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Image Professional Advisor News: October 2023

Clients want to know: What’s deductible and what’s not?

Whether you are an estate planning attorney, financial advisor, or accountant, you’ve probably seen an uptick in client questions about tax deductions–and tax rules in general–over the last few years. Tax law changes at the end of 2017 have caused a lot of ongoing taxpayer confusion

To be sure, your clients will be asking about charitable tax deductions as year-end rolls around. As an advisor, you’re already working with clients on financial and tax planning all year long, but fall is the time when many clients buckle down. Whether it’s the change in the weather or the imminent end of the calendar or tax year, autumn is a time to reassess things like tax loss harvesting and charitable giving. These are just two of many types of transactions that result in deductions when tax returns are filed in the spring. 

Charitable giving may be especially high on the planning radar right now because of the many national fundraising initiatives that kick into gear this time of year. You (and your clients) have probably noticed that many different types of causes are celebrated each and every month. October, in health-related charities alone, is National ADHD Awareness Month, National Down Syndrome Awareness Month, Pregnancy and Infant Loss Awareness Month, Spina Bifida Awareness Month, National Physical Therapy Month, and likely many more. 

Make sure your clients are aware that there are specific parameters around tax deductibility before they respond to requests from organizations and even their friends and family members who support these organizations. Your clients are relying on you as an advisor to stay on top of the rules, including:

–Section 501(c) of the Internal Revenue Code lays out the requirements for organizations to be considered tax-exempt–a status for which an organization must seek IRS approval. 

–Tax exemptions apply to certain types of nonprofit organizations, but status as a nonprofit (which is a state law construct) does not necessarily mean that the organization will be exempt from Federal income taxes.

–Furthermore, even under Section 501(c), there are different types of nonprofits that are recognized by the IRS as tax-exempt. 

–To qualify under the Internal Revenue Code Section 170 charitable deduction for gifts to Section 501(c)(3) organizations, for example, the recipient must be organized and operated exclusively for “charitable, religious, educational, scientific, literary, testing for public safety, fostering national or international amateur sports competition, and the prevention of cruelty to children or animals.” “Charitable,” according to the IRS, has a very narrow definition.   

–No doubt, many of your clients not only support 501(c)(3) charities, but also social welfare groups organized under Section 501(c)(4). Examples of social welfare groups include neighborhood associations, veterans organizations, volunteer fire departments, and other civic groups whose net earnings are used to promote the common good. Donations to social welfare groups are tax deductible in only certain cases (e.g., gifts to volunteer fire departments and veterans organizations). 

–Chambers of commerce and other business leagues fall under Section 501(c)(6); donations to these entities are not tax deductible. 

If you have any questions about the tax deductibility of your clients’ contributions to various organizations, please reach out to the team at the community foundation. We are immersed in the world of Section 501(c) every single day and are happy to help you navigate the rules. 

Spotting opportunity: Moving from a commercial fund to the community foundation

Although a donor-advised fund, which is becoming a more and more popular charitable planning tool, can be established through a national financial institution, the community foundation offers its donor-advised fund holders much broader services, more personal attention, and deeper connections to the nonprofits whose work is essential to effecting positive community change. Unfortunately, many attorneys, accountants, and financial advisors are simply not aware that a donor-advised fund established at the community foundation is in most cases a far better fit for their clients than a donor-advised fund set up at a “commercial gift fund.” 

As you meet with your clients about year-end planning, be sure to ask whether they’ve established a donor-advised fund and if so, where it’s housed. If a client’s donor-advised fund is not at a community foundation, but instead was established through a national provider, please give us a call. We would be happy to talk with you and your client about the ease and benefits of moving the donor-advised fund to the community foundation. 

