Making wills, looking ahead to 2026 (!), and giving away the farm

Hello from the community foundation!

As we’re marching ahead through the weeks of summer, proper philanthropic planning is becoming even more important to your charitably-minded clients in an economic climate fraught with inflation, stock market volatility, rising interest rates, fears of a recession, and even fears of a new global health crisis. 

We understand that factors like this are very much on your clients’ minds, even if clients might not express their concerns directly during your meetings. To that end, the topics in this newsletter are designed to equip you with conversation starters and planning ideas to allow philanthropy to enrich your relationships with your clients as you guide them through challenging times. This month we’re featuring important reminders about bequests, legislative updates and a look ahead to 2026, and food for thought as you build estate and financial plans for clients who own farmland.

As always, please reach out. Our goal is to earn your trust in our team’s knowledge and expertise so that you will not hesitate to pick up the phone and give us a call whenever a client mentions anything about philanthropy. Most of the time, we can help you serve the client. If we can’t, we will point you in the right direction.

Thank you for the opportunity to work with you and your clients to make this community a better place. We are grateful.

–Your Community Foundation

Back to basics: Reminding clients about wills, trusts, and charitable bequests

August is national Make a Will Month, and the publicity surrounding this designation may prompt your clients to ask you about whether their affairs are in good order. Of course, making sure a client has established an estate plan and executed corresponding legal documents is a priority for any attorney, accountant, or financial advisor who practices in the field of estate planning, tax, or wealth management. Still, it’s always helpful to remind clients to keep their estate plans up to date and review their plans with you on a regular basis.  

Indeed, despite the many cautionary tales arising out of the Covid-19 pandemic, most Americans do not have a will. Even those clients who do have estate plans in place may not truly understand the difference between a will and a trust (and the reason they still need a will even if they have a revocable living trust). A client also may not understand that a charitable bequest can be part of an estate plan whether the client’s main estate planning vehicle is a will or whether it is a trust. 

Of the $485 billion given to charity by Americans in 2021, according to Giving USA, 9.5% of that giving came from bequests–that’s $46 billion. Giving USA’s data visualization tool illustrates the ebbs and flows of bequest giving, which has long been a significant component of philanthropy. 

Research reveals fascinating psychological factors behind a person’s decision to leave a bequest in the first place, which helps to understand the motivation for leaving a gift to a charitable organization in a will or trust. Not surprisingly, altruism has long been one of those factors. Bequests to charity are not a new idea. Examples of high profile estate gifts date back centuries. Some of your clients may be familiar with the bequests of Benjamin Franklin, who established testamentary charitable trusts dedicated to supporting Boston and Philadelphia tradesmen, and George Washington, who left bequests in his will to colleges and trade schools.

Our team welcomes the opportunity to work with your clients to establish bequests to your clients’ funds at the community foundation through a will or trust or through a beneficiary designation on a qualified retirement plan or life insurance policy, including providing you with proper bequest language to ensure alignment with your client’s intentions. Make a Will Month is also a good time to remind your clients that bequests of qualified retirement plans can be extremely tax-efficient. Funds flowing directly to a client’s fund at the community foundation from a retirement plan after the client’s death will not be subject to income tax or estate tax. 

We look forward to working with you to establish your clients’ philanthropic legacies. 

Summer legislative updates–and looking ahead to sunsets

Reconciliation legislation is back in play, and while it includes a few tax provisions (e.g., adding a corporate minimum tax and eliminating the carried interest tax break), the proposed legislation is far less sweeping than reforms proposed in earlier versions. Notably, though, the proposal includes $80 billion in budget increases for the Internal Revenue Service, which will help shore up the IRS’s expertise and pay for enforcement efforts to collect taxes. Taxpayers and their advisors can likely expect greater scrutiny from the IRS on complex or aggressive transactions in the years ahead if this legislation passes.

Philanthropic individuals and families and their advisors also continue to watch the status of SECURE 2.0 because of the enhancements it proposes to the rules for Qualified Charitable Distributions. SECURE 2.0 could pass through Congress by the end of the year.

