Checklist · Wills and Estates

Structuring, Documenting, and Substantiating a Charitable Gift: A Practical Checklist

26 U.S.C. § 170

Type
Checklist
Jurisdiction
National
Date
2024-03-20
Topic
Wills and Estates

This checklist walks a charitable gift from intent to closed file. Stage 1 identifies the donor's goal and the asset. Stage 2 selects the vehicle. Stage 3 handles diligence on the donee and the asset. Stage 4 covers valuation and appraisal. Stage 5 covers substantiation, which is where most deductions are lost. Stage 6 covers documentation and restrictions. Stage 7 covers execution and transfer. Stage 8 covers reporting, and Stage 9 covers the charity's own compliance obligations.

Structuring, Documenting, and Substantiating a Charitable Gift: A Practical Checklist

Wills and Estates > Charitable Giving and Philanthropy | Published 20 March 2024 - Updated 17 January 2025 | UpLaw - uplaw.us

Work the stages in order. A gift that skips Stage 5 is a gift with no deduction.

Stage 1 — Define the Goal and Identify the Asset

☐ What does the donor actually want? A deduction this year; an income stream; a family governance vehicle; a permanent named fund; a specific building; simply to help. These lead to different structures, and the donor rarely volunteers the answer.

☐ Is the donor itemizing? If not, a deduction under 26 U.S.C. § 170 is worth nothing, and a qualified charitable distribution from an individual retirement account under 26 U.S.C. § 408 may be the only technique that works.

☐ Inventory the candidate assets with fair market value, basis, holding period, and encumbrances for each. This single table determines everything downstream.

☐ Identify the most tax-burdened asset. Retirement accounts and low-basis long-held appreciated securities are the efficient charitable assets. Cash is the least efficient.

☐ Is a sale pending? If a binding agreement exists or the transaction is effectively complete, the gain is assigned to the donor regardless of the gift. Move the analysis earlier or abandon it.

☐ Confirm the holding period. Short-term appreciated property is reduced to basis.

☐ Check for ordinary income character — inventory, self-created works, depreciation recapture. All reduce the deduction to basis.

☐ Estimate the percentage limitation applicable to this donor, donee type, and property type, and note the five-year carryforward.

☐ Ask about intended timing. Year-end gifts of securities must settle in the intended year.

Stage 2 — Select the Vehicle

☐ Direct gift — no ongoing cost, no control, full deduction. The default.

☐ Donor-advised fund — public charity limits, immediate deduction, deferred grantmaking, privacy, minimal cost. Confirm the donor understands the fund has legal control. Screen for 26 U.S.C. § 4966 taxable distributions and 26 U.S.C. § 4967 prohibited benefits — no pledge satisfaction, no event tickets, no tuition.

☐ Private foundation — full control, higher cost, lower deduction limits, basis valuation on most appreciated property, public reporting under 26 U.S.C. § 6033, and the excise tax regime. Run the honest comparison before recommending it.

☐ Charitable remainder trust under 26 U.S.C. § 664 — verify payout between five and fifty percent, remainder at least ten percent, term a life or lives or a term of years not exceeding twenty, and, for annuity trusts, the exhaustion test.

☐ Charitable lead trust — confirm grantor or non-grantor status is deliberate, and address the generation-skipping tax if grandchildren are remaindermen.

☐ Charitable gift annuity — confirm the issuing charity is authorized in the donor's state.

☐ Testamentary gift — the estate tax deduction under 26 U.S.C. § 2055; for lifetime transfers, 26 U.S.C. § 2522.

☐ Beneficiary designation — the highest-value testamentary charitable technique and the one most often left unexecuted.

☐ Reject partial-interest gifts unless they fit a statutory exception: remainder in a personal residence or farm, undivided portion of the entire interest, qualified conservation contribution, or a qualifying trust.

Stage 3 — Diligence on the Donee and the Asset

☐ Verify the donee's current status in the public exempt organization database and confirm it is described in 26 U.S.C. § 170(c).

☐ Confirm public charity versus private foundation classification under 26 U.S.C. § 509 — it sets the percentage limit.

☐ For a newly formed donee, confirm the notice under 26 U.S.C. § 508 has been filed and understand the retroactivity of recognition.

☐ Check for an adverse determination or revocation, and whether declaratory judgment relief under 26 U.S.C. § 7428 is pending.

☐ Real property: environmental site assessment, title report, survey, tax and lien search, carrying-cost estimate, and a written liquidation plan.

☐ Closely held interests: review the operating or shareholder agreement for transfer restrictions, rights of first refusal, capital calls, and buy-sell provisions.

☐ Check for debt. Encumbered property produces a bargain sale, gain to the donor, and, in trusts and foundations, self-dealing exposure.

