Charitable giving in a bear market, helping your clients support hurricane relief, and need-to-know insights about the nonprofit sector

Hello from the community foundation! 

This month, we’re providing updates in response to many of the questions we’ve received lately as market conditions continue to present challenges for your clients and as yet another natural disaster impacts millions of lives. We’ve also taken this opportunity to share a few reminders about why the nonprofit sector is so important to the fabric of our society. 

We hope you enjoy the updates and, as always, we look forward to hearing your comments and suggestions about topics and resources that would be useful to you as you serve your philanthropic clients.

Thank you for all you do to make our community a better place by assisting your clients with charitable planning. It is our honor and pleasure to support your work in any way we can.

All the best,

Your community foundation 

P.S. We are in the midst of exploring ways we can help bring to life and summarize key information related to the funds established by your clients at the community foundation. If you’d like to discuss an early prototype and help us brainstorm, we would welcome that opportunity.

THE BEAR MARKET

Hanging in there: Charitable giving in a challenging economy 

Earlier this year, Bankrate and Psych Central released the Money and Mental Health study and, not surprisingly, a large number of people surveyed in the research reported that money has a negative impact on their mental health. Survey results varied across generations: Financial concerns psychologically impact 48 percent of Millennials, 46 percent of Generation X, and 40 percent of Generation Z. Needless to say, every generation will feel the sting of any bear market, including (and especially) Baby Boomers.

At the moment, economic conditions feel, well, awful. Some people feel better if they can gain a better understanding of the factors that created the unpleasant mix of inflation, rising interest rates, and a bear market in the first place. Others are comforted knowing they are not alone as they ride the emotional rollercoaster. And for those who are charitable inclined, challenging economic times might actually serve as an inspiration to become more intentional about charitable giving priorities. Happily, not all donors will reduce their donations. 

Here are three messages worth sharing with your philanthropic clients as bear market conditions hang on into the fourth quarter: 

“All stock is not down!” 

Giving appreciated stock to a donor-advised fund or other type of fund at the community foundation is always a tax-savvy alternative to giving cash, regardless of the economic situation. Your clients may feel disappointed that their portfolios are down, but this does not mean that there aren’t still plenty of opportunities to avoid capital gains tax on stocks held for more than a year. (Take a look at the historical share price of Apple, for example, and imagine the capital gains tax liability for clients who’ve held the stock for several years.)

“Consider the needs of others who are even more acutely feeling the pinch of inflation.” 

Community needs are rising, and the community foundation is dedicated to staying on top of the issues that are critically important to quality of life at any given time. Families with low or moderate household incomes can be especially vulnerable to high inflation. The team at the community foundation can help your clients zero in on nonprofits in our community that are serving the people who need the most help right now.  

“Don’t forget about the Qualified Charitable Distribution.” 

We mention this tool a lot because it is such a financially-savvy way for your clients to support the charities they care about. If your client has reached the age of 70 1/2, the client may be eligible to make annual distributions up to $100,000 per spouse from IRAs directly to an unrestricted or field-of-interest fund at the community foundation or other qualifying public charity. QCD transfers count toward satisfying clients’ Required Minimum Distributions and avoid the income tax on those funds. Plus, those assets are no longer part of a client’s estate at death, which avoids estate taxes, too. What’s more, the QCD may get a boost if the EARN Act becomes law; proposed bipartisan legislation would expand the QCD rules to allow a one-time, $50,000 QCD to a split-interest trust such as a charitable remainder trust. 

HURRICANE RELIEF

Disaster philanthropy: Your clients and the important role of individual philanthropy

Sadly, your philanthropic clients have likely grown accustomed to making charitable donations to support disaster relief. Individual donations provide critical resources to help communities recover from the many disasters–weather, fire, humanitarian, disease, war–that occur each year. 

In the wake of Hurricane Ian, your clients may ask you about their options to support those affected by the storm. We encourage you to reach out to the team at the community foundation. We can connect your donors with a variety of options for giving that are trustworthy and effective. Indeed, disaster relief funding is frequently coordinated by community foundations, which are widely viewed as one of the very best vehicles to help donors provide financial support to relief efforts. Individual giving is critically important to any disaster relief effort, and the community foundation can help your clients make an immediate, powerful, and positive impact on the lives of those affected by Hurricane Ian or any disaster. 

What’s more, many donors are now exploring ways to help improve a community’s readiness for disaster response, including building reserve funds for future disaster relief and bolstering emergency preparedness infrastructure for medical care, food, clothing, and shelter delivered by a network of local, on-the-ground nonprofit organizations. We are happy to work with your clients to establish field-of-interest funds or unrestricted funds at the community foundation to ensure that the people in our region remain as safe and supported as possible when disaster strikes. Disaster-preparedness field-of-interest or unrestricted funds at the community foundation can be especially attractive because these funds are qualified recipients of QCDs (Qualified Charitable Distributions) from clients’ IRAs.

We look forward to helping your clients improve the lives of those affected by disasters both here in our community and across the nation and world. 

NONPROFIT SECTOR INSIGHTS

Counseling your clients about nonprofits: The good, the bad, and the big leaps

The nonprofit sector accounts for more than 12 million jobs in the United States, and job growth in the nonprofit sector in recent years has outpaced job growth in the private sector. As an advisor, you are more likely than ever to represent clients who hold executive positions at nonprofits, serve in key roles on nonprofit boards of directors, or do business with nonprofit organizations.

Please reach out to the community foundation as a resource when questions about nonprofit matters arise in your client discussions. Here are three examples of the types of issues that come up in the nonprofit arena: 

–The good: The application process for exempt status has improved dramatically in recent years, thanks to IRS enhancements to the Form 1023. This is important for you to know when you are advising clients who are involved with a new charity. For those in the business, the new Form 1023 was a huge win and a major IRS accomplishment. 

–The bad: Watch out for exempt status issues. At the heart of a nonprofit’s favored tax treatment is the concept of “exempt purpose.” For charitable entities organized under Internal Revenue Code Section 501(c)(3), exempt status is crucial for an organization to remain exempt from paying income tax. Exempt status under Section 501(c)(3) also allows contributions to the organization to be eligible for income tax deductions (as well as estate and gift tax deductions). A bitter case in point is described in a recent private letter ruling outlining the reasons a healthy juice enterprise lost its exempt status. 

–The big leaps: The nonprofit sector, powered by private philanthropy, can be, and has been, transformational for our society. If you’ve not spent some time reading up on the major societal changes that have their roots in the nonprofit sector, you might consider doing so. As always, the team at the community foundation would welcome an opportunity to provide big picture background and inspiration to support the ongoing service you provide your clients who are involved in the nonprofit sector.  

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.

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.

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.  

Younger donors and "bunching," surprising benefits of community foundations, and a SECURE Act reminder

Hello from the community foundation!

As the second half of 2022 gets into full swing, many people are already starting to think ahead to year-end tax planning. Perhaps you’re even reviewing client files to schedule annual meetings, update estate plans, or adjust 2022 tax planning to align with the realities of the year. A lot might have changed for your clients now that we are in the midst of high inflation and stock market volatility. 

The team at the community foundation is on the same page. We’re working with our donors to ensure that their charitable giving plans are aligned with what’s going on in 2022. For example, we’re helping donors increase support for organizations that are struggling to keep up with rising costs; we’re working with donors and their advisors to implement tax planning strategies that involve the charitable tax deduction; and we’re engaging in conversations about how donors’ estate plans can leave a legacy to the community we all love.

We are grateful for the opportunity to work alongside so many of you as you’re advising your philanthropic clients. If we’ve not yet had a chance to work together, please reach out. Our team would love to get to know you and learn how we can be a useful, behind-the-scenes resource for the charitable components of the services you provide to your clients.