While potential tax reform through budget reconciliation legislation may be top of mind for taxpayers and advisors, it’s also important to remember that the Tax Cuts and Jobs Act of 2018 (which seems like a long, long time ago!) included several changes to the tax rules for individuals that are set to expire after the close of the 2025 tax year. Unless those provisions are extended, the sunsets could impact tax planning for philanthropic families and individuals. For example, the standard deduction will decrease by nearly half, adjusted for inflation. This means some clients may once again itemize their deductions, thereby influencing charitable giving income tax strategies. In addition, the estate and gift tax exemption amount, increased under the Tax Cuts and Jobs Act, will be cut down so that in 2026 the exemption amount will be approximately $6.2 million adjusted for inflation. This will impact not only estates valued above the current exemption amount of $12.06 million but also estates valued in the $6 to $12 million range. Because assets transferred through lifetime gifts and bequests to charitable organizations are not subject to gift or estate tax, philanthropy may be an effective tax planning tool for even more taxpayers after 2025.   

As your clients begin to set their philanthropic goals for the next several years, the team at the community foundation is happy to help structure long-term strategies to maximize not only your clients’ tax benefits, but also the benefits to the community. Our professionals are deeply familiar with the short-term, mid-term, and long-term needs of our community, as well as the nonprofits that are working to address those needs. Our experienced team works with you to help your clients support community needs now and in the future through clients’ donor-advised funds, field of interest funds, designated funds, and other vehicles established at the community foundation. We strive to align the interests of everyone involved: your client, the charities your client wants to support to improve our community, and you in your trusted role as the client’s advisor. 

Farms, tax planning, and funding a family legacy

Given that there are more than 2 million farms in the United States, most advisors have at least one client who owns farm property. Although the number of farms has been dropping slowly but steadily since 2000, still, millions of dollars of wealth are tied up in farms as agricultural land continues to be valuable. 

Farmland, like many other hard-to-value assets, tends to carry with it a lot of emotional attachment. Farmland also can be hard to deal with in an estate plan because of the challenges of multiple owners and the complexity of the estate tax as it’s applied to farm-related assets. For these reasons, it is worth exploring philanthropic options with your clients who own farmland.

Multiple ways to structure a gift

A fund at the community foundation can receive a tax-deductible gift of farmland in a variety of ways. An outright gift is always an option; lifetime gifts of farmland held for more than one year are deductible for income tax purposes at 100% of the fair market value of the property on the date of the gift, which also avoids capital gains tax and reduces the value of the client’s taxable estate. Other ways to give farmland include a bargain sale or a transfer to a charitable remainder trust which produces lifetime income for your client.

Keeping the family together

A gift of farmland to a fund at the community foundation doesn’t just provide tax benefits. The gift also helps your client overcome the emotional challenges associated with letting go of an asset that in many cases has been in the family for generations.

By donating farmland to a fund at the community foundation, a client can work with the foundation to extend the emotionally important, family-related dynamics that were previously linked to the land, even after the foundation sells the farmland and the client’s fund holds the proceeds. For example, multiple generations of family members can serve as advisors to the fund and collectively recommend grants to charities that carry on the values held by the family during the years it operated the farm, such as funding agricultural scholarships, promoting sustainable farming, or supporting programs that educate entrepreneurs about how to build a successful farming operation. 

A cautionary note

Closely related to gifts of farmland to charity are conservation easements. Conservation easements can be a tax-effective way for a client to fulfill charitable intentions with real estate, but these vehicles must be carefully constructed to avoid landing on the IRS’s radar. 

We are happy to help you and your client structure a gift of farmland to a fund at the community foundation so that the client’s family members can continue to work together even after the farm is sold. Please reach out anytime!

The team at the community foundation is a resource and sounding board as you serve your philanthropic clients. We understand the charitable side of the equation and are happy to serve as a secondary source as you manage the primary relationship with your clients. This newsletter is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice.  

Is big giving back?

Greetings! 

We’re honored to work with so many attorneys, accountants, and financial advisors who are committed to helping clients achieve their philanthropic goals. Every day, we are inspired by our donors–your clients–who frequently tell us how grateful they are for the strong working relationship between you, as their trusted advisors, and our team, as a trusted source for community knowledge and charitable gift planning.

In that spirit, we publish this newsletter to help you stay current on the charitable giving topics that are on the minds of your philanthropic clients, including tax developments that impact charitable giving. Our goal is to provide a valuable top-line run down and an open invitation to reach out to our team to discuss topics that catch your eye. We’d love to share more and add value to your work. 

In this issue, we’ll be covering tax legislation (actually, the lack thereof!), exploring the trend toward bigger charitable gifts, and reviewing the rules for gifts of artwork, especially in this era of NFTs.

