High-income earners, highly-appreciated assets, and cash crunches

As we enter 2022's second quarter, we’re struck by how much–and how little–has changed already this year in the world of charitable giving. Where big changes are concerned, the war in Ukraine and inflation are topping the charts in the minds of many philanthropic Americans. At the same time, questions about tax reform still are never far from our thoughts. We suspect the same is true for you and your clients. 

In this issue, we’re covering topics related to philanthropy today–right now–as charitable priorities shift in the geopolitical and economic landscape and more light is shed on what we might expect in terms of changes to the tax laws impacting charitable giving. 

Before we dive in, we’d like to draw your attention to a report updated last month by the Congressional Research Service. The Charitable Deduction for Individuals. Overall, this two-pager is an excellent primer for your clients who want to learn more about the history, policies, and fundamental concepts behind the income tax deduction for contributions made to charities. You might even find it useful for your own review purposes, as our team certainly did. 

Thank you for the opportunity to work with you and your philanthropic clients. It is our honor and pleasure. 

Wishing you all the best for the spring,

Your Community Foundation

Thumbs up: SECURE Act 2.0

Across the board, individuals, employers, and charitable organizations are celebrating the recent passage of the Securing a Strong Retirement Act of 2022 (House Bill 2954, known as the "SECURE Act 2.0") in the House of Representatives on March 29, 2022 by an overwhelming vote of 414 to 5. The legislation is headed to the Senate (which has its own, similar version of the legislation) before it becomes law.

Building on 2019 legislation known as the Setting Every Community Up for Retirement Enhancement (SECURE) Act, among SECURE 2.0's many components is a provision that would allow taxpayers to make a one-time qualified charitable distribution of up to $50,000 from an IRA to a charitable remainder trust or charitable gift annuity. In addition, the new provision would apply inflation indexing after 2022 not only to the $50,000 limit on this new split-interest distribution, but also to the qualified charitable distribution (“QCD”) limit (currently $100,000) for direct gifts to qualified charities. 

A mixed bag: Budget legislation

With President Biden’s Build Back Better 2022 budget reconciliation bill still pending, the White House just released its Fiscal Year 2023 budget proposal laying out several revenue-generating components and including a “deficit-neutral reserve fund” to buffer the impact of Build Back Better provisions that may or may not pass the Senate.

Here are a few of the tax proposals in play that could most significantly impact the way your clients plan for their charitable giving priorities:

High-income earners + highly-appreciated assets = high alert

A proposed 20% minimum tax on high-income individuals, slated in the proposal to become effective for tax years beginning in 2023, is referred to as the “Billionaire Minimum Income Tax.” The tax would be applied to the "total income," defined to include unrealized capital gains, of any taxpayer whose net wealth exceeds $100 million. Simplistically speaking, the mechanism of the tax roughly mirrors a pre-payment of capital gains tax. This is similar to the so-called “wealth tax” proposals in Build Back Better. 

Politics aside, a tax such as the one proposed in the Fiscal Year 2023 budget could mean daunting recordkeeping requirements for those impacted. Taxpayers would report their assets to the IRS annually, including closely-held assets which would be subject to a statutory valuation method. Taxpayers who qualify as “illiquid,” however, would be permitted to defer tax payments until a sale of certain illiquid assets, perhaps creating an incentive for taxpayers to increase their investments in real estate, closely-held companies, and other non-marketable assets. 

If some form of tax on unrealized capital gains becomes law, it could prompt the need for your clients to adopt even more proactive strategies to donate highly-appreciated assets to charitable organizations. In other words, giving highly-appreciated assets to charitable organizations is already a tax-savvy strategy and may become even more beneficial, depending on whether a “wealth tax” goes into effect and how the regulations interpret the law’s impact on the current charitable giving rules. 

Private foundations + donor-advised funds, take note 

Families who conduct their philanthropy using both a private foundation and a donor-advised fund will want to plan carefully if a particular item in the Fiscal Year 2023 budget package becomes law. Proposed changes to the private foundation rules seek to “clarify” that contributions to donor-advised funds do not meet the definition of "qualifying distributions" for purposes the five percent annual distribution requirement for a private non-operating foundation. These distributions still would be permissible, though, if the private foundation can show that the funds transferred to the donor-advised fund were distributed by the end of the following tax year. 

