Happy birthday, UPMIFA (for all you endowment fans out there)

UPMIFA turns 15: Happy birthday, maybe? 

It’s been 15 years since the Uniform Prudent Management of Institutional Funds Act, or UPMIFA, was first enacted to replace the Uniform Management of Institutional Funds Act, or UMIFA. Today, even though nearly every state in the U.S. follows UPMIFA, the law’s complexity still poses challenges and questions for nonprofit organizations who administer so-called “donor-permanently-restricted gifts” to which the law applies. 

Notably, the law does not apply to charitable trusts (which are governed by their own provisions), nor does it apply to donor-advised funds. UPMIFA also does not apply to endowments established by a charity using its own dollars which the charity either has earned or which originated from donors’ unrestricted gifts. 

Following the thread of donors’ permanently-restricted gifts is an accounting imperative, and it’s easier said than done. Naming conventions within that accounting are very important to clearly distinguish between an “endowment” that was created by the charity with its own dollars and therefore not subject to UPMIFA on one hand, and “endowments” funded with gifts from donors with the intent that they be “permanently-restricted” on the other hand.

What's more, the term “endowment” takes on different meanings depending on the source of the underlying assets, adding yet another wrinkle. Indeed, some argue that charities should not refer to a fund as an “endowment” if the charity isn’t following UPMIFA because of the presumptions that may be attached to the term "endowment" in the minds of donors and the public.

UPMIFA requires that charities invest endowment assets to maximize total return. This is a departure from UMIFA, which was based on preserving “historical value,” a concept that became highly problematic following the 2008 economic downturn, when charities were prohibited from using endowment funds for the very purposes for which donors had originally given them--to keep the charity’s mission afloat during tough times to avoid interruption in service.

But “maximizing total return” under UPMIFA carries with it its own challenges. For example, as a charity holding the funds, you must pay close attention to diversification and also ensure that the endowment is in fact providing annual financial support to your organization according to a spending policy.

The long and short of it? The team at the community foundation strongly encourages you to contact us with your endowment questions. Our staff’s deep experience and familiarity with UPMIFA and other laws will help you sleep better at night, especially if you select the community foundation as the investment home and administrative back office for your endowment. The community foundation is dedicated to honoring your donors' intent, complying rigorously with the laws, and doing everything it can to help your mission stay strong for the people who count on your organization. 

Space to grow: Advantages of the bargain sale

Whether your mission calls for office space, warehouse facilities, shared space, or all of the above, like most charitable enterprises, you need a physical location to serve your constituents. Unfortunately, you and other nonprofit organizations are frequently left empty handed after searching for competitively-priced commercial property to house operations.  

Enter the charitable bargain sale, a giving vehicle that allows a donor to facilitate the transfer of much-needed real estate to your charity at a price you can afford, while at the same time earning the donor a tax deduction. 

The bargain sale, frequently heralded as the earliest charitable giving vehicle, results in the real estate owner serving in both the role of a seller for the cash portion of the sale to your organization, and also in the role of a donor to your organization for the donated portion of the property. 

As is the case with many types of charitable gifts, establishing fair market value of the subject real estate is critical and requires a qualified appraisal that complies with IRS regulations. Establishing the fair market value in turn determines the charitable donation portion, which is the difference between the fair market value and the lower cash amount paid by the charity to the donor/seller.  

A post-pandemic world may create new opportunities for your donors to consider bargain sales of property to your organization. Indeed, nearly $430 billion in commercial and multifamily real estate debt is set to mature this year, opening up conversations about what property is really worth and how owners can most efficiently unlock its value. And of course, bargain sales are not limited to commercial property. The U.S. housing market is estimated to have gained more than $2.5 trillion in value in 2020 alone, bringing the total value of housing in the U.S. to over $36 trillion. 

Contact the community foundation to learn how our team can help you find creative solutions to your real estate needs.

A footnote: Keeping up with tax law

If you’re having trouble keeping up with changes to the tax laws, you are not alone! If you are a subscriber to the Wall Street Journal, we highly recommend its recently-released tax guide. For a guide that does not require a subscription, Kiplinger offers a helpful summary of the changes effective for tax year 2020. 

Bright spots amid chaos and an update on donor privacy

Greetings! 

Your colleagues at the community foundation strive to increase charitable giving in our region so that your mission continues to thrive as the need grows for your programs and services.

We hope this newsletter finds you well. In this issue, we’ll provide an update on trends in fundraising, as well as tax policy developments that may impact your organization and its donors. 

Your colleagues at the community foundation will continue to keep you up to date on information that can help your organization stay afloat and your mission strong.

Bright spots in an era of chaos

With a third of global charities shutting their doors because of pandemic-related, insurmountable obstacles, the situation may seem grim for the nonprofit sector. But there is hope:

• The CARES Act includes many provisions that help nonprofit organizations, right alongside small businesses. Too often, though, charities are not aware of the many ways they can benefit from stimulus packages.   

