Seeking solid ground: Guiding charitable clients through 2021’s choppy waters

As the Delta variant threatens pandemic recovery, and talk of tax reform bubbles up more and more frequently, it’s no wonder your clients are on edge. For attorneys, accountants, and financial advisors like you who counsel families on philanthropy planning, 2021 seems to have generated more questions than answers. 

In this issue of our advisor newsletter, we’re covering three topics illustrating just how important it is to stay on top of trends in charitable planning: So-called "insider giving," donor privacy, and out-of-the-box legacies.

As always, you’re in good hands. Our goal at the community foundation is to serve as a steady, reliable partner and as a source of timely information and ideas that enable you to serve your clients without missing a beat, even in the face of uncertainty. 

“Insider giving” and seats at the table: A team approach is essential to crafting an effective philanthropy plan

As corporate valuations soar, you may be getting more frequent questions from executives at publicly-traded companies about the tax benefits of transactions involving highly-appreciated stock. Proper planning is critical to optimize the tax aspects of a transaction, but no advisor should go it alone. A client’s attorney, accountant, and financial advisor should be at the table together to ensure that all parties are coordinated and unintended negative consequences are avoided. 

For transactions involving charitable giving, consider inviting a knowledgeable professional from the community foundation to participate in the planning. Not only can the community foundation offer structures to streamline administration, create tax efficiencies, and maximize your client’s charitable wishes, but the community foundation also can serve as a source of up-to-the-minute developments in charitable tax planning policy and regulation.

An excellent example of this will be discussed in an upcoming issue of the Duke Law Journal on the topic of “insider giving.” A study conducted by University of Michigan professors found that charitable gifts of stock by shareholders who own 10% or more of a company’s shares tend to be “suspiciously well-timed.” Thus, charitable transactions involving securities may very well begin to receive more scrutiny from the SEC.

Our team is watching this and other developments closely to help you help your clients succeed. With the community foundation at the table during estate planning meetings involving philanthropic strategies, emerging pitfalls such as "insider giving" are more likely to be avoided.  

Donor privacy: Ongoing concern for a common client priority

In an era of social media and intense polarization of rhetoric, it’s no wonder so many charitable individuals and families choose to give to their favorite causes anonymously. And, bolstered by the United States Supreme Court’s decision last month in favor of donor privacy (affirming a position advocated by parties across the political spectrum), this trend is likely to continue. 

At the community foundation, we make it easy for you to help your clients who wish to give anonymously by establishing a charitable giving fund. For example:

• Your client can select a name for the fund that is something less obvious than their own. For example, instead of the “Sam and Vera Barker Fund,” your client can name the fund the “SVB Fund,” “Desert Family Legacy Fund,” or whatever the client would like. 

• Sometimes your client will wish to recommend that certain grants (but not all grants) from a fund be issued anonymously. The community foundation offers your clients the ability to opt into anonymity on a grant-by-grant basis. 

• Your client can rest assured that no solicitations will flow directly to them; the community foundation handles all correspondence related to nonprofit grants from the fund.

• The community foundation does not disclose information about your client or the fund to any third party, nor is detailed information available through a Form 990. 

Outside the box: Legacy combinations you might overlook

As you’re developing estate plans for your charitable clients, remember that the community foundation is happy to help structure a hybrid gift in which a personal component is paired with a charitable component. 

For instance, the charitable remainder trust ("CRT") is a popular tool because it allows your client to generate a lifetime (or term of years) income stream, with the remainder automatically flowing to a nonprofit organization. Because the trust is irrevocable, an immediate income tax deduction is available for the present value of the future gift to charity.

But the CRT is not necessarily the end of the story. Many charitably-minded families elect to name their fund at the community foundation as the remainder beneficiary of a charitable remainder trust, thus creating a lasting legacy. This is especially the case when the fund is established as an endowment to dynamically support the most pressing community needs at any given time, make ongoing annual grants from the fund’s income to specific organizations your client selects, or provide regular funding to causes your client wants to support in perpetuity.  

Another example of a hybrid gift structure is a pet trust. A typical pet trust frequently does not qualify for a charitable deduction because funds are designated to support a client’s own pet. The community foundation, however, can work with a local animal shelter to create your client’s bequest such that both the pet and the nonprofit organization are supported and your client’s estate is eligible for a tax deduction for the portion of the gift that benefits the nonprofit organization as a whole.