As always, we’d love to hear from you! 

–Your Community Foundation Team  

So, what happened to tax reform? And what does that mean for charitable giving strategies? 

Last year’s heavily-debated versions of the Build Back Better Act called for tax increases that potentially could have impacted charitable giving. But, as 2022 gets into full swing, legislation that’s eventually passed may bear little resemblance to early iterations. In particular, debate over the cap on the deductibility of state and local taxes (“SALT”) has illuminated a parallel debate over whether the changes to the cap would impact charitable giving. At the moment, though, tax increases to support President Biden’s legislative agenda are still very much up in the air. 

In other tax news, advocates for charitable organizations are lobbying lawmakers to bring back Covid-19-related tax incentives, including the $300 ($600 for joint filers) so-called “universal” charitable deduction.

Meanwhile, taxpayers may find themselves in limbo over timing decisions for their gifts to charity, as well as other tax-sensitive transactions, creating ongoing discussions with advisors about whether to pursue “bunching” strategies or instead to wait for more clarity on the legislative situation.

Big gifts are getting bigger. How does that change your conversations with your clients?

Ranging from $175 million to a whopping $15 billion, the 10 largest gifts to charity in 2021 may have caught your clients’ attention. Not only do philanthropic gifts seem to keep getting bigger, but the future looks bright, too, with more than $84 trillion projected to be handed down in what may be one of the largest intergenerational transfers of wealth in history. Although most of that money will flow to heirs, projections indicate that charities could receive as much as 14% (nine percent in the form of bequests and the rest as lifetime gifts to charity). 

As your Baby Boomer clients plan their estates, keep that 14% in mind, especially as philanthropists at all levels are becoming increasingly intent on making an immediate impact on important causes instead of leaving behind perpetual philanthropic structures. 

The community foundation can help you develop an impact-focused philanthropy plan for your clients, including helping your clients “reverse engineer” the philanthropy structures that will be most likely to result in the difference your clients want to make in the world. 

Keep an eye out for clients who match these characteristics: 

--Families who have started to talk with you about multi-generational participation in philanthropy but do not yet have any formalized plans.

--Families who have publicly demonstrated a commitment to three or more charitable organizations.

--Families who own a multi-generational family business such that corporate giving and enterprise legacy have become intertwined.

--Families in which members across multiple generations appear to be actively involved in philanthropy discussions.

The team at the community foundation has the depth and breadth of experience to help you in these instances, and much more. 

When giving hard-to-value assets, creativity–and caution–are critical in the digital age

For some of your clients, the thought of giving artwork to a museum or other charity might have crossed their minds. Otherwise, in the estate plan you’ll build for the art collector, the choices largely boil down either to selling the pieces, or giving them to family and loved ones during life or through a bequest.

It is imperative to understand the tax consequences of each disposition scenario as you advise your clients about their collectibles. For example, clients may not realize that the higher capital gains rate of 28% generally applies to artwork and other collectibles–not the 20% rate typically applicable to sales of other types of capital gains assets. And even this higher rate has been the subject of some tax reform discussions. 

Indeed, many clients would prefer to hold onto their art collections, rather than sell during their lifetimes, in order to take advantage of the step up in basis upon their deaths. 

Charitable giving is an option here, too, and your client can potentially avoid capital gains and estate taxes by donating artwork to a nonprofit organization. Be very careful, though, because the rules are different depending on the type of charity (e.g., a museum versus a foundation) and whether the charity’s use is related to its exempt purpose (e.g., a museum versus an animal shelter). 

So, what happens if your client wants to give an NFT to charity? Which rules apply–the usual rules for non-cash assets, or the rules for donating artwork? The law is equal parts emerging, fascinating, and intricate! As IRS guidance emerges–and similar to the tax treatment of gifts of art collections–the proper tax treatment likely will hinge on factors such as how the NFT will be used, whether the donor is a “creator,” and whether the NFT is marketable and easily converted to cash. 

The team at the community foundation thrives on complex giving opportunities. Whether your clients’ estates include artwork, digital assets, real estate, or closely-held stock, please reach out. We’d love to help you evaluate the options for achieving both your clients’ tax goals and charitable planning goals. 

What's trendy among charitable clients? It may surprise you.

“The simplification of anything is always sensational.”

Gilbert K. Chesterton

Attorneys, accountants, and financial advisors tell us it’s getting harder to discern what’s relevant to their charitable planning work and they appreciate email updates like ours that are curated to cover the bases. 