To that end, this issue of our newsletter features three topics related to the ways we can work together:

–Tax planning strategies for your younger, philanthropic clients

–Benefits of collaborating with the community foundation that surprise some advisors

–A quick reminder of why the SECURE 2.0 Act is on our radar

We wish you a wonderful summer and hope to hear from you soon! 

Sincerely,

Your Community Foundation

Bunching, long-term appreciated assets, and the fruits of helping younger clients plan their charitable giving

Developing a thorough estate plan isn’t important only for Baby Boomers and Gen Xers. Millennials, who now make up nearly a quarter of the population in the United States, may prove to be more enthusiastic planners than their parents and grandparents, according to the 2022 Estate Planning Study: Millennial Estate Planning Continues in a Pandemic.

What does this mean for planning gifts to charity?

Your millennial clients may be interested in setting up charitable gift vehicles earlier in their lives than some of your older clients. And because millennials tend to be better savers than their elders, it’s never too soon to discuss philanthropic intentions with your younger clients.

What’s an example of a giving technique that is well-suited for millennials?

As they build careers, switch jobs, and start businesses, millennials’ incomes may ebb and flow from year to year. This makes “bunching,” or “bundling,” through a donor-advised fund at the community foundation very useful. Because contributions to the donor-advised fund are eligible for an immediate tax deduction--but are not required to be granted from the fund to charities right away--your client can “front load” donations into a donor-advised fund at a level that takes advantage of itemizing deductions during a high income year, and then contribute less to the donor-advised fund in lower income years. Each year, your client can recommend grants from the donor-advised fund to favorite charities according to the timeframe that aligns with the client’s goals for supporting those organizations, regardless of the client’s income in that particular year.

Does bunching work with long-term appreciated assets?

Yes! Although it may seem obvious to professionals in the financial world, it’s not always top of mind for your clients to remember to donate long-term appreciated assets to their donor-advised funds. This is especially true of millennial clients who only now might be reaching a point in their lives when they own stock or other assets that have gone up in value. Donating an appreciated asset is tax efficient because the asset given to the donor-advised fund or other public charity typically is deductible at the asset’s fair market value. The charity, in turn, pays no capital gains tax on its sale of the asset, thereby generating more dollars to support charitable causes than your client would have had if the client had sold the asset and given the proceeds to charity.

Does it work to give real estate?

Yes! Real estate is an excellent long-term asset to donate to a donor-advised fund at the community foundation, especially now. In late 2021, buying a second home appeared to be a strengthening trend. While higher interest rates and inflation might dampen that trend in the short-term, the ability to work from anywhere is a reality that’s unlikely to disappear. This means even your younger clients, not just retirees, may be buying and selling second homes and even rental properties. These clients could be good candidates to donate real estate to a donor-advised fund. As with gifts of other long-term appreciated assets, a client’s gift of real estate to a donor-advised fund at the community foundation avoids capital gains taxes and generates more money for charitable causes than selling the property first and donating the proceeds. 

Any fun facts here?

Millennials’ end-of-life planning preferences have departed from the previous generations’ traditions, according to the study, right down to the most popular songs played or performed at a memorial service. Sought after titles now include Beyonce’s “I Was Here” in addition to Frank Sinatra’s “My Way.” 

The community foundation edge: Personal knowledge, QCD eligibility, and public support  

Advisors frequently comment that they’re surprised to discover the many ways the community foundation can help their clients, especially compared with national donor-advised fund programs affiliated with brokerage houses or financial services firms. Here are three examples of the types of comments community foundations have heard over the years from attorneys, accountants, and financial advisors:

“I didn’t realize that the community foundation’s donor-advised fund offering was so much more than just an online account. My clients have loved getting to know other donors, accessing first-hand knowledge about what’s going on in the community and how their favorite charities are making a difference, and being able to involve their children in philanthropic events and activities.”

“I’m amazed at the variety of funds the community foundation can administer. Many of my clients have established donor-advised funds and have also augmented their philanthropic planning with a specialized fund such as a scholarship fund, designated fund, or field-of-interest fund. A big bonus for my retirement-age clients is that the IRS allows the community foundation to receive a Qualified Charitable Distribution from a client’s IRA and place it into one of these specialized funds.” 

“My clients who sit on boards of directors of start-up charities have been so happy that grants from donor-advised funds–their own and others’--count toward the IRS’s public support test. That’s really helped new organizations in our community get off the ground.” 

QCD enhancements: Steps forward and fingers crossed 

In legislative news, a recent flurry of activity in the Senate has inched forward the legislation known as SECURE 2.0. Philanthropists and their advisors are watching this legislation closely because of the proposed inclusion of provisions that would adjust the annual $100,000 Qualified Charitable Distribution (“QCD”) cap for inflation and allow a one-time, $50,000 QCD to a charitable remainder trust or other split-interest gift. It’s impossible to predict what might happen when the House and Senate bills are combined and reconciled and then brought to a final vote. If we were forced to speculate, we’d guess that the legislation will pass late this year, the QCD enhancements indeed will make it into the final bill, and the legislation will be signed into law later this year. Our fingers are crossed, as no doubt yours are as well, because we are huge fans of the QCD and its ability to unlock charitable dollars.

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. 

High-income earners, highly-appreciated assets, and cash crunches

As we enter 2022's second quarter, we’re struck by how much–and how little–has changed already this year in the world of charitable giving. Where big changes are concerned, the war in Ukraine and inflation are topping the charts in the minds of many philanthropic Americans. At the same time, questions about tax reform still are never far from our thoughts. We suspect the same is true for you and your clients. 

In this issue, we’re covering topics related to philanthropy today–right now–as charitable priorities shift in the geopolitical and economic landscape and more light is shed on what we might expect in terms of changes to the tax laws impacting charitable giving. 

Before we dive in, we’d like to draw your attention to a report updated last month by the Congressional Research Service. The Charitable Deduction for Individuals. Overall, this two-pager is an excellent primer for your clients who want to learn more about the history, policies, and fundamental concepts behind the income tax deduction for contributions made to charities. You might even find it useful for your own review purposes, as our team certainly did. 

Thank you for the opportunity to work with you and your philanthropic clients. It is our honor and pleasure. 

Wishing you all the best for the spring,

Your Community Foundation

Thumbs up: SECURE Act 2.0

Across the board, individuals, employers, and charitable organizations are celebrating the recent passage of the Securing a Strong Retirement Act of 2022 (House Bill 2954, known as the "SECURE Act 2.0") in the House of Representatives on March 29, 2022 by an overwhelming vote of 414 to 5. The legislation is headed to the Senate (which has its own, similar version of the legislation) before it becomes law.

Building on 2019 legislation known as the Setting Every Community Up for Retirement Enhancement (SECURE) Act, among SECURE 2.0's many components is a provision that would allow taxpayers to make a one-time qualified charitable distribution of up to $50,000 from an IRA to a charitable remainder trust or charitable gift annuity. In addition, the new provision would apply inflation indexing after 2022 not only to the $50,000 limit on this new split-interest distribution, but also to the qualified charitable distribution (“QCD”) limit (currently $100,000) for direct gifts to qualified charities. 

A mixed bag: Budget legislation

With President Biden’s Build Back Better 2022 budget reconciliation bill still pending, the White House just released its Fiscal Year 2023 budget proposal laying out several revenue-generating components and including a “deficit-neutral reserve fund” to buffer the impact of Build Back Better provisions that may or may not pass the Senate.

