Emotional Ties to Stock, Mixing Business with Charity & Locking In the Exemption | Advisor Newsletter (July ’24)

Greetings from the Community Foundation! 

We hope the summer of 2024 is treating you well! As always, we appreciate the opportunity to work with you and your charitable clients. 

Every year, the Giving USA study released in June reports the status of charitable giving in America. Adjusted for inflation, 2023 numbers were down, which means it’s been more difficult for our region’s charities to meet the needs of the people they serve. This is relevant to your clients because for many of them, philanthropy is an important part of financial plans and family traditions. 

In this issue, we’re sharing insights to help with your client conversations about charitable giving.

• APPRECIATED STOCK GIFTS: As an advisor, you’ve certainly experienced clients’ emotions running wild! Confronting mortality, addressing complex family relationships, and discussing money all come with financial planning’s often rocky terrain. We can help when you encounter a charitably-minded client who is devoted to a particular stock and may be reluctant to take the tax-savvy step of giving it to charity.
• MIXING BUSINESS & CHARITY: “Doing well by doing good” is a popular notion in corporate giving programs. Many of your clients may be in positions to influence corporate giving strategies. CFSI can support you as you advise on avoiding tax pitfalls and conflicts of interest as clients and their work colleagues create charitable giving strategies that align with business purposes. 
• MATCHING GRANT OPPORTUNITY: CFSI has been awarded $3,750,000 in funding to match contributions to its unrestricted Community Impact Fund. The match is a $2-for-$1 matching grant, meaning the Foundation can TRIPLE your clients’ charitable impact to any gift made to CFSI’s unrestricted Community Impact Fund – which supports the greatest needs and highest priorities of our community, now and forever.
• PLANNING FOR A SUNSET: If it feels like the topic of the estate tax exemption sunset is heating up, you are right! More and more of your clients are becoming aware of the change in the law that is slated to occur at the end of 2025 unless legislation intervenes. Be sure you know the basics about how this change could impact your clients, including the ways charitable giving and the community foundation can fit into smart planning. 

Of course, please reach out anytime! It’s our pleasure to work with you as you help your clients achieve their charitable giving goals for this year and many years to come. Happy summer! 

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Gifts of Appreciated Stocks: Picking Favorites

You’re well aware that donating highly-appreciated stock to a fund at the community foundation offers significant advantages for your clients over making cash gifts. Communicating this benefit, however, can be challenging when clients have emotional attachments to their shares. 

How can you overcome this hurdle and help optimize your clients’ charitable giving strategies?

Start by understanding the reasons a client might be reluctant to part with certain stocks in the first place:

• Legacy: “These shares have been in my family for generations.”
• Professional: “I worked at this company for decades; it’s the source of my wealth.”
• Simple preference: “I just love this stock.” 

Emotional ties like these can create psychological barriers to effective charitable planning. There is, however, a potential solution that can satisfy both your clients’ emotional needs and their philanthropic goals: The client donates shares of the highly-appreciated, emotionally significant stock to their fund at the Community Foundation of Southern Indiana, and then the client purchases shares of the same stock in their personal investment portfolio. 

Here’s why this can be such an effective strategy:

• Maximize tax deductions: Publicly-traded securities are typically deductible at fair market value (and the tax savings could potentially help fund the repurchase).
• Reset cost basis: This transaction effectively resets the cost basis of the stock in the client’s personal portfolio to its current market price, potentially reducing future capital gains taxes.
• Emotional satisfaction: Clients can support charities while maintaining their shareholder status in the company they like.
• Community impact: The community foundation can sell the donated shares tax-free, thereby maximizing the proceeds flowing into the client’s fund, and the fund in turn can be used to support the client’s favorite causes.

As you share this strategy with a client, be sure to acknowledge the emotional value of the stock and emphasize the client’s opportunity to maintain ownership in the company. Building on this, you can show the client how the tax benefits of giving stock allow the client to make an even bigger difference than if they’d given cash instead. 

As always, our team can help you assist your clients with selecting the best assets to give to charity, evaluate tax implications of various giving strategies, and structure gifts to achieve strong community benefit. We look forward to a conversation!

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Mixing Business and Charity: Keeping it Ethical, Legal & Transparent

Your clients who are corporate executives have likely wondered at some point about the benefits of aligning their companies with philanthropy, whether specific causes or particular organizations. 

In general, a community engagement strategy can be good for business, if well-executed. For example, almost half of consumers view a brand favorably when the brand supports a charitable cause. Community engagement programs can help with employee retention, too. 

But what are the risks involved in mixing business with charity?

In the spirit of aligning doing good with doing well, some companies would love to set up their own nonprofit organizations as “charitable arms” of their enterprises. Corporate leadership may like the idea of efficiency, control, and tight alignment between the company’s offerings and the charity’s mission. For example, a company that makes swimming pools might think it’s a great idea to set up a charity to build swimming pools at community centers to give more kids access to water sports. The company would like to donate tax-deductible dollars to the charity and ask its suppliers and customers to do the same. The company’s executives would serve on the board of the charity, and the charity would purchase swimming pools from the company to carry out its mission. 