Even if the proposed change becomes law, combining a private foundation with a donor-advised fund at a community foundation is still an effective charitable giving technique. At the very least, the donor-advised fund can hold the distribution for a year to give a family time to create a grant-making strategy and set goals for the impact the family wishes to make in the community through its support of nonprofit organizations. 

Donor-advised funds–no longer on the hot seat?

Donor-advised fund reforms proposed in the Accelerating Charitable Efforts (ACE) Act, introduced in June 2021 via Senate Bill 1981 and again in February 2022 in the form of House Bill 6595, have been prominently featured in the media and subject to a range of opinions. Notably, though, the just-released Fiscal Year 2023 budget proposal appears to meaningfully address donor-advised funds only in relation to receiving private foundation qualifying distributions. We’ll be watching this carefully, but for now, it appears that sweeping reform of donor-advised fund rules is not imminent.   

Of course, as with any budget proposal or pending legislation, it's impossible to predict which, if any, provisions will ultimately become law.

Cash crunch: Gifting non-income producing assets

For clients who rely on fixed-income assets, such as bonds, as well as wages, to cover their living expenses, the inflation pinch indeed may mean fewer dollars available for charitable giving. Still, for clients who own property, stocks, and other assets that tend to go up in value in an inflationary environment, now may be a good time to take advantage of tax-savvy giving of highly-appreciated assets–especially stocks that pay low–or no–dividends and therefore are not critical to maintaining a client's income levels. 

Giving highly-appreciated stock remains one of the most effective ways your clients can support their favorite charities. That’s because when a taxpayer gives stock to a public charity, such as a donor-advised fund at the community foundation, instead of selling it outright, the capital gains tax is avoided. Plus, marketable securities are typically deductible at their fair market value, further helping your client’s overall income tax situation.

As you counsel a client who is emotionally attached to a particular stock, don’t let that attachment prevent a client from making a smart tax move. Your client can donate shares of the highly-appreciated favorite stock and then immediately repurchase the same number of shares. This essentially resets the client’s cost basis to the current price, which could help reduce capital gains taxes on a future sale.

Finally, remind your clients that there are significant differences in the tax treatment of donating cash versus securities. Currently, the deductibility of gifts of cash to a public charity is limited to 60% of adjusted gross income, versus gifts of non-cash assets to a public charity which are deductible up to only 30% of adjusted gross income. Also remind your clients that the maximum benefits associated with giving appreciated assets to a public charity are realized only with long-term capital gains property, in which case the deduction is set at the fair market value of the property on the date of the gift; gifts of short-term capital gains property are valued at cost basis for purposes of calculating the deduction. 

Change is in the air: Charting a course for philanthropy amid uncertainty

Greetings!

We hope all is well in your world as current events continue to present challenges for so many people. No doubt, your clients are relying on you more than ever to help them weather the storms of inflation, financial markets impacted by global unrest, and the looming potential of changes to tax laws.

As is so often the case during periods of volatility, philanthropy can be a calming force. In that regard, the team at the community foundation is particularly interested in the latest research on the importance of meaningful relationships between advisors and their clients, and we strive to help you create those strong bonds of loyalty.

In particular, we are struck by the results of a study recently published in the Journal of Financial Planning, which illuminated the disconnect between how advisors perceive their effectiveness versus how their clients actually rate it. Related to charitable giving, for example, 68% of financial planners said they made an effort to gather information about their clients’ cultural values, but only 41% of clients agreed. 

Philanthropy, and partnering with the community foundation, can help you close that gap. Charitable giving is a natural and easy way to start a conversation with clients about their values and what’s important to them in their estate plans and financial plans beyond just dotting the i’s and crossing the t’s.  

With that in mind, we’re focusing this issue on topics that may help you start even more meaningful conversations with clients as we navigate the rollercoaster of 2022’s first quarter.

Thank you for the opportunity to work together. We are grateful. 

Your Friends at the Community Foundation 

Winds of change and headwinds: Legislation and inflation

You’ve no doubt noticed that donor-advised funds have been featured more prominently over the last few weeks in financial and wealth management publications. That’s in part because the Accelerating Charitable Efforts Act was reintroduced in the House of Representatives on February 3, 2022. The legislation contains the same proposed law changes as the bill introduced in the Senate in July 2021, which stalled. 