Here are a few of the tax proposals in play that could most significantly impact the way your clients plan for their charitable giving priorities:

High-income earners + highly-appreciated assets = high alert

A proposed 20% minimum tax on high-income individuals, slated in the proposal to become effective for tax years beginning in 2023, is referred to as the “Billionaire Minimum Income Tax.” The tax would be applied to the "total income," defined to include unrealized capital gains, of any taxpayer whose net wealth exceeds $100 million. Simplistically speaking, the mechanism of the tax roughly mirrors a pre-payment of capital gains tax. This is similar to the so-called “wealth tax” proposals in Build Back Better. 

Politics aside, a tax such as the one proposed in the Fiscal Year 2023 budget could mean daunting recordkeeping requirements for those impacted. Taxpayers would report their assets to the IRS annually, including closely-held assets which would be subject to a statutory valuation method. Taxpayers who qualify as “illiquid,” however, would be permitted to defer tax payments until a sale of certain illiquid assets, perhaps creating an incentive for taxpayers to increase their investments in real estate, closely-held companies, and other non-marketable assets. 

If some form of tax on unrealized capital gains becomes law, it could prompt the need for your clients to adopt even more proactive strategies to donate highly-appreciated assets to charitable organizations. In other words, giving highly-appreciated assets to charitable organizations is already a tax-savvy strategy and may become even more beneficial, depending on whether a “wealth tax” goes into effect and how the regulations interpret the law’s impact on the current charitable giving rules. 

Private foundations + donor-advised funds, take note 

Families who conduct their philanthropy using both a private foundation and a donor-advised fund will want to plan carefully if a particular item in the Fiscal Year 2023 budget package becomes law. Proposed changes to the private foundation rules seek to “clarify” that contributions to donor-advised funds do not meet the definition of "qualifying distributions" for purposes the five percent annual distribution requirement for a private non-operating foundation. These distributions still would be permissible, though, if the private foundation can show that the funds transferred to the donor-advised fund were distributed by the end of the following tax year. 

Even if the proposed change becomes law, combining a private foundation with a donor-advised fund at a community foundation is still an effective charitable giving technique. At the very least, the donor-advised fund can hold the distribution for a year to give a family time to create a grant-making strategy and set goals for the impact the family wishes to make in the community through its support of nonprofit organizations. 

Donor-advised funds–no longer on the hot seat?

Donor-advised fund reforms proposed in the Accelerating Charitable Efforts (ACE) Act, introduced in June 2021 via Senate Bill 1981 and again in February 2022 in the form of House Bill 6595, have been prominently featured in the media and subject to a range of opinions. Notably, though, the just-released Fiscal Year 2023 budget proposal appears to meaningfully address donor-advised funds only in relation to receiving private foundation qualifying distributions. We’ll be watching this carefully, but for now, it appears that sweeping reform of donor-advised fund rules is not imminent.   

Of course, as with any budget proposal or pending legislation, it's impossible to predict which, if any, provisions will ultimately become law.

Cash crunch: Gifting non-income producing assets

For clients who rely on fixed-income assets, such as bonds, as well as wages, to cover their living expenses, the inflation pinch indeed may mean fewer dollars available for charitable giving. Still, for clients who own property, stocks, and other assets that tend to go up in value in an inflationary environment, now may be a good time to take advantage of tax-savvy giving of highly-appreciated assets–especially stocks that pay low–or no–dividends and therefore are not critical to maintaining a client's income levels. 

Giving highly-appreciated stock remains one of the most effective ways your clients can support their favorite charities. That’s because when a taxpayer gives stock to a public charity, such as a donor-advised fund at the community foundation, instead of selling it outright, the capital gains tax is avoided. Plus, marketable securities are typically deductible at their fair market value, further helping your client’s overall income tax situation.

As you counsel a client who is emotionally attached to a particular stock, don’t let that attachment prevent a client from making a smart tax move. Your client can donate shares of the highly-appreciated favorite stock and then immediately repurchase the same number of shares. This essentially resets the client’s cost basis to the current price, which could help reduce capital gains taxes on a future sale.

Finally, remind your clients that there are significant differences in the tax treatment of donating cash versus securities. Currently, the deductibility of gifts of cash to a public charity is limited to 60% of adjusted gross income, versus gifts of non-cash assets to a public charity which are deductible up to only 30% of adjusted gross income. Also remind your clients that the maximum benefits associated with giving appreciated assets to a public charity are realized only with long-term capital gains property, in which case the deduction is set at the fair market value of the property on the date of the gift; gifts of short-term capital gains property are valued at cost basis for purposes of calculating the deduction. 

Change is in the air: Charting a course for philanthropy amid uncertainty

Greetings!

We hope all is well in your world as current events continue to present challenges for so many people. No doubt, your clients are relying on you more than ever to help them weather the storms of inflation, financial markets impacted by global unrest, and the looming potential of changes to tax laws.

As is so often the case during periods of volatility, philanthropy can be a calming force. In that regard, the team at the community foundation is particularly interested in the latest research on the importance of meaningful relationships between advisors and their clients, and we strive to help you create those strong bonds of loyalty.

In particular, we are struck by the results of a study recently published in the Journal of Financial Planning, which illuminated the disconnect between how advisors perceive their effectiveness versus how their clients actually rate it. Related to charitable giving, for example, 68% of financial planners said they made an effort to gather information about their clients’ cultural values, but only 41% of clients agreed. 

Philanthropy, and partnering with the community foundation, can help you close that gap. Charitable giving is a natural and easy way to start a conversation with clients about their values and what’s important to them in their estate plans and financial plans beyond just dotting the i’s and crossing the t’s.  

With that in mind, we’re focusing this issue on topics that may help you start even more meaningful conversations with clients as we navigate the rollercoaster of 2022’s first quarter.

Thank you for the opportunity to work together. We are grateful. 

Your Friends at the Community Foundation 

Winds of change and headwinds: Legislation and inflation

You’ve no doubt noticed that donor-advised funds have been featured more prominently over the last few weeks in financial and wealth management publications. That’s in part because the Accelerating Charitable Efforts Act was reintroduced in the House of Representatives on February 3, 2022. The legislation contains the same proposed law changes as the bill introduced in the Senate in July 2021, which stalled. 

Portions of the bill are designed to address concerns that donor-advised funds are not required to make distributions to charities according to any timeframe or monetary level. The ACE Act proposes to create four new categories of donor-advised funds, each with different tax consequences to the donor.

Donor-advised funds are excellent charitable planning tools for many situations, including for individuals and families who want to organize a regular stream of giving to community organizations and unlock illiquid assets to do so. Indeed, the proposed legislation recognizes special categories of donor-advised funds established at community foundations, referred to as Qualified Community Foundation Donor Advised Funds, which are treated favorably for tax deduction purposes.

We’re tracking closely the various conversations surrounding this proposed legislation, including a proposal by some community foundations that calls for a five percent aggregate minimum payout and other measures to address concerns while also maintaining the characteristics of donor-advised funds that motivate more charitable giving overall, especially as Millennials catch on to this particular vehicle to fund their charitable priorities. 

As with any proposed legislation, no one can predict whether or when new laws impacting donor-advised funds will be enacted, and if they are, what parts of the proposed legislation will be included in the version that becomes law. What we can tell you, though, is that we are watching this legislation very carefully, on a daily basis, just as we do with any proposed legislation that could significantly impact your clients’ charitable giving strategies. You will hear from us if changes are enacted. In the meantime, please reach out with questions. 

