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Tax Return Reviews, Types of Funds, and the Latest Donor-Advised Fund News | Advisor Newsletter (March)
Hello from the Community Foundation of Southern Indiana!
Tax time is just around the corner, which means your clients may be taking a closer look at charitable giving options as they pull together information for 2023 filings. In this issue, we’re covering three topics that may capture the attention of philanthropic individuals and families this year while they’re talking with advisors about tax preparation.
- Reviewing tax returns with a client can feel like an administrative task that simply needs to get done. But don’t overlook the value of the review process to point out planning opportunities for this year and beyond, especially related to charitable giving and working with the community foundation.
- Each philanthropic client’s goals are unique, and charitable planning is not a one-size-fits-all proposition. CFSI offers charitable giving vehicles to meet a wide range of clients’ needs. Discover the many types of funds available through the community foundation and how each may be a fit for certain client situations.
- We’re always on the lookout for trends and legal updates that may impact charitable planning and the work you do for your clients. To that end, we’re sharing recent developments related to donor-advised funds and offering suggested reading materials to help you stay informed.
As always, we appreciate the opportunity to work with you and your clients during tax time and every other time of year. We’re your partner in charitable giving, and it is our pleasure to help you serve your philanthropic clients as they support the causes they love.
Wishing you all the best for tax season!
Tax Return Reviews Help Clients Level Up Charitable Giving Plans
Tax time has its silver linings! Going over a tax return with a client helps start a productive conversation about ways to plan gifts to charity more effectively. As you scan 2023’s charitable contributions, talk with your client about whether those charitable gifts were made with cash or with other assets and then steer the conversation toward discussing the most effective assets to give to charity during 2024 and beyond.
Here is a four-point checklist that can help you advise your clients about the range of charitable giving options.
1. Remind clients that cash is not king when it comes to charitable giving. Cash is typically not the most tax-effective form of charitable giving. Instead, encourage clients to consider giving highly-appreciated assets, including publicly-traded stock, to their fund at the community foundation to support their favorite charities.
2. Think even beyond stock. Encourage clients to explore not only highly-appreciated stock as a potential gift to charity, but also the various forms of “noncash” assets that can make great charitable gifts. After all, American households’ most valuable assets are retirement accounts and personal residences, not cash. Examples of assets that could be excellent charitable gifts depending on the client’s circumstances include gifts of real estate, closely-held stock, collectibles, and, for clients who are age 70 ½ and older, direct transfers from an IRA (known as a Qualified Charitable Distribution) to a field-of-interest or unrestricted fund at the Community Foundation of Southern Indiana.
3. Make it easy on yourself and your client. Reach out to the team at the community foundation for assistance! We are happy to help you and your client evaluate the best assets to give to a donor-advised or other type of fund at the community foundation to achieve the client’s charitable goals.
4. Close the loop on IRS reporting. Remember that the reporting requirements are different for noncash gifts to charity versus cash gifts. Make sure you are familiar with IRS Form 8283, which must be filed with any tax return claiming a deduction for noncash assets valued at $500 or more. The IRS expects strict adherence to the terms of the form, especially the requirement for a qualified appraisal. On our end, the community foundation will handle the confirmation of receipt and a commitment to document and notify the IRS if disposition occurs within three years. Opening up the full range of charitable giving options for a client can help you structure a holistic estate and financial plan that meets the client’s objectives for family wealth, philanthropy, and tax effectiveness. Reach out anytime to the team at the community foundation to discuss techniques and strategies.
Fund Types Tailored to Your Client’s Charitable Goals
Just as each of your clients has a unique estate plan and financial plan to meet the client’s particular situation and goals, each of your philanthropic clients needs a unique charitable giving plan. For example, for some clients, giving shares of highly-appreciated stock consistently every year to their fund at CFSI makes the most sense for their charitable goals and their mix of assets. For other clients, leaving a bequest to support specific areas of interest is the best fit for their financial situation and community priorities.
The Community Foundation of Southern Indiana offers charitable giving vehicles to meet a wide range of clients’ needs. In many cases, a single client can benefit from setting up multiple funds of different types.
