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Gearing Up for Tax Time, A Love for Local, and Gifts of Artwork | Advisor Newsletter (Feb.)
Warmest greetings!
As is usually the case early in the year, the first quarter of 2024 is full of opportunities to revisit tax rules and planning techniques related to charitable giving. The team at the Community Foundation of Southern Indiana appreciates the opportunity to work with you and your philanthropic clients to structure giving vehicles to meet your clients’ goals for making a difference in the community.
In this issue, we’re covering three topics that are particularly relevant during the first quarter, and especially in February.
- Attorneys, accountants, and financial advisors are starting to hear questions that clients often ask about charitable giving as they are gathering information for their income tax returns. At CFSI, we’re here to help answer questions on any charitable giving topic, ranging from tax deductibility to the advantages of non-cash gifts.
- As tax season gets into full swing, remember that the community foundation is here as a resource for both straightforward and complex charitable giving issues you may encounter as you work with your clients. Recently, for example, we’re hearing more about charitable gift annuities, as well as following the coverage of potential pitfalls your clients may face when they make charitable gifts of works of art.
- Local giving is frequently on your clients’ radar. The Community Foundation of Southern Indiana is happy to talk with you and your clients anytime about the ways our team can help your clients maximize their gifts to local organizations to improve the quality of life right here at home, whether that’s by addressing the most pressing needs right now or in the future as they emerge.
An important additional note: We’re still closely tracking the IRS’s proposed regulations concerning donor-advised funds. The public comment period was extended, and you’ll hear from us when (and if) the proposed regulations, or some version thereof, go into effect and what to do about it.
Thank you for the opportunity to work together!
Tips for Serving Clients Who Love Local
Your charitably-minded clients certainly have no shortage of options for their philanthropic dollars. Many clients use their donor-advised funds, for example, at the Community Foundation of Southern Indiana to support favorite charities across the country, including alma maters, organizations in the communities where they’ve lived in the past or have a second home, or charities in communities where their grown children are now living.
Many clients, though, are also deeply committed to the local community where they’re living now, where they’ve raised their children, and where they’ve built a business. That’s why it’s helpful to remind clients that they can reach out to our team when they want to make sure their dollars are making the biggest difference possible, right here in our community.
Indeed, local giving satisfies many clients’ commitment to “take care of our own.” The unfortunate steady flow of crises and even disasters, coupled with decreasing state and federal funding to local nonprofits, means that philanthropy is playing an increasingly important role in our region. The community foundation, through its wide variety of fund types available to your clients (including endowment funds to support the community in perpetuity), can help your clients achieve their goals for local support, whether that takes the form of disaster recovery, supporting families in need, funding critical workforce development, or paving the way for historic preservation initiatives.
The Community Foundation of Southern Indiana team is always happy to provide insight into the challenges our community is facing right now and which organizations are delivering services to alleviate those needs so that your clients can provide immediate support through their donor-advised funds.
In addition, an unrestricted fund may be a good fit for clients who want to improve lives, right here in this community, for generations to come, whatever challenges our region may face at any given point in time. An unrestricted fund may be particularly compelling for your clients who are 70 ½ or older. These clients may be eligible to make annual distributions up to $105,000 per spouse from their IRAs directly to an unrestricted fund at CFSI. This transfer is called a “Qualified Charitable Distribution,” or “QCD.” Not only do QCD transfers count toward satisfying Required Minimum Distributions, but your client also avoids the income tax on those funds. Furthermore, those assets are no longer part of the client’s estate upon death, so the client can avoid estate taxes, too.
Please reach out to our team for more information on how your clients can support both current and future local needs, and also meet their own financial, tax, and generational legacy goals
FAQs: A Snapshot of Clients’ Tax-Time Charitable Giving Questions
The year is in full swing. Attorneys, accountants, and financial advisors are asking clients to start gathering tax documents and related paperwork for 2023 tax returns and 2024 planning. Now is a good time for advisors to review a few basic tax principles related to charitable giving.
Here are three questions that are top of mind for many advisors, along with answers that can help you serve your clients:
How important is it to high net-worth clients to get a tax deduction for gifts to charity?
Among clients who own investments of $5 million or more, 91% of those surveyed reported that charitable giving is a component of their estate and financial plans. In another study, most affluent investors cited reasons for giving well beyond the possibility of a tax deduction and would not automatically reduce their giving if the charitable income tax deduction went away. What this means for your practice is that it’s important to be aware of your clients’ non-tax motivations for giving, such as family traditions, personal experiences, compassion for particular causes, and involvement with specific charitable organizations. This also means it’s critical to talk about charitable giving with all of your clients because it’s likely that most consider it to be important.
Why do clients so often default to giving cash?
Many clients simply are not aware of the tax benefits of giving highly-appreciated assets to their donor-advised or other type of fund at the Community Foundation of Southern Indiana or other public charity. Even if they are aware, they forget or are in a hurry and end up writing checks and making donations with their credit cards. It’s really important for advisors to remind clients about the benefits of donating non-cash assets such as highly-appreciated stock, or even complex assets (e.g., closely-held business interests and real estate). When clients give highly-appreciated assets in lieu of cash, they often can reduce–significantly–capital gains tax exposure, and they can calculate the deduction based on the full fair market value of the gifted assets.
What are the basic deductibility rules for gifts to charities?
It’s important to know that the deductibility rules are different for your clients’ gifts to a public charity (such as a fund at CFSI) on one hand, and their gifts to a private foundation on the other hand. Clients’ gifts to public charities are deductible up to 50% of AGI, versus 30% for gifts to private foundations. In addition, gifts to public charities of non-marketable assets such as real estate and closely-held stock typically are deductible at fair market value, while the same assets given to a private foundation are deductible at the client’s cost basis. This difference can be enormous in terms of dollars, so make sure you let your clients know about this if they are planning major gifts to charities.
So what’s the first step? Reach out to the team at the community foundation! We really mean it. Make it a habit to mention charitable giving to your clients. From that moment on, whatever the clients’ charitable priorities, consider our team to be your behind-the-scenes back office and support department to handle all of your clients’ charitable giving needs.
Psst… Don’t Forget About Charitable Gift Annuities
Certain charitable clients may wish to structure a gift to charity so that the client retains a lifetime income stream. Keep in mind that a charitable gift annuity (“CGA”) could be an attractive option for these clients. Plus, if the client is 70 ½ or older, the client can take advantage of the one-time Legacy IRA opportunity to give $53,000 to a qualified charity such as an unrestricted or field-of-interest fund at the Community Foundation of Southern Indiana.
A CGA, like any other annuity, is a contract. Your client agrees to make an irrevocable transfer of cash or assets to a charitable organization. In return, the charitable organization agrees to pay the client (or a designated beneficiary such as a spouse) a fixed payment for life. Your client is eligible for an immediate income tax deduction for the present value of the future amount passing to charity.
The team here at CFSI can help you stay up-to-date on the latest CGA rate changes (including the rates that took effect at the beginning of this year). We’ll work with you to evaluate whether and when a CGA is a good planning move for your client.
Use Caution When Advising Clients About Donating Works of Art
Your clients who own highly-appreciated works of art certainly can consider making gifts of this property to a charity. Use caution, though, when helping clients structure gifts of artwork.
To be eligible for a charitable deduction at fair market value, the nonprofit recipient’s use of the donated artwork must meet certain qualifications, in that the artwork has to be used for its charitable purpose (think art museums). On top of that, be wary of techniques that recently have come under severe IRS scrutiny and have been determined to circumvent the rules for tax deductions.
Disclaimer: The Community Foundation of Southern Indiana 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.