Getting creative with NFTs, FAQs about QCDs, and must-know year-end reminders

Greetings from the community foundation, and happy December! 

The final weeks of 2022 are upon us. We’re hearing from attorneys, accountants, and financial advisors not only that your plates are full as the end of the year approaches, but also that questions from clients are rolling in about charitable giving, especially related to the alphabet soup of various planning techniques.  

In this newsletter, we’re covering a few of the most talked-about ingredients in that alphabet soup, including donor-advised funds (DAFs), Qualified Charitable Distributions (QCDs), and non-fungible tokens (NFTs). Indeed, the confusion around QCDs and RMDs is an example of how acronyms, although intended to be useful, often hamper communication instead. 

As always, please reach out to the team at the community foundation. We are here to help you help your clients achieve their 2022 charitable goals.

Thank you for your partnership. We wish you all the best for the holiday season.

Your Community Foundation 

How NFTs are connecting makers, investors and donors with causes they love

As if advisors didn’t have enough financial acronyms to explain to their clients—DAF, RMD, IPO and ETF come to mind—along comes NFT to stir the multi-letter madness further. Even under the shadow of recent turmoil in the cryptocurrency marketplace, “non-fungible tokens,” or “NFTs,” are still creating quite a buzz. 

The IRS has not directly addressed the tax rules governing NFTs, but it has issued guidance on the broader asset category of virtual currency. A comprehensive look at the tax rules and trends related to NFTs and charitable giving is eye-opening, both because of the complexity as well as because of the creative ways charities are leveraging the NFT phenomenon to engage NFT creators in unique fundraising efforts.  

NFTs defined 

Context is useful here, so let’s take a step back.

A fungible item is one that can be freely exchanged or interchanged. For example, a refrigerator can be exchanged for dollars or another item; companies may have interchangeable customers, one replacing another. Differently, a non-fungible item is not interchangeable or easily replaced. They’re represented as tokens on a blockchain and designated as non-fungible tokens or NFTs. Examples are a piece of art, a musical score or a video that can be authenticated as unique and cannot be duplicated. Like the unique history traceable to a car or truck’s VIN number, NFTs have unique serial numbers or ownership details. Their data is recorded on a decentralized blockchain and can be verified by network participants. 

NFTs are digital, not tangible or physical. They are the online and portable equivalent of a traditional collectible, like a baseball card, that can gain value, particularly over time, and largely due to scarcity. In August 2022—70 years following original production—a 1952 Topps Mickey Mantle rookie card became the most highly valued trading card when it sold for $12.6 million. Its value was enhanced by pristine condition and scarcity (fewer than 1,800 are said to still exist, with many worn or frayed). Similarly—but in the digital era—NFTs are valued for their controlled availability, always-new condition, and appeal among buyers or collectors. 

History of NFTs

Only about 10 years old, even the early history of NFTs is still being written. Quantum, a digital animation by the artist Kevin McCoy in 2014, is said to be the first NFT. NFTs often appear as other art forms, games and memes circulating on the internet.

The term “NFT” appears to have been coined in 2017 and was popularized by the game Cryptokitties, where players breed, sell and trade digital cats, adding value through customization of up to 12 “cattributes,” including their fur, mouth shape and eye color that can change through “family” generations. Hosted on the Ethereum network, game activity was so robust following the December 2017 introduction that it congested the network with a record number of transactions. 

Overall, 2021 NFT sales were estimated at $24.9 billion, including artist McCoy’s Quantum for $1.47 million, up from just $94.9 million in 2020.  

NFTs have grown through the popularity of sites and apps like NBA Top Shot, where video highlights and memorable moments (think buzzer-beating basket or championship celebration) featuring current and former basketball players can be acquired for as little as $3.00 or well into the thousands. The site’s inventory includes both the National Basketball Association and Women’s National Basketball Association alike. Buyers can acquire, sell and earn specific “moments” and can use them within online challenges or other interactive activities. 

For football enthusiasts, NFL All DAY “is where fans come to buy, sell and play for officially licensed NFL video collectibles.” And according to the site, “Your collection of NFL All DAY Moments is with you anywhere you go, will never lose quality, and is yours to own forever.”

Those same types of attributes have made art, where pieces are as unique as the artists themselves, a popular source of NFTs. Traditionally a “make one, sell one” proposition, art has become more easily scalable via digital, where a maker can offer a limited quantity of the same work, allowing one or multiple admirers or investors to own a piece. In March 2021, a digital collage with thousands of colorful images was sold by auction house Christie’s for nearly $70 million. 

How can philanthropy benefit?

NFTs’ broad reach via digital offers organizations many fundraising opportunities; therefore, your clients will be more and more likely to encounter NFTs in their involvement with charities. 

Charity advocates with artistic abilities can offer their works through NFT marketplaces like Open Sea, Magic Eden and Nifty Gateway, and then direct buyers’ proceeds to their preferred organization, such as their fund at the community foundation. Platforms like The Giving Block help charities both fundraise and receive funds via crypto. They often help organizations meet donors or creators aligned with their purpose wherever that sponsor is on their giving journey. 

