Inherited IRAs, missed opportunities for stock gifts, topics for client meetings, and, wait for it, crypto

Greetings from the community foundation!

The last weeks of summer are already ushering in the usual uptick in questions about charitable giving and year-end tax planning. Typically, in the weeks leading up to the fourth quarter, we field quite a few questions from advisors and donors about the laws governing nonprofits and charitable giving in general. We are always glad to hear from you!

We've heard your feedback that it is easy to get caught up in the minutia of specific charitable giving vehicles and the ever-changing tax laws at the expense of the valuable big picture. For that reason, as you work with your clients this month, we encourage you to listen carefully for questions that signal the need for a quick refresher. “How much should I give to charity this year? Remind me what’s deductible and what’s not? What am I missing in my tax planning that could really save me money and help me support my favorite causes? Can you explain this whole foundation concept again? It’s been awhile.”

The team at the community foundation is here to help. We are always happy to join you for “lay of the land” conversations to help ground your clients in the charitable priorities that mean the most to them, and then connect the dots to actual charitable planning vehicles that will help your clients support the community, save taxes, and create legacies for future generations, all at the same time. We’re also always happy to point you in the right direction to find resources, articles, and tutorials that can help quickly orient your clients to the philanthropy industry as a whole. (We really like this overview sheet, for example, from Candid.) 

Thank you for the opportunity to serve your clients. We look forward to hearing from you in the weeks and months ahead as you bring your clients’ 2022 charitable giving goals to successful conclusion. 

Inherited IRAs: Big headache, or big opportunity? 

Don’t be surprised if your clients are walking into your office in a state of bewilderment over something they’ve read recently about the IRS’s distribution rules for inherited IRAs. 

What’s the back story?

Until the law changed a few years ago, a client who was named as the beneficiary of a parent’s IRA, for example, could count on a relatively straightforward and tax-savvy method of withdrawals called the “stretch IRA.” With the passage of the SECURE Act, that changed for many clients who inherited an IRA after December 31, 2019. Instead of taking distributions over their lifetimes, affected clients would need to withdraw the entire inherited IRA account within a 10-year period as calculated under the law. 

What’s the problem now?

Too bad about the loss of the stretch IRA, but we’ve all had time to adjust to the new IRS rules, right? Wrong. Unfortunately, the IRS rules are, at the moment, clear as mud. Concern escalated when the IRS issued proposed (but not yet final) regulations earlier this year. Advisors and clients are facing an acute discrepancy between what had been understood by practitioners immediately after the SECURE Act was passed, on one hand, and what the IRS has included in the proposed regulations, on the other hand.

Specifically, some non-spouse beneficiaries of an inherited IRA may not be able to wait until the 10-year post-inheritance mark to fully withdraw the funds in a lump sum, but instead, according to the proposed regulations, must begin taking annual distributions immediately following the inheritance and throughout the statutory 10-year period during which all funds must be withdrawn. This is a hard pill to swallow for clients who were counting on years of additional tax-free growth and who had hoped to defer an income tax hit until a lower-income year.

The situation is complicated but worth understanding (we like this very clear article) because of the potential headaches the proposed regulation could cause for your clients who are caught in the gray area.    

A charitable giving opportunity?

The current state of confusion could present a golden opportunity to serve your philanthropic clients.

First, anytime you are talking about IRAs, inherited or not, you’ll want to make sure your client knows about Qualified Charitable Distributions (QCDs). As tax enthusiasts, we may feel we talk about QCDs all the time. Hearing the message multiple times, though, is crucial in order for clients–who are likely not tax experts–to truly appreciate the benefits of the QCD. 

As a reminder, through QCDs, a client who is 70½ or older can use a traditional IRA to distribute up to $100,000 ($200,000 for a couple) per year, which happily counts toward satisfying Required Minimum Distributions, to a qualified charity, including certain types of funds at the community foundation. The distribution is not reported by the client as taxable income because it goes straight to charity.  

Second, for your clients owning inherited IRAs who are caught in the confusion of SECURE Act proposed regulations, a QCD could come in very handy. The IRS does permit taxpayers to make QCDs from inherited IRAs, not just their own IRAs. This option could be a welcome relief to clients who are facing the more stringent proposed IRS regulations governing the payout requirements for inherited IRAs.