Portions of the bill are designed to address concerns that donor-advised funds are not required to make distributions to charities according to any timeframe or monetary level. The ACE Act proposes to create four new categories of donor-advised funds, each with different tax consequences to the donor.

Donor-advised funds are excellent charitable planning tools for many situations, including for individuals and families who want to organize a regular stream of giving to community organizations and unlock illiquid assets to do so. Indeed, the proposed legislation recognizes special categories of donor-advised funds established at community foundations, referred to as Qualified Community Foundation Donor Advised Funds, which are treated favorably for tax deduction purposes.

We’re tracking closely the various conversations surrounding this proposed legislation, including a proposal by some community foundations that calls for a five percent aggregate minimum payout and other measures to address concerns while also maintaining the characteristics of donor-advised funds that motivate more charitable giving overall, especially as Millennials catch on to this particular vehicle to fund their charitable priorities. 

As with any proposed legislation, no one can predict whether or when new laws impacting donor-advised funds will be enacted, and if they are, what parts of the proposed legislation will be included in the version that becomes law. What we can tell you, though, is that we are watching this legislation very carefully, on a daily basis, just as we do with any proposed legislation that could significantly impact your clients’ charitable giving strategies. You will hear from us if changes are enacted. In the meantime, please reach out with questions. 

Potential legislative changes aren’t the only choppy waters as 2022 gets into full swing. Charities are impacted by inflation, and your clients may wish to take that into account in their charitable giving plans for 2022. Certainly as your clients’ purchasing power dips, so does their ability to make charitable contributions. But, it’s possible that the charities your clients love to support are feeling the sting to an even greater degree. This might sway your clients toward maintaining–or even increasing–their historical charitable giving budgets and perhaps even adjusting those budgets for inflation. Be mindful, though, that even the possibility of inflation can have a significant psychological effect on your clients, impacting everything from their confidence as consumers to attitudes toward (and longing for??) Girl Scout Cookies.

The team at the community foundation has decades of experience working with advisors and donors through economic ups and downs. We’re happy to be a sounding board as your clients evaluate whether and how to adjust their charitable giving in 2022, especially in cases where establishing a fund at the community foundation can help achieve both a client’s and a charity’s objectives. 

Closely-held business interests: Adventuresome giving

The number of businesses in the United States totals more than 27 million, but only a tiny fraction of those are publicly traded. Even so, your clients still have plenty of opportunities to give highly-appreciated marketable securities to fund their charitable endeavors. With the millions of closely-held businesses that aren’t publicly-traded, though, many of your clients may have an untapped opportunity to give corporate interests, especially considering that private equity fundraising continues to soar. 

As you talk with your clients about giving LLC and partnership interests, keep in mind that complex tax and legal rules may apply. For example, the operating agreement or partnership agreement will indicate whether interests can be gifted to charity in the first place. Another consideration in the case of an LLC is whether the entity is taxed as a partnership. Finally, if the interests are given to a public charity, such as a fund at the community foundation, in general, the contribution is deductible up to the fair market value of the gifted property (minus reductions for certain components that may include liabilities, short-term capital gain, and ordinary income). 

Please contact the team at the community foundation to explore ways your clients can fund their charitable giving strategies through gifts of closely-held business interests. We’d love to help! 

Crypto and CRTs: Buried treasure, or hidden pitfalls?

“For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.”

That’s a key phrase in IRS Notice 2014-21, where the Internal Revenue Service outlined its position on the tax treatment of the disposition of cryptocurrency. In other words, a taxpayer’s disposition of cryptocurrency will generally be treated as triggering a gain or a loss.

With this core principle at its foundation, taxpayers have been using cryptocurrency to fund their charitable goals, including establishing charitable remainder trusts with gifts of bitcoin and other cryptocurrencies. While this is certainly a strategy worth exploring for some of your clients, beware that the IRS’s commitment to increased enforcement, coupled with the purported widespread underreporting of cryptocurrency-related income and corresponding tax revenue losses, clients should proceed with caution. The IRS has even launched a special initiative to audit crypto reporting and catch fraud, calling the effort Operation Hidden Treasure. 