501(c) what? Helping clients deconstruct the tax rules for charitable giving

Sorting through jargon to determine deductibility 

When tax season rolls around each spring, a new crop of questions may arise concerning clients’ gifts to various organizations and whether those donations qualify as tax-deductible charitable contributions.

Keep in mind that Section 501(c) of the Internal Revenue Code lays out the requirements for organizations to be considered tax-exempt--a status for which an organization must seek IRS approval. Tax exemptions apply to certain types of nonprofit organizations, but status as a nonprofit (which is a state law construct) does not necessarily mean that the organization will be exempt from Federal income taxes.

Furthermore, even under Section 501(c), there are different types of nonprofits that are recognized by the IRS as tax-exempt. To qualify under the Internal Revenue Code Section 170 charitable deduction for gifts to Section 501(c)(3) organizations, for example, the recipient must be organized and operated exclusively for “charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and the prevention of cruelty to children or animals.” “Charitable,” according to the IRS, has a very narrow definition.   

No doubt, many of your clients not only support 501(c)(3) charities, but also social welfare groups organized under Section 501(c)(4). Examples of social welfare groups include neighborhood associations, veterans organizations, volunteer fire departments, and other civic groups whose net earnings are used to promote the common good. Donations to social welfare groups are tax deductible in only certain cases (e.g., gifts to volunteer fire departments and veterans organizations). Chambers of commerce and other business leagues fall under Section 501(c)(6); donations to these entities are not tax deductible. 

If you have any questions about the tax deductibility of your clients’ contributions to various organizations, please reach out to the team at the community foundation. We are immersed in the world of Section 501(c) every single day and are happy to help you navigate the rules. 

“If not 501(c), then what?”: Cautioning clients about crowdfunding 

What if your clients make donations to entities that don’t fall under a specific section of the Internal Revenue Code, but feel “charitable” nonetheless because the dollars are helping people in need? Perhaps a client has helped set up a dedicated account at a bank to provide scholarships to the children of an accident victim, or even participated in a GoFundMe fundraiser to help a specific family. These vehicles, along with other crowdfunding platforms, typically do not meet the qualifications for a charitable organization under Section 501(c)(3), usually because the funds are earmarked for a particular person or person. 

The issue is no longer academic or obscure. According to a Lilly Family School of Philanthropy survey, nearly one-third of respondents said they donate at least once a year to a crowdfunding venture, especially responding to family members and close friends in need.

Even with the increase in popularity of crowdfunding and online fundraising platforms, the IRS has only just begun to issue guidance. Consider Private Letter Ruling 2016-0036. Here, the IRS referenced a notion it referred to as "detached generosity” and noted that giving to strangers on a platform such as GoFundMe did not generate the "quid pro quo” that is an automatic knock out punch for charitable deduction eligibility. Still, the IRS indicated that the absence of a quid pro quo is not enough to cause a transaction to rise to the level of a charitable contribution. Taxpayers and professionals still must pay close attention to the circumstances and facts of each situation. 

Ice breakers: Three easy openers to talk about philanthropy 

Many advisors really want to bring up charitable giving in client meetings, especially while updates to tax and estate plans are underway. Indeed, many advisors believe they have a responsibility to raise the issue. But how? 

Addressing charitable giving priorities with clients does not need to be hard. The key is to be interested, relevant, and authentic. Here is a tip for each.

Show genuine interest.

Dale Carnegie’s maxim, “To be interesting, be interested,” is good advice for nearly every social or business encounter. Especially with charitable giving topics, showing interest is important because giving is very personal and emotional. When you are reviewing a client’s tax return, for example, ask about the charitable organizations the client supports. You’ll likely be amazed at the richness of the stories behind each gift. 

Stay relevant.