☐ Screen the donee's unrelated business income exposure on the asset — partnership interests, S corporation stock, and debt-financed property.

☐ Art: obtain provenance and confirm the donee's intended related use, which determines fair market value versus basis treatment.

☐ Confirm the charity will accept it in writing before the donor announces anything.

Stage 4 — Valuation and Appraisal

☐ Determine the deduction measure first: fair market value or basis. Apply the reduction rules for ordinary income property, short-term property, unrelated-use tangible personal property, and most appreciated property given to a private foundation.

☐ Publicly traded securities: mean of high and low on the transfer date. No appraisal required.

☐ Everything else over $5,000: obtain a qualified appraisal from a qualified appraiser. Cryptocurrency is included — the publicly traded securities exception does not reach it.

☐ Engage the appraiser as the donor's appraiser, not the charity's, and confirm the appraiser's credentials, education, experience, and absence of prohibited relationships.

☐ Confirm the appraisal date falls within the permitted window relative to the contribution and the return.

☐ Confirm the appraisal contains every required element: property description, condition, contribution date, terms of any agreement affecting use or disposition, appraiser identity and qualifications, statement that it was prepared for income tax purposes, valuation date, fair market value, method, and basis for the valuation.

☐ Gifts over $500,000: attach the appraisal itself to the return.

☐ Document discounts for lack of marketability and minority interest with support, not assertion. Valuation principles parallel those under 26 U.S.C. § 2031.

☐ Bargain sales: allocate basis and compute gain on the sale portion.

☐ Assess penalty exposure for substantial and gross valuation misstatement, appraiser penalties under 26 U.S.C. § 6695A, and, in promoted arrangements, 26 U.S.C. § 6700.

☐ Conservation easements: treat as a high-audit item. Confirm perpetuity, the conservation purpose, baseline documentation, mortgage subordination, and deed language on extinguishment proceeds. Decline syndicated arrangements.

Stage 5 — Substantiation (Do Not Skip)

☐ Any cash gift: retain a bank record or written communication from the donee.

☐ Any gift of $250 or more: obtain a contemporaneous written acknowledgment under 26 U.S.C. § 170(f)(8).

☐ Confirm the acknowledgment contains all four elements: (1) donee name; (2) amount of cash or description of property — not a value; (3) a statement whether goods or services were provided; (4) if so, a description and good faith estimate of value, or a statement that only intangible religious benefits were provided.

☐ Confirm it is contemporaneous: received by the earlier of the filing date or the due date including extensions. This cannot be fixed later.

☐ Read it the day it arrives. Missing goods-and-services language is the single most common cause of total disallowance.

☐ Noncash over $500: complete the noncash contribution form with acquisition date, manner, and cost basis.

☐ Noncash over $5,000: obtain the signed appraisal summary from the appraiser and the donee.

☐ Quid pro quo payments: verify the donee's disclosure statement under 26 U.S.C. § 6115 and deduct only the excess. Apply United States v. American Bar Endowment, 477 U.S. 105, and Hernandez v. Commissioner, 490 U.S. 680.

☐ Vehicles, boats, aircraft: obtain the acknowledgment with the prescribed statements about use or sale.

☐ Note the donee's three-year disposition reporting obligation on applicable property and its effect on a claimed related use.

☐ Assume strict compliance is required. Substantial compliance is not a reliable defense to a defective appraisal or acknowledgment.

☐ Assemble the substantiation packet before filing, not at examination.

Stage 6 — Documentation and Restrictions

☐ Unrestricted gift: a short letter of intent is enough.

☐ Restricted gift: a signed gift agreement. Include, at minimum:

☐ the charitable purpose, stated at a level of generality that can survive fifty years; ☐ whether the fund is endowed and whether principal may be invaded; ☐ what happens if the purpose becomes impracticable — the single most valuable clause in the document; ☐ a modification mechanism short of court proceedings, coordinated with the state's uniform endowment statute; ☐ reporting to the donor or a designated family member, with frequency and content; ☐ enforcement standing, expressly reserved if the donor wants it; ☐ naming terms, including duration, demolition, renaming, and reversion for reputational events; ☐ payment schedule and whether the pledge is binding; ☐ administrative fee disclosure.

☐ Understand cy pres and equitable deviation as the fallback if the agreement is silent, and that the attorney general is a necessary party.

☐ Private foundation and split-interest instruments: confirm the governing instrument contains the required prohibitions, and note that 26 U.S.C. § 4947 applies the foundation rules to split-interest trusts.

☐ Fiduciary charitable deductions: confirm the payment is authorized by the governing instrument and made from gross income as 26 U.S.C. § 642 requires.

Stage 7 — Execution and Transfer

☐ Cash: deduct when mailed or charged, not when the check clears. A check mailed 31 December is a December gift; a credit card charge on 31 December is a December gift even if paid in January.