Potential legislative changes aren’t the only choppy waters as 2022 gets into full swing. Charities are impacted by inflation, and your clients may wish to take that into account in their charitable giving plans for 2022. Certainly as your clients’ purchasing power dips, so does their ability to make charitable contributions. But, it’s possible that the charities your clients love to support are feeling the sting to an even greater degree. This might sway your clients toward maintaining–or even increasing–their historical charitable giving budgets and perhaps even adjusting those budgets for inflation. Be mindful, though, that even the possibility of inflation can have a significant psychological effect on your clients, impacting everything from their confidence as consumers to attitudes toward (and longing for??) Girl Scout Cookies.

The team at the community foundation has decades of experience working with advisors and donors through economic ups and downs. We’re happy to be a sounding board as your clients evaluate whether and how to adjust their charitable giving in 2022, especially in cases where establishing a fund at the community foundation can help achieve both a client’s and a charity’s objectives. 

Closely-held business interests: Adventuresome giving

The number of businesses in the United States totals more than 27 million, but only a tiny fraction of those are publicly traded. Even so, your clients still have plenty of opportunities to give highly-appreciated marketable securities to fund their charitable endeavors. With the millions of closely-held businesses that aren’t publicly-traded, though, many of your clients may have an untapped opportunity to give corporate interests, especially considering that private equity fundraising continues to soar. 

As you talk with your clients about giving LLC and partnership interests, keep in mind that complex tax and legal rules may apply. For example, the operating agreement or partnership agreement will indicate whether interests can be gifted to charity in the first place. Another consideration in the case of an LLC is whether the entity is taxed as a partnership. Finally, if the interests are given to a public charity, such as a fund at the community foundation, in general, the contribution is deductible up to the fair market value of the gifted property (minus reductions for certain components that may include liabilities, short-term capital gain, and ordinary income). 

Please contact the team at the community foundation to explore ways your clients can fund their charitable giving strategies through gifts of closely-held business interests. We’d love to help! 

Crypto and CRTs: Buried treasure, or hidden pitfalls?

“For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency.”

That’s a key phrase in IRS Notice 2014-21, where the Internal Revenue Service outlined its position on the tax treatment of the disposition of cryptocurrency. In other words, a taxpayer’s disposition of cryptocurrency will generally be treated as triggering a gain or a loss.

With this core principle at its foundation, taxpayers have been using cryptocurrency to fund their charitable goals, including establishing charitable remainder trusts with gifts of bitcoin and other cryptocurrencies. While this is certainly a strategy worth exploring for some of your clients, beware that the IRS’s commitment to increased enforcement, coupled with the purported widespread underreporting of cryptocurrency-related income and corresponding tax revenue losses, clients should proceed with caution. The IRS has even launched a special initiative to audit crypto reporting and catch fraud, calling the effort Operation Hidden Treasure. 

As always, keep in mind the old saying that a client “should not give away a dollar to save 50 cents.” As is the case with any legal structure that results in tax consequences, there are pros and cons, ie.,“charms and dangers.” Think of a charitable remainder trust–including one funded with cryptocurrency–as a vehicle for helping clients support the charities they love, not simply a tax-planning tool. Viewed through that lens, clients will be pleased that a charitable remainder trust not only provides them with an income stream, but also can offer flexibility in the ways they provide for their intended charitable beneficiaries, especially when aligned with a fund at the community foundation that supports a client’s philanthropic goals.

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. 

Strategies and tax planning tips for your philanthropic, affluent clients

We can only imagine how anxious your clients must be to gain clarity about tax reform so that they can implement planning strategies, take care of the charitable organizations they care about, and move on to enjoying the holidays with friends and family. 

That's why this issue of our newsletter drills down into three areas we know are top of mind for you and your charitable clients:

1. Tax reform: What's the latest, and how could it impact charitable giving techniques?
2. Strategies of the wealthy: How much--and how--are billionaires deploying their wealth to help nonprofits?
3. Year-end giving: Remind me again what I should be telling my clients?

As always, please contact us directly if we can be of assistance as you serve your philanthropic clients. We are thankful for you!

--Your friends at the community foundation

Relax a little (maybe?): What’s off the table, what’s still in play, and what your charitable clients need to know now about tax reform

Late last month, the White House released a proposed $1.75 trillion revenue package, putting to rest (at least for now) some of the uncertainty as to how sweeping tax reform could upend wealth planning strategies via changes to top marginal rates, a restructuring of the capital gains tax, and lower estate and gift tax exclusions, all of which have been heavily discussed and debated over the last several weeks. For now, those particular big changes appear to have been dropped. 

Attorneys, accountants, and financial advisors who represent high-net worth clients are, however, keenly aware of how the just-proposed legislation still could pack a punch:

1. Where charitable giving is concerned, the proposed new surtax (modified from earlier versions) is not something that can be avoided or reduced through charitable deductions. That is because the proposed 5% surtax on taxpayers with more than $10 million in adjusted gross income is assessed on just that--adjusted gross income. Below-the-line deductions won’t help. Furthermore, an additional 3% surtax has been proposed for taxpayers with more than $25 million in AGI.

2. In addition, under this new proposal, pass-through entities, such as S corporations and partnerships, are still the subject of a 3.8% Net Investment Income Tax, as was the case under the prior version of the revenue package. Under the new proposal, this tax would be expanded to taxpayers with taxable income of $400,000 ($500,000 for joint filers) or more.    

3. Of interest to advisors who represent businesses and business owners, under the proposed new law, a 15% “corporate minimum tax” would apply to “book income” of corporations earning profits greater than $1 billion. For your clients who’ve historically relied on income tax credits, this is an important provision to watch because income tax credits would not be as valuable as they are now. 

4. Related, look out for a parallel increase to the global minimum tax rate, especially for corporate clients who have an eye on relocating headquarters to foreign countries. And under the new proposed laws, when a corporation buys back its own stock, it would be taxed like corporate dividends--plus a new 1% excise tax.

5. Finally, effective as of September 13, 2021 if the legislation is passed as written, high net-worth clients could be significantly impacted by the proposed limitation on “stock exclusions” under Internal Revenue Code Section 1202. For taxpayers with adjusted gross income of $400,000 or more, and for estates and trusts, only the 50% exclusion provision would remain. The 75% and the 100% exclusion would no longer be available.

The buzzword is “billionaire”: How tax reform discussions have pulled complex charitable planning strategies into the spotlight

Forbes reports that the latest headcount of American billionaires checks in at 724. That number surprises some people, and for different reasons. Many are surprised to learn that the number is so low, when the word “billionaire” has been used so frequently lately in discussions about changes to the tax laws. Others are amazed at the vast wealth created by not just dozens, but hundreds, of individuals.

Both reactions have sparked interest in how billionaires and other ultra high-net worth people structure their estate plans and support their favorite charities. Even if your client base doesn’t include one of the 724 American billionaires, it is still well worth your time to spend a few minutes getting familiar with this topic so you can carry on a conversation with curious clients. 

Here’s how to get up to speed:

1. Forbes compiles a list of the 25 most philanthropic billionaires. Scan it so that you’re generally aware of how this group conducts its charitable giving activities.

2. Know the basics of grantor retained annuity trusts and charitable lead trusts, especially because both vehicles have been the subject of conversation in the ongoing tax reform dialogue.

3. Understand the core mechanics of ultra high-net worth wealth transfer strategies. You might be surprised that what you learn helps you structure your own clients’ estate plans.

4. Internalize the old saying “No one gives away a dollar to save 50 cents.” In other words, no matter how aggressive the planning strategy and the resulting tax savings, your clients almost certainly would have more money for themselves and their families if they didn’t give money to charities. 

5. It flows naturally from item 4 that your clients probably don’t take their charitable giving lightly. Clients intend for their charitable dollars to make a difference in the causes they care about. The community foundation has its finger on the pulse of the needs in our region and which organizations are helping and how. Put us on speed dial! 