The team at the community foundation would love to hear from you if you’re working with clients at the intersection of NFTs and philanthropy. We can help design a charitable giving strategy to maximize the impact of NFT proceeds and facilitate sale transactions to be processed through The Giving Block or another provider. What’s more, our team can help you and your clients envision the enormous philanthropic potential of digital assets, both in terms of clients using valuable NFTs assets to generate funds for charitable causes and creators using the power of NFTs to boost the profile of worthy causes.  

Finally, while caution is always advised in leveraging new types of assets to further charitable giving, the team at the community foundation is also committed to staying on the cutting edge of strategies and techniques to fuel the growth of philanthropy. Indeed, we need only think back to when donations were largely made by cash or check—and then consider the advances enabled by technology. Whether by debit or credit card, EFT or ACH, digital has become a preferred donor payment method that increases reach, efficiency and cash flow. For thousands of philanthropically-minded individuals, NFTs and crypto are the latest technological pipe to further the causes they care about and help important nonprofit organizations secure mission-critical financial support. 

Five of 2022’s most-asked questions about Qualified Charitable Distributions

Qualified Charitable Distributions, or “QCDs,” are becoming a very popular financial and charitable planning tool. At the same time, QCDs are growing as the source of more and more confusion.

Here are answers to the questions we’ve been asked most frequently this year by both advisors and donors. Be on the lookout for these and other client questions, and please do not hesitate to reach out to the community foundation for assistance.

“Is an IRA (Individual Retirement Account) the only eligible source for Qualified Charitable Distributions?”

Short answer: Almost.

Long answer: An individual can make a Qualified Charitable Distribution directly to an eligible charity from a traditional IRA or an inherited IRA. If the individual’s employer is no longer contributing to a Simplified Employee Pension (SEP) plan or a Savings Incentive Match Plan for Employees (SIMPLE) IRA, the individual may use those accounts as well. In theory, a Roth IRA could be used to make a QCD, but it is rarely advantageous to do that because Roth IRA distributions are already tax-free.

“What is the difference between a QCD and an RMD?”

Short answer: Quite a bit! But a QCD can count toward an RMD. 

Long answer: Everyone must start taking Required Minimum Distributions (“RMDs”) from their qualified retirement plans, including IRAs, when they reach the age of 72. RMDs are taxable income. The Qualified Charitable Distribution, by contrast, is a distribution directly from certain types of qualified retirement plans (such as IRAs) to certain types of charities. When a taxpayer follows the rules, a QCD can count toward the taxpayer’s RMD for that year. And because the QCD goes directly to charity, the taxpayer is not taxed on that distribution.      

“Can I make a Qualified Charitable Distribution even if I am not yet required to take Required Minimum Distributions?” 

Short answer: Yes–within a very narrow age window. 

Long answer: RMDs and QCDs are both distributions that impact retirement-age taxpayers, and it would seem logical that the age thresholds would be the same. Under the SECURE Act, though, the required date for starting RMDs was shifted from 70 ½ to 72 (which is better for taxpayers who want to delay taxable income). A corresponding shift was not made to the eligible age for executing QCDs; that age is still 70 ½ (which benefits taxpayers who wish to access IRA funds to make charitable gifts even before they are required to take RMDs).

The IRS’s rules for QCDs are captured in Internal Revenue Code Section 408 and summarized on pages 14 and 15 in Publication 590-B in its FAQs publication. 

“Can I direct a QCD to my fund at the community foundation?”

Short answer: Yes, if it’s a qualifying fund.

Long answer: While donor-advised funds are not eligible recipients of Qualified Charitable Distributions, other types of funds at the community foundation can receive QCDs. These funds include designated funds, unrestricted funds, field-of-interest funds, and scholarship funds. 

“How much can I give through a QCD?” 

Short answer: $100,000 per year.

Long answer: A Qualified Charitable Distribution permits you (and your spouse from your spouse’s own IRA or IRAs) to transfer up to $100,000 each year from an IRA (or multiple IRAs) to a qualified charity. So, as a married couple, you and your spouse may be eligible to direct up to a total of $200,000 per year to charity from your IRAs and avoid significant income tax liability. 

So long, 2022: Important charitable tax planning reminders as the year winds down

Now is the time to share important reminders with your clients about year-end gifts. Time is indeed of the essence!

Gifts of appreciated stock still shine

Giving in a roller coaster market may continue to be a real concern for many of your philanthropic clients, but remember, not all stocks are down. Gifts of appreciated stock to a donor-advised fund or other type of fund at the community foundation is still one of the most tax-savvy ways to support favorite charitable causes because capital gains tax can be avoided. And of course, a stock market rally can present timely opportunities.

Donor-advised funds help both the donor and the donor’s favorite nonprofits

Grantmaking from donor-advised funds (DAFs) continues to rise, especially as donors and their advisors pay increasing attention to the ways a donor-advised fund can help with tax planning and, importantly, keep a donor’s giving levels consistent even in lower income years. Reach out to the community foundation to learn more about how “bunching” at year end can maximize clients’ tax benefits, and at the same time ensure that nonprofits are supported as demands on their missions continue to grow in choppy economic waters.

