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Rebecca Rothey of the Greater Washington Community Foundation explains how donors can maintain or increase their charitable giving under the new tax law while preserving the tax benefits of such giving.
By Rebecca Rothey
Rebecca Rothey, CFRE, CAP®, joined the Greater Washington Community Foundation on Aug. 1, 2016, as vice president of development and senior philanthropic advisor. Prior to coming to the Community Foundation, Rebecca has held several charitable gift planning positions.
The passage of the 2017 tax act, with its near doubling of the standard deduction, is expected to cause a significant reduction in the percentage of individuals and couples who itemize—from approximately 30 percent to around 8 percent or 9 percent. This has caused concern that charitable giving may decline, because, with the added limitations on state and local taxes and mortgage interest, fewer people will reach the amount of deductions needed to make itemizing beneficial.
However, there are some opportunities for donors and advisors who want to maintain (or even increase) their charitable giving while also preserving tax deductions under the new law.
In response to the 2017 tax act, many advisors are recommending that people “bundle” their giving and make donations in alternating years, or even every third or fourth year. One way to bundle is through donor-advised funds, especially for those donors rightly concerned about nonprofits losing the revenue from the annual gifts on which they have come to depend.
A donor-advised fund (DAF) is a philanthropic vehicle offered by sponsoring organizations. By using a DAF for charitable giving, donors receive an immediate charitable income tax benefit for a gift to a public charity (now 60 percent of adjusted gross income (AGI) for gifts of cash and still 30 percent for appreciated assets) for the contributions made into their fund, and then recommend grants from the fund over time.
The Economic Stimulus Act of 2008 defined rules for DAFs. While gifts to DAFs are irrevocable, donors are granted the right to recommend where grants are made from their fund and how to allocate their DAF’s investments. Restrictions on what is permitted or prohibited are spelled out in tax code Section 4966 and Section 4967. The restrictions follow private foundation rules, such as the requirements regarding charitable purpose and prohibitions against self-dealing and receiving more than an incidental benefit from a gift. (Happily, the Internal Revenue Service is currently reviewing the prohibition against using DAFs to fulfill pledges.)
DAFs are offered by financial institutions such as Fidelity, Vanguard, and Schwab through their charitable affiliates, as well as by public charities such as community foundations, religious foundations, and increasingly, universities and other large nonprofit institutions. For example, community foundations often manage hundreds of charitable giving funds established by generous individuals, families, corporations, and civic leaders. In addition to fund administration, community foundations offer local nonprofit sector expertise to advise donors’ charitable giving plans, and provide flexibility around both investing and disbursing funds. DAFs are easy to establish, and typically the host institution will charge a management fee.
Another less-frequently discussed option to consider in the wake of the new tax law is individual retirement account charitable rollover gifts. The 2017 tax act retained qualified charitable distributions (QCDs) from individual retirement accounts of up to $100,000 per year for those over age 70 1 2 , and even increased the advantages for individuals who make these types of gifts. Gifts made directly from an IRA to a qualified public charity are not included in donors’ income for income tax purposes, and these gifts may be used to meet mandatory minimum distribution requirements. If a donor does not have deductions sufficient to exceed the new standard deductions (which will be the case for the many seniors who have little or no mortgage interest payments and lower state and local taxes due to lower income), QCDs are now a particularly attractive option. Seniors using this option lower their overall income tax burden because the charitable distribution is not included income for tax purposes, thus lowering their adjusted gross income.
The law still prohibits QCDs from being made to DAFs. However, community foundations (but not most other sponsoring organizations) offer other options for donors who may be reluctant to make large, one-time distributions to a particular charity: this includes field of interest funds and designated funds. Field of interest funds allow donors to specify an area of philanthropic interest (e.g., arts, early childhood education, animal welfare, etc.), and then rely upon the expertise of program staff familiar with the most effective organizations to select grant recipients. This fund type is attractive to donors who know the charitable purpose(s) they wish to support, but do not want the burden of researching and selecting the organizations doing the work.
Designated funds name specific organizations to receive distributions. The distributions can be made as a lump sum, spread out over a pre-determined number of years, or be set up as a term or permanent endowment. This is attractive to donors who want external control over the timing and frequency of their gifts or who wish to wall off the asset in case of financial difficulties or mission shift at the designated nonprofit. Both options are also excellent vehicles for charitable estate planning.
With the increased benefit of using DAFs, field of interest, and designated funds, clients will look to advisors for advice not only about whether or not to establish a charitable fund but also for advice about how to use a fund once opened.
