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.

Cybersecurity, starting a charity, and conservation easements

Advising clients on starting a charity

As 2020 marches on with little relief in sight from crises affecting our region, more and more attorneys, accountants, and financial advisors are fielding questions from well-intended clients who are exploring starting their own nonprofits to help people in need. 

Whether a client's passion is health care access, support for the arts, social justice, or any one of hundreds of other worthy causes, it's critical that you provide counsel regarding the pros and cons of forming a brand new nonprofit.

Here are suggested topics to include in your client discussions:

1. For profit, or nonprofit? Help your client decide whether they really, truly want to start a charity, or whether what they’re envisioning would be better structured as a for-profit business. Explain to the client that the rules and tax advantages are different, and so is the way the enterprise is funded. Most charities keep the lights on by securing donations. Businesses keep the lights on by selling goods or services. Either way, you’ve got to pay employees and run a budget. This seems like common sense and something that any astute client would understand, but sometimes even these basic principles are easy to overlook when enthusiasm for a cause takes over. 

2. The state and the Feds. Explain to the client that if they do decide to start a new charity, just like a business, it still requires setting up a legal entity. Unlike a for-profit business, though, to qualify as a tax-exempt nonprofit, the client will need to apply to the Internal Revenue Service for an exemption under Section 501(c)(3). This exemption is what allows the organization to be free from paying income tax, and it also allows people to donate to the organization and be eligible for a tax deduction on their own tax returns. Again, these rules seem like Charity 101 material, but never assume your client is in the know. 

3. Sell, sell, sell. Most people who start a charity are passionate about a cause and probably already have programs in place or in mind to help others. The trick, though, is to get out there and share the news about the cause to raise money. Your client needs to be aware that starting a new charity involves “sales,” just like a for-profit enterprise, except they most likely will be asking for donations to support their good work instead of selling goods or services like a for-profit business. Certainly nonprofits can generate earned income, but most organizations also should be designed to receive public support in the form of grants and contributions to avoid certain tax rules, such as those prohibiting excess “unrelated business taxable income.”  

4. Verify the unmet need. Finally, and perhaps most importantly, encourage your client to research whether there are any existing organizations that are already serving the mission your client intends to fulfill. Indeed, during challenging economic times such as these, best practices suggest that two or more nonprofits combining their efforts is a good way to create efficiencies and ensure more effective service delivery to people in need.   

Weeding out taxpayers who abuse conservation tools

As environmental consciousness continues to rise, so does the subject of conservation easements as a tax-savvy charitable giving tool. Perhaps your clients have even explored this vehicle, which involves the client giving up certain rights to the ability to alter a tract of land, with the intent to preserve the land indefinitely. The reason this transaction creates a charitable gift is because the easement typically results in a lower property value because the parcel's usefulness for commercial purposes is eliminated or drastically reduced. 

Conservation easements are not new. A resource called the National Conservation Easement Database provides mapping and information related to all conservation easements in the United States, which as of 2018 totaled 130,000 in number and covered nearly 25 million acres of land. 

Unfortunately, conservation easements can be the target of abuse by unscrupulous taxpayers seeking to undermine the Internal Revenue Service’s strict parameters for deductions and tax benefits generated from the grant of a conservation easement. This abuse has caught the attention of lawmakers. On August 25, 2020, Senate Finance Committee Chairman Chuck Grassley and Ranking Member Ron Wyden released a report on the findings of investigations into a few “bad actors” who, they believe, are circumventing the rules and thereby reducing federal tax revenue to the tune of billions of dollars. 

The report is a must-read if you have clients who are involved in conservation easements or are considering using this planning vehicle. 

IRS speaks out on cybersecurity

According to the American Bar Association’s 2019 Legal Tech Report, 26% of law firms experienced some type of security breach in 2018. Although fortunately only 3% of the law firms affected reported compromised client data, the risk is real. As virtual work environments have become the norm at many law firms, accounting firms, and financial advisory firms, the issue of cybersecurity has landed squarely on the Internal Revenue Service’s radar. 

In IR–2020–176, released on August 4, 2020, the IRS strongly recommends that every firm deploy a virtual private network (VPN) to guard against security threats. “As teleworking or working from home continues during the coronavirus,” the notice says, “VPNs are critical to protecting and securing internet connections."  

