Typically, a charitable lead annuity trust ( a “CLAT”) provides for level annuity payments to the charity during the trust’s term.  For the trust to be effective in transferring value to the remainder beneficiaries, who are usually family members, the total return inside the trust must exceed the required annuity payments; otherwise, such payments will consume the entire value of the trust’s assets and no property will then pass to the remainder beneficiaries.  A “Shark-Fin” CLAT is designed so that small payments, such as $1,000 per year, are made in the early years of the trust term, with a very large payment required in the last year or two. By proceeding in that manner, fluctuations in value of trust assets in the early years become less of a factor in assuring assets will be available for distribution at the end of the term.

A CLAT may be designed as a grantor trust, providing a charitable income tax deduction to the grantor upon its creation and funding; however, the grantor would be subject to income tax on the income generated inside the trust during its term. Therefore, the nature of the assets held in the trust and the income generated are significant factors in the design of a grantor CLAT. A CLAT may also be designed as a non-grantor trust, which would not provide a charitable income tax deduction. Both types of CLATs provide a gift or estate tax charitable deduction equal to the present value of the annuity payments, using the required federal interest rates, which are currently very low.

We frequently get asked by new and existing nonprofit organizations about directors and officers liability insurance (“D&O Insurance”). Should you obtain coverage? Is it worth the cost?

Yes, you should explore obtaining D&O Insurance. If you want to recruit high-quality directors, you may find that they will not serve on your board without seeing a copy of your policy. They want to know that they will be protected. In addition, their employers may not allow them to serve on your board unless you have D&O Insurance.

On a related note, you might also want to review your organizational documents for provisions that indemnify your directors and officers against certain acts. The same potential directors who want to see a copy of your D&O Insurance policy may also want to see your indemnification provisions.

There are a number of organizations, some of them nonprofit themselves, that provide affordable D&O Insurance to nonprofit organizations of all sizes. When discussing your policy, make sure that you understand its terms and the acts it actually covers.

Tax-exempt organizations that fail to file Form 990 (including Form 990-EZ and Form 990-N) for three consecutive years will automatically lose their tax-exempt status.  The IRS announced today that it is providing one-time relief to small charities to file a delinquent Form 990-N or Form 990-EZ and retain their tax-exempt status even though they failed to file for three consecutive years.  This one-time relief is available for Form 990-N (e-Postcard) and Form 990-EZ filers only. 

Small organizations that are required to file Form 990-N (e-Postcard) and whose Form 990-Ns are due on or after May 17 and on or before October 15 can maintain their tax-exempt status by filing the delinquent Form 990-N by October 15, 2010.

Other small organizations who are eligible to file Form 990-EZ (but not the Form 990-N) can use a one-time voluntary compliance program (VCP) to come back into compliance. To be eligible to participate in the VCP, an organization must:

The IRS website includes a list of organizations that may be in jeopardy of losing their exempt status.  For more information regarding this relief, please visit the IRS website by clicking here.

The excess business holdings rules (IRC Section 4943) limit the stock a private foundation may hold to 20 percent of a corporation’s voting stock less stock held by its disqualified persons (including trustees, directors, officers, and their family members).  A special rule gives a private foundation five years to dispose of any stock that constitutes an excess business holding if it was acquired by gift.  In light of the current economy, private foundations may find it difficult to dispose of excess business holdings within this five year period without selling for a substantial discount.  

Fortunately, an additional five years may be granted if (1) the foundation made diligent efforts to dispose of the stock, (2) disposition within the initial 5-year period has not been possible, except at a price substantially below fair market value, by reason of such size and complexity or diversity of such holdings, (3) prior to the expiration of the initial 5-year period, the private foundation submits to the IRS and relevant Attorney General a plan for disposing of all of the excess business holdings involved in the extension, and (4) the IRS determines that such plan can reasonably be expected to be carried out before the close of the extension period.  In Priv. Ltr. Rul. 201028044, the IRS granted a 5-year extension to a private foundation where the value of its stock had declined by more than 50% and the timing of the foundation’s disposition was affected by federal securities laws.  In light of the stock market decline, numerous private foundations may currently be in a similar position.  Private foundations faced with the pending deadline to reduce its excess business holdings should expl0re prior to the expiration of the initial 5-year period whether an additional 5-year extension may be available.

The rate that the IRS uses to calculate the present value of an annuity has dropped to 2.6% for August. This is historically a very low rate, as just two years ago the rate was 4.2% and within the last decade the rate reached 8.2%. Clients are generally aware that such low rates present estate planning opportunities for vehicles such as Grantor Retained Annuity Trusts, where the ability of the trust to obtain an investment yield higher than 2.6% presents real family wealth transfer opportunities. However, clients with charitable intentions need to be aware that the same low interest rate is of substantial benefit in family wealth planning involving CLTs.