Year-end giving: Repeat, repeat, repeat

It's the season for email newsletters hitting your inbox with tips for tax planning. We get it! With so much information flying around for your clients, too, we highly recommend that you cut through the noise and mention four key tax strategies to your clients at least twice, and ideally three times, before late December: 

1. Don’t let clients miss out on the few provisions of the 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act that carried over to 2021, including the ability to deduct up to 100% of adjusted gross income (AGI) for cash gifts made directly to qualifying charities and the “universal” charitable deduction of $300 per taxpayer ($600 for a married couple). 

2. Unlike in 2020, when pandemic relief laws offered a tax break, this year your clients have to take required minimum distributions from their qualified retirement accounts. Especially for clients who take the standard deduction, you ought to consider a qualified charitable distribution, which allows eligible individuals to donate up to $100,000 directly from individual retirement accounts to a qualified charity. The community foundation is happy to help your client identify a qualified charity or structure a qualifying fund to receive a distribution.  

3. “Bundling” or “bunching” multiple gifts into tax year 2021 can help your clients who have had exceptionally high incomes this year. Donor-advised funds at the community foundation are particularly useful in these situations. We’d love to discuss this option! 

We know you strive to identify the optimal tax strategies for each client’s charitable giving. As always, please contact us to find out how we can make year-end tax savings as frictionless as possible for you and your charitable clients.   

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. 

Special edition: What's AHEAD IN proposed legislation?

The nonpartisan Joint Committee on Taxation’s report issued just a few days ago is already creating a buzz among attorneys, accountants, and financial advisors who provide charitable planning advice to their clients. 

Here are four considerations as you navigate the weeks ahead and prepare for the possibility that the legislation may become law.

1. Take advantage of the AGI limitations suspended by the CARES Act.

The CARES Act may seem like a very long time ago, now that sweeping tax reform could be imminent. Still, the Act contained helpful incentives for charitable giving. Instead of the usual caps, eligible taxpayers may deduct up to 100% of AGI for cash gifts made directly to qualifying charities in 2021.  

1. Start seeing a silver lining in capital gains tax increases. 

It’s possible that the top capital gains rate could increase immediately to 25%, up from 20%, for certain high income individuals. Although there are transition provisions that would apply in some circumstances, the proposed legislation sets September 13, 2021 as its effective date. For your clients who may have been on the fence about donating highly-appreciated assets to charity, the higher tax rate (and the corresponding higher amount of tax that can be avoided) might be enough to tip the scales in favor of philanthropy.

1. Consider planning for more aggressive annual giving.

Client households earning $1 million or more in annual income would see their taxes go up under the proposed legislation. The Joint Committee on Taxation indicates that this represents an increase in these households’ average federal tax rates from 30.2% to 37.3%. Other tax increases in the proposed legislation include a 3% surtax on income over $5 million and additional tax hits on business owners and business income.

These high-income clients may decide to increase their annual charitable giving, effectively redirecting funds to charity that would otherwise go to taxes.  

1. Dust off that estate plan.

For the last few years, estate plans enjoyed more breathing room, thanks to the high estate and gift tax exemptions. For estate and gift transfers after December 31, 2021, under the proposed new law, these exemptions would return to their pre-2017 levels of $5 million (adjusted for inflation), instead of the current inflation-adjusted level of $11.7 million. The increase in taxes may prompt wealthy families to consider increasing charitable gifts and bequests to reduce their taxable estates. 

Some good news? As it is currently proposed, the legislation does not impact the step up in basis for capital gains tax purposes. Bad news? The legislation effectively ends the use of the grantor trust as an estate planning technique because trust assets would be pulled back into the estate at the taxpayer’s death.  

Advisors' roles: Gifts of life insurance and closely-held stock

A personal note to our advisor colleagues

The community foundation is honored to work with you and your clients to structure charitable giving plans and establish funds that achieve both your clients’ charitable objectives as well as address our region’s greatest needs.

The professionals at the community foundation intimately understand the issues facing our community and how grants from funds can be impactful. We do this through deep knowledge of our area’s nonprofits, due diligence to ensure that each charitable dollar helps as many people as possible, and an unwavering commitment to investing in our community for the long term.  

As we enter into an era of potential tax reform, we pledge to keep you informed of legislative developments that will require you and other advisors to navigate the important distinctions between community foundation donor-advised funds and commercial donor-advised funds, as well as the differences between donor-advised funds and private foundations. 

No matter what legislation is passed and when, the community foundation team is here to educate you and your clients. We’ll also keep you posted on charitable giving options that are tax reform-neutral and suggest ways to leverage pre-legislation windows of opportunity. Please reach out with any questions you’d like to be sure we address in our advisor communications.

In the meantime, we’ve focused this newsletter on three legal doctrines: a fidiciary’s personal liability, ”incidents of ownership” in gifts of life insurance, and the nuances of giving S Corporation stock to charities--all of which represent important, decades-old bodies of law that can easily be overlooked in the rush of an advisor’s day-to-day work with clients. 

Advisors' fiduciary obligations can get personal

With charitable bequests on the rise, and the possibility that more clients will be subject to Federal estate taxes in the future, many attorneys, accountants, and financial advisors are refreshing their recollections on the requirements of advising and administering taxable estates where one or more charitable organizations is a beneficiary.

Advisors’ fiduciary responsibilities to charitable beneficiaries are similar to fiduciary responsibilities to a decedent’s family members and other individual beneficiaries. Where a charity is a residuary beneficiary, for example, a fiduciary must pay careful attention to expenses and liabilities that impact the amount the charity ultimately receives. These liabilities and expenses include taxes, debts, fees, and costs incurred by the executor or trustee. A fiduciary should expect charity remainder beneficiaries to pay as much attention to the bottom line as family members. 

Not only must a fiduciary watch expenses to maximize the remainder beneficiaries’ interests, but a fiduciary must also be careful to avoid making distributions too early and therefore potentially becoming personally liable if estate obligations surface later. This was the unfortunate situation in Estate of Lee, T.C. Memo. 2021-92, where the fiduciary ultimately was found by the Tax Court to be personally liable for amounts due under a Federal tax lien.

As you assist your clients with estate planning that involves charitable giving, consider encouraging your client to talk with the charitable organization about the intended bequest so that expectations are well-documented, even if the bequest likely will not materialize until well into the future. Remember, too, that some charitable clients can benefit from establishing a fund at the community foundation to receive and administer their bequests to charitable causes. In that case the professionals at the community foundation can assist as you structure a bequest in the client’s estate plan.

Finally, and critically, ensure that the legal documents or beneficiary designation forms reflect the correct name of the charity. There are more than 1.5 million charitable organizations in the United States, and many have similar names. If you have any questions about which charity your client intends to benefit, ask both the client and the charity to confirm the exact name and location of the organization. 

Five pointers for gifts of life insurance to charities

“Incidents of ownership” are three powerful words in estate planning where life insurance is concerned. The phrase is a key component of Internal Revenue Code Section 2042, which provides for the inclusion in a taxpayer’s gross estate, for estate tax purposes, of the proceeds of insurance policies on the taxpayer’s life under two circumstances. First, if the proceeds are actually received by the estate, they are included. Second, proceeds are included in an estate when the money is received by named beneficiaries other than the estate if the taxpayer died possessing “incidents of ownership” in the policy.

Section 2042 is the reason an estate planning advisor typically strives to ensure that a client does not own life insurance policies on the client’s own life. This is frequently accomplished by creating an irrevocable life insurance trust. As an alternative, many clients give life insurance policies to charitable organizations, not only for the estate tax benefits, but also for potential income tax benefits during the client’s lifetime.