As always, keep in mind the old saying that a client “should not give away a dollar to save 50 cents.” As is the case with any legal structure that results in tax consequences, there are pros and cons, ie.,“charms and dangers.” Think of a charitable remainder trust–including one funded with cryptocurrency–as a vehicle for helping clients support the charities they love, not simply a tax-planning tool. Viewed through that lens, clients will be pleased that a charitable remainder trust not only provides them with an income stream, but also can offer flexibility in the ways they provide for their intended charitable beneficiaries, especially when aligned with a fund at the community foundation that supports a client’s philanthropic goals.

A fresh start: Family businesses, hard-to-value assets, and transfer of wealth

We’re ready for a fresh start. How about you? 

Alas, it’s still not clear what might happen with tax reform given the fluid status of the Build Back Better Act. But that doesn’t mean we can’t begin 2022 with enthusiasm for helping philanthropic individuals and families achieve their goals for improving the quality of life in our region. Indeed, according to a 2021 Harris Insights & Analytics survey, 60% of Americans are expecting their taxes to go up in the next four years. And most of them are looking for ways to minimize taxes now, rather than waiting for retirement. 

With that in mind, we’re kicking off our newsletter series this year with topics that will help you more easily start conversations with your clients about their philanthropic plans by raising the issue not in a vacuum, but within the context of their families, their businesses, and a charitable giving marketplace that continues to deliver twists and turns such as cryptocurrency and NFTs.

Thank you for allowing us to help you serve your clients. We are honored, and we’re sending our best wishes for a happy, healthy, and productive year for you, your clients, and the community we all love. 

Your Friends at the Community Foundation 

Philanthropy and the family business: Ripe for great questions 

More than half of the country’s GDP is generated by the 5.5 million family-owned businesses in the United States. Profits aren’t the only priority for most family businesses; indeed, the vast majority of family business owners report that other factors, such as culture, community, charity, and values, are also important to the business. Although it is not surprising that philanthropy is a vital part of the family business fabric, setting up the right structure to leave a legacy is not a cakewalk. As you advise a business-owner client, consider sharing questions that might help your client create or grow an effective corporate philanthropy program within the family enterprise.

Getting organized

Does the company have a strategy or system for prioritizing sponsorship requests, charity event invitations, and requests for donations? Is the strategy based on the owners’ values, along with employee input? What is the communication strategy for maintaining positive relations with the charities whose requests the company turns down? How are requests from employees handled? Could a corporate donor-advised fund at the community foundation help streamline administrative load? Is there a corporate foundation in place and if so could it be streamlined into a corporate donor-advised fund to save administration hassles and better leverage tax strategies?

Getting employees engaged

If the company has a community engagement program, how popular is it? For example, is there a matching gifts program and is that program being utilized as expected? Are employees eager to attend community events to sit at the company’s tables, or is it sometimes hard to fill seats? Are there opportunities for employees to volunteer together at local nonprofits? Has the company surveyed employees to learn about their favorite causes and the ways they prefer to give back (e.g., donate money, volunteer, serve on boards)? 

Getting the word out

How is the company letting employees and other stakeholders know about its community commitments? Is it a priority to share civic engagement with the outside world, such as through a page on the company’s website, or is the company’s approach to stay under the radar? Do the employee handbook and recruiting materials describe community engagement opportunities for employees?  

Helping your clients ask the right questions can make a big difference in the success of their corporate philanthropy programs.

Related, and importantly, it is wise to remind your clients that the sale of a closely-held business creates strong opportunities for tax-savvy charitable giving–and that it is critical for the business owner to plan ahead.  

As always, the team at the community foundation is here to help you serve your family business clients by setting up a corporate donor-advised fund, assisting with a matching gifts program, creating donor-advised funds for employees, collaborating on a philanthropic component of a business sale, and much, much more.

Giving hard-to-value assets: It’s not just for real estate anymore

You are no doubt familiar with the many benefits of giving hard-to-value assets to a charity–and especially to a client’s donor-advised fund at the community foundation. Because the community foundation is a public charity, your client is eligible for the maximum allowable tax deduction for their contributions. This is because a client typically can deduct the fair market value of the asset given to the fund, and, furthermore, when the fund sells the asset, the community foundation (as a public charity) does not pay capital gains tax. This means there is more money in the donor-advised fund to support charities than there would be if your client had sold the hard-to-value asset on their own and then contributed the proceeds to the donor-advised fund.  

