In recent years there have been many proposals to change the way charitable gifts are treated from an income, gift and estate tax perspective. Plans recently put forth by Congress, the administration and various commentators would change the value of, or in some cases entirely eliminate, long-standing tax incentives to make charitable gifts.
Let’s take a look at what is certain in the coming year and what strategies you can use to maximize your fundraising potential.
What is certain? The charitable income tax deduction. There are currently no scheduled changes for 2012 that would limit the federal income tax benefits associated with charitable gifts. No one can predict what Congress may do during an election year but, without Congressional action, limits to the value of charitable and other income tax deductions for higher income taxpayers are not scheduled to return until Jan. 1, 2013.*
What you should do – Contact donors who may have been considering larger gifts and those who have significant outstanding commitments. Make sure they know there may be no better time than 2012 to complete their gifts. Cash may be a popular gift option, as commentators report unprecedented amounts of cash “on the sidelines.” This cash, which may be earning less than 1 percent, could yield the donor immediate federal (and perhaps state) income tax savings of 35 percent or more of donated amounts in 2012, while at the same time removing a pledge obligation from their balance sheet.
Watch investment market values and be prepared to suggest that donors may want to consider appreciated securities or similar assets to complete gifts, thereby using all or a portion of the paper profits in their portfolios. It may be wise to recommend this early in the year so they have time to review this strategy with their advisors before the inevitable distractions of the fall election season set in.
What is certain? Historically high estate and gift tax exemptions. After a decade of gradual changes in estate and gift tax rates and exemptions, Congress acted in the final weeks of 2010 to create a two-year window of certainty that is scheduled to close at the end of 2012. Through 2012, it is possible for individuals to transfer up to $5,120,000** to family or other loved ones free of federal estate and gift tax. Unless Congress acts before the end of 2012, that amount is scheduled to return to the 2001 level of $1 million, along with accompanying increases in estate and gift tax rates. This possibility means that many donors will find it advantageous to revise their plans in 2012.
What you should do – Be aware that many among your constituents will be making extensive changes to their estate plans during 2012 and will be looking for every possible way to lock in the benefit of what could prove to be temporary exemption amounts. Fortunately, there are a number of ways donors can transfer assets to heirs that qualify for the current exemption amounts, while also making near-term charitable gifts in amounts they might never have thought possible.
What is certain? Low interest rates. It appears that national monetary policy and other factors will keep the interest rates that help determine the tax benefits of various charitable gifts at historic lows as we enter 2012. Therefore, certain gift vehicles will continue to be especially attractive.
What you should do – This opportunity cuts two ways. For wealthier donors, lower interest rates make charitable lead trusts and gifts of remainder interests in real estate more attractive. According to recently released IRS reports, the charitable lead trust has been the fastest-growing type of charitable trust over the past decade. This trend can be expected to continue because this plan can also help donors transfer assets to heirs under the favorable 2012 estate tax rates.
For donors of more modest means, charitable gift annuities should be especially popular in 2012 because they provide a way of enhancing current income. At the same time, by “accelerating a bequest” from what may be a nontaxable estate in the future, the donor is also afforded income tax benefits that may never be greater.
What is certain? Competition for charitable dollars. As the number of charities in America has increased at unprecedented rates in recent years, competition for charitable dollars has intensified. With fundraising goals increasing during a time of more limited resources, it is certain that many of us will have to work harder—and smarter—to achieve our objectives.
What you should do – Seize the opportunity to excel. Understand the challenges facing us all and be prepared to take advantage of the season of certainty described above.
Also remember that now is the time to “dance with the ones who brought you to the party.” While attracting new donors is vitally important, make sure you are also spending adequate time thanking existing donors while you are seeking new ones. Be sure not to overlook those older donors who have given for a long period or have given larger amounts on a cumulative basis.
Information about bequests that has been accumulated in the Sharpe KnowledgeBaseSM over some 50 years of studying bequests that were actually realized by all types of nonprofits reveals that almost half of the gifts were from donors who passed away within four years of making their final will, typically in their early to mid-80s. Gifts from the estates of donors such as these may well make the difference between good and bad years in the near term for many programs. Ignore this fact at your peril.
Don’t be among those who find out too late, during a period of intense competition for inclusion in the wills of charitably minded seniors, that their organization was taken out of as many wills as it was added to.
Will 2012 be an easy year for fundraising? In most cases the answer will be NO. Will it be possible to succeed? The answer is YES. That will be especially true for those who look for the opportunities that can be found in this short season of certainty.
* The Pease Amendment, which limits the savings generated by charitable deductions by reducing all itemized deductions by 3 percent of a taxpayer’s income over a certain base amount, will reappear Jan. 1, 2013. For example, if a taxpayer’s income is $100,000 over the threshold, itemized deductions will be reduced by 3 percent of that amount, or $3,000.
** When Congress increased the gift and estate tax exemption to $5 million, it also provided that beginning in 2012 this amount would be indexed for inflation. On Jan. 1, 2012, the exemption amount will be adjusted upward by $120,000, resulting in an exemption amount of $5,120,000.