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Exempt Organizations
December 2010

It was not a sure thing until the ink was dry, but the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (“Tax Act”) finally became law on December 17th. The law resolved, at least in the near term, the question of income tax rates for 2011 and 2012. The Tax Act included extensions of several charitable deduction provisions. As discussed in more detail below, however, the provisions with the most significant implications for nonprofits may be those in the estate and gift tax area.

Many tax provisions that were scheduled to expire at the end of 2010 were extended. A number of provisions related to charitable giving were extended through December 31, 2011, including the following:

  • Enhanced deduction for contributions of appreciated real property for conservation purposes
  • Favorable treatment for contributions of book inventories to public schools and corporate contributions of computer equipment for educational purposes
  • Enhanced deduction for contributions of food inventory
  • The provision that allows S corporation shareholders to take their allocable share of charitable deductions without limitation by basis

Also extended was the provision allowing for gifts to charities of up to $100,000 directly from regular or Roth IRAs for individuals over 70-1/2. Because the tax legislation was enacted so late in the year, it was nice to see a provision that allowed for contributions made in January, 2011, to count as a contribution for 2010 for required minimum distribution purposes.

The provisions that may affect nonprofits the most, however, may be those that were not directly aimed at the charitable sector. The Tax Act reinstated the estate tax for 2011 and 2012 (it had been allowed to expire for 2010) with an exemption amount of $5,000,000 and maximum rate of 35%. The gift tax exemption was also set at $5,000,000. In addition, the Tax Act allows for a full step up in basis upon death for income tax purposes. Taken as whole, these provisions are quite favorable and exceeded the expectations of many practitioners.

From an estate planning standpoint, these increased exemption amounts create dramatic possibilities for the transfer of wealth from one generation to the next. Historically, the planning focus has been to try to transfer the full exemption amount and to minimize the estate tax, the payment of which seemed to be inevitable. While charitable gifts could reduce the estate tax, such gifts did not necessarily translate into greater wealth passing to the next generation.

With the significant increase in the exemption amounts, many taxpayers will be able to comfortably provide for the next generation without feeling the pressure of the estate tax. Some of these taxpayers will have provided for the next generation and still have wealth remaining. For these taxpayers, charitable giving may be the next best planning alternative, particularly if there is still some potential estate tax liability they may be facing. The increased gift tax exemption amount may also accelerate charitable giving, as individuals utilize the increased exemption amount to complete wealth transfers during life, freeing them to make lifetime charitable gifts as well.

We are entering into a period in which many existing estate plans will be reviewed and revised. This presents an unprecedented opportunity for nonprofits to insert themselves into the conversation. The planning choice may no longer be limited to “heirs or estate tax;” rather the planning opportunity may be “heirs and charity, then estate tax.”

Should you have any questions regarding the foregoing, please contact John Kikuchi at (925) 944-7666 or by email.

The information contained in this newsletter is general in nature and does not constitute tax advice or opinion. Applicability to specific situations should be determined through consultation with your tax advisor.

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