Year-end giving deadlines are firm

Watch the calendar closely! Year-end can sneak up on all of us, and it’s important not to miss key deadlines for accomplishing your clients’ charitable goals. Please reach out to our team to find out when certain transactions must occur to be completed during this tax year, including checks to a fund at the community foundation which must be postmarked or hand-delivered no later than December 31. Gifts of marketable securities also need to be fully transferred by December 31, so please urge clients to contact us in plenty of time for our team to process and receive the transfer. 

Handy tools in a bear market, GivingTuesday, and avoiding valuation pitfalls

Hello from the community foundation, and happy November! 

Thank you for the opportunity to work together as you serve your philanthropic clients. We are grateful for the many ways our team collaborates with attorneys, accountants, and financial advisors. Whether we are working together to structure a family’s donor-advised fund, a gift of real estate, endowed support for a favorite nonprofit, or a Qualified Charitable Distribution to a field-of-interest fund at the community foundation, our team enjoys and appreciates every minute.

In this issue, we’re covering three highly-requested topics:

–Outlining how to use donor-advised funds to help your clients continue giving to their favorite charities even when stocks are down.

–Clarifying GivingTuesday so that you can be prepared to answer clients’ questions and help them participate in a meaningful way.

–Reinforcing the importance of valuing gifts of hard-to-value assets to avoid running afoul of the IRS’s stringent rules.

As always, we are here for you! Please call or email anytime with your charitable giving questions. More often than not, the team at the community foundation can help your clients. If we’re not a fit, we are happy to point you in the right direction. We love serving as your first stop for all things philanthropy.

Wishing you and your family all the best for the Thanksgiving holiday,

Your Community Foundation

Strong year-end giving in a bear market: Donor-advised funds come in handy

Giving appreciated stock to charitable organizations is certainly a highly-effective tax strategy. During years when highly-appreciated stock is in short supply, however, implementing this strategy may be easier said than done. 

This is when donor-advised funds come in especially handy. Now is the time to discuss charitable giving with those clients who regularly added to their donor-advised funds throughout the market’s long bull run. If these clients intend to ride out today’s market conditions in their personal portfolios, this year’s bear market doesn’t mean the clients’ year-end charitable giving has to take a hit. These clients can use their donor-advised funds to support their favorite organizations, sometimes even at levels consistent with prior years. 

Related, now is a good time for clients to evaluate the asset allocation in their donor-advised funds. The community foundation is happy to assist your clients with assessing cash positions in their donor-advised funds as a potential source of year-end giving. 

Similarly, for some clients, this may be a year to consider contributing cash to a donor-advised fund instead of donating highly-appreciated stock (which has been the go-to gift for so many of the last several years). Gifts of cash could reduce the burden on a client’s personal stock positions that may have fallen in value dramatically, giving these positions more time to recover value and, at some point in the future, be contributed to a donor-advised fund at a higher value (thereby resulting in a higher tax deduction for the client). 

Now may also be a good time for clients to consider using their cryptocurrency in creative ways to meet their charitable giving goals. Clients holding cryptocurrency may have come to the conclusion that it does not necessarily provide the protection against inflation they thought it would. A client could, for instance, sell their cryptocurrency at a loss and contribute the cash to their donor-advised fund. Then, the client can keep an eye on the cryptocurrency market and decide when–or whether–to wade back in. 

Finally, consider encouraging your clients who’ve not yet established donor-advised funds at the community foundation to consider doing so now. Not only does a donor-advised fund help organize charitable giving, but over the long term it can also protect a client’s ability to support favorite charitable organizations even when market conditions are rough.

The team at the community foundation is always happy to help your clients maximize both the philanthropic and financial elements of their charitable giving strategies. We look forward to hearing from you.

It’s a big deal: Answering clients' questions about GivingTuesday

Among the many client questions you and other attorneys, accountants, and financial advisors can be prepared to answer as year-end approaches is, “What is Giving Tuesday? And why the hashtag that often precedes it in print or online?”

Giving Tuesday–or “GivingTuesday” to be more accurate–has become a philanthropic phenomenon of sorts, generating support and enthusiasm from a wide range of people and institutions. Many of your clients are likely reading about GivingTuesday in the media, especially after the Gates Foundation recently announced its $10 million gift to support the effort. 

Celebrating 10 years in 2022—and vastly different from both the Black Friday and Cyber Monday that it follows—GivingTuesday is a day of generosity. Generosity of time, effort, money, concern or any other well-intended act of giving. 

Facts about GivingTuesday:

–Started in 2012.

–More than a day, GivingTuesday is a movement and an organization. 

–Founded at New York’s 92nd Street Y and celebrated globally.

–Falls on the first Tuesday following Thanksgiving, always. 

–Though not strictly a fundraiser, money “moved” has grown from $28 million in 2013 to $2.7 billion in the U.S. in 2021. 

Clients typically get involved in GivingTuesday by supporting their favorite charitable organizations. Many nonprofits promote GivingTuesday as an important source of funds for their organizations, and they frequently encourage their donors–your clients–to give via cash, check, online or even via cryptocurrency. Your clients also can participate in GivingTuesday by recommending grants from their donor-advised funds to favorite organizations. 