Stress in the sector: Tips for relief

Keep clients informed about stress on the social sector

Peter Drucker once wrote “Only the social sector, that is, the nongovernmental, nonprofit organization, can create what we now need, communities for citizens.” Charitable giving is an important component of American society. In 2019, for example, total giving by individuals (including bequests), foundations and corporations reached nearly $450 billion, according to Giving USA 2020: The Annual Report on Philanthropy for the Year 2019, released this summer.

Unfortunately, COVID-19 is taking its toll on nonprofit organizations and philanthropic institutions. In a report recently released by Deloitte's Monitor Institute, the writers offer their predictions for how charities will fare, depending on how the pandemic--and our response to it--play out. Early evidence shows that total 2020 giving will decline significantly. According to the Chronicle of Philanthropy, giving declined six percent during the first quarter of 2020, which translates to $5 billion in lost revenue to nonprofit organizations.

One of the most important ways you can help your clients support the charities they care about is to do everything you can to keep clients informed about the increasing challenges faced by the social sector. We encourage you to reach out to the team at the community foundation to answer questions and provide resources to share with your clients to help them help the causes they love.

Advocacy efforts accelerate and expand to help communities

A silver lining of the pandemic and struggling economy is an unprecedented effort by philanthropic leaders to ensure that communities stay supported through fiscal and tax incentives for nonprofits and charitable giving. We encourage you to seek out and share examples of what’s going on in the philanthropic sector to help ease the burden of COVID-19. For instance:

• A letter from the Council on Foundations to Congressional Leaders in advance of future relief packages, encouraging the inclusion of provisions to enhance charitable giving, increase support for nonprofits, and help state and local governments.

• A tremendous response from community foundations across the country, encouraging donors to activate donor-advised funds to support causes in the community that can provide immediate and direct assistance to those most affected by the pandemic.

• Increasing interest in mutual aid organizations, which is fueling grassroots response to people in need across the country. 

In short, the spirit of philanthropy is alive and well. Sharing this with your clients will help build the momentum and expand the impact of charitable giving during this time of crisis. 

IRS ruling helps employers and employees help pandemic victims

In Notice 2020-46, the IRS said compensation treatment will not be triggered when an employer makes cash payments to a charitable organization based on employees’ forgoing vacation, personal, or sick days. So-called “leave donation programs” are becoming popular ways for employees to make meaningful contributions to organizations in need. To qualify, an employer’s payments must benefit victims in that geographic area, and payments must be made in 2020. The foregone leave won’t be treated as gross income to employees. Furthermore, the employer may deduct the payments as a charitable contribution or business expense, if otherwise eligible.

IRS updates: Retirement distributions, privacy, and events

Eyebrow-raising IRS relief for required minimum distributions

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

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

Why does this matter to you and your philanthropic clients?

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

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

Donor privacy protections now official

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

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

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

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

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

Galas look different, but the tax rules are still sticky

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

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

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

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

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

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

Special edition: Social justice and charitable giving

Greetings from your community foundation.

We hope this special edition of our newsletter finds you and your family well.

Recent events in communities across America are painful reminders to all of us that systemic racial inequity and injustice in our society continues to severely damage the quality of life for Black people. 

Our responsibility as your community foundation is to strive for positive change in our region, especially as it relates to transforming systems that have been broken for far too long. 

Part of that responsibility is our duty to you--attorneys, accountants, and financial advisors--to help you serve the donors, nonprofits, and citizens who are your colleagues and clients. 

To that end, we would like to suggest actions you can take to join us in supporting Blacks in the community we all love.

Donor-advised funds as anti-racism impact investing tools

Donor-advised funds are sometimes described as “charitable checking accounts.” This explanation is far too limiting, especially now. Yes, donor-advised funds established at the community foundation are convenient and tax-savvy. But the benefits to society and community impact run far deeper.

Embedded at the intersection of donors, nonprofits, civic leaders, and citizens, community foundations serve on the front lines of impact investing, including offering options for impact investing through donor-advised funds. Our team understands where capital can be deployed to result in the swiftest and deepest positive change for Black people in our community. If you aren’t yet familiar with the growing importance of impact investing, it’s a good time to get up to speed. 

For inspiration, we recommend that you become familiar with the proactive strategy adopted by Andreesen Horowitz in establishing the Talent X Opportunity Fund, a donor-advised fund. Anything but passive, this fund is an example of roll-up-your-sleeves philanthropy designed to immediately address societal injustice. 