As always, our team builds this newsletter so that you can skim the material in 5 minutes or less to see what catches your eye. We provide links for further reading. You might even find a few of the resources suitable to share with your clients.  

This issue features updates in three areas:

1. Trends that inform what your clients are thinking even if they aren’t saying it

2. Pending legislation that could impact charitable giving strategies

3. Recent IRS actions illuminating charitable tax planning pitfalls

Please contact us directly if we can be of assistance as you serve your philanthropic clients.  

Trends that inform what your clients are thinking even if they aren't saying it

Hot off the press, the 2021 Bank of America Study of Philanthropy: Charitable Giving by Affluent Households confirms that wealthy families are as committed as ever to the nonprofit sector and community causes. Of the 1,626 households surveyed with annual income of at least $200,000 or a net worth of at least $1 million (not counting a primary residence), 88% gave to at least one charity in 2020. Indeed, average giving by this demographic grew to $43,195 from $29,269--a 48% increase--between 2017 and 2020. 

The motivations and preferences behind that giving are also changing. Here’s how: 

—For the first time, affluent donors care as much about supporting the issues (44%) as they care about supporting the nonprofit organizations themselves (45%). In the past, most affluent donors have put far more weight on the organization when considering charitable giving options. 

—The issues themselves are shifting, too. For example, more than 20% of affluent households supported social and racial justice causes, and impact investing nearly doubled, during the period covered by the study. 

—Diverse donors and younger donors are beginning to prefer structured giving vehicles, such as donor-advised funds, over direct giving to operating charities.

—Affluent volunteers give twice as much as affluent people who don’t volunteer. 

—Affluent philanthropists are becoming more vocal about the challenges they face when making charitable giving decisions, notably:

• Figuring out what causes they care about and where to make donations to support those causes (40%)

• Figuring out a charitable giving budget and how much they can afford to give (32%)

• Figuring out how to measure the results of their giving to be sure it’s making a difference (24%)

What most affluent households are not worried about, however, according to the study, are potential changes to the income tax rules. Indeed, 78% say their giving levels would stay the same or even increase if they could not deduct contributions. 

Pending legislation that could impact charitable giving strategies

Even with a government shutdown averted (at least for now), there are still plenty of legislative loose ends that we’ll help you keep an eye on. Changes could directly or indirectly impact your clients’ overall charitable and estate plans. 

Here’s what we’re tracking:

1. General economic concerns if the debt ceiling is not raised

2. Implications of the infrastructure bill on the nonprofit sector as a whole

3. Specific tax changes that could occur under the Build Back Better plan 

4. Potential expansion of charitable deduction opportunities for non-itemizers

If and when these or other legislative actions edge closer to becoming laws that could impact your clients’ charitable planning priorities, we’ll provide an update. 

Regardless of what happens with the legislative agenda, we’re encouraged that the role of community foundations has become increasingly important in supporting your clients’ desires to improve the quality of life in the communities they love. (On that note, you might enjoy this inside baseball book excerpt as much as we did!)

Recent IRS actions illuminating charitable tax planning pitfalls

It requires a keen eye to spot unintended negative consequences of a well-meaning client’s charitable giving strategies! This fall, we suggest you take note of three cautionary tales: 

1. Clients can no longer “hide” with confidence behind a so-called blocker LLC to avoid sticky self-dealing rules when a note is transferred to a private foundation as part of a tax-savvy charitable estate planning structure.

1. Although rarely imposed, intermediate sanctions on excess benefits are a real thing if a disqualified person attempts to use influential muscle to access financial resources. 

1. Conservation easements--especially those of the syndicated variety--continue to land on the hot seat. 

Spotlight on planned giving tools and strategies

Case study: How to spot a prime CRT opportunity

Imagine that a client sits down at your conference room table and begins the meeting something like this:  

“I’ve got a prime tract of land I bought for $200,000 just 10 years ago, and now I am sure I could sell it for $2 million because the market is so hot for new residential development in the area. I need to act fast because I am not sure how much longer this real estate boom will last.”

What’s your response? Before you suggest that your client put the property up for sale as soon as possible, consider asking a few more questions that could save your client a lot of money and help satisfy the client’s income and charitable giving goals at the same time.

“That’s fantastic,” you say. Instead of jumping to getting the property listed, you go deeper.