Is this a good idea? 

No. This strategy plays fast and loose with the rules. Beyond setting up an obvious conflict of interest, this practice would mean that a company effectively would be using charitable funds to benefit itself. This is not a “charitable purpose” in the eyes of the IRS and could result in the loss of the charity’s tax exemption. Plus, if the news got out about this structure, the company could suffer reputational damage.

The company, its executives, and the community are all better off if the company pursues more transparent and ethical charitable strategies such as establishing a corporate fund at CFSI, setting up a volunteer program for employees, establishing a matching gifts program, or aligning with wholly-independent charities on cause-related marketing partnerships.

Reach out to our team to learn more about effective corporate philanthropy strategies. We are here to help as you work with your clients to achieve their charitable goals both at home and in the workplace.

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TRIPLE Your Clients’ Charitable Giving Using a Qualified Charitable Distribution, Other Gift Options

Thanks to a generous opportunity from the Lilly Endowment, CFSI has been awarded $3,750,000 in funding to match contributions to its unrestricted Community Impact Fund as part of the Endowment’s Giving Indiana Funds for Tomorrow, Phase viii (GIFT VIII) initiative. The matching grant will TRIPLE any gift made to our Community Impact Fund.

Each year from the Community Impact Fund, we award over $400,000 to organizations, projects, and programs that directly benefit Southern Indiana residents. By meeting our $5 million matching grant goal, the increased amount available to spend from the Community Impact Fund would allow for an estimated additional $200,000 in local grant awards – a 50% annual increase – each year. Forever.

This initiative presents an opportunity to award more grants annually – by a substantial margin. And your clients can TRIPLE their charitable impact to any gift made to CFSI’s unrestricted Community Impact Fund – which supports the greatest needs of our community, now and forever.

Gifts that can be matched include:

• Qualified Charitable Distributions (IRA Rollover)
• Cash / Checks
• Stocks / Bonds
• Mutual Funds
• More!

When you support your local Community Foundation, you’re not just giving to a single entity – you’re investing in the entirety of your community. Together, we have the power to address pressing challenges, unlock potential, and nurture the seeds of growth and prosperity for everyone in our community.

**If you would like a CFSI team member to make a presentation to your company or firm on the GIFT VIII match — and the tax-beneficial ways your clients can use it — please send us an email and we’d be happy to schedule a time to come out and speak with your team: LSpeed@CFSouthernIndiana.com

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Planning for a Sunset: Lock in a Higher Exemption, Unlock a Legacy

Without legislation to prevent it, the sunsetting of current estate tax laws at the end of 2025 will dramatically reduce the federal estate tax exemption from $13.61 million per person in 2024 to approximately $7 million in 2026 (this includes adjustments for inflation). This change would affect many high net-worth individuals and families, likely exposing many more estates to federal estate taxes.

It is impossible to predict whether or not legislation will prevent the sunset. Even so, it is important for advisors to prepare for client discussions and start considering estate planning strategies now, especially techniques that incorporate multi-generational gifts and charitable planning.

Indeed, for a client who is charitably-inclined, making larger lifetime gifts to charity and arranging for charitable bequests will help reduce the client’s taxable estate because of the charitable estate and gift tax deduction. Donor-advised, field-of-interest, designated, unrestricted, and endowment funds at the community foundation are flexible and effective charitable recipients of both lifetime and estate gifts. 

For some clients, you may wish to begin exploring a comprehensive, multi-generational wealth transfer plan, potentially using key tax-planning vehicles:

Charitable lead trust

Charitable lead trusts (CLTs) may be particularly effective in the current environment. These trusts can provide income to your client’s fund at the community foundation for a set period of time, with the remaining assets passing to family members. Right now, the higher exemption allows for potentially significant initial funding of such trusts. This is because the value of the remainder interest counts toward the client’s estate and gift tax exemption.

Generation-skipping trust

A generation-skipping trust is an irrevocable trust that can benefit a client’s grandchildren and later generations. This trust utilizes a client’s generation-skipping transfer (GST) tax exemption (which parallels the estate and gift tax exemption). This type of trust could allow a client to take advantage of the higher exemption before it potentially decreases in 2026. It is possible under some states’ laws for these trusts to go on for many generations in a “dynasty” format, such that each generation benefits from the trust’s income (and potentially principal for health and education) without the trust’s assets being included in the beneficiaries’ estates for estate tax purposes. 

Multi-generational fund at the Community Foundation

Alongside a charitable lead trust or generation-skipping trust, or as a standalone, a client can establish a donor-advised fund at the community foundation that can function much like a family foundation, with successive generations serving as advisors, or the community foundation stepping in after the first or second generation, to recommend grants from the fund to carry on a tradition of supporting the causes that have been most important to the client during the client’s lifetime. 

Our team looks forward to working with you to achieve your clients’ long-term charitable goals, even in the midst of uncertainty concerning the estate tax laws.

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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.