Our community foundation team can work with you and your clients to establish donor-advised funds with a wide range of asset levels. Whether your clients are venture capitalist investors or small business owners, we would be honored to assist you in supporting this critically important cause. 

Start educating the next generation, right now

Learning about the destructive forces of racial injustice is a priority. Knowledge, although insufficient when not coupled with action, is a necessary step for Americans who do not yet understand the unforgivable circumstances of Blacks. 

We encourage you to urge your clients to waste no more time in doing everything possible to become educated about racism in our communities. Family members of all ages can learn together with the help of these and other resources: 

• Each Kindness, by Jacqueline Woodson; 

• All American Boys, by Brendan Kiely; and

• Thoughtful advice from Harpers Bazaar for how to start planning for an important discussion around the Thanksgiving table. 

Show examples

Your clients will undoubtedly benefit from seeing examples of anti-racism philanthropy, especially if they are business owners, private investors, or corporate executives. Three items to help:

• A growing number of tech companies are stepping up to match their words with money to fight racism. 

• The business case for battling racial injustice is gaining strength.

• Private sector philanthropists and donors are stepping up to better understand the perspectives of nonprofits and their leaders who face the struggles of Black communities every single day. 

Expand investment options

The $69 trillion asset management industry is riddled with a lack of diversity. Last year, a study published by the Knight Foundation revealed disparities: 

• Less than 4% of publicly-traded funds are run by people of color.

• Firms owned by women and minorities combined manage just 1.3% of assets. 

The study included a small glimmer of hope: Representation of diverse-owned firms among hedge funds, real estate, and private equity has shown modest gains in recent years. 

Professionals who are mindful and proactive about combating racial injustice will be naturally curious to seek out investment funds where decision-makers and top executives are Black.

As always, please contact the team at the community foundation to learn more about what you can do to join us in our important community leadership work to bring an end to the racial bias that is embedded in our daily lives. Your philanthropic commitments and those of your clients can, and will, make a difference.

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

Donor-advised funds: Tried and true

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

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

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

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

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

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

Important reminders: QCDs and CLATs

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

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

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

Signs of the times: Disaster giving and charitable lead trusts

Charitable lead trusts: A timely revival

Among the many factors swirling together in the pandemic marketplace are (1) historically low interest rates and (2) historically high needs for increasing charitable giving to support organizations dealing with the health crisis. This makes the charitable lead trust an attractive vehicle for your clients who want to help charities in the near term and still preserve assets for their families.

Here’s how a charitable lead trust works. Your client transfers cash or other property to an irrevocable trust. For a term of years, a charity designated by your client (which could be a donor-advised fund) receives an income stream. The trust can be structured to maximize income tax benefits, or estate and gift tax benefits, in varying degrees. At the conclusion of the term of years, the remaining assets in the trust are distributed to the client’s designated non-charitable beneficiaries.

The reason a charitable lead trust is so advantageous right now is because if, over the term of the income period, the trust assets outperform the current IRS 7520 rate (which should be easy to do because rates are so low right now), the non-charitable remainder beneficiaries will receive assets with a value much higher than the taxable gift reported when the trust was created. This results in a tax-free transfer of wealth. 

What’s more, if a client designates a donor-advised fund to receive the income during the term of years, the client can stay involved by recommending grants to the most appropriate charities as the health crisis moves through different stages of need during the months and years ahead. 

Charitable lead trusts are complex instruments. As with any charitable planning vehicle, it is important to consult professionals as you evaluate whether a particular strategy is right for you. 

Covid-19: A new tipping point for disaster philanthropy?

The community foundation provides context and education for your philanthropic clients at all levels of giving and across the full range of charitable interests. The global Covid-19 pandemic in many ways has likely united your clients and other donors in a collective effort to support people in the communities they love. You’re no doubt seeing increased interest in this trend as you talk with clients and their families.

By many accounts, this new era of collective charitable giving in response to humanitarian crises was ushered in 10 years ago. On Tuesday, January 12, 2010, a major earthquake occurred sixteen miles west of Port-au-Prince, the capital of Haiti. Registering at a magnitude of 7.0, the quake and its many aftershocks caused catastrophic damage. The estimated death toll surpassed 100,000, and more than 3 million people were affected, according to authorities.

Only time will tell how the response to the current pandemic crisis will compare with the response to the 2010 Haiti earthquake. But it is worth reflecting on the experience of a decade ago for the important lessons that can help guide giving strategies to benefit people impacted by Covid-19.

