Another possible solution to the Illinois budget mess: Ask a donor for a loan
It looks likely that Illinois will not have a budget this year and may not have one until after the November 8 election. If you depend on state payments that aren’t coming, a lesser known but useful planned gift is a loan from a donor. A donor can lend up to $250,000 to as many different charities as the donor wants at no interest for any length of time.
When would a donor want to do this? Here are some possible scenarios:
- Your donor doesn’t itemize deductions.
- Your donor has hit the 50% ceiling on charitable deductions.
- The donor wants to help but wants to retain the right to get the money back.
You need to document the loan just as you would any commercial loan. The organization would need to sign a promissory note containing 1) a promise to repay the amount borrowed, 2) the interest rate, if any, 3) repayment terms, and 4) what happens if the organization defaults or goes out of business. If something happens to the donor, the children or spouse may ask for the money back before you are ready or able to return it.
The donor has the option to forgive the loan or a part of it and take a deduction at that time. However, you need to make sure that there is no agreement to forgive the loan at certain times. The IRS may argue that the loan was a gift at the time it was made.
If you are in a cash squeeze or simply have a donor/supporter who may not want to donate immediately, consider the loan as a possible alternative. If you have questions, or need assistance on how to document the loan, please give us a call.