By Susan M. Green, Esquire
Crisis and Kindness
In times of crisis, people often show just how caring humanity can be. Major humanitarian relief efforts respond to large-scale natural and unnatural disasters. Strangers donate time and money to individuals injured in tragic accidents. Often, the first instinct when you learn that someone is hurt is to give money. Unfortunately, unbeknownst to the donor, this kind and selfless act can have devastating ramifications for the injured individual and his or her family.
If the injured individual or a family member is receiving means-tested government benefits, such as SSI or Medicaid, any extra income or assets could potentially lead to disqualification for benefits. Further, some people might hold a fundraiser in an effort to assist the injured party without a thorough understanding of the laws regulating them. Most dangerous are those “lone rangers” who hold fundraisers or collect money without notifying the family or providing the family with an opportunity to ensure that the proper safeguards are in place.
Important Preliminary Considerations
Tax Treatment of Gifts
Under 26 U.S.C. §102(a), gifts are specifically excluded from the definition of income. As such, gifts are likely not tax-deductible to donors. Additionally, the donor may be taxed if the amount given to an individual exceeds the annual limit, currently $13,000 in 2012.
However, gifts that are to or for the use of qualified charitable organizations are tax deductible. The charity must have unfettered control of the ultimate disposition of funds, and the donor’s intent must be to benefit the charity, not a specific individual. If the contribution is to a specific individual, it does not qualify as a charitable deduction. 26 U.S.C. §170(a), (c); Rev. Rul. 79-81.
Intent of Donor: Who is the Beneficiary?
Sometimes it can be difficult to determine the proper beneficiary of a gift. A donor may intend to benefit the disabled person/injured individual, the family of the disabled person, or the organization raising the funds. The owner is the individual who has title to the proceeds of the payment. The easiest way to make clear the intent is for the donor to contribute using a check. The “name on the check” rule operates to determine the intended beneficiary. However, it can be much more difficult to determine the intended beneficiary of a cash payment.
When are Funds Considered Received?
When funds are considered received may seem simple enough, but the timing can have a major effect on individuals already receiving benefits. According to the Social Security Administration’s Program Operations Manual System (POMS), income is counted at the earliest of the following:
1. When the payment is received,
2. When the payment is credited to the beneficiary’s account, or
3. When the payment is set aside for the beneficiary’s use.
POMS SI 00810.030(A). It may be difficult to determine when income is counted for a special needs trust. The Social Security Administration may take the position that receipt occurs when the funds are held in a separate account, pending the establishment and funding of a special needs trust.
Disposition of Funds
Depending on the amount of money that is raised, there are several alternatives for properly utilizing the funds. If the recipient of the money is a minor, it may be necessary to establish a guardianship and place the funds under the supervision of the court. If an individual needs to obtain public benefits, he or she could spend down the money that is received, including the payment of debts. If the funds received are significant, and the beneficiary is disabled, it may be beneficial to establish a special needs trust.
Definition of Disability as Determined by Social Security Administration
If you are considering establishing a special needs trust, it is necessary to determine whether the individual is considered disabled within the definitions of the Social Security Administration (SSA).
For adults, disability is defined by SSA as the inability to engage in any substantial gainful activity (SGA) by reason of any medically determinable physical or mental impairment(s) which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.
A child under age 18 will be determined to be disabled if he or she has a medically determinable physical or mental impairment or combination of impairments that causes marked and severe functional limitations, and that can be expected to cause death or that has lasted or can be expected to last for a continuous period of not less than 12 months.
A “medically determinable impairment” is one that results from anatomical, physiological, or psychological abnormalities which can be shown by medically acceptable clinical and laboratory diagnostic techniques. The impairment must be established by medical evidence.
Establishing a Special Needs Trust
If a special needs trust is appropriate, there are several important considerations to be made. First, termination language should be included in the trust to provide for the possibility that the disability is later resolved. When funds are payable to or donated in cash to a disabled beneficiary, a third party trust is not a viable option. If the funds are not that significant, but disqualification for benefits is a concern, a pooled trust can be considered. For a pooled trust, funds of others who are similarly situated are pooled together for investment purposes; however, each individual has a separate sub account and receives monthly statements of the account activity.
An individual self-settled special needs trust (also known as a d4A trust) may be established when donated funds are identified as clearly meant for the benefit of the beneficiary with the disability, there is no question as to the donor’s intent, any alternatives to a special needs trust would not meet the beneficiary’s needs, personal funds are not anticipated to be sufficient for future expenses, and the amount would attract a professional trustee. This type of trust will be subject to a Medicaid payback provision.
There are two tests for measuring whether a charitable organization can obtain tax-exempt status. The organizational test provides that an organization must be for one or more exempt purposes. 26 C.F.R. §1.501(c)(3)-1(a). The operational test provides that an organization is exempt only if it engages primarily in activities that accomplish an exempt purpose. 26 C.F.R. §1.501(c)(3)-1(c).
New Jersey Statutory Requirements for Registration
The New Jersey Charitable Registration and Investigation Act (N.J.S.A. §45:17A-18 through -40) defines a charitable organization as “any person determined by the federal Internal Revenue Service to be a tax exempt organization pursuant to section 501(c)(3)…or any person who is, or holds himself out to be, established for any benevolent, philanthropic, human, social welfare, public health, or other eleemosynary purpose, or for the benefit of law enforcement personnel, firefighters or other persons who protect the public safety, or any person who in any manner employs a charitable appeal as the basis of any solicitation, or an appeal which has a tendency to suggest there is a charitable purpose to any such solicitation.” N.J.S.A. §45:17A-20.
