Case of the Week

Case:

Brandon loves his truck, which he affectionately named “the Beast.” It was a gift for Brandon’s 18th birthday. It is painted bright red and made of two tons of metal, muscle and noise. Indeed, many neighbors would grumble as Brandon drove by because the rumbling engine could be heard three blocks away. As you can imagine, 18-year-old Brandon was in truck heaven.

Brandon is now 20 years older and a university professor, but he never could part with his beloved truck. The truck now sits quietly in the driveway collecting dust and serving as merely an “eye sore” according to his wife. Occasionally, Brandon will take the truck out for a spin, but its low gas mileage makes it a costly joy ride. Plus, Brandon still receives glares from neighbors as he passes through the neighborhood, something he does not relish anymore.

After much deliberation, Brandon decides to give his truck to a local charity. Before deciding to contribute the truck to charity, Brandon checked with his tax advisor regarding the tax benefits of his gift and how he should structure the gift. To his surprise, Brandon’s tax advisor suggested contributing the truck to Brandon’s existing $100,000 charitable remainder unitrust (CRUT). While there would be no capital gain bypass benefit, there will be a charitable income tax deduction and increased CRUT income.

Question:

Can a truck or other tangible personal property be contributed to a CRUT? Are there any rules Brandon should be aware of?

Solution:

Tangible personal property (TPP) may be transferred to a CRUT. However, there are two rules that require close attention. First, there is no charitable deduction for a future interest in tangible personal property. The deduction is only allowed after all “intervening interests” have expired. Sec. 170(a)(3). The intervening interest remains until the CRUT has sold the asset, and the donor must ensure that he or she does not engage in any self-dealing.

Thus, there is no charitable deduction for Brandon when he initially transfers his truck into a CRUT. Instead, the charitable deduction is delayed until the year when the truck is sold by the CRUT. At that time, the “intervening interest” in the TPP has expired and a charitable deduction is allowable. This means that Brandon’s contribution may not qualify for a charitable deduction in the current tax year unless the CRUT can sell the truck by December 31.

The second rule relates to “cost basis” deductions for gifts of tangible personal property for an unrelated use. Unrelated use gifts of TPP are usually deductible at cost basis only. If, however, the cost basis is greater than the fair market value, then the lower fair market value is the deductible amount. Gifts of vehicles have a separate set of deduction rules. Because vehicles are usually worth less at the time of donation than the original purchase price, the fair market value of the vehicle will be less than the cost basis. Thus, the “cost basis” deduction for gifts of tangible personal property does not generally apply to gifts of vehicles. For a vehicle with a value of more than $500, the rules limit the deduction to the lesser of the gross proceeds from the sale of the vehicle, the fair market value of the vehicle on the date of contribution or the cost basis. Sec. 170(f)(12). As a result, in most scenarios, the charitable deduction for the vehicle will likely be limited to the gross proceeds of the sale multiplied by the unitrust remainder factor.

Brandon likes the idea of receiving a greater income from his CRUT. He also likes the charitable deduction, even though it is modest. Consequently, Brandon decides to contribute his truck to the CRUT. In the end, Brandon’s truck provided nice tax savings, an eventual charitable gift and great memories to last a lifetime.