“Your current estate plan already includes bequests to hospice, animal rescue, and the art museum,” you remind the client. “There actually is a way to wrap those goals into your strategy for selling the land.” 

“Hmmm,” the client says, considering your idea. “If it’s all the same in terms of which charities receive money when I die, sure, I’m open to it.” 

“Good,” you respond. “Now, remind me, does this property produce any income for you right now?” 

“Unfortunately, no,” replies your client. “I’ve never had time to develop the land, so it just sits there. At least the value has been going up.”

“Ah,” you respond. “With the technique I have in mind, you may be able to secure an income stream for the rest of your life, in addition to satisfying your charitable goals and capitalizing on the property’s high value.”

“That sounds great,” is your client’s response, which you predicted. 

So what idea is on your mind for this client? Hint: Its initials are C R T. 

That’s right. CRT. A charitable remainder trust (“CRT”) is a “split interest” charitable planning tool that allows your client to transfer an asset (in this case, real estate) to an irrevocable trust, retain an income stream, and earmark what’s left (the “remainder”) to pass to a charity or charities of the client’s choice.

For example, in our hypothetical situation, your client could establish a fund at the community foundation to receive the CRT’s assets following the termination of the income stream, in this case, on the client’s death. The client’s fund at the community foundation can provide for distribution of those assets to hospice, animal rescue, and the art museum according to the client’s wishes.

Because the charitable remainder trust qualifies as a charitable entity under the Internal Revenue Code, here’s what happens from a tax perspective:

• When the client transfers the property to the CRT at a fair market value of $2 million with a cost basis of $200,000, and then the CRT sells the property, the CRT itself does not pay tax on the $1.8 million capital gain.

• This leaves the full $2 million in the trust to be invested, subject to the client’s retained income stream. 

• The client is eligible for a charitable tax deduction of the fair market value of the property given to the trust, minus the present value of the retained income stream.

• Payments to the client generally are subject to income tax during each year of the distributions, but under more favorable terms than if the client had conducted an outright sale. 

• Because the CRT is an irrevocable trust, the property and its proceeds (other than what winds up in the client’s estate from the retained income stream) are excluded from the client’s estate for estate tax purposes. 

Contrast this with an alternative scenario in which your client sells the property, realizes a $1.8 million capital gain, pays tax on that gain, and ends up with, say, $1.5 million (probably less!) with which to invest, give to charity, and draw from for income. And, in this situation, the proceeds would be included in the client’s estate for estate tax purposes. Ouch!

When you spot a client who could benefit from a CRT, give us a call! The team at the community foundation is happy to help you as you serve your clients from the moment a client walks in the door through fulfilling the client’s wishes after the client passes away. 

Planned giving starts now: Tips and talking points for lifetime charitable gifts

According to 2020 statistics released in June 2021 as part of the Giving USA report, Americans’ bequests to charity totaled nearly $42 billion last year. That’s a tremendous amount of charitable giving flowing to community organizations from donors after they die. Still, it’s a fraction of the $324 billion Giving USA reports was given to charities in 2020 by living individuals.     

As you work with your philanthropic clients, do not only consider the benefits of building philanthropic components into clients’ estate plans for distribution after death, but also consider helping your clients make meaningful gifts during their lifetimes. 

Here are three tips for encouraging your clients consider “giving while living” as part of their plans:

• Clients get to see the results of their gifts and have an opportunity to get involved, whether as a volunteer, board member, or simply an observer at a site visit to each charity they support. 

• Clients can involve their children and grandchildren in making the gifts, especially when the clients are working with the community foundation through a family donor-advised fund or other collaborative vehicle.

• Clients are eligible for an income tax deduction for lifetime charitable gifts, and the gifted assets are no longer subject to future estate taxes. 

The team at the community foundation can help you assist your clients with a philanthropy plan, starting with the basics. Here are a three talking points to help you begin the conversation with your philanthropic clients:  

• “Give to what you know. Most Americans get the greatest joy from giving to causes with which they are personally familiar. This makes it easier to understand how the charity is using your dollars. So, for example, if you’ve had experience with helping foster children, you are likely to understand how the organization is using your donation to support training for foster parents. Or if someone in your family suffers from an eating disorder, you will understand what it means to give money to support an individual to receive an extra six weeks of treatment beyond what insurance will pay. And do not be afraid to ask! Most organizations are happy to share the tangible impact of your donation—whether it is $10, $100, $1,000 or more.”