• Similarly, advocacy groups and educational institutions are ramping up educational resources to help organizations like yours get through the tough times and be prepared for even greater success in better days ahead. 

• A strong stock market creates lots of opportunity for your organization to educate donors about the benefits of donating highly-appreciated stock. 

Legislation is likely to continue to provide a boost. For example, 2020 ended with the extension of tax provisions to encourage charitable giving in the midst of ongoing pandemic-related challenges facing nonprofits. In 2021, we are already hearing about potential tax reform under the Biden administration.

Still, your donors can achieve their charitable giving goals regardless of what happens with tax policy and legislation. For example, because the housing market shows no sign of slowing down in 2021, your donors can seriously consider charitable gifts of real estate, whether a primary residence, vacation home, rental property, or even niche commercial property that’s benefited from a multi-faceted pandemic marketplace.

As is the case with gifts of other long-term capital gains assets, gifts of real estate to a charity can be quite tax-efficient. Whether a donor is giving a second home, rental property, or commercial property, the donor may be eligible for a charitable tax deduction of the fair market value of the property. In the case of gifts to a public charity, when the property is sold, the full amount of the proceeds will remain intact for charitable purposes, without reduction for income taxes. 

Gifts of real estate to charity shouldn’t be undertaken lightly, though; certain pitfalls and missteps can have a devastating tax impact. If a donor is considering a gift of real estate to your charity, we invite you to work closely with the community foundation to ensure that the transaction is properly structured. 

The team at the community foundation can help you navigate the rules for gifts of real estate. such as how to determine valuation, dealing with any debt on the property, how to substantiate value and properly report the transaction on Form 8283, when and to what extent minority interest discounts may apply, how to avoid “step transaction” treatment due to a sale that's deemed "prearranged," and determining whether unrelated business taxable income (UBTI) will be a problem.

Finally, if a donor would like the gift of real estate to benefit your organization as well as one or more other nonprofits, the community foundation can help facilitate a transfer into a donor-advised fund, from which the donor can recommend grants to your charity and the other charities after the property sale is complete. 

Legal update: Will the Supreme Court unravel 50 years of case law on donor privacy?

On January 8, 2021, the United States Supreme Court granted review to Americans for Prosperity Foundation v. Becerra and Thomas More Law Center v. Becerra. Both cases challenged the California attorney general’s requirement that charities disclose major donors’ names and addresses. The United States Court of Appeals for the Ninth Circuit disagreed with advocacy groups’ arguments that the policy runs afoul of the First Amendment. 

The Supreme Court’s decision will be significant because the Becerra decisions are inconsistent with case law dating back to 1958, when NAACP v. Alabama ex rel. Patterson granted First Amendment protection to the privacy of a group’s members and supporters via rights of free association. Indeed, the NAACP’s amicus brief is frequently quoted in publications across the political spectrum: 

“In an increasingly polarized country, where threats and harassment over the Internet and social media have become commonplace, speaking out on contentious issues creates a very real risk of harassment and intimidation by private citizens and by the government itself….Thus, now, as much as any time in our nation’s history, it is necessary for individuals to be able to express and promote their viewpoints through associational affiliations without personally exposing themselves to a legal, personal, or political firestorm.”

Donor privacy is an important issue for advocacy groups that may be unpopular with the governing majority of a particular state. 

This newsletter is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice.  

Messages to your donors to kick off a new year

Welcome to 2021! 

We know how hard our community’s nonprofit organizations are working to keep our community afloat as the pandemic and economic crisis continues into a new calendar year. While the vaccine illuminates hope on the horizon, we know that you, your staff, and the people you serve are not out of the woods yet. 

During this time--and at all times--the community foundation is here for you. Consider our team as a behind-the-scenes extension of your fundraising arm. We’re at the ready to help you with the legal, tax, and administration side of key functions, such as:

• accepting complex gifts; 

• establishing or grow your endowment and rainy day reserves;

• facilitating donation opportunities where a single donor wishes to support your organization as well as others;

• creating a vehicle for a donor to give to your organization over time;

• and much, much more.

This month, our newsletter keeps you up to date on changes in the law and draws your attention to emerging research that can help set in motion a successful legacy fundraising plan, even in the midst of COVID-19 and its fall out.  

Maintaining year-end momentum: New tax laws create opportunities to communicate with donors

Post-giving season donor fatigue might not be as large a factor this year as it has been in prior Januarys. Thanks to the passage of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, known as the Coronavirus Stimulus 2.0 bill, you’ve got a great reason to inspire donors through your newsletters and social media posts.