Before you assist your client with a gift of life insurance to a charity, here are five pointers:

Check state law first. Most--but not all--states allow transfers of life insurance policies to a charity. 

Request change of ownership and change of beneficiary forms from the insurance company, and make sure you have the right forms. The paperwork is not always user-friendly. There are instances where a taxpayer completed the wrong set of forms and thus failed to accomplish the intended transfer. The charity will need to be the policy owner and, unless the charity intends to surrender the policy, also be the named beneficiary.

Carefully calculate the charitable income tax deduction for the gift of the life insurance policy to the charity. The taxpayer is eligible for a deduction equal to the lesser of the policy's value or the taxpayer’s basis (usually the total amount of premiums paid). The “value” of the policy is computed using the replacement cost or the “interpolated terminal reserve” plus unearned premiums.

Be sure to check for loans against the policy to avoid an income tax event for the taxpayer. 

Finally, do not run afoul of the “insurable interest” rules, which can come into play where the charitable entity pays the premium on a life insurance policy transferred to or secured by the charity on your client’s life.

These three factors are a big deal in gifts of S Corp stock to charity

S Corporation, or limited liability company? That’s a question many family businesses grapple with in their formative stages. For years, S Corporations were frequently preferred for small businesses that wanted the protection of a corporate structure versus a traditional partnership. In the 1990s, limited liability companies, or LLCs, rose in popularity because they offered both favorable tax treatment and corporation-like protections. In recent years, lower tax rates have contributed to the resurgence of traditional C Corporations as a viable structure for a business.

Since the adoption of laws and regulations decades ago making them advantageous, many S Corporations and LLCs have grown into thriving, highly-valuable businesses that are owned by your clients and are therefore now the subject of your estate planning work. So, too, have grown many clients’ desires to unlock these assets to fulfill charitable goals.  

Many advisors find themselves discussing the benefits of donating S Corp stock to a charity prior to the sale of a business, but rarely do advisors feel prepared for that discussion with a client. That’s why it is important to be generally aware of the rules before the topic arises in a client meeting. A discussion with your client is especially important as business succession plans are crafted because many business owners want to minimize tax liability and also give back to the communities where their businesses have flourished. As an advisor, you have a responsibility to understand what might be possible. 

Donating S Corp stock to a charitable organization is an important option that your clients will want to consider, and understanding the complexities is critical. Three factors are particularly important:

This idea must be addressed early in the process of business succession planning, especially prior to any formal discussions about a sale. Indeed, the IRS is known for its keen eye in spotting transactions that could be construed as resulting in “anticipatory assignment of income,” especially where a charitable deduction is involved. At the same time, many charitable organizations prefer not to hold hard-to-value assets like S Corp stock for more than a few years. Balancing these factors requires thoughtful planning and timing.

Private foundations and certain donor-advised funds at trust-form institutions (which then trigger the trust tax rates) are permissible shareholders of S Corp stock. Moreover, public charities have been eligible S Corp shareholders since 1998. Before you explore an S Corp gift to a charity, be sure to review the rules related to permissible S Corp shareholders.

Charities holding S Corp stock may be subject to Unrelated Business Taxable Income rules. Be sure to show your client various alternative calculations to determine the most cost-effective structure for each transaction alternative. 

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.

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.

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.  

Factors to consider for a couple’s charitable giving

Giving together: Factors to consider when representing couples

The community foundation can help as you work with a couple to design a charitable giving plan that will create rewarding philanthropic experiences for both partners. Indeed, in Giving as a Couple, Rockefeller Philanthropy Advisors reinforces the tenets we maintain as a team at the community foundation when we are working with a couple to develop and activate a charitable giving strategy that matches the couple’s goals and values.

For example:

• Our team strives to understand why your clients want to give together as a couple, rather than “dividing and conquering” as individuals.  

• Our team seeks to deeply understand your clients’ perspectives on roles and control so that we can help structure a process that will allow both partners to be active decision-makers. In certain cases, from time to time, a couple will ask the community foundation to act as a mediator, or even a tiebreaker, in the event that the partners are in the midst of an amicable debate about a particular community impact strategy or charitable gift. 

• Our team helps couples decide on financial levels of current and legacy giving that will achieve the couple’s philanthropic goals in harmony with their goals for children and grandchildren’s personal inheritances and involvement in the family’s legacy philanthropy. 

Especially if you are representing couples that include women, it’s worth checking out Women Give 2021: How Households Make Giving Decisions, a study released last month by Women’s Philanthropy Institute at the Indiana University Lilly Family School of Philanthropy. The authors of the study observed notable trends in how partners--not just women--approach giving. For example, according to the report:

• More than 61% of couples make charitable giving decisions jointly.

• When decisions are made by one member of a couple, and that couple includes one woman, the woman is more likely to be that decision maker.

• Couples tend to agree on the amount and recipients of their philanthropic investments.

As always, the team at the community foundation looks forward to supporting you as you help your clients achieve their family philanthropy goals. 

In sync on giving: Lawmakers from both parties support expansion of CARES Act deduction

Four Republican Senators, four Republican Democrats, a House Democrat, and a House Republican have introduced legislation to expand the increased charitable deduction cap for non-itemizers to up to one-third of the standard deduction. The Universal Giving Pandemic Response and Recovery Act (S.618/H.R.1704) also extends this temporary $300 deduction, which was included in the original CARES Act, through 2022 and enhances the provision to include gifts to donor-advised funds.  

Preliminary reports suggest that the so-called “universal charitable deduction” is already showing signs of success in encouraging more people to give to charitable organizations. For example, AFP’s Fundraising Effectiveness Project reports a 28% increase of $300 gifts made on December 31, 2020. Considering that $300 is the precise amount of the maximum a non-itemizer can deduct, this does not seem to be a coincidence! AFP also reports that gifts of $250 or less increased by more than 15% in 2020 compared with 2019. 

The inclusion of donor-advised funds as qualified recipients of universal charitable giving is an important breakthrough and recognition that donor-advised fund vehicles are powerful tools to increase effective charitable giving. Especially when paired with the expertise and resources uniquely available through the community foundation, a donor-advised fund can be a critically important component of the philanthropic strategy for an individual, family, or business. 

April showers: Puddles to avoid as you navigate tax deadline extensions

Your clients most certainly are aware that the Internal Revenue Service and the Treasury Department have extended the federal income tax filing and payment deadline for the 2020 tax year from April 15, 2021 to May 17, 2021. Be aware, however, that clients might overlook the fact that this extension applies only to individual taxpayers. And although the May 17, 2021 deadline does apply to individuals who pay self-employment tax, it does not apply to estimated tax payments (still due on April 15) or withholding. The extension also does not apply to nonprofits and business entities, so it’s business as usual on April 15 for entities filing Forms 1120 and 990. In addition, individuals still must comply with state filing deadlines, to which an extension may or may not apply.  

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.

Tax perks: Treats to start a happy new year

Congress extends charitable giving incentives

As your clients reboot after a wild 2020, now is a great time to address their charitable giving plans for 2021. COVID-19 has proven to be a marathon, not a sprint. Nonprofit organizations will be relying on the generosity of donors for the foreseeable future to stay afloat and serve the people who need their programs.

Consider dropping a quick note to clients for whom philanthropy is a priority, sharing a few tips that can help make 2021 a better year for our community: 

1. Even non-itemizers should plan to make at least $300 in cash contributions to qualifying charities (and now $600 for non-itemizing joint filers) this year. The Taxpayer Certainty and Disaster Tax Relief Act of 2020, known as the Coronavirus Stimulus 2.0 bill, was passed by Congress on December 21, 2020 and signed by President Trump on December 28. The legislation extends the CARES Act’s temporary, above-the-line charitable deduction for contributions to qualifying public charities for tax year 2021. 

