Earlier today, George Zimmerman’s wife, Shellie N. Zimmerman, was arrested for allegedly lying at her husband’s bond hearing. Mr. Zimmerman made headlines this spring when he shot an unarmed Florida teen, Trayvon Martin. Mr. Zimmerman claimed that the shooting was justified and was done in self-defense after the teen became aggressive.
In April, Mr. Zimmerman was arrested on charges of second-degree murder. His wife testified under oath at his bond hearing that she was not aware how much money a website soliciting cash for Mr. Zimmerman’s defense had raised; she also claimed that the couple did not have financial means to support a defense, a claim that was later disputed by prosecutors who successfully moved revoke his bail. Prosecutors allege that Mr. Zimmerman had nearly $135,000 at the time of Ms. Zimmerman’s statements.
Nearly $200,000 has been raised for Mr. Zimmerman’s defense. Of that amount, Zimmerman’s attorneys say that $150,000 is now in a trust fund for the defense. Nearly $30,000 has been used “to make the complicated transition from private life in Sanford, Florida, to a life in hiding as a defendant in a high-profile court case” – a taped jail conversation suggests that the money was used to pay bills including American Express and Sam’s Club credit cards. The remaining $20,000 will be used to provide living expenses for the Zimmermans up to and during the trial.
The original web site used to raise money, therealgeorgezimmerman.com, is now defunct.
Last month, a new site was created at www.gzdefensefund.com. That site raised about $15,000 in its first two weeks of operation, according to Zimmerman’s attorneys. Most of the donations to the fund ranged from $25 to $100 with the largest donation received being $3,000. According to the site, the money donated will be used for “Zimmerman’s ongoing living expenses, legal costs, and fees.”
The site doesn’t say anything about donations being tax-deductible (despite some claims to that effect in the press). That’s because donations to the legal defense fund are not tax-deductible. The fund is not a charitable entity – nor could it be. To be charitable, an organization generally has to benefit a class of persons, not an individual. Even if you believe a cause to be the noblest in the world, it’s not deductible unless the organization is considered a qualified charitable organization by the IRS (you can search to see if an organization has status by checking the IRS web site here).
If it’s not tax-deductible, then what is it? It’s a gift.
With a cash gift, there is no federal income tax consequence to the recipient. Cash gifts include checks and payments received through third-party processors like PayPal. So the Zimmermans won’t have to report that cash to the IRS come next April.
But what about the folks who made a donation? What are the tax consequences to them?
Transfers of property in exchange for nothing (or less than full value) are subject to federal gift tax if they exceed the annual exclusion. For 2012, that amount is $13,000 per person. There is no limit to the number of people that you can make gifts to without triggering federal gift tax: it makes no difference if you give $13,000 to one person or to one million people. Gifts in excess of the annual exclusion are subject to the federal gift tax.
What a lot of folks don’t realize is that the federal gift tax is payable by the person making the transfer or the gift, not the recipient. So, the Zimmermans will not have any gift tax consequences as a result of the defense fund; donors would, however, if they made gifts in excess of $13,000 (so far that hasn’t happened).
Now that the money has been moved from personal collection by the Zimmermans to being managed inside a trust, does that change the analysis? Not at all. Under section 2511(a) of the Tax Code, it’s clear that the gift tax still applies:
Subject to the limitations contained in this chapter, the tax imposed by section 2501 shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible; but in the case of a nonresident not a citizen of the United States, shall apply to a transfer only if the property is situated within the United States. (emphasis added)
Finally, if it’s a gift, does that mean that the Zimmermans can deduct expenses paid out of the defense fund? It would if they were deductible (medical expenses on a Schedule A, for example). But living expenses are still personal in nature – even if they’re out of the ordinary such as this – making them not deductible. Similarly, expenses for legal fees are not deductible except to the extent that they’re used for business or tax advice. That’s not the case here since it’s private criminal defense matter not related to Zimmerman’s occupation.
The fact that the legal defense fund is now in trust doesn’t change the tax consequences to the donors or to the Zimmermans. The Zimmerman case may have raised a lot of questions about our criminal laws … But the tax ones? In this case, that’s the easy bit.