• “Give where you are. Many Americans support charitable causes overseas, and that is wonderful. But don’t forget that sometimes the greatest needs are right here at home. Look for opportunities to support local charities who are celebrating year-end giving by offering information about the overall need, the mission they serve to meet that need, and the positive impact of a year-end gift on the lives of others. When you give to local organizations, you are in a much better position to have confidence in your gift.”

• “Above all, give to the charities you love. Gifts that are aligned with a passion and your own love of humanity carry the most energy and ultimately make the most difference. The bottom line is that giving should feel good. Certainly understanding how a charity is using the money is a part of that. But don’t let that get in the way of doing good and enjoying every minute of it.”

Need more tips and talking points? The team at the community foundation is always here to help. 

An eye on the law: Recent updates and rulings

The team at the community foundation stays on top of tax cases, IRS rulings, and legislation that could impact the advice and counsel you provide your clients on matters involving charitable giving. 

Here are a few current highlights and reminders we recommend you skim.

Electronic filing is now required for private foundations

For tax years 2020 and beyond, all private foundations must file Form 4720 (Return of Certain Excise Taxes) electronically, beginning with returns due on or after July 15, 2021. The Internal Revenue Service will no longer accept paper returns filed by a private foundation with a due date on or after July 15, 2021. More information is available from the IRS in a special notice and on a reference list of software providers.

Charitable giving legislation introduced

Senate Bill 1981 was introduced on June 9, 2021 by Senators Angus King and Chuck Grassley. The Accelerating Charitable Efforts (ACE) Act, as it is called, aims to increase the flow of support to nonprofits’ efforts to help the communities they serve. The Act would impose new requirements and limitations on private foundations and donor-advised funds. 

The professionals at the community foundation are watching this legislation closely. We encourage you to reach out to our team if you have questions or concerns about how potential changes to the law might affect the charitable planning work you do for your clients.   

Conservation easements remain on the radar

If any of your clients have deployed a conservation easement as a charitable planning tool, you’ll want to keep a close eye on the law in this area. Long the subject of scrutiny, arguably due to the behavior of a few bad actors claiming aggressive deductions, conservation easements may soon be subject to the provisions of the Charitable Conservation Easement Program Integrity Act introduced in both the House and the Senate on June 24, 2021. The proposed legislation intends to prevent abuse while still encouraging the proper use of the conservation easement as a vehicle for the long-term protection of public land.  

Indeed, TOT Property Holdings LLC et al. v. Commissioner, a recent Eleventh Circuit case affirming the Tax Court’s decision to disallow a deduction for a charitable gift of a conservation easement, is one of 80 cases currently being pursued by the Internal Revenue Service to challenge aggressive “syndicate” forms of conservation easements.

Understanding the best vehicles for family giving

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.)

Hard -to-value assets, bequests, and other charitable giving trends

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.

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.

Bread and butter basics: Types of funds, disaster giving, and tax tips

Be wary of overstating the value of charitable tax deductions

In Estate of Dieringer v. Commissioner, the Tax Court issued an opinion reducing the charitable deduction in a decedent’s estate when the stock was redeemed only shortly after the decedent’s death. Earlier this year, on appeal, the Ninth Circuit affirmed that decision, referencing Ahmanson Foundation v. United States. The court relied in part on the principle that an estate tax deduction is allowed only for what is actually received by the charity. This longstanding “actually received” rule should always be top of mind for practitioners as they advise their clients on charitable giving tools and techniques. Read the full text of the court’s opinion for a refresher course on this important issue.
 

Substantiation requirements: Still relevant

As 2019 draws to a close, now is a good time to refresh your recollection about gift substantiation requirements as your clients plan their year-end charitable giving activities. Since last year, when the Department of Treasury released its final regulations for substantiation and reporting of deductions for charitable contributions, gift substantiation has remained a hot tax topic during giving season. Key areas include:

• Definition of a qualified appraiser (this provision took effect in 2019)

• Requirements for gifts of partial interests

• Appraisal requirements for charitable remainder trusts, even if the trust holds marketable securities

• Requirement to attach an appraisal for gifts of real estate valued over $500,000  

Check out the full text of the regulations.   

Tune in to questions on disaster relief giving

Catastrophic weather events may leave your clients wondering how best to help people who’ve been affected. Americans give a total of more than $10 billion to disaster relief efforts annually, but only 25% feel “very clear” about how that money is spent. This is a surprisingly low number, especially given the popularity of giving for disaster relief. What this should signal to you is that your clients are seeking information on topics such as when to give, how to be sure the gifts have an impact, and which organizations to support.

