What goes up may come down: Start now to plan for 2025
Many of your donors who are now retiring may still vividly remember the Federal estate and gift tax framework that was in place decades ago. Consider a 75-year-old donor who, in 2023, is making plans to leave a bequest to your organization’s endowment fund at the community foundation. When that donor was 45, and perhaps even experiencing meaningful wealth for the first time, the potential taxability of estates was a big issue. In 1993, for example, this hypothetical donor could give away, during the donor’s lifetime or at death (or a combination of the two), a total of $600,000 to family members and loved ones without triggering Federal estate or gift tax. Everything above that $600,000 “exemption” amount was subject to tax, then at a top rate of 55%, unless certain deductions applied. One of these deductions, of course, was (and still is) the charitable deduction. Because estate and gift taxes were so high back then, many donors routinely established charitable bequests to relieve the tax burden and support favorite causes.
Historical perspective is important here, because many of your long-term donors have no doubt watched the estate tax with keen interest over the years. From $600,000 in 1993 (and a top tax rate of 55%), the exemption rose to $675,000 in 2001 (still with a top rate of 55%). By 2006, the exemption stood at $2 million, with a top rate of 46%. Several more increases to the exemption followed, until the exemption more than doubled to exceed $11 million in 2018 under the Tax Cuts and Jobs Act of 2017. Fast forward to 2023, and the exemption is $12.92 million per individual ($25.84 million for a married couple). This means a married couple can transfer almost $26 million to family members and other beneficiaries without incurring federal estate or gift tax.
Fundraising strategies have changed along with the exemption. Back in 2001, for example, when the exemption was $675,000, charities could educate donors whose assets totaled more than $675,000 about the benefits of leaving the bulk of their above-exemption estates to charity, rather than letting up to half of it go to the federal government. Today, the estate tax conversation is most effective with donors whose estates exceed nearly $13 million. That is a big reduction in the size of the pool of affected donors! It is easy to see why donor interest in tax-motivated charitable bequests began to decrease. Although donors continued to leave substantial estate gifts to charities, a lot of the tax incentive for doing so has been eroding.
Change may be coming, though. Barring legislation that extends the tax cuts, the Federal estate and gift tax exemption, in a case of “what goes up must come down,” is scheduled via sunset provisions to significantly drop in 2025, by about half. If this does occur, the change will most certainly increase the number of your donors who are facing the potential of incurring significant estate and gift taxes on the transfer of assets to family members and loved ones. The upshot here is that it soon may be time to again talk with many of your donors–not just a select few–about the benefits of leaving a bequest to your organization, whether to your endowment fund at the community foundation or otherwise.
Here are a few fundraising tools that may be worth sharpening as you prepare for potential changes in 2025:
–The specter of a sunset is becoming a popular topic of conversation. Regardless of the estate tax exemption amount and what may or may not happen in 2025, the exemption’s potentially-changing status is reason enough to strike up a conversation with a donor about bequests. To be sure, anytime there are potential changes in tax laws swirling around, you have an excellent opportunity to discuss planned giving with your donors.
–On the flip side, as you talk with donors who think legislation will intervene and therefore believe the exemption will not drop back down, keep an ear to the ground for those among them who may have purchased life insurance policies during the low-exemption years as a source of liquidity to pay estate taxes. Donors who don’t reasonably expect their estates to be taxable can name a charity as the life insurance beneficiary. For example, a donor could name your organization’s endowment fund at the community foundation as the beneficiary of the policy, or even name a designated fund at the community foundation as beneficiary and then the community foundation could distribute the proceeds to your organization and other charities the donor wants to support.
–Remember that annual exclusion gifts may again become hyper relevant. Back in the low exemption days, a donor did everything possible to remove assets from the donor’s estate without eating into the donor’s Federal estate and gift tax exemption. Years ago, the annual exclusion maximum was $10,000 per person, meaning a donor could give up to $10,000 annually to each child, grandchild, or other beneficiary and still keep the full exemption intact. So, in the late nineties, for example, a donor could essentially remove $100,000 from the donor’s taxable estate every year by giving $10,000 to each of 10 children and grandchildren. Because the exemption is so high right now, a smaller percentage of your donors are likely taking advantage of these annual exclusion gifts using the now inflation-adjusted annual exclusion amount of $17,000 for 2023. What’s important for you to know, though, as you are raising funds for your organization, is that your donors may be rebooting their annual giving habits if the tax cuts do in fact sunset in 2025. It is a good idea for you to think about how to make the case that your organization is a worthy recipient alongside family members for regular annual gifts and should become part of that regular giving habit.
Though relatively few financial certainties exist, especially where tax laws are concerned, what we do know is that you and other charitable organizations have plenty of time to plan, strategize, and consult the team at the community foundation about how fundraising and endowment-building strategies might change for 2025 and beyond.
Give your endowment a summer boost
The summer months are typically slow, but if ever there were a summer to step up your fundraising efforts–especially efforts to grow your endowment or reserve funds–this would be the summer to do it. That’s because new research points to a lack of awareness that the percentage of Americans giving to charities has noticeably declined in recent years. Indeed, only one in three people is aware of this decline, according to the survey. What’s perhaps even more surprising is that people who are actually giving to charity did not demonstrate a significantly higher likelihood of awareness about this trend, as compared with non-givers. This is especially eyebrow-raising because the topic has been covered heavily in the media, including in mainstream publications.
This rather dismaying situation does, however, create an opportunity for your organization to get the word out. Here are a few tips for ways you can inform your donor base and encourage them to step up.
–Consider actively sharing the recent study on your blog and social media channels. Invite readers to learn more about how they can help the community by getting involved with your organization.
–Send out a special communication to your donor base with a summary of the study and offer concrete ways for donors to help your organization, such as increasing their annual giving levels, considering a planned gift, or talking with your team about supporting your endowment or reserve fund at the community foundation.
–Report on your success to your donor base. Donors love to hear that they have made a difference, especially when they join an overall effort of your organization to move to the next level. When you show donors at the end of the summer that the number of donors giving to your organization has increased, bucking the national trend, they will be so happy they were part of the success!
We look forward to talking with you about how to maximize your fundraising and endowment-building opportunities, even in a challenging year!
Protect your exemption
A recent private letter ruling reinforced once again that the IRS takes the concept of “private inurement” very seriously for nonprofits. As in, if you do it, you’re out. Most nonprofits are well aware that they will be putting their 501(c)(3) exemption status at risk if they play fast and loose with the rules for preventing undue benefit to a private person. After all, charities are established for the public good, and public good and private profit do not mix.
Take note of this potential pitfall as you work with your advisors, board members and colleagues to establish policies and procedures at your organization. Please reach out to the community foundation anytime. We are happy to help clarify what these rules mean and how you can keep your organization compliant and your mission safe.
This newsletter is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice.