When it comes to charitable giving, there are those who are purely philanthropic and would donate as much as they can afford regardless of the tax consequences. the other side of the spectrum is the purely tax-driven contribution.
The reality for us as practitioners is that charitable giving is dominated by the high-income and high-net-worth crowd, and with that audience the trends and tax consequences always matter.
A new trend that I see is the suddenness of what is known as flash giving. This is giving that generally follows an unplanned local or international disaster. Whether it is washed-out roads in Vermont or tsunamis in Japan, these types of sudden, unanticipated events mobilize billions in unplanned contributions from U. S. taxpayers. These events have definitely redirected millions in traditional gifting for many of your clients.
Of course, world tragedies are not new, but the rapid mobilization of disaster funds and larger charities is a fairly recent trend. If you have clients who always seem to go for spontaneous giving, perhaps another big trend can also be helpful - the use of charitable gift trusts.
A charitable gift trust is basically a not-for-profit holding tank. Sponsored by mutual fund companies and other asset management or custodial platforms, charitable gift trusts allow your clients to make deductible contributions today, and have the money sit in an account where the client or their advisor actually gets to control or manage the holdings in the account. These accounts can be very effective for the client who frequently contributes spontaneously and those who may be unaware of the AMT or other tax consequences of their actions.
Gift trust accounts are also helpful for clients who may have a windfall. The windfall earner can make a large contribution to the gift trust, then dole the funds out of the gift trust in the manner and frequency that they want to continue in future years.
In the early years, contributions were often funded with cash.
According to a report from Financial-Planning.com in June 2011, there appears to be a large increase in the percentage of contributions that are coming from what are known as complex assets. Complex assets may be those with low basis or even significant liquidity issues, such as a closely held business or real estate. With the long-anticipated possibility of higher income and capital gains tax rates, contributions of complex assets could become even more popular.
FOUNDATIONS VS. TRUSTS
Gift trust accounts started as a way to get private foundation-like flexibility for less-than-ultra-wealthy charitable contributors. Now, large firms market their gift trust accounts as a supplement to a private foundation strategy. And while it does give you the same force and effect from both the gifting and the tax portion of the gift, there are some things that wealthy clients can do with foundations that you cannot do with a charitable gift trust.
First is the name of the entity. Some of your very wealthy clients simply want to see their family name and values connected to a charitable entity that lasts in perpetuity. The gift trust of a large mutual fund family is not about to change its name to accommodate your wealthy clients.
A second benefit to the private foundation over a gift trust account is the ability to appoint the board of directors and the leadership for the entity. I have many clients whose primary concern is that their wealth not cause their offspring and grandchildren to be trust-fund babies who may have less motivation to succeed in life. These clients are keenly focused on their values, and want to make sure that these values are instilled in next generations in as many ways as possible. One such way is to ask for their participation in private foundation management to witness this piece of the family values that grandpa wants to preserve for the generations.
Another trend in the private foundation space is government scrutiny. IRS audits are on the rise, and those using their private foundations to provide salaries and other personal benefits to friends and families are under closer scrutiny from taxing authorities than ever before. While there are bona-fide reasons for a private foundation to have salaries and other operating expenses, they are subject to a reasonableness test if ever audited at the private foundation level.
CHARITABLE GIFT ANNUITY
Another strategy is a gift with strings attached. There are products called charitable gift annuities where the donor, or anyone else that the donor delegates, becomes entitled to a lifetime stream of income from funds that the donor has gifted to a charity according to the terms of their agreement with that charity. When the donor dies, the charity keeps any remaining principal, and that is their ultimate gift. The amount of the income the donor receives is calculated as it would be for many traditional income annuities, and generally calculated based on the amount of their contribution, current interest rates, the age of any income beneficiaries in addition to the donor, and other factors depending on the charity's policies and procedures. The income amount is typically fixed, and will not fluctuate based on interest rate changes or any other economic or market changes.
The tax consequences of a charitable gift annuity are different. Because of the income stream of payments coming to the donor or their designated beneficiary, the deduction for the gift annuity will be less than the fair market value of the property contributed, just as in a charitable lead or annuity trust. Using present value calculations and the donor's life expectancy, an IRS table is used to determine the amount of the current tax deduction.
The income received from the donation is also subject to taxation.
If the gift was made with all cash, then the donor's income will be partially taxable and partially tax-free and considered a return of the original principal. If the donor made their contribution with appreciated property, the taxation of the income stream will be different. The income will be partially tax-free, part ordinary income, and part capital gain to the extent of the gains in the donor's appreciated property.
A trend within the charitable gift annuity space itself is that low interest rates have put a lot of pressure on charitable gift annuities to perform for the charity. Interest rates are a core component of the annuity income calculation. The current low rate environment has made the earnings portion of the assets gifted particularly troublesome for both the charities and any insurers selling charitable gift annuities. I expect to see lower income benefits in the very near future for charitable gift annuities, so if you have any clients talking about this strategy, help them decide if this strategy makes sense and if there are any rate changes pending at the institution of their choice.
I GAVE AT THE OFFICE
Workplace giving has also changed. With higher unemployment comes lower workplace giving. I don't know about you, but it has been a long time since a charity has come knocking on our door looking to establish a workplace giving program.
Another trend in giving doesn't involve cash or tax deductions at all. That is the gift of time and service. With unemployment so high and cash flow still ebbing for millions of Americans, many have donated more time to charitable purposes.
Probably the largest trend in giving is the coming of age of charitable giving Internet portals. As we learned this past holiday season, Internet commerce is still growing and philanthropy is no different. Not-for-profit organizations with no significant Internet presence for gifting need to overhaul their contribution engine drastically.
For your individual clients, this means a few other things that they need to be concerned about. First is the legitimacy of the entity. For charitable entities that are not familiar to you, it would pay to verify their not-for-profit status and learn more about them through independent, third-party sources. You can even ask for a copy of their Form 990 filed with the IRS and the division of public charities in their state. Second, remember to scan credit card statements so you do not miss any deductions.
Low interest rates have revived another trend - the use of charitable lead annuity trusts and charitable remainder unit trusts is growing, while the use of charitable lead unit trusts and charitable remainder annuity trusts is becoming less popular from a tax-effectiveness viewpoint.
IRA ROLLOVERS AND ESTATE TAX
We'd be negligent if we did not mention the charitable rollovers from IRAs that were available for 2010 and 2011. Obviously it is too late to act on that now in 2012, but this definitely impacted your high-net-worth taxpayers over age 70-1/2.
The use of charitable planning for estate tax purposes is also gaining popularity. Whether it means making your favorite charity a beneficiary of your IRA or naming the charity in a will or trust document to receive part of your estate - expect to see this on the rise as the aging of our population increases.
One trend that is directly related to you is the large increase in the percentage of donors who seek professional guidance before making material charitable contributions. According to a study sponsored by Bank of America and researched by the University of Indiana in November 2010, wealthy families were far more likely to use professionals to help with contributions in 2009 than they were in 2007.
More encouragingly, about 94.3 percent of all contributors who consulted professionals did initiate a call to their CPA about the topic - the highest of all professional categories. On the other hand, only about 5.7 percent of all those who consulted with their CPA had the discussion initiated by the CPA - the lowest of all professional categories.
It would be wise to ask your clients if they see philanthropy now or through their estate as a part of their future. If the answer is yes, perhaps there are ways to help them that they haven't thought of yet. If they are not charitably inclined, still inquire about their ultimate estate plan and help to see that it is current and in good working order.
John P. Napolitano, CFP, CPA, PFS is chairman and CEO of U.S. Wealth Management in Braintree, Mass.
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