Please contact us if you have questions about how your clients can use their IRAs to support their favorite charitable causes. We’d be glad to help. 

Highly-appreciated stock: If your client missed the ideal window, it’s still not too late to support charity

During a routine check-in meeting, your client casually mentions that the client’s employer, a local company, was just acquired. The client and dozens of fellow employee shareholders are now flush with cash. “I’d like to use some of the money to give to charity,” the client tells you. “Let’s talk about a family fund at the community foundation.”

You try not to flinch as you mentally calculate the capital gains taxes your client could have avoided if the client had given some of those shares to a fund at the community foundation years ago when the company was clearly growing fast, making it a natural target for acquisition or IPO, but well before an exit was in the works.  

All is not lost. You can still help the client establish a donor-advised, field-of-interest, unrestricted, or other type of fund at the community foundation to fulfill the client’s charitable intentions. The client’s gifts to the fund qualify for a charitable tax deduction in the current tax year, helping to offset the income from the sale of the shares.  

Still, this situation is all too common and a good reason to regularly remind clients about their options for making gifts to charity and the tax benefits of each.

Giving cash to a public charity, which is what your client in this situation will be doing (!), is always a viable option. The general rule is that your client can deduct cash gifts to up to 60% of their adjusted gross income (AGI) in any given year. While this may not completely offset large gains from the sale of the stock, it will help to reduce the client’s taxable income.

Giving appreciated stock, which is what you wish your client had done, is a very tax-effective method of supporting public charities. Clients who donate stock outright avoid all capital gains tax that would be levied on a sale of the stock if it were sold prior to making the donation. Even with the 30 percent of AGI limitation imposed on gifts of highly-appreciated, long-term capital gains property to a public charity, your client likely will still come out ahead because the client’s AGI is presumably a lot lower than it will be in the year of a future stock sale. 

The “i’s” have it: Two key topics for client meetings

Inflation, interest rates, income tax, and the IRS are ever-present topics during discussions with your clients. Right now, there’s a lot to talk about, especially related to charitable giving.

Let's look at two examples of hot topics that may take a front seat in your client conversations this fall as you are helping your clients consider their options for structuring charitable giving and philanthropic legacies in the current economic environment.

Our first hot topic is the notion that rising interest rates can increase the attractiveness of certain charitable remainder gift vehicles.

Clearly, wealth planning priorities are impacted by interest rates. Charitable components of estate and financial plans are no exception. When interest rates are high, your clients may want to look closely at annuity vehicles that leave a remainder gift to charity, such as a charitable remainder annuity trust or a charitable gift annuity. 

Creating a charitable remainder annuity trust in a high interest rate environment, versus a low interest rate environment, drives down the present value of your client’s income stream, which means that the value of the remainder passing to charity is relatively high and therefore so is the client's upfront tax deduction for the charitable portion of the gift. 

Charitable gift annuities also are becoming more attractive to philanthropic clients, for different reasons. Thanks to the recent increase in rate of return assumptions for charitable gift annuities, this planned giving vehicle is now more attractive to donors who like the idea of a higher payout rate for their lifetime annuity.

Our second hot topic relates to the IRS. Projected increases in the IRS’s ranks may be raising more advisors’ and clients’ eyebrows than actual tax hikes. The much anticipated Inflation Reduction Act is now law, and while the Act did include changes to a few income tax provisions, many tax professionals are viewing the Act’s $80 billion in funding increases for the IRS to be the bigger headliner. 

Some commentators worry that the IRS still may not be able to build its staff and update technology as quickly as the legislation anticipated. Nonetheless, financial advisors, attorneys, and accountants are taking note. In all likelihood, shoring up the IRS’s operations means that the chances of client audits will increase. Your clients may even be reading up on this in the mainstream media, which frequently cites unusually large charitable deductions as a potential trigger for an IRS audit. 

Now is the time to make sure your clients understand the rules for charitable deductions and commit to keeping track of their donations in detail. Establishing a fund at the community foundation is an easy way for clients to organize and track their annual giving.

Some clients, for example, make a single, tax-deductible transfer of highly-appreciated stock each year to their fund at the community foundation. The proceeds from the sale of that stock are then used for distributions from the fund to the client’s favorite charities. In this situation, no matter how many different charities benefit from the fund, the client still has just one receipt to keep track of charitable donations for income tax deduction purposes. 