The 2010 Haiti earthquake was the first time social networks played a major role in philanthropy. Accelerated by Internet connections and social media, millions of people got the message that relief organizations needed help. Individual donors contributed an estimated $43 million to the assistance and reconstruction efforts using the text messaging feature on their cell phones, according to a study conducted at the Pew Research Center. Fueled by the speed of communication, within days of the earthquake, more than $200 million had been given to the relief effort. Within a year, total gifts and pledges surpassed $5 billion.

Analysts at the Pew Research Center, who studied the phenomenon, describe the “Text to Haiti” effect as “a new mode of engagement” that “offers opportunities to philanthropies and charitable groups for reaching new donors under new circumstances as messages spread virally through friend networks.”

The 2010 Haiti earthquake caused “impulse” giving in response to a disaster to go mainstream. According to the Pew research project:

• 89 percent of the people in the study heard about the “Text to Haiti” effort on television.

• 50 percent made their contribution immediately upon learning about the campaign.

• An additional 23 percent donated on the same day they heard about it.

• 75 percent of the Haiti text donors in the research said that their text message contributions resulted from spur-of-the-moment decisions.

That’s not all. The message traveled! Forty-three percent of the Haiti text donors encouraged their friends or family members to make a similar contribution using their mobile phones, and nearly 75 percent of those they asked actually did make the gift.

Since then, philanthropy has learned lessons that are helping maximize effective support during the Covid-19 pandemic.

Here are two helpful resources:

Grantbook offers valuable insights, such as the observation that Haiti’s earthquakes taught us that charities, funders, and governments need to work together. Plus, immediate needs for medical supplies and food were part of just a first wave of issues. As time went on after the disasters, deeper economic and health problems emerged that were also critically important for philanthropy and its partners to address. Grantbook also observes that money and volunteer efforts are important in the midst of a disaster and its immediate aftermath, but deploying the aid can be a huge challenge that donors need to keep in mind.

For perspective on levels of charitable giving relative to the size of the disaster, we recommend this article in the Houston Chronicle, noting:

• Overall giving in response to Hurricane Harvey was three times more than Hurricane Irma and six times more than for Hurricane Maria.

• Not only was Harvey a bigger disaster, but also there was likely less donor fatigue than in the case of other disasters that occurred in short succession--Hurricane Maria, Hurricane Irma, the California fires, and the Mexico earthquake.

For additional information on the Covid-19 pandemic and philanthropy's response, visit the Center for Disaster Philanthropy. 

The net-net?

Our communities need both immediate philanthropic support for people affected by the pandemic and long-term support for ongoing ramifications of Covid-19, preparedness to blunt the effects of the next pandemic, and resources to address future humanitarian disasters. Encourage your clients to consider endowments, field-of-interest funds, designated funds, and other perpetual structures available through the community foundation to ensure that the community we love is protected for generations to come. 

Now in bloom: Tax reform and tax tips

A special message to advisors

Meeting the ever-changing needs of our community has always been an integral part of our mission as a community foundation. Over the last several weeks, our team has responded to the COVID-19 emergency in several ways, including outreach to nonprofits that are providing critical services to the citizens of our region, educating donors about opportunities to help those in need, and staying on top of the rapidly-evolving Federal legislation that will help mitigate the pandemic's devastating effects on families and organizations.

We would like to take this opportunity to express our gratitude to advisors like you who in many ways are on the front lines of helping your clients get through this challenging time. Whether you are an attorney, an accountant, or a financial advisor, we appreciate your commitment to our donors and their families to help them weather the storm and stay on track to meet their wealth and community legacy goals.

As always, we are here to serve as your partner to help your clients navigate charitable giving priorities, especially in times like this when your clients are balancing financial uncertainty with passion for the charities they love.

What's in the CARES Act for philanthropy?

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act), signed into law by President Trump on March 27, is the largest stimulus package in history. The Act unlocks $2 trillion in funds for American individuals and businesses impacted by COVID-19.

Here’s what the Act includes to help stimulate charitable giving:

• An above-the-line deduction for a “Qualified Charitable Contribution” of up to $300 for non-itemizers is available for cash contributions made to charities (excluding donor-advised funds and supporting organizations) for the 2020 tax year and beyond.

• For cash contributions to charities (excluding donor-advised funds and supporting organizations) made in 2020, the AGI limit is increased from 60% to 100%, with a 5-year carryforward for contributions that exceed 100% of AGI.