Establishing a DAF, even at the standard entry-level amount of $10,000, causes donors to think differently about their philanthropy. A fund holder once described this new viewpoint by saying, “I went from being a donor to becoming a philanthropist.” This process is not dependent on age, overall wealth, or the amount in the fund. It is a shift in intentionality and, at its core, relates deeply to worldview and values.
Open Impact, a strategic advisory firm that partners with social change leaders to help craft and accelerate their impact, recently released a study of high-net-worth and ultra-high-net-worth philanthropists in California called “ The Giving Journey.” Most in the study were in their 40s and 50s; all had newly acquired wealth. The paper identifies a common four-stage process for emerging philanthropists. The first stage begins with relatively small gifts to well-known organizations, followed by a pause to reflect, then finding a “tribe” of fellow philanthropists for learning and collective impact, and, finally, reaching a stage the paper calls becoming “an actualized philanthropist.”
The paper shares a common lament: Most participants did not get guidance from their advisors as they embarked on and continued this journey. Unfortunately, research has consistently shown that clients are not getting the assistance with their philanthropy from their advisors that they would like to receive.
As an advisor, there are resources that can help you improve how you assist your clients. The remainder of this article provides a brief overview of a few of the resources available for improving an understanding of your clients’ motivations and ways to assist them.
Most community foundations have staff with deep expertise in advising philanthropy who offer resources for professional advisors including networking events, presentations, educational sessions for clients (with no “pitch”), and one-on-one meetings with advisors and/or their clients. Advisors working at smaller firms can utilize the deep local knowledge and expertise of community foundations. Community foundations are geographically based; there are now 800 across the country. Even the larger firms refer to community foundations when philanthropic clients have locally based objectives. Most community foundations allow fund holders to recommend outside investment managers above a certain dollar threshold (this varies by community foundation), allowing the advisor to keep the investment relationship while provide a gratifying client experience.
Many of the larger wealth advisory firms have hired philanthropic advisory staff as part of their family-office style services; some view this as a new business acquisition opportunity. U.S. Trust offers a useful resource for advisors who wish to understand their clients’ perceptions in its 2016 Study of High Net Worth Philanthropy, a biannual survey done in collaboration with the Indiana University Lilly Family School of Philanthropy. It has a wealth of data on demographics, perceptions, and opportunities for advisor-client interactions.
John Warnick, an estate planning attorney who founded the Purposeful Planning Institute after experiencing frustration at the lack of collaboration between the multiple specialties that assist clients, especially during liquidity and wealth-transfer planning, uses a unique training process. His method includes a fictional video drama (performed by actors) of a couple who have just sold their business and are sharing for the first time their plans with their three children. The conversation does not go as the couple anticipated. Advisors across disciplines discuss how the unfortunate outcome might have been avoided with improved collaboration and communication. The pitfalls of planning in silos are explored in detail, including the consequences of doing the transfer planning under the gun of an impending sale, creating a private foundation without consulting the children first, and treating a son who left a career to work for the company the same as the other two siblings.
No matter how you choose to deepen your understanding about guiding clients on their philanthropic journey, the outcome will be truly win-win-win. You will deepen your relationship with your clients, who will, in turn, imprint on you as the advisor who helped them accomplish what is often their most meaningful life’s work. Finally, you will help impact the innumerable non-profit, educational, and health-related institutions that will benefit from your clients’ generosity. It doesn’t get much better than that!
The mission of Advisors in Philanthropy Foundation “… is to encourage and support the professional education of advisors in philanthropy and to increase the public’s awareness that such advisors exist” ( http://www.advisorsinphilanthropy.org/). It has a growing number of local chapters and hosts an annual conference. The National Association of Charitable Gift Planners ( https://charitablegiftplanners.org/), comprised primarily of charitable gift planning staff at charitable organizations, has local chapters that offer educational and networking opportunities. The American College offers a professional designation called the Chartered Advisor in Philanthropy, CAP® ( https://www.theamericancollege.edu/designations-degrees/cap). Three masters-level courses cover advisors’ roles and perspectives, the non-profit sector’s role and goals, and charitable gift planning techniques. Taking the program is especially beneficial if it is possible to participate in a study group. Check with The American College or your local community foundation or planned giving council for opportunities. Also see http://purposefulplanninginstitute.com/.
Copyright © 2018 The Bureau of National Affairs, Inc. All Rights Reserved.
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