Please reach out to learn more about ways the community foundation can work with you and your clients to navigate the ever-changing economic factors that influence their charitable giving plans.

Cryptocurrency: What if your clients own it and you don’t think they should?

Most advisors exercise extra caution when advising clients about cryptocurrency. Indeed, 68% of investment fund executives surveyed do not believe it is a good idea for their clients to own cryptocurrency in the first place. Still, according to some sources, 43% of clients hold cryptocurrency in their portfolios. 

If you’re among the advisors who routinely caution clients about investing in cryptocurrency, what is the best way to navigate conversations with clients who are among the 43% who already own it?

In a case like this, consider talking with your client about giving cryptocurrency to a family fund at the community foundation or other public charity. Gifts of cryptocurrency are similar to gifts of other highly-appreciated assets, including the documentation required to substantiate value. Be aware, though, that the IRS is watching cryptocurrency closely and considers it an area of potential underreporting and abuse. Recently, for example, for the very first time the IRS has targeted a cryptocurrency trading platform with a subpoena-like process to gather information about possible abusive transactions. 

As cryptocurrencies’ profiles rise in the marketplace, the team at the community foundation is happy to work with you to evaluate whether charitable giving strategies could be a tax-savvy option for your community-minded clients to exit the cryptocurrency market and simultaneously support their philanthropic goals. 

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.

Philanthropy and retirement planning: Intertwined in today's market

Greetings from the community foundation!

We hope this newsletter finds you well. 

As global and national events continue to remind us about what’s really important, our board of directors and staff remain deeply and increasingly committed to deploying the power of giving to create positive change in the world. 

Recently, we reflected on a 2017 Forbes post about the important role community foundations play in responding to tragedies and disasters. Still relevant nearly five years later, this article offers a simple review of the ways our community foundation and other community foundations across the country are uniquely qualified to address global issues with local impact, and local issues with global impact, through a combination of deep community knowledge and charitable giving expertise. The short article may also be worth sharing with clients who are building philanthropic legacies now and for their families’ future generations. 

Thank you for trusting the community foundation to help you stay current on legislative changes that impact charitable giving, trends in philanthropy, and planning techniques. We look forward to continuing to help you serve your philanthropic clients by offering solutions to address local, national, and global needs, as well as helping your clients build legacies across generations. 

–Your Community Foundation

Planning for retirement and giving to charity: Intertwined solutions in economically puzzling times  

Retirement planning no doubt is an important discussion topic during client meetings every year. In recent months, though, you may have observed an uptick in clients’ questions about their plans for retirement, perhaps related to:

–Required minimum distributions (“RMDs”) from qualified retirement plans, including questions prompted by media coverage of pending legislation known as SECURE 2.0;

–Stability of retirement investments, a topic that is widely covered in mainstream financial news; and

–Rising interest rates and what that means for retirement, which is also a frequent topic in the media, along with inflation’s impact on retirees.  

Against this backdrop, the issues become particularly complex for philanthropic clients. Here are answers to questions you may be asking:

What’s going on with updates to the charitable giving components proposed in the SECURE 2.0 Act?

Right now, SECURE 2.0 includes a provision that would index the $100,000 Qualified Charitable Distribution (“QCD”) allowance for inflation and also expand the technique to allow for a one-time transfer of $50,000 to a charitable remainder trust or other split-interest vehicle. But those enhancements are not the law, yet. Overall, the legislation appears to stand a good chance of becoming law. Still, a lot can happen as the House and Senate reconcile their respective bills before the legislation heads to President Biden for signature.

So what should I be telling my clients about the potential changes to the Qualified Charitable Distribution rules? Or should I say nothing?

For clients who are seriously considering a QCD, it may be worth mentioning these potential enhancements. But in general, it’s usually more confusing than helpful to bring up pending legislation, no matter how exciting. Instead, consider placing your focus on the QCD rules as they currently stand. The QCD already is a strong planning tool.

When should I reach out to the community foundation for help with QCDs?

The answer is, anytime! The community foundation can help establish a qualifying fund to receive your client’s Qualified Charitable Distribution, regardless of whether the SECURE 2.0 enhancements become law. The recipient fund can’t be a donor-advised fund, but there are other very effective options. 