Far beyond simple acts of benevolence, GivingTuesday is steeped in the idea of “radical generosity,” which the organization describes as giving to create systemic change, or to “recognize that we each can drive an enormous amount of positive change by rooting our everyday actions, decisions and behavior in radical generosity—the concept that the suffering of others should be as intolerable to us as our own suffering. Radical generosity invites people in to give what they can to create systemic change.”

Beyond monetary donations, systemic change comes from participating in activities like social media advocacy (the # in #Giving Tuesday that creates ripple-effect awareness online), sharing love, spreading kindness, supporting a food pantry, shopping local or hosting a food or coat drive. 

To help clients learn more or get answers to additional questions about GivingTuesday, please reach out to the community foundation. Our team welcomes your call!  

Adopt a “donor beware” attitude when clients make non-marketable gifts

Market declines and inflation have made 2022 a more challenging year for some clients to fulfill their traditional giving objectives or early-year gifting intentions. 

With annual inflation hovering at 8% (and no relief in sight) and liquidity perhaps less than ideal, cash may be hard for donors to part with. Giving stock may also be hard to swallow, at least psychologically, in a down market. For example, assume shares of a client’s stock have dropped 15% over the last quarter, from $200 per share to $170. If the client has been intending to make a $10,000 gift to charity this year, last quarter the client could have accomplished that with a gift of 50 shares. Now, though, the client will need to give nearly 59 shares to hit that $10,000 target. Realizing that it will "take more shares to do the same good,” your clients may be less inclined to give depreciated stock shares to their donor-advised funds and other charitable recipients.

So, with money tight and stock perhaps painful to give, your clients may be considering alternatives to cash or securities for their gifts to charity. You and your clients need to be aware of the rules—meaning the IRS’s rules—to both meet the clients’ objectives and stay in Uncle Sam’s good graces. 

A high-level understanding starts with the $5,000 threshold for documentation that appears on IRS Form 8283, titled Noncash Charitable Contributions. This form is required to be filed with any tax return claiming such a deduction. 

Substantiation of value up to $5,000 is routine and consistent with securities (i.e., acquisition and contribution dates, fair market value of the item(s) and method of value determination). Requirements for gifts up to $500 are less stringent. 

Real estate, closely-held stock, art, jewelry, vehicles or baseball card collections, for example, valued at $5,000 or greater require more specifics. They’re also subject to greater scrutiny if the donor is audited or questioned. 

Consider the additional documentation requirements:

–From the donor (your client): the type of gift, description, physical location and a third-party appraisal of value. 

–From the appraiser: a signed declaration on the tax form describing their qualifications and identification number; that they do this work regularly; and where they can be located. 

–From the recipient (the charity, sometimes known as the “donee”): signed confirmation of qualification, receipt, federal identification number and a commitment to document and notify if disposition occurs within three years. (The community foundation is accustomed to filing this documentation for donors' gifts to funds.)

Your clients also need to know that meeting the requirements for declaring value rests with them and not their tax preparer, recipient organization or appraiser. In the recent case of Heinrich C. Schweizer v. Commissioner, a donor/taxpayer was found liable for reimbursements and penalties related to a decade-old donation of art first valued at $600,000—later reduced by more than 50%—and exacerbated by the IRS’s determination of participants’ roles and responsibilities. Tax advisors continue to be reminded of the intricate requirements to substantiate hard-to-value gifts such as conservation easements, watching carefully to see how taxpayers can win valuation arguments with the IRS.

So while a high-value donation of real property to your client’s donor-advised at the community foundation or a little-used auto to benefit a charity is admirable and relieves the pressure on making traditional cash or securities gifts, patrons should take a vigilant and “donor beware” approach to alternative gifting. While beauty is in the eye of the beholder, value and deductibility are determined by others. 

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

Hello from the community foundation! 

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

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

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

All the best,

Your community foundation 

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

THE BEAR MARKET

Hanging in there: Charitable giving in a challenging economy 

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

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

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

“All stock is not down!” 

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

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

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

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

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

HURRICANE RELIEF

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

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

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

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

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

NONPROFIT SECTOR INSIGHTS

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

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

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

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

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

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

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

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

Greetings from the community foundation!

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

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

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

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

Inherited IRAs: Big headache, or big opportunity? 

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

What’s the back story?

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

What’s the problem now?

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

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

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

A charitable giving opportunity?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Hello from the community foundation!

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

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

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

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

–Your Community Foundation

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

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

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

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

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

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

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

Summer legislative updates–and looking ahead to sunsets

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

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

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

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

Farms, tax planning, and funding a family legacy

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

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

Multiple ways to structure a gift

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

Keeping the family together

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

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

A cautionary note

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

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

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

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

Hello from the community foundation!

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

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

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

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

–Tax planning strategies for your younger, philanthropic clients

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

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

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

Sincerely,

Your Community Foundation

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

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

What does this mean for planning gifts to charity?

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

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

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

Does bunching work with long-term appreciated assets?

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

Does it work to give real estate?

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

Any fun facts here?

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

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

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

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

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

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

QCD enhancements: Steps forward and fingers crossed 

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

Philanthropy and retirement planning: Intertwined in today's market

Greetings from the community foundation!

