Questions to Ask Before Accepting an International Gift

I have a friend, a veterinarian, who told me that one of the first things she was taught about cats is that they are not small dogs. Even though both are companion animals, the similarities between cats and dogs are only fur deep. This anecdote came to mind last month when discussing the challenges of negotiating life income gifts from donors abroad. Because outright gifts to charity are universal, and bequests to charity nearly so, it is tempting to think that split-interest agreements, like charitable gift annuities, charitable trusts, and pooled income funds, are just as ubiquitous. Think again.

Among the nearly 200 countries on the planet, only a few have charitable gift opportunities similar to American charitable gift annuities and charitable trusts. Even when split-interest gift arrangements are allowed, there can still be striking differences. For instance, Canada offers immediate charitable gift annuities but does not allow donors deferred gift annuities or flexible gift annuities. Canada offers net income charitable trusts but no standard payout charitable trusts.

While split-interest agreements turn out to be cats instead of dogs, that doesn’t mean a charity can’t issue a CGA to a foreign donor or an American donor living abroad or pay annuity income to a foreign national. However, both you and your donor may need the services of a legal advisor schooled in international giving to help navigate potential complexities.

To assist you in your conversations with legal counsel, here are some questions that we recommend you explore:

1. Who is your donor? What is their citizenship? Is this a gift coming from an American expat living abroad or a non-US citizen?

Knowing who is making the gift and where the gift is coming from are essential questions. If the gift is to be made by a US citizen living abroad, ask if they are considered a permanent resident of the foreign country or if they still have a US residence. If they still have a US residence, ask if it will be possible for their home state’s laws to govern the contract. If they have no residence, ask if the charity’s home state can govern the CGA contract.

2. What country will the asset be transferred from? Is there a tax treaty with the country the gift is originating in? And if so, how does that country handle split-interest agreements? Do they have a parallel gift structure?

The US has tax treaties with many countries allowing for outright charitable gifts and bequests to flow across borders in a tax-efficient or tax-neutral manner. But, if the country you’re dealing with doesn’t have a parallel gift structure to a CGA or charitable trust, their revenue service may not recognize a split-interest agreement as a charitable gift but as a financial investment or form of insurance.

If the split-interest agreement is not recognized as a charitable gift, the donor may still be allowed to transfer the assets to charity, but the transfer could result in tax. This amount may be levied on the donor, or it may be levied on the receiving charity. An excise tax may be based on the gift transferred or the value of the gift upon the death of the surviving trust beneficiary or annuitant.

Knowing if there will be a transfer tax, who will be expected to pay it, how it will be calculated, and when the tax will be assessed are all critical questions to resolve prior to accepting the gift.

3. What tax benefit is there to the donor for making this gift (if any)?

If the charitable trust or charitable gift annuity qualifies as a gift in the foreign country, what benefit is there for the donor? A reduction in income tax? A reduction in the size of their estate for the calculation of estate tax? Avoidance of capital gain tax?

If the gift is made in the US by a non-US citizen and they pay taxes in the US, they may be able to use the charitable deduction to reduce US taxes, even if the asset used to make the gift comes from abroad.

Depending on the citizenship and residence of the donor, the gift may be tax neutral, neither incurring a tax penalty nor producing a tax benefit. In this case, the gift will still be worth pursuing if the donor has high donative intent.

4. Who is receiving the annuity payments or trust income?

Is the annuitant or income beneficiary a US citizen living abroad or a foreign national living abroad? If they are the latter, do they have an Individual Tax Identification Number (ITIN)? If not, they will have to obtain one and report it to the charity. This number is similar to a Social Security Number and is available for certain nonresident and resident aliens. Individuals who need an ITIN must apply for one using IRS Form W-7.

For annuitants and trust beneficiaries living abroad, it is important to understand that the charity must withhold part of their income. Many tax treaties specify a particular withholding amount that must be reported on IRS Form W8-BEN. In the absence of a specified withholding amount in the tax treaty, charities must withhold 30%.

5. Is the non-citizen married to the donor?

One recurring issue we’ve seen is gift tax incurred when the donor is a US citizen but their spouse is not. In these cases, gift tax may come into play as there is a limit to the value of gifts that can be made to a non-citizen spouse without triggering gift tax. In 2024 the marital deduction for gifts to a non-citizen spouse is $185,000 and is indexed to inflation. Above this annual amount, the donor would need to either assign part of their unified gift and estate tax exclusion or simply pay the resulting gift tax.

6. If the donor made this type of gift before, has anything changed?

Once having leaped through these hoops, the donor may be tempted to assume that this gift will be allowable in perpetuity. However, rules may change annually, either with a change in political leadership or as the revenue needs of the country change. If the donor contemplates a new split-interest gift in a successive year, it is always safer to check on the answers to these questions again.

If the answers to the questions above cause either the charity or the donor to decide a split-interest agreement is not in the cards, consider pivoting your ask to either an outright gift or a bequest pledge. Those truly are the cat’s pajamas.

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