HOW WE CAN HELP

As you talk with your clients about how to support people in need after disasters, consider calling the community foundation for insights. Whether the people affected live in this region or not, our experts will be able to guide you and your clients through a decision-making and evaluation process about how dollars can best be deployed.  
 

Building emotional connections: Philanthropy and its role in families

Attorneys, financial planners, and accountants frequently observe that their clients who participate in philanthropic endeavors seem happier and more connected to their fellow family members. This phenomenon is more than just an observation. Several studies over the years have shown that engaging in “prosocial behavior” helps build strong relationships. According to a study in Mindfulness, for example, 85% of people help someone else once a week, which fosters overall mental health and positive interpersonal connections. As you work with your clients and their families across generations, keep in mind the power of philanthropy to keep families connected.

HOW WE CAN HELP

The community foundation’s experience working with families across generations can help you build a legacy of giving for your clients. For example, consider working with the community foundation to help grandparents establish donor-advised funds for each child or grandchild. Or, consider working with a client and the community foundation to set up a fund to support a specific cause that the whole family loves.

Worth repeating: Bundling gifts

The timing of charitable gifts is something that can’t fall off the radar, so it’s worth a regular reminder about bunching, or “bundling,” gifts to charities. The ripple effects of tax reform have meant that just 10% of taxpayers now itemize deductions, down from 30%. A smart strategy for your charitable clients who want to maximize deductions under the new tax laws is to make two or more years’ worth of charitable contributions in a single year. This can push taxpayers over the itemizing threshold to reap the benefits of deducting the full value of their donations.

Checklist: Types of funds at community foundations

The community foundation offers a variety of funds to meet your clients’ needs. Keep this checklist handy as you meet with philanthropic families.

Donor-advised Funds

A donor-advised fund enables your client to establish a specific account for charitable giving. Clients make tax-deductible contributions of cash or other assets to the fund, and then they are able to recommend grants to favorite charities. 

Unrestricted Fund

The community foundation has its finger on the pulse of the community’s most pressing issues. An unrestricted fund gives your clients the opportunity to support community needs that can’t be identified until the future. One of the biggest benefits of a community foundation is its perpetual structure that allows support to nonprofits to evolve over time as priorities in the region shift. 

Field of Interest Fund

Clients who want to target giving to specific areas of community need (such as education, health, environment, or the arts) can establish a field of interest fund to establish parameters for grant making under the ongoing guidance and expertise of the community foundation’s staff.  

Designated Fund

A designated fund allows a client to direct giving to a specific agency or purpose. Over time, the community foundation's staff manages the distributions from the fund according to the terms established by the client.

Scholarship Fund

Your clients can set up funds to support students’ educational pursuits based on the parameters and application requirements they select with help from the experts at the community foundation. 

Recipe for success: A bit of caution and all the right tools

Avoiding landmines in charitable planning

A cautionary tale

Donor-advised funds are popular because they allow an individual, family, or business to make a tax-deductible transfer that qualifies as a charitable contribution, and then later recommend gifts to favorite charities from the fund when the time is right. A donor-advised fund operates a lot like a checking account just for charity, except it’s established according to the IRS guidelines that create the tax advantages.

Through a donor-advised fund at the community foundation, your clients not only receive the tax benefits and ease of administration common across all donor-advised fund programs, but they also have access to the deep resources, philanthropy expertise, and community-specific knowledge that only community foundations can deliver. 

Indeed, not all experiences with donor-advised funds are created equal. If you’ve not been keeping up with what’s going on in the legal world of donor-advised funds, you can get up to speed by reading the petition in a case filed in 2018 in the United States District Court for the Northern District of California. 
 

HOW WE CAN HELP
A community foundation’s sole responsibility is to serve as a steward of philanthropic assets and honor donor intent to achieve positive community change. We welcome the opportunity to talk with you and your clients about our policies, procedures, and safeguards that align with your responsibility to serve your clients.   
 

Don’t let this gotcha get you

Making a gift of alternative assets such as real estate and closely-held business interests is a tax-savvy way for your clients to give to charitable organizations. Highly-appreciated assets can be sold by the charity for 100 cents on the dollar—no capital gains tax applies. That means the charity ends up with more money to work with than your client would have received if the client had sold that same asset on their own.