The community foundation offers donor-advised fund holders the same tax and administrative benefits as a commercial gift fund, including:

–Online access to the donor-advised fund to view balances, contributions, and grants

–Simple process for requesting grants to favorite charities

–Streamlined tax reporting, often represented by just one letter to provide to an accountant at tax time, even when the donor-advised fund is used to support dozens of individual charities throughout the year

–All back-office administration, tax receipts, recordkeeping, and other requirements for the donor-advised fund’s 501(c)(3) status

–Favorable tax-deductibility of contributions to the fund

Unlike standard commercial gift funds, though, the community foundation offers high-level, customized services to its donor-advised fund holders, including:

–Concierge-level service by knowledgeable staff to structure estate gifts to charities and accept gifts of appreciated stock or complex assets such as real estate or closely-held stock

–In-house experts who have a finger on the pulse of community needs, the strengths of specific nonprofits, and how to structure grant making for the highest possible community benefit

–Opportunities to collaborate with other donors who care about similar issues and forums to tap into local and national subject matter experts

–Opportunities to go deep into specific issue areas, both through education and hands-on involvement

–Assistance with structuring and measuring the impact of grants 

–Family philanthropy and corporate giving services to foster a well-rounded, holistic approach to philanthropy 

–Administrative fees that are reinvested into the community foundation, itself a nonprofit, to help support operations, grow its mission, and help even more donors support the causes they care about

–Hands-on assistance from local experts who understand both local and distant needs, and welcome the opportunity to research and identify causes aligned with donors’ goals and priorities 

–Staff members who live in the community they serve and often personally know the leaders and staff of grantee organizations and regularly hear about their needs first-hand

Keep an eye out for clients’ donor-advised funds at commercial gift funds. You’ll be doing a tremendous service for your client, and you’ll be helping the local community. You will also be fulfilling your own professional responsibilities by exploring the opportunity for a client to move a donor-advised fund to the community foundation. At the community foundation, hard-earned assets receive the attention they deserve as your clients strive to make a difference in the causes they care about the most. 

Charitable planning and women clients: Three mini-case studies

Women’s spending power has been in the news over the last several weeks as Taylor Swift’s and Beyonce’s tours continue to break records and the Barbie movie still looms large. As you’ve worked with female clients over the years, you’ve likely noticed a few trends:

–Women frequently take on caregiving roles within a family, including caring for both their parents and their own children, and often while also working full-time or owning businesses.

–Women often take the lead on charitable giving decisions.

–Women often find themselves living alone at some point in their lives, including because of a spouse’s death or because of divorce. 

–Women often have a hard time putting themselves first.

At the community foundation, we are always up-to-date on the trends in philanthropy that affect women as they build charitable components of their estate and financial plans. Our team is happy to provide helpful resources if you’d like to learn more about how philanthropy plays a role in your female clients’ lives.   

Here are three examples of cases where the community foundation team can help:

Family philanthropy vehicle funded with tax-efficient assets

We can work with you and your client to establish a donor-advised fund that includes your client and her children as advisors so that they can all learn together about nonprofit organizations in our community and jointly decide on grant recipients, tapping the knowledge and connections of the community foundation team. We can help you identify the most optimal assets for your client to transfer to the donor-advised fund, including highly-appreciated stock, real estate, or even an interest in a closely-held business. 

Funds dedicated to a specific area of interest funded with IRAs

Our team can provide deep research and expertise on a client’s specific areas of interest, whether that’s the arts, education, emergency assistance, medical research, or another cause that is important to your client. Then, we can work with your client to establish a field-of-interest fund at the community foundation to receive Qualified Charitable Distributions from your client’s IRAs. Your client can also name the field-of-interest fund as the beneficiary of the IRA to receive the remaining assets at her death. Your client will enjoy the confidence of knowing that her charitable priorities will continue to be supported for years to come, even beyond her lifetime.

Leaving a Charitable Legacy

For a client who has dedicated many years of her life to supporting charitable organizations, including perhaps even serving on one or more board of directors, our team can work with you to help the client create a legacy plan that includes all of the charitable organizations and causes that she cares about. The client can amend the plan, a letter of intent on file at the Community Foundation, with ease during her lifetime without having to revise her estate planning documents. Through our legacy planning process, we take the time to get to know each client, to document their personal history and to help them create a legacy plan that reflects the impact they wish to make.

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