Springfield Business Journal Articles


What to Know When Donating to Someone in Need

Unfortunately we all know people or know of people who have been struck by tragedy and have been unprepared. We read in the paper everyday about people who are stricken with cancer or who need an organ transplant and have no way to pay their medical bills. We also read about parents who are killed in accidents leaving young children with inadequate funds.

Fortunately, Americans are a very giving people, and when these situations come to light many people rush to help, donating money and even holding fund raisers. But even these acts of kindness have legal implications.
One common misconception regarding these types of donations is that they are deductible for income tax purposes. This is generally not correct. Donations to individuals are not deductible. Donations to non-profit organizations are not deductible either if they are directed by the donor to a specific individual. For example, if you made a contribution to the Red Cross, it would generally be deductible for income tax purposes. However, if you make a donation to the Red Cross and require them to use it for a specific person, that donation is generally not deductible because it is really a gift to the person. Likewise, gifts to trust funds that are established for specific individuals are not deductible for income tax purposes.

I have had several calls this year from people wanting to know how to set up a trust to collect donations. There are no strict guidelines. Because the trust will not qualify as a tax exempt entity, it does not have to meet the requirements for tax exempt entities set forth by the Internal Revenue Code or the State of Illinois. The important decisions to be made have to do with access and control. Who will be the trustee? Who will receive distributions? For what purposes? For example, if donations were made for a child who needed an organ transplant, would distributions be made only for medical expenses or also for general living expenses?

In most of these cases, it seems that a simple structure works best. No trust may be needed at all. For example, all donations can be sent to a bank and deposited directly in a separate account for the family. It is not necessary for the bank to serve as trustee, and it may not be desirable. Banks have minimum annual fees for trust accounts, and for small trusts, the fee may be not be cost effective. For example, although $50,000 in donations would be a great benefit to a family in need, it is considered a very small trust. If a bank has a minimum annual fee of $2,500, the fee will not be covered by income and will actually reduce trust principal. In addition, the trust may last for such a short period of time that there is no real benefit in naming a trustee. The money may be spent as quickly as it comes in. Most people are motivated to help a person in need and are not concerned with whether the money is used for medical costs or groceries or clothes. Therefore, it is not important to have a trustee watch over the money and decide how the person can spend it.

If a trust is appropriate, however, it should have provisions that allow donations to the trust to qualify for the annual gift tax exclusion. Every person can give up to $11,000 to any other person in each calendar year without making a "taxable gift." This is called the "annual gift tax exclusion." Gifts in trust do not qualify, however, unless the trust contains certain provisions. If these provisions are missing, every gift to the trust, even $1, is a "taxable gift" (although there will generally be no tax due). I doubt that these gifts are reported on many gift tax returns, and I doubt that this matter is of importance to the IRS, but, as always, it is best to set things up correctly to avoid potential problems.

Finally, if you are considering a fund raiser, you should be aware of the Illinois Raffles Act which provides that no person can conduct a raffle in Illinois without first obtaining a license. Although this may seem burdensome, the statute is intended to stop people from conducting fraudulent raffles and illegal gambling. "Licenses shall be issued only to bona fide religious, charitable, labor, business, fraternal, educational or veterans' organizations . . . or to a non-profit fundraising organization that the licensing authority determines is organized for the sole purpose of providing financial assistance to an identified individual or group of individuals suffering extreme financial hardship as the result of an illness, disability, accident or disaster."

Perhaps most importantly, keep in mind that anything you say in your fundraising posters or brochures must be true. Don't advertise that the money will be held in trust for medical expenses if it will actually be given to the family for whatever they may need. You don't want anyone being misled or claiming they were misled.
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