☐ Securities: instruct the broker in writing with the exact number of shares, the receiving institution's DTC number, and the account number. Never sell first. Confirm the transfer settles in the intended tax year — a December instruction that settles 3 January is a January gift.

☐ Physical certificates: delivery of a properly endorsed certificate to the donee or its agent completes the gift; delivery to the donor's own broker for transfer does not until the transfer occurs.

☐ Real property: deliver and record the deed as state law requires, confirm the donee has accepted in writing, transfer insurance, and prorate taxes.

☐ Tangible personal property: physical delivery plus a deed of gift, with the related-use statement.

☐ Retirement account distributions: the qualified charitable distribution must go directly from the custodian to the charity. A distribution to the donor who then writes a check is not a qualified charitable distribution.

☐ Beneficiary designations: submit the custodian's form, then obtain written confirmation and put it in the file. An unconfirmed designation is the most common single point of failure in charitable estate planning.

☐ Trust funding: confirm the trust is executed and has a taxpayer identification number before assets move, and that the trustee has accepted.

☐ Confirm the donee's receipt independently of the transferring institution.

☐ Calendar the acknowledgment and follow up if it does not arrive within thirty days.

Stage 8 — Reporting and the Return

☐ Compute the current-year deduction against the applicable percentage limits, in the statutory order among categories.

☐ Track carryforwards by category and by year, five years each. Maintain a running schedule; this is where multi-year plans quietly fail.

☐ Attach the appraisal summary signed by the appraiser and the donee.

☐ Attach the full appraisal for gifts over $500,000.

☐ Coordinate with the estate or gift tax return where applicable, under 26 U.S.C. § 2055 or 26 U.S.C. § 2522, and note that the annual exclusion under 26 U.S.C. § 2503 is irrelevant to a charitable transfer.

☐ Split-interest trust returns are due annually and are frequently missed in the first year.

☐ Retain the substantiation packet for the full assessment period plus the carryforward years — practically, ten years.

☐ If examined, produce substantiation first and completely; the examination almost always opens there.

☐ Assess penalty defenses early and remember that reasonable cause is narrowed for valuation misstatements.

Stage 9 — The Charity's Compliance Checklist

☐ Board-adopted gift acceptance policy covering accepted, reviewed, and refused assets, signature authority, environmental review, and immediate liquidation of marketable securities.

☐ Acknowledgment template reviewed by counsel with the goods-and-services statement built in so it cannot be omitted.

☐ Quid pro quo disclosure procedure with documented good faith estimates for every benefit offered.

☐ Insider transaction screen. Public charities: run the rebuttable presumption procedure under 26 U.S.C. § 4958 — independent body, comparability data, contemporaneous documentation.

☐ Private foundations: screen every transaction against the disqualified person list in 26 U.S.C. § 4946 and against:

☐ self-dealing, 26 U.S.C. § 4941 — remember that fairness is not a defense; ☐ minimum distributions, 26 U.S.C. § 4942; ☐ excess business holdings, 26 U.S.C. § 4943; ☐ jeopardizing investments, 26 U.S.C. § 4944; ☐ taxable expenditures, 26 U.S.C. § 4945, including expenditure responsibility and advance approval of individual grant procedures; ☐ net investment income tax, 26 U.S.C. § 4940; ☐ governing regulations at 26 C.F.R. part 53.

☐ Correction posture. Because the second-tier excise tax is confiscatory, correct first and argue later.

☐ Annual information return under 26 U.S.C. § 6033, with public inspection compliance and awareness of 26 U.S.C. § 6110.

☐ Nondeductibility notice under 26 U.S.C. § 6113 if the organization is not eligible to receive deductible contributions.

☐ Termination planning under 26 U.S.C. § 507 if the foundation will convert or wind down.

☐ State solicitation registration audited annually against where the charity actually solicits, including online. Register before asking, not after.

☐ Professional solicitor and fundraising counsel contracts filed where required, with statutory terms and cancellation rights.

☐ Commercial co-venture agreements in writing with per-unit disclosure.

☐ Charitable trust registration with the state attorney general.

☐ Gift annuity authority confirmed in every state where annuities are issued.

☐ Donor privacy. Do not disclose donor identities beyond what is legally required; Americans for Prosperity Foundation v. Bonta, 141 S. Ct. 2373, applies exacting scrutiny to compelled donor disclosure.

☐ Restriction file maintained permanently and indexed by fund, with the original agreement, amendments, and correspondence.

☐ Endowment spending policy documented against the statutory prudence factors, with minutes reflecting the analysis.

☐ Exemption boundaries. Political campaign intervention is prohibited outright; lobbying is limited, as sustained in Regan v. Taxation With Representation of Washington, 461 U.S. 540; and public policy limits under Bob Jones University v. United States, 461 U.S. 574, remain the outer boundary.