We hope this newsletter finds you well. 

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

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

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

–Your Community Foundation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

How do rising interest rates factor in?

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

What’s the bottom line on this?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

QCDs, NIMCRUTs. and other reminders for advisors

Hello, and Happy May!

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

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

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

–Your Community Foundation

QCDs: Good news and important reminders

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

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

Here are four important reminders about QCDs:

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

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

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

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

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

Income timing: A NIMCRUT could hold the key

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

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

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

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

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

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

Social consciousness: Today's expectations of advisors

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

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

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

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

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

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

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

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

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

Wishing you all the best for the spring,

Your Community Foundation

Thumbs up: SECURE Act 2.0

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

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

A mixed bag: Budget legislation

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

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

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

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

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

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

Private foundations + donor-advised funds, take note 

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

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

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

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

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

Cash crunch: Gifting non-income producing assets

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

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

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

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

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

Greetings!

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

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

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

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

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

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

Your Friends at the Community Foundation 

Winds of change and headwinds: Legislation and inflation

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

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

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

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

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

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

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

Closely-held business interests: Adventuresome giving

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

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

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

Crypto and CRTs: Buried treasure, or hidden pitfalls?

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

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

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

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

Is big giving back?

Greetings! 

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

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

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

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

–Your Community Foundation Team  

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

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

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

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

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

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

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

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

Keep an eye out for clients who match these characteristics: 

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

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

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

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

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

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

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

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

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

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

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

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

A fresh start: Family businesses, hard-to-value assets, and transfer of wealth

We’re ready for a fresh start. How about you? 

Alas, it’s still not clear what might happen with tax reform given the fluid status of the Build Back Better Act. But that doesn’t mean we can’t begin 2022 with enthusiasm for helping philanthropic individuals and families achieve their goals for improving the quality of life in our region. Indeed, according to a 2021 Harris Insights & Analytics survey, 60% of Americans are expecting their taxes to go up in the next four years. And most of them are looking for ways to minimize taxes now, rather than waiting for retirement. 

With that in mind, we’re kicking off our newsletter series this year with topics that will help you more easily start conversations with your clients about their philanthropic plans by raising the issue not in a vacuum, but within the context of their families, their businesses, and a charitable giving marketplace that continues to deliver twists and turns such as cryptocurrency and NFTs.

Thank you for allowing us to help you serve your clients. We are honored, and we’re sending our best wishes for a happy, healthy, and productive year for you, your clients, and the community we all love. 

Your Friends at the Community Foundation 

Philanthropy and the family business: Ripe for great questions 

More than half of the country’s GDP is generated by the 5.5 million family-owned businesses in the United States. Profits aren’t the only priority for most family businesses; indeed, the vast majority of family business owners report that other factors, such as culture, community, charity, and values, are also important to the business. Although it is not surprising that philanthropy is a vital part of the family business fabric, setting up the right structure to leave a legacy is not a cakewalk. As you advise a business-owner client, consider sharing questions that might help your client create or grow an effective corporate philanthropy program within the family enterprise.

Getting organized

Does the company have a strategy or system for prioritizing sponsorship requests, charity event invitations, and requests for donations? Is the strategy based on the owners’ values, along with employee input? What is the communication strategy for maintaining positive relations with the charities whose requests the company turns down? How are requests from employees handled? Could a corporate donor-advised fund at the community foundation help streamline administrative load? Is there a corporate foundation in place and if so could it be streamlined into a corporate donor-advised fund to save administration hassles and better leverage tax strategies?

Getting employees engaged

If the company has a community engagement program, how popular is it? For example, is there a matching gifts program and is that program being utilized as expected? Are employees eager to attend community events to sit at the company’s tables, or is it sometimes hard to fill seats? Are there opportunities for employees to volunteer together at local nonprofits? Has the company surveyed employees to learn about their favorite causes and the ways they prefer to give back (e.g., donate money, volunteer, serve on boards)? 

Getting the word out

How is the company letting employees and other stakeholders know about its community commitments? Is it a priority to share civic engagement with the outside world, such as through a page on the company’s website, or is the company’s approach to stay under the radar? Do the employee handbook and recruiting materials describe community engagement opportunities for employees?  

Helping your clients ask the right questions can make a big difference in the success of their corporate philanthropy programs.

Related, and importantly, it is wise to remind your clients that the sale of a closely-held business creates strong opportunities for tax-savvy charitable giving–and that it is critical for the business owner to plan ahead.  

As always, the team at the community foundation is here to help you serve your family business clients by setting up a corporate donor-advised fund, assisting with a matching gifts program, creating donor-advised funds for employees, collaborating on a philanthropic component of a business sale, and much, much more.

Giving hard-to-value assets: It’s not just for real estate anymore

You are no doubt familiar with the many benefits of giving hard-to-value assets to a charity–and especially to a client’s donor-advised fund at the community foundation. Because the community foundation is a public charity, your client is eligible for the maximum allowable tax deduction for their contributions. This is because a client typically can deduct the fair market value of the asset given to the fund, and, furthermore, when the fund sells the asset, the community foundation (as a public charity) does not pay capital gains tax. This means there is more money in the donor-advised fund to support charities than there would be if your client had sold the hard-to-value asset on their own and then contributed the proceeds to the donor-advised fund.  

