provision for United Way only if you so provide in your estate plan at the time you have it prepared or at the time you have it reviewed and revised.

D. Income In Respect Of A Decedent ("IRD"). IRD can be an ideal type of asset to leave to charitable organizations. Basically, IRD is an asset which is inherited from a decedent and which would have constituted some taxable income to the decedent had the decedent received it before death. When IRD is received by the beneficiary of an estate, then the beneficiary will be required to include all or a portion of it on his tax return for the year it was received. Some examples of IRD assets are retirement plans, installment notes, savings bonds and annuity contracts.

Since all or a part of IRD assets will potentially constitute taxable income to the recipient, that income can be tax-exempt if left to a tax-exempt entity, such as United Way. By designating United Way as the beneficiary, not only is the value of the asset itself deductible in its entirety for estate tax purposes, but also any income which would otherwise be taxable escapes taxation.

E. Transfers That Avoid Probate Administration. There are a number of ways where gifts can be left to United Way, after your death, without the necessity of any probate administration. Some of the methods are as follows:

Revocable Living Trust. A revocable living trust is used as a substitute for a Will. The difference is, however, that upon your death, the various assets which have been held in trust can pass to the designated beneficiaries without the need for any probate administration. On the other hand, assets which are transferred by means of a Will are subject to probate administration.
T. O. D. (Transfer On Death). This is a means which can be used to register certificates of title to automobiles, trucks, boats, trailers, and other similar vehicles and assets. Upon the death of the owner, the title and ownership to the asset will pass automatically to the designated beneficiary.
P. O. D. (Payable On Death). This form of registration is used most commonly with bank accounts and deposits and also with U. S. Government bonds. Again, when the owner dies, ownership is payable on death to the designated beneficiary or beneficiaries without the need for probate.
Non-Probate Transfers Law Of Missouri. This set of laws became effective in 1989 in the State of Missouri. They greatly expand the types and kinds of assets which can be registered so that an owner can continue to have full and unrestricted ownership of the asset for life, but, in the event of death, the asset will pass, without probate, to the intended beneficiary.
A type of a non-probate transfer that has become popular is what is referred to as a "beneficiary deed." By the use of a beneficiary deed, one can exercise 100% ownership of his real estate during the rest of his lifetime, including the right to sell it, rent it or otherwise deal with it. But, in the event of the death of the owner, title to the real estate will pass to the designated beneficiary without the need for any probate administration. Beneficiary deeds must be recorded in order to be effective.
Joint Tenancy. A very common form of joint ownership is a joint tenancy with right of survivorship. In the event of the death of one joint owner, the survivor succeeds to sole ownership of the asset. For technical legal reasons, owning property with United Way in the form of a joint tenancy is probably NOT advisable.
Conveying Property But Retaining Life Estate. Another possible means by which property may be transferred to United Way without probate would be to deed the property to United Way, but reserve a life estate in yourself. Under this form of conveyance, you would continue to have full use and possession of the property for the rest of your lifetime; but, in the event of death, United Way would become the sole owner. Unlike a beneficiary deed, this form of conveyance is normally irrevocable.

CONSULT WITH YOUR TAX PROFESSIONAL

The information in this article consists only of some of the general rules and is not intended to be an exhaustive discussion of the tax and estate planning laws as they relate to contributions to United Way. As a result, there may be some special rules or exceptions which might apply to your specific situation.

Therefore, in planning your contributions to United Way, and in planning your estate generally, you should confer with your tax and estate planning professionals. Hopefully, this article will be of some benefit to you and will provide some ideas which might be of assistance to you in your future planning. It is entirely possible that there may be some techniques available which will prove to be beneficial not only for you and your family but also for United Way.

Richard Owensby
Neale & Newman, LLP
Attorneys at Law
1-130 Corporate Centre
P. O. Box 10327
Springfield, MO 65808
Telephone (417) 882-9090