Dear Colleague,

Welcome to another Gift Planning Update, an in-house publication of the Advancement department of the Jewish Home of San Francisco. The goal of these ongoing communications is to provide up-to-date charitable planning information for California practitioners.

We continue to await (sometimes more patiently than others) Congressional action on both the federal estate tax and charitable gift opportunities through "tax extender" legislation. In the meantime, recent cases and other legislation provide guidance on how we can best serve the planning needs of our clientele and benefactors.

The Jewish Home of San Francisco is pleased to offer free consultation and information services to professionals, such as you, to assist you in serving your clientele and our donors. I should note that the Jewish Home does not perform legal work on behalf of individuals; donors are encouraged to independently consult qualified professional advisors to assist them in their charitable estate planning.

Best regards,
Daniel Hoebeke, J.D.
Gift Planning Officer

We have all seen variants on this theme: "If you're thinking about challenging the will, all you get is a dollar." In Re Estate of Tolman, 104 Cal.Rptr.3d 924 (Cal. Ct. App. 2010) provides an interesting wrinkle.

The will provided: "Except as otherwise specifically provided for herein, I have intentionally omitted to provide herein for any of my heirs who are living at the time of my demise, and to any person who shall successfully claim to be an heir of mine, other than those specifically named herein, I hereby bequeath the sum of ONE DOLLAR ($1.00)."

The case turned on whether general disinheritance language overcame the provisions of California's anti-lapse statute. The court held that the testatrix could have specifically provided that anti-lapse provisions did not apply. Since she did not, the term "any of my heirs" was construed to refer to unknown or unanticipated relatives. Therefore, the descendants of a predeceased legatee were awarded significantly more than a dollar … plus costs.

Clarity of will language is a frequent issue for nonprofits, particularly those whose names are confusingly similar to other organizations. At the Jewish Home, we obviate this issue by providing both our legal name and tax ID number to professional advisors who work with our current or prospective donors.

The combination of recent judicial and legislative actions have caused concern among a number of nonprofit healthcare providers. The Jewish Home has no need to be one of them.

Since the Jewish Home reports as a hospital for exemption purposes, we regularly monitor trends that apply to both the services we provide and the areas which are under the greatest regulatory scrutiny. This information is important to you as a professional advisor, because individuals need the assurance that their planned gifts will benefit charities that not only meet the basic requirements of the IRS but also are doing more than just reacting to legislative and judicial pronouncements.

Within the last three months, there has been action on both the judicial and legislative fronts that impact nonprofit hospitals.

In Provena Covenant Medical Center v. Department of Revenue (No.107328, 2010), the Illinois Supreme Court considered whether Provena was entitled to both a charitable and religious exemption under the Illinois Property Tax Code for various parcels it owned in Urbana. (It had received a federal exemption.) Although the case was highly complex, a central issue was whether Provena exhibited the distinctive characteristics of a charitable institution. These characteristics include: deriving "its funds mainly from private and public charity"; dispensing "charity to all who need it and apply for it"; and not placing "any obstacles in the way of those who need and would avail themselves of the charitable benefits it dispenses." (citing Methodist Old Peoples Home v. Korzen , 39 Ill.2d 149 at 157.) A plurality of the court held that Provena did not meet these tests.

The broader implications of Provena to nonprofit hospitals are being widely debated, but one message is clear: nonprofit healthcare providers are under increasing scrutiny to make certain they qualify for their exemptions.

Contemporaneous with but unrelated to Provena, Congress addressed comprehensive health care reform with the adoption of the Patient Protection and Affordable Care Act (H.R. 3590). Deep within this bill is Section 9007 – Additional Requirements for Charitable Hospitals. Section 9007 conditions tax exempt status on four special requirements, which include conducting community health needs assessments and meeting financial assistance policy guidelines. As is common with legislation of this sort, the additional requirements are designed to flag areas of legislative concern.

The Jewish Home began conducting community health care assessments almost 10 years ago, long before there were any legal requirements to do so. And we continue to be an industry leader in the percentage of residents for whom we provide financial assistance. The Home's proactive approach to meeting its nonprofit mission becomes all the more attractive to donors interested in leaving the legacy of a planned gift.