With interest rates rising, are there particular techniques that I should be discussing with my clients who are planning for retirement and are charitable inclined?

Yes. Now is a good time to consider talking with these clients about charitable gift annuities. A charitable gift annuity, like any other annuity, is a contract. Your client agrees to make an irrevocable transfer of cash or assets to a charitable organization. In return, the charitable organization agrees to pay the client (or the client’s designated beneficiary) a fixed payment for life. Your client is eligible for an immediate income tax deduction for the present value of the future amount passing to charity. 

What if my client needs the tax deduction this year but won’t be retiring for several years? 

Charitable gift annuities offer flexibility, in that your client may choose to structure the contract as a “deferred gift annuity,” meaning that the client starts receiving payments at a future date (or upon a future event such as retirement), rather than immediately while the client's effective income tax rate may still be high. In this way, the charitable gift annuity can be a tax-savvy component of an overall retirement plan.

How do rising interest rates factor in?

Client discussions about charitable gift annuities are especially timely because the American Council on Gift Annuities recently voted to increase the “rate of return assumption” used as guidelines for maximum payout rates. Effective on July 1, 2022, the return assumption will increase from 3.75% to 4.5%. This means that the Council’s suggested payout rates will be going up. That’s good news for a client’s income stream. 

What’s the bottom line on this?

The net-net here is that rising interest rates make the charitable gift annuity an even more attractive tool for clients who want to combine charitable planning with retirement planning. The team at the community foundation can help you evaluate this option to determine if it is a good fit for your client.

Playbook: Helping clients organize their giving through a donor-advised fund

Your clients will arrive in 15 minutes. You’re reviewing the file. Everything is in order. The estate planning documents are up to date, you’re ready to share the latest investment results, and you are prepared to debrief the 2021 tax season and make tax planning recommendations for the remainder of this year. It sounds pretty typical up to this point, right? 

As you continue to scroll through the materials, you see the names of several charitable organizations that your clients have supported every year for at least a decade. Ah ha! This is an opportunity to add even more value to your clients. Easy for a busy advisor to overlook, charitable giving habits are actually an important window into helping a client make planning decisions around their philanthropic intentions.

Here’s a simple playbook to guide you through a client conversation to begin establishing a charitable giving plan using a donor-advised fund at the community foundation.

–Call your clients’ attention to their charitable giving history. They might not even be aware of how much they are giving or how long they’ve been supporting their favorite charities. 

–Gather more information about why the clients support those particular causes. Family tradition? Past involvement as a beneficiary of an organization’s services? Desire to impact a particular area of need? 

–Talk with your clients about their community involvement. Do they serve on any boards of directors? Do they volunteer at local organizations?

–Review any charitable giving provisions in the current will or trust. Are the clients leaving a bequest to favorite charities?   

–Ask your clients if they’ve ever considered organizing their giving through a donor-advised fund. If they are not familiar with donor-advised funds, perhaps offer a quick primer, and certainly offer to introduce the client to a member of the community foundation team.

–Briefly mention that a donor-advised fund can be an effective alternative to a private foundation, thanks to fewer expenses to establish and maintain, maximum tax benefits (higher AGI limitations and fair market valuation for contributing hard-to-value assets), no excise taxes, and confidentiality (including the ability to grant anonymously to charities).

–Also mention that a donor-advised fund at the community foundation is frequently a more effective choice than a donor-advised fund offered through a brokerage firm (such as Fidelity or Schwab). That’s because, at a community foundation, the donor is part of a community of giving and has opportunities to collaborate with other donors who share similar interests. In addition, the donor is supported in strategic grant making, family philanthropy, and opportunities to gain deep knowledge about local issues and nonprofits making a difference. 

Finding the good, giving as a wealth strategy, and an open invitation

It can be hard to see the good in people as heartbreaking exceptions seem to dominate modern life, but it is worth remembering that philanthropy–”love of humanity”--is alive and well. A study at Stanford University indicates that a sense of community and calls to action help align people around common values. Indeed, high-profile examples of philanthropy, from Carnegie Hall to the manatees, help reinforce the notion that people can turn altruism into action through their leadership and financial resources. 