Tax reform is on the minds of many clients. This gives you an opening to talk about potential changes to the tax rates and what might happen to capital gains treatment. Explore each client’s balance of charitable interests versus leaving inheritances to family members. Charitable clients will be glad to know you are up to date on lobbying efforts of nonprofit sector leaders. Indeed, many charitable clients serve on nonprofit boards whose members also would find this information useful. For example, in its April 16, 2021 letter to Secretary of the Treasury Janet Yellen, the Charitable Giving Coalition noted that the charitable deduction is “unique” and “promotes a selfless act, incentivizing taxpayers to give more funds to charities than they would otherwise give.”

Be authentic about COVID-19.

Nearly everyone has been affected by the pandemic in some way. Sharing your own experiences and impressions of 2020 and early 2021 will encourage clients to open up. Charitable giving is a natural topic of this conversation. According to a study conducted by Candid, U.S. foundations, corporations, and individual donors stepped up by granting more than $10.7 billion as of early 2021 to address pandemic-related challenges. “There is no doubt that philanthropy has responded to COVID-19 on a scale not seen before,” note the study’s authors. Inspiring statistics like these bring home the importance of charitable giving as part of a family’s overall financial and estate plan. And of course, please reach out to the community foundation for updates on how our board, staff, and donors are rallying to meet the COVID-19 challenges in our own community.  

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.

Kicking off a new year: Philanthropy in the news and charitable giving budgets

Philanthropy in the News

#GivingTuesday continues to grow in popularity. 2019 marked the eighth annual event, raising an estimated $511 million online. This figure is up significantly from 2018's total, which was $400 million. As #GivingTuesday continues to grow and more people participate, it's becoming more likely that your clients are joining in, too, so you'll want to stay up to date. #GivingTuesday 2020 is scheduled for December 1. 

#GivingTuesday is just one of many examples of ways philanthropy is going mainstream and sparking new movements that quickly rise in popularity. The community foundation plays a key role in staying on top of all of the trends in giving. Our team is happy to answer questions about ways your clients can give to their favorite causes, whether online, through a donor-advised fund, or through more complex charitable planning vehicles such as gift annuities, bequests, and charitable remainder trusts.

Creative Solutions

As your clients gear up for another year of giving, how can you help them make the most of their good intentions? Consider helping clients plan their charitable giving budgets around three points—amount, timing, and category.

1. How much? That’s the $64 question. Likely more, depending on the client's budget. Something for clients to keep in mind when setting a budget for supporting favorite causes is that giving money isn’t the only way to do good. Clients should also celebrate other social impact activities such as volunteering, serving on a board, donating gently-used clothing, purchasing products that support a cause, or marketing favorite charities through social media. It all counts. Clients can set annual charitable giving budgets based on what makes sense for their families. Keep in mind that a donor-advised fund at the community foundation is a great way to organize financial contributions to favorite charities.

2. How often? Charities are looking for support year round. More than 50 percent of charitable contributions are made during the holiday season, but it doesn’t have to be that way. Consider suggesting that clients spread giving throughout the year. Their tax deductions are unaffected, and they'll be giving the organizations they support a much-appreciated boost to cash flow.

3. Who gets it? Most people support a wide variety of charities. To help your clients see where their dollars are going, suggest that they sort the recipient organizations into major categories of social impact. For example: Community Development, Arts & Culture, Children & Families, Health & Life Science, Education. Keep in mind that religious giving frequently falls into one of these five categories, depending on the gift’s purpose. 

As always, the team at the community foundation is here to help you as you work with your philanthropic clients. We look forward to collaborating in 2020! 

Tax Savvy 

As you counsel your nonprofit organization clients and individual clients who are board members of charities, it is important to stay on top of changes in the tax laws that pertain to exempt organizations. Most recently, on December 20, 2019, President Trump signed the Further Consolidated Appropriations Act 2020, H.R. 1865, which passed the House of Representatives by a vote of 297–120 and the Senate by a vote of 71–23. The law repeals Internal Revenue Code Section 512(a)(7). This provision was part of  the Tax Cuts and Jobs Act. It required tax-exempt employers to pay unrelated business income tax (UBIT) on transportation fringe benefits, such as parking. The tax applied to the amount by which Section 274 did not allow a deduction. So, tax-exempt employers no longer need to pay UBIT tax on these fringe benefits.

Please contact the team at the community foundation anytime you have a question about laws that impact the charitable sector. It's our job to help you stay current on tax laws and regulations that impact your clients.