Individuals can take advantage of giving hard-to-value assets, and so can businesses. For example, when a business is sold, its owners may find themselves with artwork, insurance policies, or real estate on their hands, any of which can be donated to a donor-advised fund with the favorable tax treatment described above. Gifts of real estate have long been popular (although still underutilized) gifts to charity, sometimes making up nearly 3% of the value of all charitable contributions in any given year. 

And the universe is expanding! In 2021, gifts of novel non-cash assets made their mark as a viable way to fund donor-advised accounts and other charitable efforts. Cryptocurrency is one type of asset that clients are now giving to charities, which was to be expected given the rise in popularity of Bitcoin and other currencies. But advisors might not have expected to see NFT (non-fungible token) auctions result in more than $1 million in 2021 Giving Tuesday charitable donations processed by Giving Block.  

Will NFTs be the next hard-to-value asset donation craze? That remains to be seen. In the meantime, though, the team at the community foundation is staying close to the trend. We can help your charitable clients make any type of gift by guiding you and your client through the gifting process and, in the case of crypto, collaborating with well-vetted intermediaries like Giving Block, so that your client’s donor-advised fund at the community foundation can grow and support your client’s favorite charities.  

Notably, we will be watching closely as more information becomes available about the environmental cost of donating ephemeral assets because of the stress that mining and transferring Bitcoin and other cryptocurrencies place on the energy grid. The toll is so great, for example, that Greenpeace is backing away from accepting gifts of cryptocurrency. But if the $23 billion in NFT sales generated in 2021 (compared with less than $100 million in 2020) is any indication, philanthropy may see significant NFT activity in the years ahead.

Transfer of wealth: Following the money

“The greatest wealth transfer in modern history has begun,” according to a mid-2021 report in the Wall Street Journal. And, with tax reform’s big bite into estate values off the table, at least for now, many of your older clients may be thinking seriously about their legacies.

And these legacies will be significant. As of March 31, 2021, according to data collected by the Federal Reserve, Americans in their 70s and older had a total net worth reaching almost $35 trillion. By 2042, an estimated $70 trillion will change hands, including an estimated $9 trillion flowing to charities, according to research conducted by Cerulli Associates. 

As you advise an older client, an important part of the conversation will be to determine the best charitable giving vehicles to achieve your client’s community goals, particularly evaluating the potential role of a donor-advised fund or private foundation. Increasingly, your clients are learning about their options in mainstream media and likely have a greater level of awareness about charitable giving options than ever before, especially in the wake of the recent twists and turns concerning potential tax reform. 

Here are key points to keep handy for those conversations (as you pick up the phone to call the community foundation team!):

–A donor-advised fund at the community foundation costs nothing to set up, and ongoing fees are minimal. 

–A donor-advised fund can be created quickly–within a week or even days. A private foundation, by contrast, requires establishing a legal entity through state and IRS filings. 

–Donating hard-to-value assets to a donor-advised fund delivers better tax benefits (deduction of fair market value) than a gift of the same assets to a private foundation (deduction of cost basis).

–A client can deduct a greater portion of AGI (e.g., cash deductible up to 60% of AGI) with a gift to a donor-advised fund than with a gift to a private foundation (e.g., cash deductible up to 30% of AGI). 

–Ongoing operations of a donor-advised fund through the community foundation are very easy, with no tax filings required. 

–Sometimes, both a private foundation and a donor-advised fund are useful tools to meet a client’s charitable giving goals. The team at the community foundation team can help you develop a structure for your client that maximizes the benefits of each vehicle within an overall philanthropy strategy.

Next, consider encouraging your clients to make charitable giving part of “living large” in their golden years, especially in light of an emerging trend that some retirees are spending their money instead of giving it away.

Finally, remind your clients that the best time to set up their philanthropic plans really is right now. By being proactive, your client has nothing to lose and everything to gain in ensuring that their charitable wishes are carried out. To that end, the community foundation regularly works with advisors helping clients who wish to establish “shell funds” to receive bequests after the clients pass away. A shell fund allows a client to describe charitable intentions, including naming advisors and suggesting nonprofits to receive fund distributions, to guide the heirs through the client’s charitable legacy. Your client can name the fund, and even provide that the community foundation’s board of directors work with advisors to make grants and evaluate impact. A shell fund agreement can be modified anytime before your client’s death. 