When it comes time to file the client’s income tax return, though, don’t overlook the importance of filing IRS Form 8283, “Noncash Charitable Contributions.” This is the form that documents the tax basis for the donated assets. Even though the value of the donation for income tax deduction purposes is based on fair market value, not basis, the IRS nevertheless wants to see a paper trail documenting just how highly appreciated the asset really is.   

Failure to file Form 8283 can have devastating tax consequences for the donor. This spring, the United States Court of Appeals for the District of Columbia affirmed the Tax Court’s 2017 decision in RERI Holdings I, LLC, denying the entire charitable income tax deduction--a whopping $33,019,000--because of a missing Form 8283. You’ll note in its decision that the Court of Appeals refused to apply the “substantial compliance” doctrine, which historically has excused taxpayers from failure to comply with formal filing requirements. (Like we said, “gotcha!”) 
 

HOW WE CAN HELP

Our team at the community foundation thinks about charitable giving 24/7. This means we are highly tuned in to filing requirements and other rules that can make or break your clients’ tax planning strategies. We are honored to work alongside you as you structure your clients’ plans to support favorite causes, dotting every “i” and crossing every “t.”
 

Tax reform’s ripple effects

We’ll continue to keep you posted on what’s trending in philanthropy and charitable planning as a result of the Tax Cuts and Jobs Act of 2017. 

Last month, Connecticut, New Jersey, and New York filed a lawsuit against Treasury and the Internal Revenue Service to challenge the new final regulations that place limits on the tax benefits of giving to entities (including some community foundations) in cases where the donors are entitled to local or state tax credits for making the contribution. The regulations are the latest step in a saga that includes workaround legislation enacted in many states to avoid the $10,000 SALT deductions cap. The argument is that the new regulation flies in the face of prior tax policy and “undermines state and local programs designed to promote charitable giving through the use of state and local credits.” The case was filed in the Southern District of New York.
 

Tools in your back pocket

The team at the community foundation understands that it sometimes can be hard to know where to start a conversation with a client about charitable planning. As you ask questions about the causes your clients love and how your clients intend to support the community in their estate plans, you’ll need quick access to a few go-to planning tools to inspire the dialogue. To help you do just that, we’ve assembled this list of a few of our favorite planning tools. 

Qualified Charitable Distributions

Under the now permanent IRA charitable rollover laws, your 70 ½+ clients can direct up to $100,000 annually of required minimum distributions to charitable organizations, avoiding inclusion in taxable income. These distributions are called Qualified Charitable Distributions (QCDs). Although donor-advised funds can’t receive QCDs, there are still plenty of ways our team at the community foundation can help your clients take advantage of this tool for lifetime gifts. Also, your clients can name their donor-advised fund as the beneficiary of a qualified plan, which is still a tax-savvy bequest strategy.  

Charitable Remainder Trusts and Charitable Gift Annuities

They’re back! Tax reform’s elimination of the Pease provision, which limited charitable deductions for high income taxpayers, means your clients can better leverage a single, up front gift to a charitable remainder trust or a charitable gift annuity. 

Bundling . . . or Is It Bunching?

Whether you call it “bundling” or “bunching,” clients who want to maximize their charitable deductions under the new tax laws can benefit from making two or more years’ worth of charitable contributions in a single year. This helps push taxpayers over the itemizing threshold, where they can reap the benefit of deducting the full value of their donations. (Quick stat: Because of tax reform, just 10 percent of taxpayers itemized deductions in 2018, compared with 30% in 2017.) 
 

Reflections on the impact of a do good, feel good moment

Remember the Ice Bucket Challenge, when 17 million people dumped icy water over their heads to raise money for the ALS Association? It may seem like yesterday, but it was actually five years ago this summer that the viral sensation helped raise $115 million in eight weeks for research and patient services. The five-year results are captured in an infographic, which the ALS Association has made available for everyone to share.

HOW WE CAN HELP

When nonprofit organizations launch online fundraisers, they capture a lot of attention. Your clients may ask questions about impact, such as “How do I know the dollars are used wisely?” or “What should I watch out for when I am donating online?” or “Is the expense of viral fundraising campaigns worth the ultimate benefit achieved for the people being served?” The team at the community foundation is your partner. We are here to help you provide thoughtful, helpful answers to your clients' questions. Think of our experts as extensions of your team to help you fulfill your client service role.