☐ Regulations reference: 26 C.F.R. part 1 for deduction, valuation, and substantiation; qualification standards under 26 U.S.C. § 501.

Stage 10 — Twelve Failures That Cost Real Money

  1. Selling the stock first. The gain is taxed; only the after-tax cash is given. Irreversible.
  2. An acknowledgment without the goods-and-services sentence. Total disallowance of a valid gift.
  3. Obtaining the acknowledgment after filing. Not curable.
  4. No appraisal for cryptocurrency. The exchange price is not a substitute.
  5. A December wire that settles in January. Wrong tax year.
  6. A binding sale agreement before the gift. Assignment of income.
  7. A unitrust payout above the maximum or a remainder below ten percent. The trust fails at funding.
  8. Contributing mortgaged real property to a split-interest trust. Self-dealing plus bargain sale gain.
  9. Satisfying a personal pledge from a donor-advised fund. Prohibited benefit under 26 U.S.C. § 4967.
  10. Hiring a founder's child at a private foundation without documenting reasonableness. Self-dealing under 26 U.S.C. § 4941.
  11. A restriction with no impracticability clause. A court proceeding two generations later.
  12. An unconfirmed beneficiary designation. The charity gets nothing, and no one finds out until probate.

Related Checklists

Stage 11 — Vehicle Selection Reference

Donor's stated goal First choice Second choice Avoid
"Biggest deduction this year" appreciated long-held securities, direct or to a fund cash selling first
"I don't itemize" qualified charitable distribution under § 408 testamentary designation current cash gifts
"I want the family involved" named donor-advised fund with successor advisors private foundation if assets and appetite justify it an unfunded foundation
"I need income from it" charitable remainder unitrust under § 664 charitable gift annuity retained-interest arrangements outside statute
"Pass assets to my kids at a discount" charitable lead annuity trust grantor lead trust lead annuity trust for grandchildren
"A building with my name on it" pledge plus a written gift agreement multi-year cash oral naming promises
"Something permanent" endowed fund with a modification clause field-of-interest fund narrow perpetual restrictions
"My retirement account" charitable beneficiary designation qualified charitable distributions leaving it to heirs and cash to charity
"My company stock, pre-sale" gift before a binding agreement charitable remainder trust before signing anything after the letter of intent hardens
"My house someday" remainder interest in a personal residence testamentary devise undocumented life estates

Stage 12 — Closing the File

☐ Confirm the deduction was actually claimed on the filed return, in the right year and category.

☐ Diary the carryforward for each of the next five years, with the category preserved.

☐ Diary split-interest trust filings, the annual valuation date for a unitrust, and the payment schedule.

☐ Diary foundation compliance: the minimum distribution computation, the annual return, and the excise tax payment.

☐ Diary pledge payments and the annual reporting the charity owes the donor.

☐ Send the donor a one-page summary stating what was given, what it was worth, what was deducted, what carries forward, and what happens next year. Most donors have never received one, and it is the cheapest client-retention document in the practice.

☐ Store permanently: the gift agreement, the acknowledgment, the appraisal, the transfer confirmations, the trust instrument, and the beneficiary designation confirmation.

☐ Calendar a review for any restriction that could become impracticable, and for successor advisor designations when family circumstances change.

Stage 13 — Scripts for the Hard Conversations

When the donor has already sold the stock. "The gain is locked in — that part can't be undone. What we can still do is give the cash and get a full deduction against a higher percentage limit, and if this is likely to recur, let's build a standing instruction with your broker so the next liquidity event goes to the charity in shares."

When the donor wants a private foundation and shouldn't have one. "You want three things: the family name attached, your children involved, and a say in where the money goes. A named fund at a community foundation gives you all three for about a tenth of the cost, keeps your balance sheet private, and doesn't put your son's summer job under 26 U.S.C. § 4941. If the assets grow past a few million and you want to run programs or make grants to individuals, we convert."

When the charity wants to refuse a gift. "We're grateful, and we want to say yes in a way that works. Our board policy requires an environmental assessment on real property before acceptance because the liability travels with the deed. Here's what that costs and how long it takes — or, if you'd prefer, you can sell it and give us the proceeds, which gets you the same deduction on the same appraisal."

When the acknowledgment is wrong. "Your receipt is missing one sentence the statute requires. We need a corrected one before you file, and after that it can't be fixed. I've drafted the language — please send it to their finance office today."

When the family wants the restriction narrowed. "Every word you add makes the gift more likely to fail. Name the purpose, then give the institution written permission to adapt it if the field disappears. That clause is what keeps your name on the fund in eighty years instead of putting it in front of a judge."

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