Beyond the tax deductions: Selecting a vehicle to celebrate and support a family's culture of philanthropy
For many donors, the importance of a multi-generational family philanthropy plan is high on the radar, especially in the wake of 2020’s eye-opening events highlighting the importance of rallying around important social and community priorities.
How do you know when a client’s family is a strong candidate for more formal philanthropic planning, beyond simply budgeting for annual gifts to charity? Watch for these candidates among your client base:
Families who have started to ask you about multi-generational participation in the family’s favorite causes but do not yet have any formalized plans.
Families who have publicly demonstrated a long-term charitable commitment to at least three charitable organizations.
Families who own a multi-generational family business, creating the opportunity for corporate giving and values to serve as inspiration for the family’s charitable plans, even beyond the family’s ownership of the business.
Families who have the capacity to give more than $25,000 per year to charity and have expressed or demonstrated enthusiasm and willingness to do so.
Families in which at least five family members across two or more generations have shown an interest in philanthropy.
A comprehensive philanthropy plan often starts with establishing a structure, typically in the form of either a donor-advised fund or a private foundation. Although there are benefits and advantages of each, the donor-advised fund option has become increasingly popular because of its favorable tax treatment, simplicity of administration, and flexibility. By contrast, private foundations typically appeal to families who want to engage directly in charitable activities, hire family members as employees to operate the foundation’s day-to-day business and receive salaries, run their own grant programs to support individuals, and grant directly to international efforts.
A common myth, however, is that families who wish to collaborate across generations on grant making and impact are better suited for a private foundation. The reality is that families can work together to determine and execute a philanthropic vision, mission, and grants from the family’s charitable structures, whether a donor-advised fund, private foundation, or both. When a family establishes a donor-advised fund at the community foundation, for example, the community foundation’s professional staff can support the family in areas of expertise well beyond the administrative duties that are built into donor-advised fund services provided through the community foundation.
Here are examples of comments you may hear from families who may be excellent candidates to work with the community foundation alongside you as their key advisor:
“We are interested in engaging the next generation of our family in philanthropic conversations, but we are at a bit of a loss as to how to go about it.”
“We are concerned that families today--including our family--are less community centered than they used to be. So we don't want to ignore global issues, but we want to ensure that we make a difference locally. We thought about working with our children and grandchildren on community priorities and deploying philanthropy as a way to communicate our concerns and dreams for the region we all love, but we aren't sure where to find tools and best practices.”
“As a member of my family foundation’s so-called 'next generation,' I am worried that our older generation has been directly involved with just a handful of organizations, so they tend to support only those organizations. As younger donors, we aren't necessarily going to want to be directly involved with these particular organizations, and at the same time we don't want to shut off support. We want to respect and engage with our older family members while also charting our own course.”
“As a thirty-something, I have a young family and it is really important to me to be able to engage my kids in the family’s philanthropy, working right alongside me, my parents, siblings, nieces and nephews, and grandparents.”
If you’re hearing these and similar expressions of interest from your clients, please don’t hesitate to reach out. The team at the community foundation is your partner to serve your clients’ philanthropic endeavors.
Unlocking the power of clients' real estate: Why the bargain sale is a must-have in your charitable planning toolkit
Whether a nonprofit’s mission calls for office space, warehouse facilities, or something in between, most charitable enterprises need a physical location to serve their constituents. Unfortunately, nonprofit organizations are frequently left empty handed when they search for competitively-priced commercial property to house their operations.
Enter the charitable bargain sale, a giving vehicle that allows a donor to facilitate the transfer of much-needed real estate to a favorite charity at a price the charity can afford, while at the same time earning the donor a tax deduction.
The bargain sale, frequently heralded as the earliest charitable giving vehicle, results in the real estate owner serving in both the role of a seller for the cash portion of the sale to a charity, and also in the role of a donor for the donated portion of the property.
As is the case with many types of charitable gifts, establishing fair market value of the subject real estate is critical and requires a qualified appraisal that complies with IRS regulations. Establishing the fair market value in turn determines the charitable donation portion, which is the difference between the fair market value and the lower cash amount paid by the charity to the donor/seller.
A post-pandemic world may create new opportunities for your clients to consider bargain sales of property to charities. Indeed, nearly $430 billion in commercial and multifamily real estate debt is set to mature this year, opening up conversations about what property is really worth and how owners can most efficiently unlock its value. And of course, bargain sales are not limited to commercial property. The U.S. housing market is estimated to have gained more than $2.5 trillion in value in 2020 alone, bringing the total value of housing in the U.S. to over $36 trillion.
Tax tips: Qualified appraisals, 2020 tax changes, and holiday parties (not)
Last but not least, here are three of our favorite tax tips for March.
For yet another reminder about the importance of obtaining a qualified appraisal for transactions in order to secure a charitable deduction, as well as evidence that the IRS will continue its scrutiny of conservation easements, see the opinion in Sells v. Commissioner of Internal Revenue, a Tax Court decision issued earlier this year. (Bonus: On the positive side for the taxpayer, this ruling is an illustratration of the type of case where the IRS may agree to abate penalties, even those related to the taxpayer’s misvaluation.)
If you’re having trouble keeping up with changes to the tax laws, you are not alone! If you are a subscriber to the Wall Street Journal, we highly recommend its recently-released tax guide. For a guide that does not require a subscription, Kiplinger offers a helpful summary of the changes effective for tax year 2020.
Finally, we suggest skimming the examples in Private Letter Ruling 202107012, released on February 19, 2021, as a reminder of what types of activities are deemed to go beyond the Internal Revenue Service’s definition of “charitable and educational” for qualification as an exempt organization under Internal Revenue Code Section 501(c)(3). (Hint: Holiday parties, outings to restaurants and bars, car shows, and other social gatherings can tip the scales against exemption, even if those activities are conducted in connection with fundraising and collecting in-kind donations for charitable causes.)