Community Connection
Professional Advisors Edition - February 2022
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A personal note to our advisor colleagues |
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We’re ready for a fresh start. How about you?
Alas, it’s still not clear what might happen with tax reform given the fluid status of the Build Back Better Act. But that doesn’t mean we can’t begin 2022 with enthusiasm for helping philanthropic individuals and families achieve their goals for improving the quality of life in our region. Indeed, according to a 2021 Harris Insights & Analytics survey, 60% of Americans are expecting their taxes to go up in the next four years. And most of them are looking for ways to minimize taxes now, rather than waiting for retirement.
With that in mind, we’re kicking off our newsletter series this year with topics that will help you more easily start conversations with your clients about their philanthropic plans by raising the issue not in a vacuum, but within the context of their families, their businesses, and a charitable giving marketplace that continues to deliver twists and turns such as cryptocurrency and NFTs.
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So, what happened to tax reform? And what does that mean for charitable giving strategies? |
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Last year’s heavily-debated versions of the Build Back Better Act called for tax increases that potentially could have impacted charitable giving. But, as 2022 gets into full swing, legislation that’s eventually passed may bear little resemblance to early iterations. In particular, debate over the cap on the deductibility of state and local taxes (“SALT”) has illuminated a parallel debate over whether the changes to the cap would impact charitable giving. At the moment, though, tax increases to support President Biden’s legislative agenda are still very much up in the air.
In other tax news, advocates for charitable organizations are lobbying lawmakers to bring back Covid-19-related tax incentives, including the $300 ($600 for joint filers) so-called “universal” charitable deduction.
Meanwhile, taxpayers may find themselves in limbo over timing decisions for their gifts to charity, as well as other tax-sensitive transactions, creating ongoing discussions with advisors about whether to pursue “bunching” strategies or instead to wait for more clarity on the legislative situation.
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Transfer of wealth: Following the money |
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“The greatest wealth transfer in modern history has begun,” according to a mid-2021 report in the Wall Street Journal. And, with tax reform’s big bite into estate values off the table, at least for now, many of your older clients may be thinking seriously about their legacies.
And these legacies will be significant. As of March 31, 2021, according to data collected by the Federal Reserve, Americans in their 70s and older had a total net worth reaching almost $35 trillion. By 2042, an estimated $70 trillion will change hands, including an estimated $9 trillion flowing to charities, according to research conducted by Cerulli Associates.
As you advise an older client, an important part of the conversation will be to determine the best charitable giving vehicles to achieve your client’s community goals, particularly evaluating the potential role of a donor-advised fund or private foundation. Increasingly, your clients are learning about their options in mainstream media and likely have a greater level of awareness about charitable giving options than ever before, especially in the wake of the recent twists and turns concerning potential tax reform.
Here are key points to keep handy for those conversations (as you pick up the phone to call the CFCI team!):
–A donor-advised fund at CFCI has minimal ongoing fees.
–A donor-advised fund can be created quickly–within a week or even days. A private foundation, by contrast, requires establishing a legal entity through state and IRS filings.
–Donating hard-to-value assets to a donor-advised fund delivers better tax benefits (deduction of fair market value) than a gift of the same assets to a private foundation (deduction of cost basis).
–A client can deduct a greater portion of AGI (e.g., cash deductible up to 60% of AGI) with a gift to a donor-advised fund than with a gift to a private foundation (e.g., cash deductible up to 30% of AGI).
–Ongoing operations of a donor-advised fund through CFCI are very easy, with no tax filings required.
–Sometimes, both a private foundation and a donor-advised fund are useful tools to meet a client’s charitable giving goals. The CFCI team can help you develop a structure for your client that maximizes the benefits of each vehicle within an overall philanthropy strategy.
Next, consider encouraging your clients to make charitable giving part of “living large” in their golden years, especially in light of an emerging trend that some retirees are spending their money instead of giving it away.