Here’s a quick primer on a few of the most popular fund types:
A donor-advised fund enables your client to establish a specific account for charitable giving. Your client makes tax-deductible contributions of cash (or, ideally, stock or other highly-appreciated assets) to the fund, and then recommends grants to favorite charities.
CFSI has its finger on the pulse of the community’s most pressing issues. An unrestricted fund gives your client the opportunity to support community needs that can’t be identified until the future. One of the biggest benefits of a community foundation is its perpetual structure that allows clients and their families to offer support to nonprofits that evolves over time as priorities in the region shift.
NOTE: Look for information soon regarding a 2-for-1 match from the Lilly Endowment for gifts from your clients to the CFSI’s unrestricted Community Impact Fund.
Field-of-interest Fund
Clients who want to target their giving to specific areas of community need (such as education, health, environment, or the arts) can set up a field-of-interest fund to establish parameters for grant making under the ongoing guidance and expertise of the CFSI staff.
Designated Fund
A designated fund allows a client to direct giving to a specific agency or purpose. Over time, the Foundation’s staff manages the distributions from the fund according to the terms established by your client.
An agency fund is similar to a designated fund, except in the case of an agency fund, the source of the initial contribution is the beneficiary nonprofit organization itself, not a donor or donors as is the case with a designated fund. If your client serves on boards of directors of charities, they’d likely be interested in learning more about agency funds. Indeed, if you represent nonprofit organizations and their board members in your practice, it’s helpful to keep in mind that organizations frequently establish agency funds at the community foundation to set aside endowment reserves or rainy day funds. The team at the community foundation is adept at navigating the specific accounting standards that are unique to this type of arrangement.
Clients can set up funds to support students’ educational pursuits based on the parameters and application requirements they outline with help from the experts at the community foundation.
Here’s a pro tip: If you represent clients who are age 70 ½ and older, consider recommending a Qualified Charitable Distribution from a client’s IRA to a fund at the Community Foundation of Southern Indiana. All of the fund types noted above are eligible recipients, with the exception of only the donor-advised fund. We look forward to working together to discover the type of fund (or funds!) at the community foundation that could be a good fit for each client’s unique charitable giving needs.
Donor-Advised Funds: Recommended Reading
On an ongoing basis, our team tracks legislation, legal developments, trends, news, and innovative strategies for all types of charitable giving so that we can keep fund holders and their advisors up to date.
Recently, donor-advised funds have been the subject of conversation within financial and estate planning circles, as well as a trending topic in philanthropy, related to a set of proposed regulations issued by the IRS late last year. The IRS has scheduled public hearings on the proposed regulations, set for May 6, 2024.
As just one of many types of funds your clients can establish at CFSI, the donor-advised fund is popular because it allows your client to make a tax-deductible transfer of cash or marketable securities that is immediately eligible for a charitable deduction. Then, the client can recommend gifts to favorite charities from the fund to meet community needs as they emerge.
Our team has compiled a list of articles we’d recommend if you’d like to dig deeper into the topic of donor-advised funds. Of course, we welcome your questions and comments, so please reach out anytime!
- The Donor Advised Fund Research Collaborative’s recently-released study of donor-advised funds reported that the majority of donor-advised funds make at least one grant per year, and the national average annual “pay-out rate” for all donor-advised funds is 18%. Donor-advised funds are frequently deployed as a tool to help philanthropists who have a wide range of financial capacity, from a little to a lot, organize their charitable giving; consistent with that function, the study found that nearly half of all donor-advised funds carry balances less than $50,000.
- The proposed IRS regulations related to donor-advised funds are attracting significant interest in legal circles. To dig into the legal issues, you might check out this article in Financial Advisor because it includes commentary from professionals in the field, as well as this article if you are a Bloomberg subscriber. You can also check out the Council on Foundations’ comments for additional insight.
- For a big-picture look at the state of donor-advised funds, including the relevance of recent research and the status and implications of the proposed regulations, check out this article in Wealth Management and this article in Think Advisor.
While these materials are useful to gain an understanding of the current situation, at this point, no one can predict what will happen with the proposed regulations–whether and how they will be revised or when they might become effective, if ever. As always, our team is staying on top of the issues. We’ll keep you posted!