Community Connection
Professional Advisors Edition - February 2021
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A treat to boost 2021:
Congress extends charitable giving incentives
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As your clients reboot after a wild 2020, now is a great time to address their charitable giving plans for 2021. COVID-19 has proven to be a marathon, not a sprint. Nonprofit organizations will be relying on the generosity of donors for the foreseeable future to stay afloat and serve the people who need their programs.
Consider dropping a quick note to clients for whom philanthropy is a priority, sharing a few tips that can help make 2021 a better year for our community:
1. Even non-itemizers should 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.
2. 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 with your clients on a charitable giving budget for 2021, especially because you’ll want to run calculations to determine whether clients can benefit from this incentive, or whether a client would still be better off carrying forward charitable contribution deductions into future years.
3. Given the extensions included in the Coronavirus Stimulus 2.0 bill, coupled with the general uncertainty about potential tax reforms under the Biden administration, it is wise to counsel your clients about being especially organized about charitable giving in 2021. Clients will want to be even more conscientious about the impact of dollars invested in the community, too.
As always, we would be pleased to assist you and your clients. For example, donor-advised funds and other planning vehicles through the Community Foundation of Central Illinois can help your clients organize their giving and deploy it in a way that maximizes results for the causes your clients care about.
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Keeping our community strong:
Your role is critical
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COVID-19 has significantly impacted nonprofit operations across the country and hampered nonprofits’ ability to help their communities during a crisis in which millions of people are in need. The National Council of Nonprofits reports widespread damage to nonprofits’ programs, services, supplies, staffs, and budgets due to the pandemic and current economic challenges. This means nonprofits need philanthropic support now more than ever.
1. Although 24.4% of study participants reported in late 2020 that they planned to give more to charities, that figure represents a drop of more than 6% since early 2020.
2. Gen Zers are more likely than other generational cohorts to shift from giving money to charities to supporting local businesses instead. Specifically, 28.6% of Gen Zers report this preference, compared to 0% of Matures and just 1.9% of Boomers.
3. Related, 26.3% of Gen Zers report that they are not satisfied with traditional charitable donations.
As a trusted advisor to your clients and their families across generations, your opportunity here is to offer information and resources to help your clients become more giving savvy--understanding the impact of nonprofits, how to measure the success of their charitable gifts, and how to select nonprofit organizations who are delivering the greatest return on investment to the people they serve. Our team at the Community Foundation of Central Illinois is deeply familiar both with the needs of the community and the nonprofits who are fulfilling them. We hope you won’t hesitate to reach out for support as you help your clients navigate ways to address our community’s challenges.
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Consciousness on the rise:
Tips for advising impact investors
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The term “impact investing” is said to have emerged in 2007 as a descriptor for deploying capital not only to achieve financial returns, but also to foster social progress and/or avoid harm to people and the environment.
Since then, impact investing as a discipline among individual and institutional investors has grown rapidly. According to Barron’s, a total of $502 billion was held in impact investments in mid-2019. A year later, that number stood at $715 billion--an increase of more than 42%.
As inquiries from your clients increase, and more and more of them ask for your help in exploring impact investing options for their philanthropic and non-philanthropic dollars, keep an eye on opportunities that seem to promote having the cake and eating it, too.
For example, in a recent private letter ruling, the IRS denied an organization’s application for 501(c)(3) status because the activities it proposed--creating an investment fund to carry out typically “charitable” activities--were not viewed by the IRS as charitable for tax purposes. The taxpayer requesting the ruling had proposed activities such as economic development in low-income communities and initiatives to fight climate change.
Though an eyebrow-raiser at first glance, the ruling ultimately does a nice job of reinforcing the distinction for tax purposes between program-related investments, which is itself a charitable activity, and mission-related investments, which is not a charitable activity.
It’s relatively easy for investment-focused professionals to miss the distinction, but the distinction is critical for proper tax treatment. A program-related investment (PRI) must significantly further a charitable purpose and can’t have a significant investment purpose, which effectively means that the investment is not one that a pure investor would be likely to make because its possibility of achieving competitive returns is extremely slim.
