ELITE ADVISOR BEST PRACTICES

Elements and Timing of a Charitable Gift - Part One

For year-end tax planning purposes, make sure your clients know the difference between the date a check is written for a charitable gift, the date the check is sent and the date it is actually received.

By Russell James III, J.D., Ph.D.

Key Takeaways:

  • Regardless of its size or its benefit to a charity, any transfer that does not meet the definition of a charitable gift for tax purposes will generate no charitable deduction.
  • Giving money to a specific person—no matter how badly he or she needs it—is not considered a charitable gift for tax purposes.
  • For year-end tax planning purposes, make sure your clients know the difference between the date a check is written for a charitable gift, the date the check is sent and the date it is actually received.

Understanding what a charitable gift is and when a charitable gift is made seem like obvious and simplistic tasks. What could be easier? What initially appear to be simple concepts can become quite complex. But a fundamental competence required of anyone who will be advising donors about charitable gifts is to know what tax consequences such gifts will generate. Charitable gifts can generate income tax deductions. Applying that knowledge requires knowing what constitutes a charitable gift for tax purposes. Regardless of its size or its benefit to a charity, any transfer that does not meet the definition of a charitable gift for tax purposes will generate no charitable deduction. So let’s begin by looking at what is a charitable gift for tax purposes and then consider examples of transfers that are not charitable gifts for tax purposes.

A deductible charitable gift occurs when the donor delivers money or valuable property to a charity or agent of the charity. That’s it. There is nothing particularly complicated about the definition (except perhaps the phrase “agent of the charity,” which simply means a representative of the charity). How then could things possibly become complicated when starting with such a simple definition?

Examples of giving that don’t qualify for tax deductions
  1. The first example of an action that is not a charitable gift for income tax purposes is a promise to deliver money or valuable property in the future. A promise is not a gift. Even if the promise is a legally enforceable written contract, it is still just a promise, so it is not a gift—at least not yet. Once the promise is fulfilled and the donor actually delivers money or valuable property to the charity (or agent of the charity), then—and only then—the definition of a gift is met.

  2. Another example of an action that is not a completed gift is when a donor gives money or valuable property to the donor’s agent (i.e., the donor’s representative) with instructions to deliver the gift to a charity or an agent of the charity. Because the money or valuable property is still in the hands of the donor’s representative, it has not yet become a completed gift. Once the money or valuable property is given to the charity (or the charity’s representative/agent), then—and only then—is there a deductible charitable gift.

  3. Another example that does not qualify as a charitable gift for tax purposes is when the donor delivers money or valuable property to the charity but still retains prohibited control over the money, even after the transfer to the charity. This retained control prevents the gift from being deductible until such time as the retained interests expire or are also given to the charity. This area is a bit more complicated because there are specific retained interests that are permitted by the tax code. Nevertheless, the general rule is that if a donor retains rights to control the money or get the money back, such a transfer is not (or at least not yet) a charitable gift.

  4. The last example of a transfer that is not a deductible gift is when a donor delivers money or valuable property to a charity for delivery to a specific person. A person is not a charity. Any person, even a person in serious financial or medical need, is not a charity. Giving money to a specific person is not a charitable gift for tax purposes. This fundamental rule cannot be avoided by simply giving money to a charity with the requirement that the money must then be delivered to a specific person. Such a transfer is treated as if it were a direct transfer to the person. Since a person is not a charity, the transfer is not a deductible charitable gift.

Conclusion

As with so many things in life, timing is everything when it comes to tax-efficient charitable giving. In Part 2 of this article, we will look at some examples of how we can apply these rules to actual gift scenarios

My book about this topic has more.


About the Author

Russell James, J.D., Ph.D., CFP®, is a professor in the Department of Personal Financial Planning at Texas Tech University. He directs the on-campus and online graduate program in Charitable Financial Planning. Additionally, he teaches Charitable Gift Planning at the Texas Tech University School of Law. He graduated, cum laude, from the University of Missouri School of Law where he was a member of the Missouri Law Review. While in law school he received the United Missouri Bank Award for Most Outstanding Work in Gift and Estate Taxation and Planning. He also holds a Ph.D. in consumer economics from the University of Missouri, where his dissertation was on charitable giving.