Individuals can take advantage of giving hard-to-value assets, and so can businesses. For example, when a business is sold, its owners may find themselves with artwork, insurance policies, or real estate on their hands, any of which can be donated to a donor-advised fund with the favorable tax treatment described above. Gifts of real estate have long been popular (although still underutilized) gifts to charity, sometimes making up nearly 3% of the value of all charitable contributions in any given year. 

And the universe is expanding! In 2021, gifts of novel non-cash assets made their mark as a viable way to fund donor-advised accounts and other charitable efforts. Cryptocurrency is one type of asset that clients are now giving to charities, which was to be expected given the rise in popularity of Bitcoin and other currencies. But advisors might not have expected to see NFT (non-fungible token) auctions result in more than $1 million in 2021 Giving Tuesday charitable donations processed by Giving Block.  

Will NFTs be the next hard-to-value asset donation craze? That remains to be seen. In the meantime, though, the team at the community foundation is staying close to the trend. We can help your charitable clients make any type of gift by guiding you and your client through the gifting process and, in the case of crypto, collaborating with well-vetted intermediaries like Giving Block, so that your client’s donor-advised fund at the community foundation can grow and support your client’s favorite charities.  

Notably, we will be watching closely as more information becomes available about the environmental cost of donating ephemeral assets because of the stress that mining and transferring Bitcoin and other cryptocurrencies place on the energy grid. The toll is so great, for example, that Greenpeace is backing away from accepting gifts of cryptocurrency. But if the $23 billion in NFT sales generated in 2021 (compared with less than $100 million in 2020) is any indication, philanthropy may see significant NFT activity in the years ahead.

Transfer of wealth: Following the money

“The greatest wealth transfer in modern history has begun,” according to a mid-2021 report in the Wall Street Journal. And, with tax reform’s big bite into estate values off the table, at least for now, many of your older clients may be thinking seriously about their legacies.

And these legacies will be significant. As of March 31, 2021, according to data collected by the Federal Reserve, Americans in their 70s and older had a total net worth reaching almost $35 trillion. By 2042, an estimated $70 trillion will change hands, including an estimated $9 trillion flowing to charities, according to research conducted by Cerulli Associates. 

As you advise an older client, an important part of the conversation will be to determine the best charitable giving vehicles to achieve your client’s community goals, particularly evaluating the potential role of a donor-advised fund or private foundation. Increasingly, your clients are learning about their options in mainstream media and likely have a greater level of awareness about charitable giving options than ever before, especially in the wake of the recent twists and turns concerning potential tax reform. 

Here are key points to keep handy for those conversations (as you pick up the phone to call the community foundation team!):

–A donor-advised fund at the community foundation costs nothing to set up, and ongoing fees are minimal. 

–A donor-advised fund can be created quickly–within a week or even days. A private foundation, by contrast, requires establishing a legal entity through state and IRS filings. 

–Donating hard-to-value assets to a donor-advised fund delivers better tax benefits (deduction of fair market value) than a gift of the same assets to a private foundation (deduction of cost basis).

–A client can deduct a greater portion of AGI (e.g., cash deductible up to 60% of AGI) with a gift to a donor-advised fund than with a gift to a private foundation (e.g., cash deductible up to 30% of AGI). 

–Ongoing operations of a donor-advised fund through the community foundation are very easy, with no tax filings required. 

–Sometimes, both a private foundation and a donor-advised fund are useful tools to meet a client’s charitable giving goals. The team at the community foundation team can help you develop a structure for your client that maximizes the benefits of each vehicle within an overall philanthropy strategy.

Next, consider encouraging your clients to make charitable giving part of “living large” in their golden years, especially in light of an emerging trend that some retirees are spending their money instead of giving it away.

Finally, remind your clients that the best time to set up their philanthropic plans really is right now. By being proactive, your client has nothing to lose and everything to gain in ensuring that their charitable wishes are carried out. To that end, the community foundation regularly works with advisors helping clients who wish to establish “shell funds” to receive bequests after the clients pass away. A shell fund allows a client to describe charitable intentions, including naming advisors and suggesting nonprofits to receive fund distributions, to guide the heirs through the client’s charitable legacy. Your client can name the fund, and even provide that the community foundation’s board of directors work with advisors to make grants and evaluate impact. A shell fund agreement can be modified anytime before your client’s death. 

Bonus material: International giving: Know your clients' options

Giving directly to international charities can involve a steep learning curve. Legal complexity no doubt was at play in the 2.2% (adjusted for inflation) decline in giving to international affairs in 2019, according to Giving USA. An example of one of the many legal issues with international giving is described in the recently-issued Private Letter Ruling 202119002 involving a domestic private foundation with board members who also serve on the board of the foreign organizations ultimately receiving grants from the domestic private foundation. The IRS decided that the domestic private foundation was not engaged in prohibited self-dealing in this particular case, but the IRS’s discussion in the ruling itself illustrates the complexity of supporting international charities. 