We encourage you to let your clients know about these tax incentives so they can help support the nonprofit organizations in our community that are delivering aid to the people most affected by the pandemic.

Four tips for advisors

There is certainly (and understandably) no shortage of news about COVID-19. We've compiled a few of our top tips to help streamline your information-gathering efforts as you assist your clients with charitable priorities:

• You'll find Kiplinger’s calculator useful to determine the amount of a client’s stimulus check. 

• The Center for Disaster Philanthropy provides an overview of the collective efforts of philanthropy to address the COVID-19 outbreak.

• We encourage you to visit the community foundation’s website for the latest news on efforts to help our own community and how you and your clients can get involved. 

• Finally, we'd love to learn from you. Please let us know what you're hearing from clients about their philanthropic priorities during this unprecedented challenge in the lives of the people in our community.

Be well, and thank you again for being part of the community foundation.

Election year insights: What's on the IRS's radar?

Corporate philanthropists get relief from SALT cap on charitable donations

Businesses frequently make cash donations to charitable organizations. But what happens to the deductibility of those donations under the state and local tax limitations imposed by the 2017 tax law? This issue continues to be the subject of discussion, but your business clients should be encouraged by the IRS’s commentary. The IRS has taken the position that a business taxpayer can usually deduct payments to a charitable entity by treating them as Section 162 ordinary and necessary business expenses. Indeed, reducing the impact of state and local taxes itself constitutes a business purpose.

The continuing relevance of this topic is a reminder that philanthropy remains a priority in advising your corporate clients.

Watch out for compliance pitfalls as clients favor gifts of hard-to-value assets

If volatile market conditions persist, gifts of hard-to-value assets may become popular substitutes for appreciated stock gifts. That’s why we’re keeping a close eye on the IRS’s scrutiny of Form 8283, “Noncash Charitable Contributions,” especially now that the final regulations governing substantiation and reporting have taken effect. 

It is critical to pay attention to the details when your clients have made gifts of hard-to-value assets. In Chad Loube et ux. v. Commissioner; No. 5092-17; T.C. Memo. 2020-3, the taxpayers failed to provide the required components of the “appraisal summary” and instead attached a full appraisal to the Form 8283 to substantiate the value of their charitable contribution. 

According to the Tax Court, attaching a full appraisal did not constitute substantial compliance. “While it may have been possible for the Commissioner to glean sufficient information from the purchase price and tax information listed in the appraisal,” stated the Memorandum Opinion, “that does nothing to change the fact that Congress specifically passed [the] heightened substantiation requirements so that the Commissioner could efficiently flag properties for overvaluation from the face of appraisal summaries. In so doing, Congress wanted precisely to prevent the Commissioner from having to sleuth through the footnotes of millions of returns.”

In other words, the IRS won't do your work for you. 

Close scrutiny of 501(c)(3) political activities in an election year

An election year frequently inspires clients’ passion for social issues, making philanthropy an especially important topic for your conversations. You may also experience an uptick in questions about giving vehicles such as donor-advised funds and foundations.

It’s critical to stay current on the IRS’s interpretation of the statutes and regulations prohibiting charitable organizations from engaging in certain types of political activity. 

For example, in early 2020, the IRS issued Private Letter Ruling 202005020 ruling that a for-profit subsidiary’s political activities would be attributed to its nonprofit parent and therefore constitute impermissible political campaign participation. In addition, a shared services agreement between the two entities constituted operation for private interests, thereby flying in the face of Section 501(c)(3). 

If you'd like to go deeper into the connection between charitable giving and politics, GuideStar offers insight into how the 2016 presidential election impacted charitable giving.

Charitable planning for business owners: Lots to love

Special opportunity for a higher charitable deduction

Don't miss out on the opportunity to inform your clients about a special provision in the Taxpayer Certainty and Disaster Tax Relief Act, signed into law on December 20, 2019 by President Trump. For cash donations made to public charities that are helping with qualified disaster relief efforts, the Act suspended the deduction limitations. Ordinarily, deductions of these contributions by individuals are limited to 60% of adjusted gross income. The provision is effective retroactively but also temporarily, covering 2018 and 2019 contributions as well as this year's contributions so long as they are made before February 18, 2020. The limit still applies to contributions to donor-advised funds and supporting organizations.