Advisors' roles: Gifts of life insurance and closely-held stock

A personal note to our advisor colleagues

The community foundation is honored to work with you and your clients to structure charitable giving plans and establish funds that achieve both your clients’ charitable objectives as well as address our region’s greatest needs.

The professionals at the community foundation intimately understand the issues facing our community and how grants from funds can be impactful. We do this through deep knowledge of our area’s nonprofits, due diligence to ensure that each charitable dollar helps as many people as possible, and an unwavering commitment to investing in our community for the long term.  

As we enter into an era of potential tax reform, we pledge to keep you informed of legislative developments that will require you and other advisors to navigate the important distinctions between community foundation donor-advised funds and commercial donor-advised funds, as well as the differences between donor-advised funds and private foundations. 

No matter what legislation is passed and when, the community foundation team is here to educate you and your clients. We’ll also keep you posted on charitable giving options that are tax reform-neutral and suggest ways to leverage pre-legislation windows of opportunity. Please reach out with any questions you’d like to be sure we address in our advisor communications.

In the meantime, we’ve focused this newsletter on three legal doctrines: a fidiciary’s personal liability, ”incidents of ownership” in gifts of life insurance, and the nuances of giving S Corporation stock to charities--all of which represent important, decades-old bodies of law that can easily be overlooked in the rush of an advisor’s day-to-day work with clients. 

Advisors' fiduciary obligations can get personal

With charitable bequests on the rise, and the possibility that more clients will be subject to Federal estate taxes in the future, many attorneys, accountants, and financial advisors are refreshing their recollections on the requirements of advising and administering taxable estates where one or more charitable organizations is a beneficiary.

Advisors’ fiduciary responsibilities to charitable beneficiaries are similar to fiduciary responsibilities to a decedent’s family members and other individual beneficiaries. Where a charity is a residuary beneficiary, for example, a fiduciary must pay careful attention to expenses and liabilities that impact the amount the charity ultimately receives. These liabilities and expenses include taxes, debts, fees, and costs incurred by the executor or trustee. A fiduciary should expect charity remainder beneficiaries to pay as much attention to the bottom line as family members. 

Not only must a fiduciary watch expenses to maximize the remainder beneficiaries’ interests, but a fiduciary must also be careful to avoid making distributions too early and therefore potentially becoming personally liable if estate obligations surface later. This was the unfortunate situation in Estate of Lee, T.C. Memo. 2021-92, where the fiduciary ultimately was found by the Tax Court to be personally liable for amounts due under a Federal tax lien.

As you assist your clients with estate planning that involves charitable giving, consider encouraging your client to talk with the charitable organization about the intended bequest so that expectations are well-documented, even if the bequest likely will not materialize until well into the future. Remember, too, that some charitable clients can benefit from establishing a fund at the community foundation to receive and administer their bequests to charitable causes. In that case the professionals at the community foundation can assist as you structure a bequest in the client’s estate plan.

Finally, and critically, ensure that the legal documents or beneficiary designation forms reflect the correct name of the charity. There are more than 1.5 million charitable organizations in the United States, and many have similar names. If you have any questions about which charity your client intends to benefit, ask both the client and the charity to confirm the exact name and location of the organization. 

Five pointers for gifts of life insurance to charities

“Incidents of ownership” are three powerful words in estate planning where life insurance is concerned. The phrase is a key component of Internal Revenue Code Section 2042, which provides for the inclusion in a taxpayer’s gross estate, for estate tax purposes, of the proceeds of insurance policies on the taxpayer’s life under two circumstances. First, if the proceeds are actually received by the estate, they are included. Second, proceeds are included in an estate when the money is received by named beneficiaries other than the estate if the taxpayer died possessing “incidents of ownership” in the policy.

Section 2042 is the reason an estate planning advisor typically strives to ensure that a client does not own life insurance policies on the client’s own life. This is frequently accomplished by creating an irrevocable life insurance trust. As an alternative, many clients give life insurance policies to charitable organizations, not only for the estate tax benefits, but also for potential income tax benefits during the client’s lifetime.

Before you assist your client with a gift of life insurance to a charity, here are five pointers:

Check state law first. Most--but not all--states allow transfers of life insurance policies to a charity. 

Request change of ownership and change of beneficiary forms from the insurance company, and make sure you have the right forms. The paperwork is not always user-friendly. There are instances where a taxpayer completed the wrong set of forms and thus failed to accomplish the intended transfer. The charity will need to be the policy owner and, unless the charity intends to surrender the policy, also be the named beneficiary.