Finally, remind your clients that the best time to set up their philanthropic plans really is right now. By being proactive, your client has nothing to lose and everything to gain in ensuring that their charitable wishes are carried out. To that end, CFCI regularly works with advisors helping clients who wish to establish “shell funds” to receive bequests after the clients pass away. A shell fund allows a client to describe charitable intentions, including naming advisors and suggesting nonprofits to receive fund distributions, to guide the heirs through the client’s charitable legacy. Your client can name the fund, and even provide that the CFCI’s board of directors work with advisors to make grants and evaluate impact. A shell fund agreement can be modified anytime before your client’s death.
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Big gifts are getting bigger. How does that change your conversations with your clients? |
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Ranging from $175 million to a whopping $15 billion, the 10 largest gifts to charity in 2021 may have caught your clients’ attention. Not only do philanthropic gifts seem to keep getting bigger, but the future looks bright, too, with more than $84 trillion projected to be handed down in what may be one of the largest intergenerational transfers of wealth in history. Although most of that money will flow to heirs, projections indicate that charities could receive as much as 14% (nine percent in the form of bequests and the rest as lifetime gifts to charity).
As your Baby Boomer clients plan their estates, keep that 14% in mind, especially as philanthropists at all levels are becoming increasingly intent on making an immediate impact on important causes instead of leaving behind perpetual philanthropic structures.
CFCI can help you develop an impact-focused philanthropy plan for your clients, including helping your clients “reverse engineer” the philanthropy structures that will be most likely to result in the difference your clients want to make in the world.
Keep an eye out for clients who match these characteristics:
--Families who have started to talk with you about multi-generational participation in philanthropy but do not yet have any formalized plans.
--Families who have publicly demonstrated a commitment to three or more charitable organizations.
--Families who own a multi-generational family business such that corporate giving and enterprise legacy have become intertwined.
--Families in which members across multiple generations appear to be actively involved in philanthropy discussions.
The team at CFCI has the depth and breadth of experience to help you in these instances, and much more.
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When giving hard-to-value assets, creativity–and caution–are critical in the digital age |
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For some of your clients, the thought of giving artwork to a museum or other charity might have crossed their minds. Otherwise, in the estate plan you’ll build for the art collector, the choices largely boil down either to selling the pieces, or giving them to family and loved ones during life or through a bequest.
It is imperative to understand the tax consequences of each disposition scenario as you advise your clients about their collectibles. For example, clients may not realize that the higher capital gains rate of 28% generally applies to artwork and other collectibles–not the 20% rate typically applicable to sales of other types of capital gains assets. And even this higher rate has been the subject of some tax reform discussions.
Indeed, many clients would prefer to hold onto their art collections, rather than sell during their lifetimes, in order to take advantage of the step up in basis upon their deaths.
Charitable giving is an option here, too, and your client can potentially avoid capital gains and estate taxes by donating artwork to a nonprofit organization. Be very careful, though, because the rules are different depending on the type of charity (e.g., a museum versus a foundation) and whether the charity’s use is related to its exempt purpose (e.g., a museum versus an animal shelter).
So, what happens if your client wants to give an NFT to charity? Which rules apply–the usual rules for non-cash assets, or the rules for donating artwork? The law is equal parts emerging, fascinating, and intricate! As IRS guidance emerges–and similar to the tax treatment of gifts of art collections–the proper tax treatment likely will hinge on factors such as how the NFT will be used, whether the donor is a “creator,” and whether the NFT is marketable and easily converted to cash.
The team at CFCI thrives on complex giving opportunities. Whether your clients’ estates include artwork, digital assets, real estate, or closely-held stock, please reach out. We’d love to help you evaluate the options for achieving both your clients’ tax goals and charitable planning goals.
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We're proud of our accreditation with National Standards for U.S. Community Foundations®. This accreditation, signified by this Seal, indicates that the Community Foundation of Central Illinois meets the highest standards for philanthropic excellence. The 26 national standards establish legal, ethical, effective practices for community foundations everywhere and indicates CFCI’s commitment to excellence and accountability. Learn more about the accreditation process at cfstandards.org.
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3625 North Sheridan Road
Peoria, IL 61604
309-674-8730
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