So long, stretch IRA

Among the changes enacted by the SECURE Act, which became law on December 20, 2019, is a provision eliminating the so-called stretch IRA. This change, which came as a surprise to many wealth advisors, requires that non-spousal beneficiaries of a decedent's IRA draw down the funds over a 10-year period, rather than giving them the option to take the distributions over the rest of their lives. Although exceptions apply for certain beneficiaries (such as a minor child, a disabled or chronically ill beneficiary, and beneficiaries who are younger than the decedent by fewer than 10 years), the new law is problematic for estate plans that contemplated allowing a high income-earning beneficiary to take advantage of lower income years later in life. The SECURE Act contains several other provisions designed to help Americans boost retirement savings, including new provisions for multi-employer plans, increasing the required age for starting distributions, automatic enrollment, and increases to IRA and 401(k) contribution limits.

Importantly, but for a few timing nuances, the SECURE Act left intact provisions for the popular "charitable rollover," which permit qualified charitable distributions from a retirement account to a charity. Even though donor-advised funds are not permitted as rollover recipients, the technique is still quite valuable to generate tax savings for the donor and a boost for the charity's finances.

Charitable planning is a must prior to sale of a business

A new decade frequently inspires closely-held business owners to start thinking about an exit strategy. Before your business-owner client starts putting out feelers to potential acquirers, be sure to counsel your client about the benefits of contributing an ownership interest to a charitable organization, especially to a flexible donor-advised fund at the community foundation. No doubt your client has substantial unrealized capital gains that have accrued in the business over the years. Upon a sale, capital gains tax will be triggered on the proceeds of the client's asset. No capital gains tax will apply, however, to any portion of the business owned by a charitable organization. The charity will net 100 cents on the dollar for the portion it owns. So, in the case of an interest in the business owned by a donor-advised fund at the community foundation, the proceeds of the sale will create an immediate "charitable giving account" for the business owner to enjoy by recommending grants from the proceeds to favorite charities, in whatever amounts and according to whatever schedule the business owner desires.

Be careful, though, that you counsel your clients about securing a proper valuation for charitable deduction purposes at the time the business interest is contributed to the charity. In addition, it is critical that no deal is on the table at the time of the contribution. Don't get caught in the step transaction trap that is a risk in any pre-sale gift to charity of real estate, closely-held stock, and other alternative assets.

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

Philanthropy in the News

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

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

Creative Solutions

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

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

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

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

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

Tax Savvy 

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

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

Winter is coming: Tax tips and donor-advised funds in the news

Philanthropy in the News: Donor-advised Funds

Donor-advised funds continue to be a hot topic among commentators, including several recent opinion pieces published in the Chronicle of Philanthropy. Now is an ideal time to remind your clients of the benefits of establishing a donor-advised fund through the community foundation. Donor-advised funds are popular because they allow an individual or family to make a tax-deductible transfer that qualifies as a charitable contribution, and then later recommend gifts to favorite charities from the fund when the time is right. A donor-advised fund operates a lot like a checking account just for charity, except it’s established according to the IRS guidelines that create the tax advantages. Most importantly, however, establishing a donor-advised fund through the community foundation offers the additional benefit of allowing your clients to access the expertise of our team who is dedicated to staying up-to-date with the community's greatest needs and priorities and the causes your clients care about. This means your clients can make a meaningful and lasting difference in your community--an advantage not available through commercial donor-advised fund providers.

Creative Solutions: Answering Clients' Questions About Charities

During the giving season, it is not unusual for a client to ask an advisor about a specific charity in the community. Clients might want to know whether that charity is reputable and effective. That's a tough question to answer! Most attorneys, accountants, and wealth advisors are not in a position to know the ins and outs of how charities in the community are being managed. That’s okay, as long as you have a few  strategies for client conversations when they do arise.

Your responsibility to your clients in today’s social impact culture is to be equipped with at least a minimum level of working knowledge. For example:

Tell your client to consider the source. Your talk track can go something like this: "If it’s a friend, colleague, or a neighbor asking you to support a cause she knows and loves, you can be more confident in your contribution. Ask about the organization to find out whether it’s a fit for you. Don’t worry—you won’t offend your friend by asking questions. Instead, your interest in the cause your friend is marketing will give her a chance to tell the story about how that organization is making a social impact."