What’s more, nearly two-thirds of high net-worth philanthropists agree that charitable giving is part of their overall wealth strategy, according to a recently-released study by BNY Mellon reporting the results of a survey of individuals with investable assets of at least $5 million. Once again, the takeaway here for advisors is that it is important in any situation to at least ask whether the client would like to incorporate charitable giving into their financial and estate plans. If the answer is yes, the team at the community foundation is just a phone call away to provide guidance and serve as a sounding board. 

Your clients’ charitable intentions, coupled with the community foundation’s ability to structure donor-advised funds and other charitable giving vehicles to meet your clients’ financial and community impact goals, create many opportunities for us to work together. The offer is always open for our team to stop by your office over breakfast, lunch, or even as a midday break to exchange ideas. We’d love to help you help your clients make a difference in our community. 

QCDs, NIMCRUTs. and other reminders for advisors

Hello, and Happy May!

This month, our newsletter is heavily focused on tax and legal matters. As you and other advisors emerge from a busy tax season, we know that legislative changes, charitable giving vehicles, and even cautionary tales are topics that are likely to capture your interest.

As always, the community foundation is here to help you and your clients navigate the various options for charitable giving. We’ll help give you the insights and confidence you need to develop plans that enable your clients to provide the charitable support they intend while also keeping the clients’ activities well within the boundaries of the law.    

It is our honor and pleasure to work with you and your clients. We look forward to talking with you soon!

–Your Community Foundation

QCDs: Good news and important reminders

Qualified Charitable Distributions, or “QCDs,” have been in the news a lot lately, especially in light of proposed SECURE Act 2.0 legislation that passed the House of Representatives in March and is now pending in the Senate.

Through a QCD, starting at age 70½, your client can instruct the administrator of an IRA to direct up to $100,000 per year to a qualified charity. This helps your client’s tax situation because the client does not need to report the amount of the QCD as taxable income.

Here are four important reminders about QCDs:

–Even though the SECURE Act changed the Required Minimum Distribution (RMD) age to 72 from 70 ½, the QCD age is still 70 ½. 

–QCDs cannot be made to donor-advised funds, but your client can set up a field-of-interest or unrestricted fund at the community foundation to receive a QCD.

–Under a version of the proposed SECURE Act 2.0 legislation, QCDs would be indexed for inflation. In addition, proposed legislation would allow a client to make a one-time QCD of up to $50,000 to a charitable remainder trust or other split-interest entity.

–Finally, be sure to help your clients coordinate their QCDs with their Required Minimum Distributions. Proper planning will help avoid troublesome tax pitfalls. 

Please reach out to the team at the community foundation to learn more about QCDs and how your client can establish a fund to support financial and tax goals as well as charitable giving goals.

Income timing: A NIMCRUT could hold the key

Clients who own closely-held businesses, real estate, or even cryptocurrency may be good candidates for a particular type of charitable remainder trust known as a NIMCRUT, which is short for “Net Income with Makeup Charitable Remainder Unitrust.” 

The way it works is that your client transfers a highly-appreciated asset to a trust. The trust terms provide for the payment of a fixed percentage (at least 5%) of the trust’s value, revalued annually, to your client or another beneficiary. 

Here’s the key with the NIMCRUT: The terms of this type of trust also provide that if the trust’s income is less than the designated fixed percentage, the trust will only distribute the actual income. Later, upon the liquidation of the highly-appreciated asset, for example, the income distributions will be made up. 

In this way, not only does the NIMCRUT keep the highly-appreciated asset growing under favorable tax conditions inside the trust until it is sold, but it also allows your client to receive the higher income in later years, such as retirement, when the client’s tax bracket is likely to be lower. As with other types of charitable remainder trusts, when the term of the NIMCRUT expires, the remainder passes to charity. 

Some NIMCRUTs deploy a “FlipCRUT” feature which removes the net income limitation upon a triggering event (such as the sale of an asset or a date). This creates even more flexibility in timing income for your client.

Note that it’s wise to consider naming a public charity, such as a donor-advised fund at the community foundation, versus a private foundation, as the charitable remainder beneficiary of a NIMCRUT or other charitable remainder trust. This optimizes the amount of your client’s up-front charitable deduction when the trust is funded.