Unless a charitable organization is exempt from registration requirements, that organization must file a registration statement with the Attorney General in New Jersey. Exempt entities include religious institutions and charitable organizations that receive gross contributions that do not exceed $10,000 in a fiscal year if all of the functions of the organization are carried on by “volunteers, members, officers or persons who are not compensated for soliciting contributions.” N.J.S.A. §45:17A-26. Short form registration is required for charitable organizations that receive gross contributions less than $25,000 in a fiscal year and if all functions are carried out by those individuals described above. Short form registration will also be required for people who request contributions for relief of a specified individual if all of the contributions, with no deductions, are turned over to the named beneficiary. N.J.S.A. §45:17A-25. Other organizations are required to file long form registration, which is more complex. N.J.S.A. §45:17A-24.
Further, in New Jersey, it is unlawful to act as a solicitor of an independent paid fund raiser unless you have registered with the Attorney General. The laws of New Jersey define an independent paid fund raiser as “any person…who for compensation performs for or on behalf of a charitable organization any service in connection with which contributions are or will be solicited…” N.J.S.A. §45:17A-20. This does not include a bona fide salaried officer, employee, or volunteer, nor does it include an attorney, accountant or banker who advises a person to make a charitable contribution. Id. Prior to soliciting a contribution, an independent paid fund raiser or a charitable organization shall clearly and conspicuously disclose any information as prescribed by the rules adopted by the Attorney General. N.J.S.A. §45:17A-28. Solicitation is defined in New Jersey as the “request, directly or indirectly, for money, credit, property, financial assistance, or another thing of any kind or value which will be used for a charitable purpose or benefit a charitable organization.” N.J.S.A. §45:17A-20. It is of course necessary to keep complete and accurate records.
Pennsylvania Statutory Requirements for Registration
The Pennsylvania Solicitation of Funds for Charitable Purposes Act (10 Pa.C.S. §162.1 through .22) defines a charitable organization as “any person granted tax exempt status under section 501(c)(3)…or any person who is or holds himself out to be established for any charitable purpose or any person who in any manner employs a charitable appeal as the basis of any solicitation or an appeal which has a tendency to suggest there is a charitable purpose to any solicitation.” 10 Pa.C.S. §162.3.
In Pennsylvania, charitable organizations that receive contributions of $25,000 or less annually and that do not compensate solicitors are exempt from registration requirements. 10 Pa.C.S. §162.6. Short form registration is required in Pennsylvania in a number of situations, including but not limited to:
1. An individual or charitable organization that accepts contributions for a specific individual if all of the contributions, without any deductions, are given to the beneficiary and held in trust subject to 20 Pa.C.S. §71.
2. Charitable organizations whose fundraising activities are carried on by volunteers, members, officers or permanent employees and that do not receive contributions in excess of $25,000 in a fiscal year, if no part of the assets or income inures to the benefit of or is paid to any officer or member, professional fundraising counsel, professional solicitor or commercial coventurer.
3. Charitable organizations described in number 2 above which do not receive contributions in excess of $100,000 in a fiscal year if no part of the assets or income inures to the benefit of or is paid to a professional solicitor. 10 Pa.C.S. §162.7.
Other organizations will be required to file long form registration. Again, it is extremely important to keep accurate records.
In Pennsylvania, solicitation is defined as, “any direct or indirect request for a contribution on the representation that such contribution will be used in whole or in part for a charitable purpose…” 10 Pa.C.S. §162.3. A professional solicitor in Pennsylvania is “any person who is retained for financial or other consideration by a charitable organization to solicit…contributions for charitable purposes…A bona fide salaried officer or regular, nontemporary employee of a charitable organization shall not be deemed to be a professional solicitor provided that the individual is not employed or engaged as professional fundraising counsel or as a professional solicitor by any other person.” Id.
In New Jersey, there is no annual fee for those organizations filing the short form registration and grossing less than $10,000 in a fiscal year. For organizations filing short form registration, but grossing more than $10,000 in a fiscal year, the annual fee is $30. The fee for organizations utilizing long form registration and grossing less than $100,000 per year is $60. For organizations filing long form registration and grossing more than $100,000 per year, the fee is $250. N.J.S.A. §45:17A-40.
In Pennsylvania, there is a $15 annual fee for short form registration filing or for organizations grossing less than $25,000 in a fiscal year. The fee for organizations grossing between $25,000 and $100,000 in a fiscal year is $100. The fee for organizations grossing $100,000 to $500,000 in a fiscal year is $150, and there is a $250 fee for organizations grossing more than $500,000 each year. 10 Pa.C.S. §162.5(p).
In New Jersey, after notice and the opportunity for a hearing, the Attorney General may revoke or suspend any registration for reasons of a false filing, violations of the New Jersey Charitable Registration and Investigation Act, engaging in dishonesty, conviction of a criminal offense in connection with activities regulated under the Act, etc. A civil penalty of $20,000 will be assessed for each further violation of the Act. N.J.S.A. §45:17A-33.
In Pennsylvania, penalties will be assessed for violations following notice and a hearing. Violations may include violations of the Pennsylvania Solicitation of Funds for Charitable Purposes Act, refusal to produce records, and material false statements. Remedies include revocation of tax exempt status or the issuance of a cease and desist order. Civil fines cannot exceed $1,000 for each act of wrongdoing, and additional penalties of $100 per day may be charged as long as the violation continues. Criminal penalties may also be assessed, if necessary. 10 Pa.C.S. §162.17-.19.
The laws regulating fundraisers and charitable organizations are intricate. Statutes in New Jersey and Pennsylvania each have slightly different nuances. The most prudent action one can take is to bring together a disciplinary team who will work together to navigate the legal system.
Susan M. Green is a New Jersey estate planning attorney with The Begley Law Group. To contact a New Jersey estate planning, special needs planning, or elder law attorney, call 1.800.533.7227 or visit http://www.begleylawyer.com.