If the charity is brand new and not one you’ve heard of, suggest that your client start with something other than money. You can say something like the following: "Giving money to a charity is not the only way to do good. Supporting causes includes a wide range of other activities, such as recycling, volunteering, serving on boards, donating canned goods or clothing, attending community events, marketing a favorite nonprofit, sharing with friends and families in need, purchasing brands that support causes, and caring for your own health and wellness. So, if you are uncomfortable with a monetary contribution, do something else for the charity you’re being asked to support. Volunteer for an hour or two, donate household items, or attend one of the charity’s events by buying a ticket instead of making an outright donation. These activities give you a chance to check things out."

Encourage your client to go online. Here's what you can say: "You should check out the charity online. Giving is big business, and charities today know they need to report compelling information on their websites about the difference they’re making with your dollars. Be sure to look at the charity’s Form 990, too, available through GuideStar.org. The Form 990 is the charity’s tax return, and it will contain important disclosures to provide a glimpse into the financial stability of the organization."

Above all, make it a point to familiarize yourself with the experts in your region. Remember that the community foundation is here for you. Our mission is to increase charitable giving in the community, connect donors to causes, and lead on critical community issues to improve the quality of life in our region, now and in the future. We are integrally involved with nonprofits in the community, and our team knows how to help you help your clients improve the quality of life for everyone.

Tax-Savvy Giving: A Quick Reminder

Year-end is is good time to remind your clients about the benefits of giving shares of highly appreciated stock. Donating long-term appreciated securities, including stock, bonds, and mutual funds, to a fund at the community foundation delivers much greater benefits compared with donating cash, or selling the securities and contributing the after-tax proceeds. The team at the community foundation is here to help you and your clients establish the most tax-savvy giving vehicles, especially at year-end. We encourage you to contact us with all of your clients' year-end charitable giving needs. 

Fall focus: Advisors' roles are a big piece of the charitable planning pie

Focus on Advisors: The Critical Importance of Your Role

Today’s social impact culture mindset has infiltrated every business, nonprofit, and financial institution in America. The boundaries of our personal and professional lives are blurred across a wide range of social impact behaviors.

What does this mean for your work with your clients? It means your clients are walking into your office with "doing good" on their minds. You can build an immediate connection with your clients when you start a conversation about the ways they--and you--are getting involved in the community. Here are three tips for starting that conversation.

1. Demonstrate that you are in touch with the wide range of "doing good" activities.

With the rapid rise of social consciousness, philanthropy is expanding to cover far more territory than just one or two ways to do good. Consider the full footprint of social impact lifestyle factors that make up the contemporary marketplace mindset: Giving to charities, volunteering in the community, serving on boards, donating necessities to people in need, recycling, purchasing products that support a cause, marketing a favorite organization, celebrating at fundraising events, sharing with friends and family, and caring about your own well-being. Ask your clients about a few of these social impact behaviors. This lets them know that you care about them as human beings.

2. Be aware of the regulatory environment.

Many of your clients who run or own businesses are paying attention to social responsibility in the corporate sector. For example, the Global Reporting Initiative (GRI) is an international standards organization that helps businesses, governments, and other groups understand and communicate the impact of business on critical sustainability issues such as climate change, human rights, corruption, and many others. GRI represents the commitment of hundreds of companies to strive toward a common set of benchmarks to protect the earth and humanity. More than 90 percent of the world’s largest 250 companies are among the thousands of “GRI reporters,” meaning they subscribe to the organization’s standards for sustainability performance. Ask your clients about their corporate commitment to civic engagement.

3. Show your clients that you are doing something, too.

Your clients want to know that you share their commitment to community. Give them peace of mind by talking about your own volunteering efforts, the boards you serve on, or the charities you support. Best of all, let your clients know that you are connected to the Community Foundation, an organization committed to helping people fulfill community dreams through the power of philanthropy.




Worth a Reminder: Donor-Advised Fund Basics

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

How can you connect this trend to your work with your clients? Here are three pointers.

1. Talk the talk.

Your clients are hearing about donor-advised funds. Make sure they are hearing about them from you! Whether your clients support a few charities or many charities each year, a donor-advised fund is a useful tool. Furthermore, the tax advantages set the donor-advised fund apart from other vehicles. Your clients will expect you to be knowledgeable.