Here are a couple of suggestions for blurbs you can include in your communications: 

Even if you don’t itemize, it is still a good idea to plan to make at least $300 in cash contributions to qualifying charities (and now $600 for non-itemizing joint filers) this year. The Taxpayer Certainty and Disaster Tax Relief Act of 2020, known as the Coronavirus Stimulus 2.0 bill, was passed by Congress on December 21, 2020 and signed by President Trump on December 28. The legislation extends the CARES Act’s temporary, above-the-line charitable deduction for contributions to qualifying public charities for tax year 2021. 

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

Legacy giving: Encouraging signs of donor commitment

Bequests, beneficiary designations, remainder trusts, and other charitable planning vehicles are an important part of every charitable organization’s fundraising strategy.

Although gift planning staffs have been under pressure over the last several months due to their organizations’ overall financial stress, that pressure does not appear to be reducing the level of donor interest in leaving a legacy. According to a study conducted by Marts & Lundy on the impact of COVID-19 on gift planning, donors are actually more interested in gift planning than they were pre-pandemic. 

That’s good news! It means that the donors who know and love your mission are not likely to step away. To the contrary, your loyal donors are likely more open than ever to considering a bequest or other planned gift to support your organization for years to come. 

The team at the community foundation would be pleased to talk with you about how our administrative capabilities and infrastructure can help streamline your fundraising efforts as you step up to these very timely gift planning opportunities.

We look forward to hearing from you!

Year-end giving and looking ahead to a new year

Supporting Your Mission as a New Year Approaches

In the wake of 2020’s many obstacles, your mission has never been more important. At the same time, your organization is experiencing one of the most challenging fundraising environments in decades.

The community foundation is by your side. Our mission is to keep the power of philanthropy strong in our community so that your organization can thrive and continue to serve the people who count on you.

Here are two ways the community foundation can help ease the pressure as 2020 draws to a close.

We can assist you as you help your donors plan for year-end giving. 

Encouraging your donors to make charitable donations during the holiday season has traditionally been made easier by the looming December 31 tax deadline. This year, encouragement is a bit tricker because so many elements of tax law seem up in the air. 

The elections may very well have left your high-net worth donors with a dilemma as they consider whether to make large gifts to your organization: Should your donors assume that laws will change such that charitable gifts will be even more tax efficient in 2021 and beyond? Or should your donors bet on the tax laws becoming less favorable to charitable giving in the future? Either scenario could play out, depending on the extent and nature of tax reform. 

Here’s what’s in play:  

• Under Joe Biden’s proposed tax plan, taxpayers making more than $400,000 per year would be taxed at a top income tax rate of 39.6%, an increase from 37% under current law. For some of your donors, this would mean gifts to your organization would become even more tax efficient under the new law.

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

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

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

• Your ultra-wealthy philanthropists are surely keeping an eye on Biden’s stated intention to raise estate taxes and change the way capital assets are taxed after death. Currently, the gift and estate tax exemption per person is $11.58 million and $23.16 million for a married couple. These amounts are effectively double what they were before the Tax Cuts and Jobs Act of 2017 (TCJA). The TCJA calls for an automatic sunset of these increases on December 31, 2025, at which point the exemption will drop back down to $5 million per person, as adjusted for inflation. Under Biden’s proposed tax plan, though, the estate and gift tax exemption and rates would be restored to the lower levels of more than a decade ago. This would create a major incentive for the ultra affluent to give even more of their wealth to support your mission. 

• Finally, Biden’s proposal calls for substantial elimination of the step up in basis from the taxpayer’s cost to fair market value at the time of death, further incentivizing testamentary gifts by donors to your organization.

As the saying goes, there are a lot of moving parts! The team at the community foundation is always happy to discuss scenarios, share insights about what might happen under tax reform, and assist you as you help your donors fulfill their desire to support your important mission. 

We can serve as an extension of your team to answer questions as they pop up.

With this year’s job losses in the nonprofit sector topping 900,000 since February, we know your teams are short staffed. This can make even small projects, such as researching and responding to donors’ inquiries, seem monumental.

Consider the team at the community foundation to be on call. We’ve got answers to your year-end giving questions. We don’t want you to miss out on the few perks that 2020 has to offer your donors as they support your good work, including:

• A reduction in adjusted gross income (even for donors who take the standard deduction) for charitable contributions up to $300 per taxpayer. 

• An increase in allowable itemized deductions for charitable donations up to 100% of a donor’s 2020 adjusted gross income, instead the usual 60% cap. 

• The waiver of the Required Minimum Distribution for 2020, which may free up cash for your donors to increase their charitable gifts to your organization.

• The favorable rules that are still in effect for Qualified Charitable Distributions, which permit both itemizers and non-itemizers to direct up to $100,000 from an IRA to qualifying charities without triggering a taxable event.

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

This newsletter is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice.