Gifts of Undivided Partial Interests
Under the general rule for charitable contributions, no income, gift, or estate tax deduction is allowed for a gift of a partial interest in property not held in trusts meeting certain specifications. It may be possible for an individual to "share" certain of his property with a charity however. A gift of an undivided one-third interest in a collection, paintings for example, allows the donor to display the collection in her home for eight months out of a year, and a museum to display it for the remainder of the year. The donor receives current income and gift tax deductions for one-third of the value of the property in the year in which the gift is made.
The Pension Protection Act of 2006 provides additional restrictions of gifts of undivided partial interests in property. The new provisions require that charities receiving a fractional interest in an item of tangible personal property must take complete ownership of the item within 10 years or the death of the donor, whichever is first. In addition, the donee organization must have taken possession of the item at least once during the 10-year period as long as the donor remains alive, and used the item for the organization's exempt purpose. Failure to comply with these requirements results in the recapture of all tax benefits plus interest and the imposition of a 10 percent penalty.
Gifts of undivided interest are useful in limited circumstances. The donated interest must include of a portion of each substantial interest the donor holds in the property. A carved out overriding royalty interest from a working interest in mineral property fails to convey an undivided portion in each interest that the donor holds in the property.
Gifts of this type are particularly appropriate in instances where the donor or wants to retain some personal enjoyment of the property. Properly structured, this type of gift can be combined with a gift of the remainder interest to produce an income and gift tax deduction equal to substantially all of the fair market value of the property, yet allowing the donor or to use the property for some portion of the year. One caveat; a gift of an undivided interest in property should not be placed in trust since the objective of the gift will not meet the strict requirements of charitable remainder or charitable lead trusts.
We have assisted donors and their charitable beneficiaries in structuring gifts of partial interests in property to ensure that all parties receive the maximum benefit from the donation. We can assist you or your organization in structuring gifts of this nature.
©2008 Ronnie C. McClure, PhD, CPA