A CLT is both a family wealth transfer vehicle, as well as a charitable giving vehicle. A trust is established which pays an annuity to charity for a period of years, and at the end of that term of years, any left over assets belong to the client’s heirs. Usually, a CLT is structured so that the current fair market value of the annuity payments to charity substantially reduces or eliminates the gift tax upon formation, so that after the annuity stream is completed, the remaining assets belong free of gift or estate tax to the heirs. In this structure, the lower the IRS-assumed interest rate, the easier it is to achieve the desired gift tax result and the more likely it is that substantial assets will be left over after the required annuity is paid to charity. For an overview regarding the basics of lifetime CLTs, see A Primer on Lifetime Charitable Lead Trusts.

Here is an example of how a CLT would work at a 2.6% interest rate, as compared to a higher rate that is likely to prevail at some point in the future: (more…)

Each year, sometime in early December, my spouse and I discuss our charitable donations to be made prior to year-end. We look at what donations we made up to that point, and then together decide what we’re going to donate prior to December 31 so that we can deduct these donations on that year’s income tax return. Once we decide our charities and amounts, we set about to implement our plan. Frequently, that means going online and giving via credit card payment through the organization’s website.

Frankly, it never occurred to me that because I actually pay these credit card bills in January of the following year that there could be an argument that because I actually paid the amount the following year I couldn’t deduct it the year in which I clicked “confirm donation” on the website.

For a variety of reasons, several nonprofits have undergone mergers or consolidations over the last year or so.  At the same time, both the IRS and Financial Accounting Standards Board (“FASB”) have issued guidance on mergers of non-profit organizations.  So, although these rules are not brand new, they are relatively new and relevant for many exempt organizations.  IRS Publication 4779  describes the IRS rules and FASB Statement No. 164 (which you can access here after free registration) details the accounting rules.  A thoroughly-researched summary of each is located here.  For those of you with little time, I hereby summarize the requirements with brevity: (1) notify the IRS of any merger by filing a final Form 990, (2) have someone smart–preferably an accountant–explain FASB Statement No. 164 and (3) try to say “Financial Accounting Standards Board” 5 times fast.

A “co-venturer” is a for-profit entity which promotes its products or services by representing that the purchase or use of such products or services will benefit a charitable cause (e.g., a for-profit makes a statement advertising that a portion of the proceeds from the sale of this product will be donated to charity). Since consumers are not given an option of whether or not to donate to the charity,  Approximately twenty-five (25) states have enacted specific laws which govern these so-called “commercial co-ventures” (or “cause-related marketing” programs). While the laws governing commercial co-ventures vary by state, in general, the state regulatory authorities are concerned with protecting consumers from fraudulent or deceptive advertising.

Thus, state laws generally require that the co-venturer (1) enter into written contracts with the charitable organization that will benefit from the promotion; (2) keep accurate records during the promotion; (3) include certain disclosures in all advertisements relating to the promotion (including amount or percentage per unit of goods purchased that will benefit the charitable organization); and (4) certain statutes require that the co-venturer or the charity register with the state, provide a bond and file annual reports. Notwithstanding the fact that certain states do not impose disclosure requirements in advertisements, all state regulatory authorities recommend that, as a good business practice, such disclosures be made. Disclosure may be made via signage, flyers, or other notice of general application. In addition, it is also good business practice to satisfy the contract and record-keeping requirements outlined above even if the promotion is conducted in a state without a co-venture statute. (more…)

IRC § 501(r) was enacted during 2010 to tighten the requirements that hospitals must satisfy to maintain IRC § 501(c)(3) status.  IRC § 501(r) also complements steps taken by the IRS in the last couple of years to increase hospital transparency and supplement the”community benefit” standard set out in IRS Rev. Rul. 69-545, including more detailed requirements for reporting charity care and community benefits in the redesigned annual federal information return form (Form 990, particularly Schedule H).  Under IRC § 501(r) a hospital organization that wants to retain its IRC § 501(c)(3) status must: (1) at least every three years conduct a community health needs analysis and develop a plan to meet these needs; (2) adopt, implement, and widely publicize written financial assistance and emergency care policies that must cover specified topics; (3) limit charges to persons qualifying for financial assistance to amounts charged to persons with emergency insurance; and (4) not take extraordinary collection actions without first trying to find out whether the individual is eligible for financial assistance under its policy. (more…)

A corporate sponsored charitable organization may conduct a scholarship program for the benefit of its sponsoring corporation’s employees and/or children of such employees. Scholarships must be awarded on an objective and non-discriminatory basis. The scholarship program may not be used to induce employment or represent compensation for services, and availability must be limited by non-employment related factors. With respect to a corporate sponsored private foundation, the scholarship selection committee must also be independent from the private foundation and sponsoring corporation, and the scholarship program must be approved in advance by the IRS.  See IRS Rev. Proc. 76-47 for additional requirements. If the requirements are satisfied, donors who contribute to the charitable organization are entitled to an income tax deduction and the scholarship payment is not treated as taxable compensation to the employee.