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.

Mixing it up: Cryptocurrency, QCDs, and international giving

Charities and cryptocurrency: Gifts are on the rise

As cryptocurrencies’ profiles rise in the marketplace, your clients are likely to begin asking questions about the possibility of using cryptocurrency holdings as part of their charitable giving plans. Interest in this technique has spiked in recent weeks, especially after the University of Pennsylvania’s announcement of a landmark $5 million gift of bitcoin to support the Wharton School’s Stevens Center for Innovation in Finance.

In many ways, advising clients about charitable gifts of cryptocurrency parallels the strategies you routinely use to advise clients about a gift of any highly-appreciated asset. For example, cryptocurrency gifts require documentation similar to what’s necessary to substantiate gifts of real estate, closely-held stock, and collectibles.

Furthermore: 

• In the case of cryptocurrency held by your client as an investment for more than one year, the rules for gifts of long-term capital gains assets apply. In this situation, the client's gift of cryptocurrency is valued at its fair market value at the time of the donation. 

• The receiving charity must sign your client’s IRS Form 8283 for your client to be eligible for the charitable deduction (unless the value of the gift is less than $500).

• A qualified appraisal is required for gifts with a value greater than $5,000.

• The recipient organization is required to file IRS Form 8282 if all or a portion of the cryptocurrency is sold or converted to cash within three years of the gift. As with gifts to charity of other appreciated assets, the charity does not pay tax on the gains. 

The IRS has issued guidance for charitable gifts of cryptocurrency, including confirmation that the usual rules apply for a “contemporaneous written acknowledgment,” even though cryptocurrency is treated and reported by the charity as a non-cash gift. 

The team at the community foundation is ready to assist you and your clients who may wish to donate cryptocurrency to a donor-advised fund or other type of fund. For example, we take care of establishing an account with Bitpay, Coinbase, or other third-party processor to receive the gift. After that, our team is responsible for converting the cryptocurrency to cash so that your client’s fund can be diversified to support the client’s charitable giving goals.

IRAs, field-of-interest funds, and designated funds: Don't overlook these powerful tools

Designated funds and field-of-interest funds may not always be top of mind when you are developing philanthropy plans for your clients and their families, but they are extremely valuable tools in certain circumstances and it’s important to be aware of what the terms mean.

A field-of-interest fund at the community foundation is established by your client for a charitable purpose described by your client. For example, a field-of-interest fund can be established to support research for rare diseases, to support organizations that assist homeless families in getting back on their feet, to enable art museums to acquire works that celebrate the region’s diversity, and so on. The knowledgeable team at the community foundation distributes grants from the field-of-interest fund according to the spending policy set by your client to further the client’s wishes. Your client selects the name of the fund, whether they wish to use their own name (e.g., Samuels Family Fund or Samuels Family Fund for the Arts), maintain anonymity (e.g., Maryville Fund for the Arts), or something else altogether (e.g., Bettering Our World Fund).    

A designated fund at the community foundation is a good choice for a client who knows they want to support a particular charity or charities for multiple years. This is useful so that the distributions can be spread out over time to help with the charity or charities’ cash flow planning, enable your client to benefit from a larger charitable tax deduction in the current year when the client’s tax rates are high rather than spreading it out over future years when tax rate projections are lower, or both. The client specifies the charities to receive distributions according to a spending policy they select, and the client can choose a name for the fund.

Perhaps one of the most compelling reasons to encourage a retirement-age client to consider establishing a field-of-interest fund or a designated fund is to take advantage of the Qualified Charitable Distribution planning tool. As an advisor, you are well aware that clients who own Individual Retirement Accounts (IRAs) are required to take “Required Minimum Distributions” each year beginning at age 72, whether or not they need or want the income. These distributions often cause an increase in the client’s income taxes. 

A Qualified Charitable Distribution permits a client to transfer up to $100,000 from an IRA to a qualified charity instead of taking a Required Minimum Distribution, thereby avoiding the income tax hit. Although the IRS does not permit Qualified Charitable Distributions to donor-advised funds, charities eligible to receive a client’s Qualified Charitable Distribution do include designated funds and field-of-interest funds at the community foundation.

International giving: Know your clients' options

Giving directly to international charities can involve a steep learning curve. Legal complexity no doubt was at play in the 2.2% (adjusted for inflation) decline in giving to international affairs in 2019, according to Giving USA. An example of one of the many legal issues with international giving is described in the recently-issued Private Letter Ruling 202119002 involving a domestic private foundation with board members who also serve on the board of the foreign organizations ultimately receiving grants from the domestic private foundation. The IRS decided that the domestic private foundation was not engaged in prohibited self-dealing in this particular case, but the IRS’s discussion in the ruling itself illustrates the complexity of supporting international charities. 

The rules surrounding charitable gifts to international causes have been a rollercoaster ride for many years, especially with the expansion of anti-terrorism and foreign investment regulations. A glimmer of hope emerged in September 2017, when the Internal Revenue Service released Revenue Procedure 2017-53, allowing practitioners to at least be able to rely on safe harbor guidance that applies not only to international grants by private foundations, but also to distributions from donor-advised funds at the community foundation.

The team at the community foundation can help you and your clients navigate the options for international giving, ranging from compliance with so-called “expenditure responsibility” to “foreign public charity equivalency.” In most cases, though, we help you and your client find a domestic charitable organization--recognized under Section 501(c)(3) of the Internal Revenue Code--that works internationally to address the causes your client cares about. Carrying out global grant making in this way through a donor-advised fund helps avoid the pitfalls that your clients might encounter using a private foundation or going it alone.