Carefully calculate the charitable income tax deduction for the gift of the life insurance policy to the charity. The taxpayer is eligible for a deduction equal to the lesser of the policy's value or the taxpayer’s basis (usually the total amount of premiums paid). The “value” of the policy is computed using the replacement cost or the “interpolated terminal reserve” plus unearned premiums.

Be sure to check for loans against the policy to avoid an income tax event for the taxpayer. 

Finally, do not run afoul of the “insurable interest” rules, which can come into play where the charitable entity pays the premium on a life insurance policy transferred to or secured by the charity on your client’s life.

These three factors are a big deal in gifts of S Corp stock to charity

S Corporation, or limited liability company? That’s a question many family businesses grapple with in their formative stages. For years, S Corporations were frequently preferred for small businesses that wanted the protection of a corporate structure versus a traditional partnership. In the 1990s, limited liability companies, or LLCs, rose in popularity because they offered both favorable tax treatment and corporation-like protections. In recent years, lower tax rates have contributed to the resurgence of traditional C Corporations as a viable structure for a business.

Since the adoption of laws and regulations decades ago making them advantageous, many S Corporations and LLCs have grown into thriving, highly-valuable businesses that are owned by your clients and are therefore now the subject of your estate planning work. So, too, have grown many clients’ desires to unlock these assets to fulfill charitable goals.  

Many advisors find themselves discussing the benefits of donating S Corp stock to a charity prior to the sale of a business, but rarely do advisors feel prepared for that discussion with a client. That’s why it is important to be generally aware of the rules before the topic arises in a client meeting. A discussion with your client is especially important as business succession plans are crafted because many business owners want to minimize tax liability and also give back to the communities where their businesses have flourished. As an advisor, you have a responsibility to understand what might be possible. 

Donating S Corp stock to a charitable organization is an important option that your clients will want to consider, and understanding the complexities is critical. Three factors are particularly important:

This idea must be addressed early in the process of business succession planning, especially prior to any formal discussions about a sale. Indeed, the IRS is known for its keen eye in spotting transactions that could be construed as resulting in “anticipatory assignment of income,” especially where a charitable deduction is involved. At the same time, many charitable organizations prefer not to hold hard-to-value assets like S Corp stock for more than a few years. Balancing these factors requires thoughtful planning and timing.

Private foundations and certain donor-advised funds at trust-form institutions (which then trigger the trust tax rates) are permissible shareholders of S Corp stock. Moreover, public charities have been eligible S Corp shareholders since 1998. Before you explore an S Corp gift to a charity, be sure to review the rules related to permissible S Corp shareholders.

Charities holding S Corp stock may be subject to Unrelated Business Taxable Income rules. Be sure to show your client various alternative calculations to determine the most cost-effective structure for each transaction alternative. 

Election year insights: What's on the IRS's radar?

Corporate philanthropists get relief from SALT cap on charitable donations

Businesses frequently make cash donations to charitable organizations. But what happens to the deductibility of those donations under the state and local tax limitations imposed by the 2017 tax law? This issue continues to be the subject of discussion, but your business clients should be encouraged by the IRS’s commentary. The IRS has taken the position that a business taxpayer can usually deduct payments to a charitable entity by treating them as Section 162 ordinary and necessary business expenses. Indeed, reducing the impact of state and local taxes itself constitutes a business purpose.

The continuing relevance of this topic is a reminder that philanthropy remains a priority in advising your corporate clients.

Watch out for compliance pitfalls as clients favor gifts of hard-to-value assets

If volatile market conditions persist, gifts of hard-to-value assets may become popular substitutes for appreciated stock gifts. That’s why we’re keeping a close eye on the IRS’s scrutiny of Form 8283, “Noncash Charitable Contributions,” especially now that the final regulations governing substantiation and reporting have taken effect. 

It is critical to pay attention to the details when your clients have made gifts of hard-to-value assets. In Chad Loube et ux. v. Commissioner; No. 5092-17; T.C. Memo. 2020-3, the taxpayers failed to provide the required components of the “appraisal summary” and instead attached a full appraisal to the Form 8283 to substantiate the value of their charitable contribution. 