Social consciousness: Today's expectations of advisors

Especially over the last few years as social consciousness has increased, many of your clients have no doubt become more interested in how they can make a difference through their philanthropic activities, whether those activities include giving to favorite charities, volunteering, serving on boards of directors, purchasing products that support a cause, and respecting a sustainable environment.

As clients grow more in tune with social impact, they are expecting their advisors to be ready to help them structure and plan their charitable giving. What’s more, clients who receive charitable planning advice from their advisors tend to be more loyal and more willing to recommend their advisor to others, especially when that advisor is proactive in bringing up options for incorporating philanthropy into financial and estate plans. 

With that in mind, the community foundation is here to help you stay up to date with philanthropy topics so you can, in turn, have the conversations and deliver the services your clients are seeking. To that end, for an insightful look into the inner workings and current state of the philanthropy industry, we suggest skimming the written testimony that the Council on Foundations recently provided to the Senate Finance Committee. The Council, a major voice and advocate for philanthropy in the United States, notes that the current economic and legislative environment has created a “pivotal moment for nonprofits and their philanthropic partners.” 

The community foundation is also here to help you avoid treacherous situations as you create philanthropic plans for your clients.

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.

IRS updates: Retirement distributions, privacy, and events

Eyebrow-raising IRS relief for required minimum distributions

In the CARES Act, passed on March 27, 2020, Congress eliminated this year’s Required Minimum Distributions from IRAs, 401(k)s, and 457(b) and 403(b) plans. The end of March, however, was too late for people who had already taken Required Minimum Distributions for 2020.

To remedy this situation, the IRS issued Notice 2020-51 on June 25, which allows taxpayers to replace Required Minimum Distributions taken year-to-date. Taxpayers now have until August 31 to replace the funds, and this includes replacing funds from an inherited IRA. Furthermore, taxpayers can replace multiple distributions because the “one rollover per year” provision does not apply for 2020.

Why does this matter to you and your philanthropic clients?

• First, the ruling itself is unusual, in that the IRS seems to have engaged in what could be construed as lawmaking. We’re keeping an eye on rulings like this to gain an understanding of the reach of the IRS during times of crisis. 

• Second, for your clients over 70 ½ who were already planning to give their Required Minimum Distributions to charity this year, nothing has changed about their ability to do so. Be sure to take a careful look at each client's 2020 tax situation. It could still be most advantageous for a client to make a Qualified Charitable Distribution instead of forgoing the Required Minimum Distribution or replacing the funds through the special rollover provisions now in place for 2020.

Donor privacy protections now official

Many of you have been tracking developments related to the disclosure of donor identity and proposed IRS regulations to clarify the rule’s applicability.

You may recall that focus on this issue increased on July 30, 2019, when a Montana federal district court judge set aside the IRS’s Revenue Procedure 2018-38. Under that Revenue Procedure, the IRS had removed the Schedule B disclosure requirements for Section 501(c)(4) and several other forms of tax-exempt entities.

Because the court based its ruling wholly on procedural grounds, advisors still remained concerned that information could be accessed by the public regarding clients’ contributions to 501(c)(4) social welfare organizations and 501(c)(6) trade associations.

That concern has now been laid to rest. The IRS’s final regulations, effective on May 28, 2020 (which may be applied to returns filed after September 6, 2019) retained the provisions in the proposed regulations requiring that only 501(c)(3) charitable organizations and 527 political organizations report names and addresses of substantial contributors during a taxable year. 

The net-net here is that your clients who are giving money to certain organizations that are tackling controversial social issues on either end of the political spectrum are less likely to have their identities revealed, sparing your clients from potential harassment. In an era when more and more people are mobilizing to stand up for their beliefs and causes, the IRS’s nod to free speech and privacy is likely to be a welcome development.

Galas look different, but the tax rules are still sticky

For many charities that rely on events to achieve annual fundraising goals, the cancellation of 2020’s Met Gala (which raised an estimated $15 million in 2019) came as a blow, signaling that live galas and auctions might not be back anytime soon. 

Still, many organizations are moving forward with virtual fundraisers. What should you keep in mind as you advise clients who routinely support charities through events? 