The rules surrounding charitable gifts to international causes have been a rollercoaster ride for many years, especially with the expansion of anti-terrorism and foreign investment regulations. A glimmer of hope emerged in September 2017, when the Internal Revenue Service released Revenue Procedure 2017-53, allowing practitioners to at least be able to rely on safe harbor guidance that applies not only to international grants by private foundations, but also to distributions from donor-advised funds at the community foundation.

The team at the community foundation can help you and your clients navigate the options for international giving, ranging from compliance with so-called “expenditure responsibility” to “foreign public charity equivalency.” In most cases, though, we help you and your client find a domestic charitable organization--recognized under Section 501(c)(3) of the Internal Revenue Code--that works internationally to address the causes your client cares about. Carrying out global grant making in this way through a donor-advised fund helps avoid the pitfalls that your clients might encounter using a private foundation or going it alone.

it's time TO CELEBRATE TAX PLANNING

What a year! (Or should we say deja vu?)

Last December, we heard from our advisor friends that clients were hoping to maximize the charitable giving tax breaks included in the coronavirus legislation. You also reported that clients had expressed curiosity about how tax laws might change in the coming months, and at the same time clients were increasingly interested in involving their extended families in charitable giving.

Here we are, twelve months later, and we’re hearing from you that these three topics are still top of mind--but with a couple of twists, which we’ll be covering in this newsletter.

With some of the mystery now eliminated regarding potential tax reforms, we know your clients are now looking at how to move forward creatively with specific charitable planning techniques, especially donor-advised funds as these vehicles are increasingly in the news.

Family philanthropy conducted from multiple locations is no longer daunting to many of your clients. Video conferencing has revolutionized the opportunities for families to connect about charitable priorities. Now, the conversation is turning toward how to make family philanthropy fun and rewarding for everyone, especially during the holiday season.  

Thanks so much for the opportunity to work together! The team at the community foundation is honored to help you serve your clients.

The ever-popular, handy-dandy, year-end charitable giving checklist

We’ve heard that many of you appreciate a quick checklist for charitable giving reminders each December. We know you receive this type of information from many sources, and frequently in great detail. It is our goal to break things down into a few simple points (below are three). To dive deeper, we encourage you to reach out to our team. We’ll jump in to help! 

First, in the midst of recent flurry surrounding the Build Back Better legislation, clients won’t want to forget about the charitable giving provisions from 2020 COVID-19 relief legislation that carried over to 2021, notably the $300 “universal deduction” even for non-itemizers. Helpful to itemizers is the allowance for cash contributions to charities to be deducted up to 100% of adjusted gross income. This allowance creates an ideal opportunity for your clients to “bundle” or “bunch” their charitable gifts this year, taking full advantage of the limited-time ability to offset significant levels of income. Donor-advised funds are not eligible recipients of these cash contributions; however, designated funds and field-of-interest funds at the community foundation can qualify and are very useful philanthropy planning tools. 

Second, never assume that your clients will remember the benefits of donating highly-appreciated securities to a charitable organization or fund at the community foundation. It seems obvious to those of us in the business, so to speak, but clients do not live and breathe the tax laws like we do. Remind clients that frequently the best way to fund their charitable giving is through highly-appreciated assets. 

Third, let your clients know that charitable giving is still an important priority and that most people who give to charity still plan to do so, even this year after the wild ride of the pandemic. Indeed, clients might appreciate seeing the data, including a study recently released by Classy showing that 84% of donors planned to give to charities at the same or higher level this year as they gave in 2020. 

And (not so) suddenly, it’s a thing: What’s up with donor-advised funds?

For nearly 90 years, charitably-minded individuals and families have established donor-advised funds to help carry out their philanthropic wishes. Popularity of the donor-advised fund steadily grew, especially beginning in the 1990s, eventually resulting in official recognition in the Internal Revenue Code under 2006 tax law updates. Today, over one million donor-advised fund accounts hold nearly $160 billion in charitable assets, according to the latest numbers.

The growth of the donor-advised fund as a useful charitable giving tool has made this vehicle something of a celebrity. You and your clients no doubt have begun to see articles about donor-advised funds pop up in mainstream financial publications, as well as in academic journals. And yes! We read those articles, too! A top priority for our team is keeping up with proposed legislation and commentary about charitable giving, including particular vehicles such as donor-advised funds.

As you talk with your clients about options for their charitable giving plans, please reach out. We would be happy to share perspectives and ideas that take into consideration current trends and legislative developments. 

To that end, you and your clients may find it helpful to review the types of funds available through the community foundation, which include donor-advised funds and much more.

First, as you’re likely aware, a “donor-advised fund” enables a client to establish a specific account for charitable giving. Your client makes a tax-deductible contribution of cash or other assets to the fund, and then recommends grants to favorite charities during the current year and in future years depending on the client’s goals and plans.

Second, the community foundation has its finger on the pulse of the community’s most pressing issues. An “unrestricted fund” provides your client with an 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. 

Third, to target charitable giving to specific areas of community need (such as education, health, environment, or the arts), your client can set up a “field-of-interest fund” to establish parameters for grant making under the ongoing guidance and expertise of the community foundation’s staff. Plus, field-of-interest funds can be a wonderful alternative to a scholarship fund and accomplish a client’s charitable goals even more efficiently and effectively.

