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 San Diego Foundation (SDF) 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 our region.
In this issue, we’re covering three particularly relevant topics during the first quarter, especially in February.
- Attorneys, accountants and financial advisors are starting to hear questions that clients often ask about charitable giving as they gather information for their income tax returns. At SDF, we’re here to help answer questions on charitable giving, ranging from tax deductibility to the advantages of non-cash gifts.
- As tax season gets into full swing, remember that SDF 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’ve heard 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’ radars. We are happy to talk with you and your clients anytime about how our team can help your clients maximize their gifts to local nonprofit organizations or initiatives to improve the quality of life right here at home, whether that’s by addressing the most pressing needs right now (such as the San Diego Flood Response Fund) or in the future as they emerge.
Another note: We’re still closely tracking the IRS’ proposed regulations concerning donor-advised funds (DAFs). 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.
3 Tax-Time Charitable Giving Questions
The year is in full swing. Attorneys, accountants and financial advisors are asking clients to gather 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 and answers that can help you serve your clients.
1. 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. They would not automatically reduce their giving if the charitable income tax deduction disappeared.
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.
2. Why do clients so often default to giving cash?
Many clients are unaware of the tax benefits of giving highly-appreciated assets to their donor-advised or other type of fund at SDF 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. Advisors must remind clients about the benefits of donating non-cash assets such as highly-appreciated stock or complex assets (e.g., closely-held business interests and real estate).
When clients give highly-appreciated assets instead of cash, they often can significantly reduce capital gains tax exposure and calculate the deduction based on the full fair market value of the gifted assets.
3. 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 SDF) on the 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. In contrast, 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 let your clients know if they are planning major gifts to charities.
So what’s the first step? Reach out to us! Make it a habit to mention charitable giving to your clients. From that moment on, whatever the clients’ charitable priorities, consider our team your behind-the-scenes back office and support department to handle all your clients’ charitable giving needs.
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.
Remember that a charitable gift annuity (CGA) could be attractive 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 San Diego Foundation.
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.
Our team 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 specific qualifications, such as 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.
Tips for Serving Clients Who Love Giving Local
Your charitably-minded clients certainly have no shortage of options for their philanthropic dollars. Many clients, for example, grant from their donor-advised funds at SDF to support their 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 San Diego Foundation when they want to make sure their dollars are making the biggest difference possible right here in our region.
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 plays an increasingly important role in our region. SDF, through our 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 education access.
Our team is always happy to provide insight into the greatest needs facing San Diegans and which organizations are delivering services to alleviate them so that your clients can provide immediate support through their DAFs.
In addition, an unrestricted fund may be a good fit for clients who want to improve lives 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 SDF. This transfer is called a “Qualified Charitable Distribution” or “QCD.” Not only do QCD transfers count toward satisfying Required Minimum Distributions (RMDs), 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 contact us for more information on how your clients can support current and future needs and meet their own financial, tax, and generational legacy goals.
Learn More
For nearly 50 years, we have partnered with an extensive network of wealth advisors, estate planning attorneys, tax planners and other financial advisors to help high-net-worth clients and families achieve financial planning objectives and charitable giving goals while maximizing tax deductions.
If you want to learn how we can help meet your clients’ financial planning and charitable giving goals in 2024, contact me at (858) 245-1508 or jrogers@sdfoundation.org.