On the other hand, a mission-related investment (MRI) still has to meet prudent investment standards, even if it might not be the most profitable investment option on the market because it is taking mission into account.
The challenge for you as an advisor is to help your clients evaluate impact investment funds that appear to promote financial returns simultaneously with community good, with an implication that tax benefits are somehow woven into the offering, which may as well be too good to be true. Our knowledgeable staff at the Community Foundation of Central Illinois is here to assist you!
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A wild ride in 2020 ended with the extension of tax provisions to encourage charitable giving in the midst of ongoing pandemic-related challenges facing nonprofits. Now, in 2021, with the possibility of another stimulus package in the mix, your clients may be hearing about potential tax reform under the Biden administration as well as dialogue on both sides of the debate over whether to restrict the benefits of certain types of giving to foundations and donor-advised funds.
Help your clients break through the noise by reviewing the many ways they can achieve their charitable giving goals, regardless of what happens with tax policy and legislation. This month, we’ll cover two tried-and-true techniques: retirement plan and life insurance bequests and gifts of real estate.
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Back to basics: Retirement plans and life insurance
can fuel meaningful bequests
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Your client’s fund at the Community Foundation of Central Illinois can be an ideal recipient of estate gifts through a will or trust, or through a beneficiary designation on a qualified retirement plan or life insurance policy.
Bequests of qualified retirement plans can be extremely tax-efficient. This is because charitable organizations such as CFCI are tax-exempt. This means the funds flowing directly to a client’s fund at CFCI from a retirement plan after the client’s death will not be reduced by income tax. This also means the assets will not be subject to estate tax.
Don’t overlook life insurance, either. Not only is your client able to designate a fund at CFCI as the beneficiary of a life insurance policy, but your client also may elect to transfer actual ownership of certain types of policies. For example, when your client makes an irrevocable assignment of a whole life policy to the client’s fund at CFCI, a tax-deductible gift of the cash value of the policy occurs at the time of the transfer. A gift like this can ease a client’s income tax burden, especially if the Foundation continues to own the policy and the client makes annual tax deductible gifts to cover the premiums.
CFCI makes it easy for you to draft bequest terms in legal documents, including beneficiary designations of retirement plans and life insurance policies. Please contact our team for the exact language that will ensure alignment with your client’s intentions.
Keep in mind that even after a client has executed estate planning documents or beneficiary designations, in many cases the client can update the terms of the fund at CFCI designated to receive the bequest upon the client’s death. Clients love the ease and flexibility and certainly will appreciate your bringing this technique to their attention.
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Red hot real estate: Structure smart gifts to charity
without getting burned
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The housing market is showing no signs of slowing down in 2021. For certain clients, this presents a strong opportunity for charitable gifts of real estate, whether a primary residence, second 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 extremely tax-efficient. Whether your client is giving a second home, rental property, or commercial property to a fund at CFCI, the client may be eligible for a charitable tax deduction of the fair market value of the property. Because the Community Foundation of Central Illinois is a public charity, when the property is sold, the full amount of the proceeds will remain in the fund--not subject to income tax.
Gifts of real estate to charity shouldn’t be undertaken lightly, though; certain pitfalls and missteps can have a devastating tax impact. If your client is considering a gift of real estate to charity, consider working closely with us to ensure that the transaction is properly structured.
Our team can help you navigate the rules for gifts of real estate. such as how to determine valuation, dealing with 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 a “step transaction” due to a prearranged sale, and determining whether unrelated business taxable income (UBTI) will be a problem.
Finally, if your client would like the gift of real estate to benefit one or more favorite nonprofit organizations, CFCI can help facilitate a transfer into a donor-advised fund, from which your client can recommend grants to the charity or charities after the property sale is complete.
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3625 North Sheridan Road
Peoria, IL 61604
309-674-8730
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