1. The Coronavirus Stimulus 2.0 bill also includes a one-year extension of the CARES Act’s provision increasing charitable deduction limits to 100 percent of AGI for contributions by individuals to qualifying charities. This creates an opportunity to work with your clients on a charitable giving budget for 2021, especially because you’ll want to run calculations to determine whether clients can benefit from this incentive, or whether a client would still be better off carrying forward charitable contribution deductions into future years. 

1. Given the extensions included in the Coronavirus Stimulus 2.0 bill, coupled with the general uncertainty about potential tax reforms under the Biden administration, it is wise to counsel your clients about being especially organized about charitable giving in 2021. Clients will want to be even more conscientious about the impact of dollars invested in the community, too. 

As always, we would be pleased to assist you and your clients. For example, donor-advised funds and other planning vehicles through the community foundation can help your clients organize their giving and deploy it in a way that maximizes results for the causes your clients care about. 

Keeping our community strong: Your role is critical

COVID-19 has significantly impacted nonprofit operations across the country and hampered nonprofits’ ability to help their communities during a crisis in which millions of people are in need. The National Council of Nonprofits reports widespread damage to nonprofits’ programs, services, supplies, staffs, and budgets due to the pandemic and current economic challenges. This means nonprofits need philanthropic support now more than ever.

At the same time, some donor segments have been steadily losing confidence in the nonprofit sector, according to the Give.org Donor Trust Report 2020: Trust and Giving During the COVID-19 Outbreak. For example: 

1. Although 24.4% of study participants reported in late 2020 that they planned to give more to charities, that figure represents a drop of more than 6% since early 2020.

1. Gen Zers are more likely than other generational cohorts to shift from giving money to charities to supporting local businesses instead. Specifically, 28.6% of Gen Zers report this preference, compared to 0% of Matures and just 1.9% of Boomers.

1. Related, 26.3% of Gen Zers report that they are not satisfied with traditional charitable donations.

As a trusted advisor to your clients and their families across generations, your opportunity here is to offer information and resources to help your clients become more giving savvy--understanding the impact of nonprofits, how to measure the success of their charitable gifts, and how to select nonprofit organizations who are delivering the greatest return on investment to the people they serve. Our team at the community foundation is deeply familiar both with the needs of the community and the nonprofits who are fulfilling them. We hope you won’t hesitate to reach out for support as you help your clients navigate ways to address our community’s challenges.

Consciousness on the rise: Tips for advising impact investors

The term “impact investing” is said to have emerged in 2007 as a descriptor for deploying capital not only to achieve financial returns, but also to foster social progress and/or avoid harm to people and the environment. 

Since then, impact investing as a discipline among individual and institutional investors has grown rapidly. According to Barron’s, a total of $502 billion was held in impact investments in mid-2019. A year later, that number stood at $715 billion--an increase of more than 42%. 

As inquiries from your clients increase, and more and more of them ask for your help in exploring impact investing options for their philanthropic and non-philanthropic dollars, keep an eye on opportunities that seem to promote having the cake and eating it, too. 

For example, in a recent private letter ruling, the IRS denied an organization’s application for 501(c)(3) status because the activities it proposed--creating an investment fund to carry out typically “charitable” activities--were not viewed by the IRS as charitable for tax purposes. The taxpayer requesting the ruling had proposed activities such as economic development in low-income communities and initiatives to fight climate change.

Though an eyebrow-raiser at first glance, the ruling ultimately does a nice job of reinforcing the distinction for tax purposes between program-related investments, which is itself a charitable activity, and mission-related investments, which is not a charitable activity.

It’s relatively easy for investment-focused professionals to miss the distinction, but the distinction is critical for proper tax treatment. A program-related investment (PRI) must significantly further a charitable purpose and can’t have a significant investment purpose, which effectively means that the investment is not one that a pure investor would be likely to make because its possibility of achieving competitive returns is extremely slim.  

On the other hand, a mission-related investment (MRI) still has to meet prudent investment standards, even if it might not be the most profitable investment option on the market because it is taking mission into account. 

The challenge for you as an advisor is to help your clients evaluate impact investment funds that appear to promote financial returns simultaneously with community good, with an implication that tax benefits are somehow woven into the offering, which may well be too good to be true. Our knowledgeable staff at the community foundation is here to assist you!    

Year-end mash up: Bequests, tax planning, and community needs

Taking chances: Will hindsight point to 2020 as the year to maximize giving?

The November 3 election left wealth managers, tax professionals, and estate planners with a dilemma: Should advisors counsel their clients to implement planning techniques in anticipation of sweeping changes to the tax laws, or instead assume the status quo will continue and stay the course with clients’ current plans? 

Here’s what’s going on and how the proposed changes might affect charitable giving strategies. 

Under Joe Biden’s proposed tax plan, taxpayers making more than $400,000 per year would be taxed at a top income tax rate of 39.6%, an increase from 37% under current law. That would mean charitable giving would become more tax efficient under the new law for some taxpayers.

However, a separate provision in Biden’s proposed plan would impose a 28% limit on charitable deductions for taxpayers who make more than $400,000 per year. This would mean that instead of avoiding income tax on charitable gifts at the rate of 39.6% as described above, these taxpayers would escape income tax only at a rate of 28%. (A similar provision was proposed, but never enacted, during the Obama Administration.) 

Biden’s tax proposal also calls for increasing--from a maximum rate of 20% to 39.6%--the capital gains and dividend tax rates for taxpayers whose annual earnings exceed $1 million. For affected taxpayers, this change would create opportunities to avoid significantly more tax than is possible under current law for gifts of appreciated assets. An increase like this would create a huge incentive for philanthropists to support charitable organizations.

Next, Biden’s proposal calls for a 3% reduction of itemized deductions for taxpayers making more than $400,000 per year. This is reminiscent of the so-called “Pease Amendment” that was repealed in 2018. Although the reinstatement of this rule could have some negative effects on charitable giving, the rule’s impact would be blunted for taxpayers for whom the reduction is absorbed by other types of itemized deductions (mortgage interest payments, for instance).

Charitable legacies: What’s on tap for bequests?

Perhaps the component of Biden’s proposal with the biggest potential impact on ultra-wealthy philanthropists is Biden’s intention to raise estate taxes and change the way capital assets are taxed after death. 

Currently, the gift and estate tax exemption per person is $11.58 million and $23.16 million for a married couple. These amounts are effectively double what they were before the Tax Cuts and Jobs Act of 2017 (TCJA). The TCJA calls for an automatic sunset of these increases on December 31, 2025, at which point the exemption will drop back down to $5 million per person, as adjusted for inflation. Under Biden’s proposed tax plan, though, the estate and gift tax exemption and rates would be restored to the lower levels of more than a decade ago.

In addition, Biden’s proposal calls for substantial elimination of the step up in basis from the taxpayer’s cost to fair market value at the time of death, further complicating existing estate plans for many families. 

Some philanthropists are maximizing gifts to family members in 2020 to take advantage of their remaining exemptions and deferring charitable gifts to 2021 and beyond, under the assumption that tax laws will change dramatically. Others simply are not comfortable with making such large gifts immediately--and thereby significantly reducing their own net worth--when it might end up not mattering.  

Advice to advisors: Seek clarity about clients’ commitment to community

The odds of Biden’s proposed tax plan becoming law depend on factors that won’t be known until Georgia’s run-off elections on January 5, which will decide whether the Democrats or the Republicans will control the United States Senate.