The rules for charitable deductions still apply, meaning that the IRS only allows a tax deduction for the portion of the ticket price for which your client received nothing of tangible value in return. So, when the charity sends a receipt for the gift, your client will see that the charity has subtracted the fair market value of the perks--food, beverage, entertainment, T-shirts, and other goodies--from the full amount of the contribution. But, in the case of virtual events, the charity may skip “tickets” and perks altogether, which means your client's contribution is entirely a donation to the charity itself, with no benefit back to the client. 

Regardless, it is still important to consider carefully the implications for your clients who want to purchase event tickets using their donor-advised funds. While straightforward gifts to charities from donor-advised funds are perfectly fine (and indeed, one of the primary purposes of donor-advised funds), it’s problematic for a client to buy an event ticket using donor-advised fund dollars. So problematic, in fact, that the IRS has issued proposed regulations which, if enacted, will confirm its position that a donor-advised fund is prohibited from paying for event tickets on behalf of an advisor to the fund. The regulations would make it clear that the donor-advised fund cannot even pay for the charitable portion of the ticket (the ticket price minus the fair market value of perks flowing back to the donor advisor).

It’s important for your philanthropic clients to pay attention to this. The proposed regulation includes fines for violations that can be imposed on your client as well as on the community foundation or other donor-advised fund sponsoring organization. 

To be on the safe side, even in the case of virtual events, be sure to advise your clients that they should not attempt to use money in their donor-advised funds to purchase event tickets of any kind.

Working hard for the community: Versatile and strong Charitable giving vehicles

Donor-advised funds: Tried and true

Donor-advised funds are a popular charitable giving tool. And right now is a perfect time to evaluate this planning strategy for your clients.

In recent years, donor-advised funds have been one of the fastest-growing philanthropic planning tools in the marketplace. Donor-advised funds are popular because they allow an individual or family to make a tax-deductible transfer that qualifies as a charitable contribution, and then recommend grants to favorite charities from the fund when the time is right. A donor-advised fund operates a lot like a checking account for charity, and it’s established according to IRS guidelines that provide tax advantages for the donor as well as administrative efficiencies.

In the midst of the Covid-19 pandemic, giving from donor-advised funds at community foundations is accelerating. This is creating a significant boost for nonprofits and people in need. Indeed, the global healthcare crisis is precisely the reason that many donors established donor-advised funds in the first place: To be ready to give when needs are the highest. 

According to a recent survey conducted by the Community Foundation Public Awareness Initiative, grants from donor-advised funds among the 64 community foundations surveyed increased nearly 60% in March and Apri 2020 compared with March and April 2019. 

To be sure, donor-advised funds can be an important “lifeline” for community organizations during periods of hardship, as noted by Bruce Hopkins, a University of Kansas School of Law professor. 

Consider working with your clients to activate their existing donor-advised funds or establish new donor-advised funds to help respond to the needs created by Covid-19. A donor-advised fund helps the community right now and also allows your clients and their families to build a nest egg to address our community’s needs during future crises. 

Important reminders: QCDs and CLATs

Our recent communications have highlighted the unique importance of Qualified Charitable Distributions (QCDs) and Charitable Lead Annuity Trusts (CLATs) in today’s market conditions. Given the critical needs facing our community right now, the team at the community foundation wants to reiterate the value of these two planning tools. We're inviting you to contact us if you have any questions about how these charitable giving techniques can help you and your clients immediately support people in need. 

In the case of Charitable Lead Annuity Trusts, some experts are heralding a “golden age of CLATs” because of the convergence of historically low interest rates and depressed asset values. The timing may never be better for your clients to use a CLAT to create an income stream to charities, thereby satisfying their current goals for amping up philanthropy in this period of extreme need, and simultaneously establish a future gift to heirs with the trust’s remainder.  

Don’t overlook Qualified Charitable Distributions, either, as a way to meet the urgent needs of the charities your clients want to support. The Coronavirus Aid, Relief, and Economic Security (CARES) Act waives Required Minimum Distributions for most taxpayers. The provision includes not only distributions from 401(k)s and IRAs, but also defined benefit pension plans and 457 plans. Taxpayers who have reached 70½ years of age still can take advantage of the Qualified Charitable Distribution, enabling a taxpayer to direct up to $100,000 from an IRA to qualified charities. The distribution is not included in taxable income.