The latest on tax reform
A wild ride in 2020 ended with the extension of tax provisions to encourage charitable giving in the midst of ongoing pandemic-related challenges facing nonprofits. Now, in 2021, with the possibility of another stimulus package in the mix, your clients may be hearing about potential tax reform under the Biden administration as well as dialogue on both sides of the debate over whether to restrict the benefits of certain types of giving to foundations and donor-advised funds.
Help your clients break through the noise by reviewing the many ways they can achieve their charitable giving goals, regardless of what happens with tax policy and legislation. This month, we’ll cover two tried-and-true techniques: retirement plan and life insurance bequests and gifts of real estate.
Back to basics: Retirement plans and life insurance can fuel meaningful bequests
Your client’s fund at the community foundation can be an ideal recipient of estate gifts through a will or trust, or through a beneficiary designation on a qualified retirement plan or life insurance policy.
Bequests of qualified retirement plans can be extremely tax-efficient. This is because charitable organizations such as the community foundation are tax-exempt. This means the funds flowing directly to a client’s fund at the community foundation from a retirement plan after the client’s death will not be reduced by income tax. This also means the assets will not be subject to estate tax.
Don’t overlook life insurance, either. Not only is your client able to designate a fund at the community foundation as the beneficiary of a life insurance policy, but your client also may elect to transfer actual ownership of certain types of policies. For example, when your client makes an irrevocable assignment of a whole life policy to the client’s fund at the community foundation, a tax-deductible gift of the cash value of the policy occurs at the time of the transfer. A gift like this can ease a client’s income tax burden, especially if the foundation continues to own the policy and the client makes annual tax deductible gifts to cover the premiums.
The community foundation makes it easy for you to draft bequest terms in legal documents, including beneficiary designations of retirement plans and life insurance policies. Please contact our team for the exact language that will ensure alignment with your client’s intentions.
Keep in mind that even after a client has executed estate planning documents or beneficiary designations, in many cases the client can update the terms of the fund at the community foundation designated to receive the bequest upon the client’s death. Clients love the ease and flexibility and certainly will appreciate your bringing this technique to their attention.
Red hot real estate: Structure smart gifts to charity without getting burned
The housing market is showing no signs of slowing down in 2021. For certain clients, this presents a strong opportunity for charitable gifts of real estate, whether a primary residence, second home, rental property, or even niche commercial property that’s benefited from a multi-faceted pandemic marketplace.
As is the case with gifts of other long-term capital gains assets, gifts of real estate to a charity can be extremely tax-efficient. Whether your client is giving a second home, rental property, or commercial property to a fund at the community foundation, the client may be eligible for a charitable tax deduction of the fair market value of the property. Because the community foundation is a public charity, when the property is sold, the full amount of the proceeds will remain in the fund--not subject to income tax.
Gifts of real estate to charity shouldn’t be undertaken lightly, though; certain pitfalls and missteps can have a devastating tax impact. If your client is considering a gift of real estate to charity, consider working closely with the community foundation to ensure that the transaction is properly structured.
The team at the community foundation can help you navigate the rules for gifts of real estate. such as how to determine valuation, dealing with debt on the property, how to substantiate value and properly report the transaction on Form 8283, when and to what extent minority interest discounts may apply, how to avoid a “step transaction” due to a prearranged sale, and determining whether unrelated business taxable income (UBTI) will be a problem.
Finally, if your client would like the gift of real estate to benefit one or more favorite nonprofit organizations, the community foundation can help facilitate a transfer into a donor-advised fund, from which your client can recommend grants to the charity or charities after the property sale is complete.
Donor privacy: Will the Supreme Court unravel 50 years of case law?
On January 8, 2021, the United States Supreme Court granted review to Americans for Prosperity Foundation v. Becerra and Thomas More Law Center v. Becerra. Both cases challenged the California attorney general’s requirement that charities disclose major donors’ names and addresses. The Ninth Circuit United States Court of Appeals disagreed with advocacy groups’ arguments that the policy runs afoul of the First Amendment.
The Supreme Court’s decision will be significant because the Becerra decisions are inconsistent with case law dating back to 1958, when NAACP v. Alabama ex rel. Patterson granted First Amendment protection to the privacy of a group’s members and supporters via rights of free association. Indeed, the NAACP’s amicus brief is frequently quoted in publications across the political spectrum:
“In an increasingly polarized country, where threats and harassment over the Internet and social media have become commonplace, speaking out on contentious issues creates a very real risk of harassment and intimidation by private citizens and by the government itself….Thus, now, as much as any time in our nation’s history, it is necessary for individuals to be able to express and promote their viewpoints through associational affiliations without personally exposing themselves to a legal, personal, or political firestorm.”
Donor privacy is an important issue for advocacy groups that may be unpopular with the governing majority of a particular state.