This uncertainty prevents advisors from having confidence about advising clients whether to implement planning strategies that would take advantage of the potential window of opportunity at the end of 2020, before new laws take effect. Should clients act now, betting that significant changes to the tax law are in store for 2021, or, betting on status quo in 2021, hold off on taking action now but potentially trigger significant tax hits if tax laws do wind up changing? 

Despite the uncertainty about exactly what might happen with the tax laws in 2021 and beyond, there are still opportunities for you to advise your charitable clients with conviction that they are doing the right thing for themselves and for the causes they care about. To that end, keep in mind that the CARES Act includes charitable giving incentives for 2020:

• Even for taxpayers who take the standard deduction, a reduction in adjusted gross income is available for charitable contributions up to $300 per taxpayer. Donations to donor-advised funds don’t count; nonetheless, this deduction is a great way for clients to help their favorite organizations in this challenging year. 

• Individuals who itemize deductions can elect to deduct donations up to 100% of their 2020 adjusted gross income instead of being capped at 60%. For corporations, the CARES Act increased the cap from 10% to 25% of taxable income. (Again, contributions to donor-advised funds and private foundations are not eligible.)

As always, remember that the community foundation can help you develop your clients’ future plans. A donor-advised fund is a powerful estate planning tool. A client can execute wills and trusts that leave a specific bequest or remainder interest to a donor-advised fund at the community foundation. This bequest triggers all the tax benefits of a direct bequest to a charity because the community foundation, and therefore the donor-advised fund, qualifies as a 501(c)(3) organization. 

Here are three key takeaways:

• Your client may already have established a donor-advised fund at the community foundation that the client is using to make annual gifts to charity. This donor-advised fund can be the recipient of a charitable bequest. 

• Even if your client is not actively using a donor-advised fund currently, the client can still set up what is known as a “shell fund” now to receive a bequest later. A shell fund is governed by a donor-advised fund document, but the fund itself does not contain any assets until the client passes away and the bequest is activated.

• A client can adjust the terms of the donor-advised fund anytime before the client’s death. This gives your client maximum flexibility to adjust charitable beneficiaries without the need to amend a will or trust. 

Please contact our team for assistance with the proper language for designating a donor-advised fund at the community foundation as a bequest recipient. Our team also will work with you on the terms of the donor-advised fund itself. For example: 

• Your client can use the donor-advised fund as a way to keep the next generation--or generations--involved with the family’s philanthropy to carry on the family’s legacy of community support. Surviving family members can serve as advisors to the fund and make decisions about which causes and organizations to support.

• It’s also possible to create several donor-advised funds--one for each grandchild, for example--so that each beneficiary has their own charitable giving account.  

Your team at the community foundation is always happy to help. We look forward to hearing from you and wish you all the best for the season.

Election season: Factors to consider in charitable giving

Elections and giving: Tips for advising your clients

Individuals who are passionate about community causes are frequently also passionate advocates for candidates running for public office. Indeed, according to the Pew Research Center, the percentage of Americans making political contributions has doubled in recent decades, from 6% in 1992 to 12% in 2016. By contrast, the percentage of Americans giving money to charity stands at a new low of 73% in 2020, according to a Gallup poll, down from a previous low of 79% in 2009.

Still, the number of Americans giving to charity each year remains significantly higher than the number of Americans making political contributions. Charitable giving is still going strong, relatively speaking, even in the midst of political frenzy. Indeed, historically, charitable giving is influenced, but not negatively affected, in election years.  

With elections top of mind for your clients, how can you best advise them about their charitable priorities? Consider the following:

1. Share the statistics with your clients. Many clients may not realize that the number of people giving to charity each year is going down, and that community organizations are an important component of the social fabric that helps improve quality of life for citizens.

1. Remind clients that in the face of uncertainty about potential tax law changes, it is generally a reasonable approach for clients to continue with charitable giving plans as they normally would. Most clients probably don’t “give away a dollar to save 50 cents,” and community needs are as urgent as ever in 2020.

1. Encourage clients to reach out to the organizations they support to learn about unique needs this year due to economic hardship and the ramifications of the pandemic.

As always, our team is happy to be a resource and sounding board. 

Corporate giving programs: Opportunity in the COVID era

According to the just-released 2020 Porter Novelli Executive Purpose Study, more than 80% of large company executives believe for-profit companies have a responsibility to play a role in resolving social issues. The study also found that most executives believe a social impact strategy improves customer loyalty (93%) and helps motivate a buying decision (91%).

How should you approach advising your corporate clients about the structure for their social impact programs, especially now that those programs play an increasingly important role in philanthropy? 

Encourage corporate clients to consider the component parts of a well-rounded corporate social responsibility program, such as:

Mission

Embrace and follow an overarching mission statement, consistent with the purpose of the business and integrated into the company’s objectives for success to reinforce the company’s values in the community. 

Structure

Typically, a corporate foundation serves as the hub--or at least a key part--of the overall corporate social responsibility program. Companies are wise to evaluate what type of corporate foundation structure would be most effective. For example, a corporate donor-advised fund at the community foundation can be established as a tax-advantageous “ABC Corporation Foundation,” allowing the company and its team to stay in the forefront as the face of the corporate foundation while utilizing the behind-the-scenes capabilities of the community foundation to process grants, handle accounting, receive and process gift transactions, and maintain records. 

Alignment

A strong program includes a mechanism for ongoing cause identification and research to stay current with employee, customer, and community trends. It also helps when a company can make a case for why corporate causes are aligned with the business’s purpose and the needs of the overall population of its industry or marketplace. 

Engagement

Employee engagement and participation in a company’s community relations and investment program will drive employee loyalty and retention and, in turn, consumer brand engagement. Companies should harness the enthusiasm of employee-led volunteer and fundraising activities. 

Communications & Sales

Celebrate the company’s program in a manner that is integrated with, and complementary to, the company’s overall brand image and public relations strategies. This occurs in the media, through events, on the website, in printed materials, and social media. 

Evaluation & Reporting

Best practices suggest ongoing monitoring of the results of the program against one or more indicators of success, including employee engagement, employee loyalty, operating efficiency, community impact of money invested, customer perception, and marketplace reputation.   

An eye toward year-end tax planning

Appreciated stock, anyone?

Yes, 2020’s stock market has been a rollercoaster, but as you guide your clients into year-end, don’t forget the powerful benefits of giving appreciated securities to a donor-advised fund at the community foundation. Now is the time to start helping your clients with tax planning. Remember, not all stock is down! For many clients, 2020 is an excellent year for year-end giving.

Closely-held business exits

Clients who are preparing to sell a business should start thinking ahead about charitable planning. Before any deal is struck, or any binding commitments discussed, encourage your client to consider the benefits of making a gift of their closely-held stock to a charitable entity, such as a donor-advised fund at the community foundation. Remember, though, that the “step transaction” doctrine is still very much alive and well. The IRS could argue that the transfer of stock to a charity should be treated as “combined” with the sale of the stock, thereby eliminating the tax benefits of the charitable transaction. The IRS could win this argument if the facts indicate that the multiple “steps” in the process were really just a single-step transaction when considering the intent and economic reality of the taxpayer’s actions. 

Back door Roth IRA conversions

Last but not least, consider the step transaction doctrine when you are advising your high income-earning clients on whether to pursue the so-called “back door” Roth IRA planning strategy. When a client’s modified adjusted gross income crosses the IRS’s designated phase-out thresholds, contributions to a Roth are no longer permitted. Contributions to a traditional IRA, however, are not subject to income limitations. In addition, there are no income limits on who can convert from a traditional IRA to a Roth. So, with the “back door” strategy, your client makes a contribution to a traditional IRA using after-tax dollars and then executes a tax-free Roth conversion. Consider carefully researching these issues and even advising clients to wait several months between the contribution and the conversion, just in case.