May 2024 Advisor News: DAF Updates, Mixing Up Assets, and Summer ReadingNeed-to-know updates on the proposed donor-advised fund regulations
The community foundation is committed to providing timely updates on legal and policy developments to help you and other professionals who advise philanthropic clients stay on top of best practices in charitable planning. In that spirit, donor-advised funds and the rules governing these vehicles are topics that are popping up more frequently in financial and even mainstream media. Our team is closely watching these regulatory developments.
As background, in November 2023, the Internal Revenue Service issued proposed regulations that would change the way donor-advised funds are defined and how they operate. Especially leading up to the May 6, 2024 public hearings, the proposed regulations have created quite a buzz. If you’d not yet heard about the proposed regulations, the April 19, 2024 letter to Treasury Secretary Janet Yellen, signed by 33 members of Ways and Means, might have grabbed your attention. The letter lays out concerns that “these regulations could have the unintended consequence of impeding charitable giving in our communities, particularly at our local community foundations.” You’ll hear from us when (and if) the proposed regulations, or some version thereof, go into effect and what to do about it.
As you track the issue, however, it’s important to remember that a donor-advised fund is just one of many types of funds your clients can establish at the community foundation. Consider:
–Certainly the donor-advised fund is popular because it allows your client to make a tax-deductible transfer of cash or marketable securities that is immediately eligible for a charitable deduction. Then, the client can recommend gifts to favorite charities from the fund to meet community needs as they emerge.
–Other types of funds at the community foundation can be just as effective as a donor-advised fund depending on the client’s objectives. In some situations, these other fund types are even more effective than a donor-advised fund to achieve a client’s goals.
–Field-of-interest funds and designated funds, for example, allow your client to support a charitable cause or organization they love. Unrestricted funds help your clients support future needs in the community that can’t be predicted and can only be addressed through the community foundation’s perpetual structure and mission to serve the community as a whole.
–A major advantage of field-of-interest funds, designated funds, and unrestricted funds is that they are eligible recipients of the popular and tax-savvy planning tool called the Qualified Charitable Distribution, or “QCD,” available to your clients who have reached age 70 ½.
We look forward to helping you serve your charitable clients regardless of where the proposed regulations ultimately land. And we’ll keep you posted!
Celebrate variety: Many assets make great gifts to charity
When your client is getting ready to make a contribution to a fund at the community foundation or other charity, remind them not to automatically reach for the checkbook! Here are other (and typically more tax-savvy) options to consider.
Marketable securities
Gifts of long-term appreciated stock to a donor-advised or other type of fund at the community foundation is always one of the most tax-savvy ways to support favorite charitable causes because capital gains tax can be avoided. Gifts of publicly-traded stock, for example, are easy to transfer to a fund. The community foundation team can provide you and your clients with transfer instructions to make the process simple.
As is the case with a cash gift, the community foundation will provide a receipt for tax purposes, and the gift of stock will be valued at the shares’ fair market value on the date of transfer. When the community foundation sells the shares, the proceeds flow into the client’s fund without any reduction for capital gains taxes. This is because the community foundation is a 501(c)(3) charitable organization and therefore does not pay income tax. That would not have been the case, however, if the client had sold the stock first and then transferred the proceeds to a fund at the community foundation; the client would owe capital gains tax on the sale. Especially in cases where the client has held the stock a long time and it’s gone up significantly in value, the capital gains hit can be big.
Closely-held business interests
The community foundation team is happy to work with you and your client to explore how the client might give shares of a closely-held business to a fund at the community foundation. Not only will transfers be eligible for a charitable deduction during the year of transfer (and at fair market value if the shares are held for more than one year), but also these gifts could potentially reduce income tax burdens triggered upon a future sale of the business. Be sure to talk with our team well before any potential sale is in the works; otherwise, you could lose out on tax benefits. Gifts of closely-held business interests are powerful but can be tricky to administer.
QCDs from IRAs
As always, keep in mind that the Qualified Charitable Distribution (“QCD”) is a very smart way to support charitable causes. If your client is over the age of 70 ½, the client can direct up to $105,000 (in 2024) from an IRA to certain charities, including a field-of-interest, designated, unrestricted, or scholarship fund at the community foundation. If your client is subject to the rules for Required Minimum Distributions (RMDs), QCDs count toward those RMDs. That means your client avoids income tax on the funds distributed to charity. Our team can work with you and your client to go over the rules for QCDs and evaluate whether the QCD is a good fit.
Real estate
Your client’s fund at the community foundation can receive a tax-deductible gift of real estate, such as farmland or commercial property, in a variety of ways. An outright gift is always an option; lifetime gifts of real estate held by the client 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 your client’s taxable estate. Other ways to give real estate include a bargain sale or a transfer to a charitable remainder trust which produces lifetime income for the client and the client’s family.
Life insurance
Don’t overlook life insurance as an effective charitable giving tool, whether by naming a client’s fund at the community foundation as the beneficiary or, in the case of whole life policies, naming the fund as beneficiary and transferring the policy itself. If your client transfers a policy, the client may be able to make annual, tax-deductible contributions to the community foundation to cover the premiums.
Other “alternative” assets
The community foundation is happy to work with you and your clients to explore options for giving other non-cash assets to funds at the community foundation, including:
We look forward to working with you to explore all the options!
The Reading Corner: Timely topics in charitable giving
Sunsetting TCJA can serve as an impetus for charitable planning
As you read up on techniques to structure philanthropy plans for your high-net worth clients, we recommend reviewing the potential impact of the estate tax exemption sunset, as well as making sure you’re one of just half of advisors (!) who are truly helping their clients with charitable giving in the first place. The team at the community foundation is happy to help you start the philanthropy discussion with clients; we understand that it’s not always easy, but it is so important.
Charitable giving in an election year
While charitable giving historically has been resilient in the midst of elections, it’s worth bearing in mind that some sources predict that political donations will eat into your clients’ budgets for charitable gifts. As you talk with clients about their philanthropy plans for 2024, you might pass along these trends so your clients can factor into their target gift amounts the potentially greater demand for funding community organizations. This is also a good time to remind clients that political donations are not tax deductible. This may seem elementary, but it still trips up some people who don’t track the rules closely.
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.