A Message to Our Nonprofit Partners
September is upon us! With the fourth quarter and giving season just around the corner, we know that fundraising is very much on your minds, and it is on our minds on your behalf.
Charitable organizations of all sizes are reporting increasing concerns among their staff members about donor fatigue. “We’re beginning to feel the pinch,” reported one nonprofit CEO. “Our development team hears frequently from small and large donors alike that they and their families are struggling to prioritize so many needs--weather disasters, fires, the Delta variant--and also juggle the need to help keep things going at the organizations they’ve supported for decades. Our organization needs new ideas to keep our donors financially engaged and supporting our mission.”
We can help! The team at the community foundation is by your side, helping you facilitate complex gifts and making it easier for you to stay on top of key trends in planned giving. In turn, you are better able to keep new ideas flowing in your donor communications.
In this issue of our nonprofit newsletter, we’re focusing on two types of gifts--life insurance policies and S Corporation stock--that are frequently overlooked.
As always, give us a call if we can be of assistance!
All the best,
Your community foundation
Five pointers for accepting gifts of life insurance
Gifts of life insurance can be a powerful tool for engaging donors and securing current gifts as well as legacy gifts. Before you accept a donor’s gift of life insurance, though, consider these five pointers:
Check your state’s laws first. Most states--but not all--allow transfers of life insurance policies to a charity.
Ensure that your donor requests both change of ownership and change of beneficiary forms from the insurance company, and make sure they actually receive, complete, and file the correct forms. The paperwork is not always user-friendly. There are instances where a donor has completed the wrong set of forms and therefore the gift failed to materialize. You, as the charity, will need to be the policy owner and, unless you intend to surrender the policy, your organization also will be the named beneficiary.
You’ll need to follow the tax rules for sending the gift acknowledgement letter to the donor. From the donor’s perspective, the gift is eligible for an income tax deduction equal to the lesser of the policy's value or the donor’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. In other words, this is complex, so reach out for assistance!
Ask the donor whether there are outstanding loans against the policy. If there are, your organization will receive less money. Plus, loans can trigger an income tax event for the donor. Be aware!
Finally, do not run afoul of the “insurable interest” rules, which can come into play if your organization pays the premium on a life insurance policy transferred to you or secured by you on a donor’s life.
Unlock gifts of S Corporation stock
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 donors and are therefore now excellent candidates for planned giving.
Donating S Corp stock to your organization is an important option that business-owner donors and their families may want to consider, and understanding the complexities is critical. Notably, 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. Our team is happy to discuss what might be the best position for your organization vis-a-vis a particular proposed gift.
Finally, public charities have been eligible S Corp shareholders since 1998. That seems like old news (23 years old!), but you’d be surprised at how many advisors and donors are not aware that the rule changed. Large gifts could be lost because your donors are still under the impression that they can’t use their S Corp stock to fulfill their giving goals.