It is axiomatic that the failure of Congress to address the federal estate tax mess continues to frustrate estate planners. The traditionally employed formula clauses are often ineffective, if not counterproductive. In spite of these issues, the need for meaningful estate planning remains.

A notable quandary for our purposes is how to use charitable giving to its best advantage. For individuals with traditional, non-Roth IRAs or other retirement plans, a primary benefit of naming a charitable beneficiary still holds, regardless of death tax issues. Gifts to charities from IRAs or other assets deemed to be "income in respect of a decedent" pass free from deferred income taxes.

Where IRA gifts are not an option, many practitioners are now turning to qualified disclaimer trusts, the ultimate in after-death planning. Under this method, assets are left to an individual with the proviso that if some or all of those assets are disclaimed, they will then be used to fund a disclaimer trust (as later detailed in the instrument). The disclaimer trust will often consist, in whole or in part, of gifts to charity.

Disclaimers carry some risks, however. First, counsel must be mindful of the disclaimer periods provided by both state and federal laws. Second, disclaimed interests must not benefit the individual disclaiming. For example, a spouse may not disclaim into a trust that provides him/her with life income.

In Kaufman v. Comm'r, (2010) 134 T.C. 9, the Tax Court upheld an IRS denial of a charitable deduction for the gift of a façade easement. The real estate was subject to a mortgage where "the bank retained a 'prior claim' to all proceeds of condemnation." Citing the regulations to Section 170(h)(1), the court noted one requirement of a perpetual conservation restriction is that "the conservation purposes is protected in perpetuity." Sec. 1.170A-14(b)(2).

Petitioners argued that even though the charitable beneficiary would not be guaranteed financial benefits in the event of execution on the mortgage, the issue of whether the charity "would receive its proportionate share of any proceeds is a question of fact." The court rejected this argument because it failed to meet the strict requirement of the section: the donee organization must be protected in perpetuity.

Outright gifts of mortgaged property interests are already complicated by the application of the bargain sale rules. The significance of Kaufman is that the strict application of Section 170 precludes any charitable deduction whatsoever where perpetual interests cannot be assured.

In Steinhart v. County of Los Angeles, 223 P.3d 57 (Calif. 2010), the California Supreme Court again addressed the issue of "change of ownership" in real estate for property tax revaluation purposes. Even though the claim of petitioner was disallowed for failure to exhaust administrative remedies, the court elected to address the merits of the claim since it raised an important issue of public policy.

Settlor had created a revocable inter vivos trust that preserved the right to live in the home for life. Upon settlor's death, the home was to be sold and the proceeds distributed to other beneficiaries. The court held that reassessment was proper at settlor's death because her entire equitable interest in the estate expired at that time.

The court made frequent references to the legislative history surrounding Prop. 13 and the subsequent legislative clarifications codified in the Revenue and Taxation Code.

The subject matter of the case did not concern charitable giving. However, it is worth noting that the provisions of Section 62, which list exceptions to "change of ownership" rules, will preserve a donor's current tax base if a donor deeds real estate to a charity while reserving a life estate interest.

"Change in ownership shall not include: …
(e) Any transfer by an instrument whose terms reserve to the transferor an estate for years or an estate for life. …" California Revenue & Taxation Code, Sec. 62.

The benefits to a donor who gifts real estate subject to a retained life estate go well beyond the preservation of his/her existing tax base, however. The donor is entitled to an immediate income tax charitable deduction for the residuary value of the real estate. In addition, since the asset is removed from the donor's estate, no estate tax or probate issues arise upon the donor's subsequent demise.

The method for calculating the charitable deduction for the gift of real estate subject to a reserved life estate is somewhat complex. The Jewish Home has the charitable giving software to assist in making this calculation and is pleased to offer free calculation services to professional advisors.

Visionary thinking, expressed through planned giving, deserves special recognition. The Jewish Home recently unveiled a recognition wall honoring those who have become part of the Carob Tree Circle through their planned gifts.

Consistent with the emphasis on vision rather than amount, all planned gifts are acknowledged. The current list contains more than 250 names. It merges living donors who have expressed their intention to remember the Home with benefactors whose estates have already been received.