2. Know the options.

Donor-advised funds are available through a variety of providers. Community foundations are uniquely positioned to offer donor-advised funds with the inherent tax and transactional benefits you and your clients expect, plus the added advantage of deep community knowledge and a well-connected team of experts to enrich your clients' experience with philanthropy. Only a community foundation has the in-depth knowledge of what it really takes to make a difference in the community. With a wide range of relationships at their fingertips, community foundations are in touch with the techniques and tools to help your clients’ favorite nonprofits make the difference they want to see in the causes they care about. In addition, a donor-advised fund at a community foundation gives you a wide range of options for successor advisors and for the charities you want to support.

3. Walk the walk.

Consider establishing your own donor-advised fund with the community foundation. In today's social impact culture, clients want to work with well-rounded professionals who are connected to well-respected community institutions. The team at the community foundation would be honored to work with you and your family to meet your own charitable giving objectives. We're always looking for donor stories to share with others, too, so keep that in mind as an option to celebrate our work together.

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

Be wary of overstating the value of charitable tax deductions

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

Substantiation requirements: Still relevant

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

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

• Requirements for gifts of partial interests

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

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

Check out the full text of the regulations.   

Tune in to questions on disaster relief giving

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

HOW WE CAN HELP

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

Building emotional connections: Philanthropy and its role in families

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

HOW WE CAN HELP

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

Worth repeating: Bundling gifts

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

Checklist: Types of funds at community foundations

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

Donor-advised Funds

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

Unrestricted Fund

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

Field of Interest Fund

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

Designated Fund

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

Scholarship Fund

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

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

Avoiding landmines in charitable planning

A cautionary tale

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

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

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

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

Don’t let this gotcha get you

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

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

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

HOW WE CAN HELP

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

Tax reform’s ripple effects

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

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

Tools in your back pocket

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

Qualified Charitable Distributions

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

Charitable Remainder Trusts and Charitable Gift Annuities

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

Bundling . . . or Is It Bunching?

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

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

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

HOW WE CAN HELP

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

End-of-summer insights: Planting seeds in client conversations

Tax-Savvy Giving

As ESG gains momentum, clients are seeking more than just a charitable tax deduction.

Be aware of social consciousness as a rising force in estate planning and wealth management.

Here's why it matters.

Environmental, social and governance (ESG) is the term used to refer to three factors that are increasingly used to measure the sustainability and ethical impact of an investment in a company or business. What's interesting is that this rise in overall awareness of the health of people and the planet has also paralleled an increase in the desire to make wealth matter. U.S. Trust’s 2018 “Insights on Wealth and Worth” survey, for example, found that 47 percent of people in the study had begun to identify a “purpose for their wealth.” What's more, according to Investment News, over the course of a 12-month period, the percentage of Millennials highly interested in ESG investing leaped from 26% to 35%. GenXers' interest jumped from 16% to 35%.

What all of this means to you is that as an advisor, your responsibility to serve your clients now extends beyond an understanding of the tax ramifications of giving to 501(c)(3) organizations. Now, you'll also want to be aware how ESG influences the ways your clients are giving back through their investments, which come with a separate set of tax ramifications.

The net-net is that as the definition of "doing good" expands, your tax savvy radar must expand, too. 
 

HOW WE CAN HELP
Our team is your partner. We understand your responsibilities to your clients from a holistic perspective. It's our job to help you make your clients feel successful as they pursue and achieve a purpose for their wealth, in whatever form that might take. 
 

Creative Solutions

A conversational approach using plain language can ease the barriers to discussing community impact with your clients.

When the time comes to discuss philanthropy with clients, advisors are often left wishing there were an easier way to discuss the results achieved with a charitable gift than simply to rely on aspirational statements such as "Let's be sure your money makes a big difference."
 

Ask good questions.

The key to engaging in a more productive planning conversation with your clients is to ask more questions. Think about the long list of questions you ask clients when you are advising them on investment vehicles, or drafting estate planning documents! A few good questions can give a big boost to charitable planning, too. Here are a few of our favorites: 

• What problem raises your eyebrows the most when you read about it in the news?

• What are the pieces of the puzzle that would need to come together to solve that problem in your community?

• If there were one piece of that puzzle you could put into place with a magic wand, what would it be?

HOW WE CAN HELP
The Community Foundation helps you build a plan based on the answers to these questions and more. For example:

• Our team helps you refine the client’s definition of the “community problem” they want to solve.

• We work with you and your client to identify practical ways that change could happen and how philanthropic investment can support the change.

• We can connect your client with nonprofits that are working in the area of desired change, and identify meaningful and attainable milestones to measure success.

• We can advise on what level of investment is appropriate and help identify other likely collaborators to make change happen.