According to the Tax Court, attaching a full appraisal did not constitute substantial compliance. “While it may have been possible for the Commissioner to glean sufficient information from the purchase price and tax information listed in the appraisal,” stated the Memorandum Opinion, “that does nothing to change the fact that Congress specifically passed [the] heightened substantiation requirements so that the Commissioner could efficiently flag properties for overvaluation from the face of appraisal summaries. In so doing, Congress wanted precisely to prevent the Commissioner from having to sleuth through the footnotes of millions of returns.”

In other words, the IRS won't do your work for you. 

Close scrutiny of 501(c)(3) political activities in an election year

An election year frequently inspires clients’ passion for social issues, making philanthropy an especially important topic for your conversations. You may also experience an uptick in questions about giving vehicles such as donor-advised funds and foundations.

It’s critical to stay current on the IRS’s interpretation of the statutes and regulations prohibiting charitable organizations from engaging in certain types of political activity. 

For example, in early 2020, the IRS issued Private Letter Ruling 202005020 ruling that a for-profit subsidiary’s political activities would be attributed to its nonprofit parent and therefore constitute impermissible political campaign participation. In addition, a shared services agreement between the two entities constituted operation for private interests, thereby flying in the face of Section 501(c)(3). 

If you'd like to go deeper into the connection between charitable giving and politics, GuideStar offers insight into how the 2016 presidential election impacted charitable giving.

Charitable planning for business owners: Lots to love

Special opportunity for a higher charitable deduction

Don't miss out on the opportunity to inform your clients about a special provision in the Taxpayer Certainty and Disaster Tax Relief Act, signed into law on December 20, 2019 by President Trump. For cash donations made to public charities that are helping with qualified disaster relief efforts, the Act suspended the deduction limitations. Ordinarily, deductions of these contributions by individuals are limited to 60% of adjusted gross income. The provision is effective retroactively but also temporarily, covering 2018 and 2019 contributions as well as this year's contributions so long as they are made before February 18, 2020. The limit still applies to contributions to donor-advised funds and supporting organizations.

So long, stretch IRA

Among the changes enacted by the SECURE Act, which became law on December 20, 2019, is a provision eliminating the so-called stretch IRA. This change, which came as a surprise to many wealth advisors, requires that non-spousal beneficiaries of a decedent's IRA draw down the funds over a 10-year period, rather than giving them the option to take the distributions over the rest of their lives. Although exceptions apply for certain beneficiaries (such as a minor child, a disabled or chronically ill beneficiary, and beneficiaries who are younger than the decedent by fewer than 10 years), the new law is problematic for estate plans that contemplated allowing a high income-earning beneficiary to take advantage of lower income years later in life. The SECURE Act contains several other provisions designed to help Americans boost retirement savings, including new provisions for multi-employer plans, increasing the required age for starting distributions, automatic enrollment, and increases to IRA and 401(k) contribution limits.

Importantly, but for a few timing nuances, the SECURE Act left intact provisions for the popular "charitable rollover," which permit qualified charitable distributions from a retirement account to a charity. Even though donor-advised funds are not permitted as rollover recipients, the technique is still quite valuable to generate tax savings for the donor and a boost for the charity's finances.

Charitable planning is a must prior to sale of a business

A new decade frequently inspires closely-held business owners to start thinking about an exit strategy. Before your business-owner client starts putting out feelers to potential acquirers, be sure to counsel your client about the benefits of contributing an ownership interest to a charitable organization, especially to a flexible donor-advised fund at the community foundation. No doubt your client has substantial unrealized capital gains that have accrued in the business over the years. Upon a sale, capital gains tax will be triggered on the proceeds of the client's asset. No capital gains tax will apply, however, to any portion of the business owned by a charitable organization. The charity will net 100 cents on the dollar for the portion it owns. So, in the case of an interest in the business owned by a donor-advised fund at the community foundation, the proceeds of the sale will create an immediate "charitable giving account" for the business owner to enjoy by recommending grants from the proceeds to favorite charities, in whatever amounts and according to whatever schedule the business owner desires.

Be careful, though, that you counsel your clients about securing a proper valuation for charitable deduction purposes at the time the business interest is contributed to the charity. In addition, it is critical that no deal is on the table at the time of the contribution. Don't get caught in the step transaction trap that is a risk in any pre-sale gift to charity of real estate, closely-held stock, and other alternative assets.