Fourth, a “designated fund” allows a client to focus charitable giving on a specific agency or purpose. Over time, the community foundation's staff manages the distributions from the fund according to the terms the client establishes. 

Helping families stay connected across the miles and generations: There’s a gift for that! 

Your philanthropic clients will thank you for suggesting they consider giving the gift of giving (say that three times fast!) in the form of a charitable fund instead of the more typical “I made a gift to my favorite charity in your honor.” 

More and more parents and grandparents (and friends and colleagues) are giving a child, grandchild, friend, or co-worker a charitable fund, pre-established and pre-funded, in the name of the recipient. Frequently taking the form of a donor-advised fund, this gift allows the recipient to experience the benefits of working with the community foundation to support important causes. 

The team at the community foundation can help your client create a gift fund from soup to nuts, including granting the recipient online access. Your client can literally put a bow on the carefully rolled up fund document, sign a card listing the URL and login credentials to view the fund online, and present the package to the child, grandchild, friend or colleague as a gift. Both giver and receiver will love the experience.

Educational opportunities are a natural follow up to this type of gift. For example, your client can work with the community foundation to find resources on the community foundation’s website and structure a family giving session over Zoom where participants learn the basics of charitable giving and are introduced to key issues facing communities in our region and across the country. This type of experience helps the family’s values stay intact across generations. 

Finally, never underestimate the power of philanthropy to help you build relationships with multiple client generations. The team at the community foundation has the tools you need to inspire Baby Boomers, Gen X, Millennials, and Gen Z by creating meaningful and lasting connections to our community, charities, and causes. Although useful in some cases, a GoFundMe or Facebook fundraiser simply cannot deliver the engagement and loyalty that have long been hallmarks of our dedication to helping your clients of all ages make a lasting impact that is as meaningful to them as it is to the causes they support.

Charities and cryptocurrency: Gifts are on the rise

As cryptocurrencies’ profiles rise in the marketplace, your clients are likely to begin asking questions about the possibility of using cryptocurrency holdings as part of their charitable giving plans. Interest in this technique has spiked in recent weeks, especially after the University of Pennsylvania’s announcement of a landmark $5 million gift of bitcoin to support the Wharton School’s Stevens Center for Innovation in Finance.

In many ways, advising clients about charitable gifts of cryptocurrency parallels the strategies you routinely use to advise clients about a gift of any highly-appreciated asset. For example, cryptocurrency gifts require documentation similar to what’s necessary to substantiate gifts of real estate, closely-held stock, and collectibles.

Furthermore: 

• In the case of cryptocurrency held by your client as an investment for more than one year, the rules for gifts of long-term capital gains assets apply. In this situation, the client's gift of cryptocurrency is valued at its fair market value at the time of the donation. 

• The receiving charity must sign your client’s IRS Form 8283 for your client to be eligible for the charitable deduction (unless the value of the gift is less than $500).

• A qualified appraisal is required for gifts with a value greater than $5,000.

• The recipient organization is required to file IRS Form 8282 if all or a portion of the cryptocurrency is sold or converted to cash within three years of the gift. As with gifts to charity of other appreciated assets, the charity does not pay tax on the gains. 

The IRS has issued guidance for charitable gifts of cryptocurrency, including confirmation that the usual rules apply for a “contemporaneous written acknowledgment,” even though cryptocurrency is treated and reported by the charity as a non-cash gift. 

The team at the community foundation is ready to assist you and your clients who may wish to donate cryptocurrency to a donor-advised fund or other type of fund. For example, we take care of establishing an account with Bitpay, Coinbase, or other third-party processor to receive the gift. After that, our team is responsible for converting the cryptocurrency to cash so that your client’s fund can be diversified to support the client’s charitable giving goals.

Strategies and tax planning tips for your philanthropic, affluent clients

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

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

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

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

--Your friends at the community foundation

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

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

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

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

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

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

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

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

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

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

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

Here’s how to get up to speed:

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

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

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

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

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

Year-end giving: Repeat, repeat, repeat

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

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

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

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

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

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

“The simplification of anything is always sensational.”

Gilbert K. Chesterton

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

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

This issue features updates in three areas:

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

2. Pending legislation that could impact charitable giving strategies

3. Recent IRS actions illuminating charitable tax planning pitfalls

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

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

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

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

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

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

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

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

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

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

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

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

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

Pending legislation that could impact charitable giving strategies

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

Here’s what we’re tracking:

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

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

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

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

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

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

Recent IRS actions illuminating charitable tax planning pitfalls

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

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

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

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

Special edition: What's AHEAD IN proposed legislation?

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

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

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

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

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

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

1. Consider planning for more aggressive annual giving.

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

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

1. Dust off that estate plan.

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

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

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

A personal note to our advisor colleagues

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

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

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

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

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

Advisors' fiduciary obligations can get personal

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

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

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

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

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

Five pointers for gifts of life insurance to charities

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Donor privacy: Ongoing concern for a common client priority

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

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

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

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

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

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

Outside the box: Legacy combinations you might overlook

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

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

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

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