The Looming Pyrrhic Victory for Contributors and Sponsors of Donor Advised Funds?

In my blog post of May 27th (An Era of Heightened Scrutiny Arising for Donor Advised Funds?), I noted the case of the Fairbairns versus Fidelity Investments Charitable Fund (Fidelity).

Their complaint alleged Fidelity failed to follow their investment recommendation on a liquidating strategy of a $100 million gift of lightly traded stock representing 10% of the company. The disposition of the stock on two of the lightest trading days of the year allegedly resulted in damages of $30 million, reflecting diminution of their charitable deduction and funds available to benefit charity. The donors alleged representations by Fidelity of its expertise in liquidating concentrated stock positions induced them to transfer.

Recently, the U.S. District Court for the Northern District of California denied Fidelity’s motion for summary judgment, ultimately finding that the tax estoppel doctrine did not apply because the charitable income tax deduction claimed by the Fairbairns was not clearly inconsistent with their assertion that Fidelity was bound by its alleged promises.1

The court recognized that although tax law requires a sponsoring organization of a DAF to have exclusive legal control over donated assets, the parties were still free, albeit at their own peril, to enter into a legally binding agreement that ultimately could cause a purported DAF not to provide the otherwise available tax benefits to the donor.1

The court ruled the requests made by the Fairbairns to control the amount and timing of the liquidation as conditions inducing the transfer to Fidelity, not conditions subsequent. The judge ruled whether or not the promises are legally enforceable and whether or not to disqualify the tax deduction are questions of fact for a jury or judge to decide at a trial.

The court noted the Fairbairns bear the risk of whether the trier of fact interprets the representations as permissible conditions precedent or impermissible conditions subsequent.2

Fidelity could also be a Pyrrhic victor with a Fairbairn loss. Would all donor advisory privileges need to be ignored or only those after receipt of contributions to their donor advised fund? Would that severely diminish the business model of commercially sponsored donor advised funds whose strength is liquidating hard to value or hard to sell assets? Would ignoring post-contribution recommendations even be contrary to the legislative intent of permitting donor recommendations of investment of the proceeds? Will this litigation prompt a legislative response? With any of these outcomes, this litigation has the potential to leave donors and donor advised funds very disappointed.

By Professor Chris Woehrle, Chair & Professor of Tax & Estate Planning Department, College for Financial Planning, Centennial, Colorado

 

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1. For the court’s ruling on the summary motion see Case 3:18-cv-04881-JSC Document 171 filed 03/02/20 in United States District Court for the Northern District of California.

2. The legislative history of the passage of donor advised funds suggests no distinction between when these rights may be exercised whether before, simultaneous to or after the contribution. See The Joint Committee on Taxation, Pension Protection Act of 2006, Title XII: Provisions Relating to Exempt Organizations, 2006 WL 479168 and Page 2 of www.treasury.gov/resource-center/tax policy.Documents/Report-Donor-Advised-Funds-2011.pdf.. The 2011 report notes, “In the case of a DAF, the donor is explicitly permitted to advise the sponsoring organization about how the donated funds should be invested and/or disbursed to other charities, but such advice is subject to the DAF sponsoring organization’s ultimate discretion and control.”

How Does a CLAT Work?

It’s well known in certain quarters that a charitable lead annuity trust (CLAT) works well in a low-interest-rate environment.

We’re in such an environment, so let’s drill down into the CLAT.

First, the big picture. A CLAT makes an annuity payment to charity for either a fixed term of years or a life. The life may be that of the trust’s creator. It also may be that of certain of the creator’s family members, although I’ve never worked on such a CLAT.

  • At the end of the trust term, all trust assets pass to noncharitable parties, typically the donor’s kids.
  • The kids generally receive the assets free of income tax.
  • Any growth in the value of CLAT assets also passes to the kids free of estate tax.

OK, so you know all that. So let’s up the ante and look at a CLAT that’s used by a few sophisticated estate planners for very wealthy clients. Here’s how it works. Donor sets up a grantor CLAT (meaning all CLAT taxable income will be taxed to Donor). The CLAT is designed to run for Donor’s life and to have an escalating payout to charity. Details omitted, the yearly payout is small but non-negligible until Donor dies. Upon Donor’s death, the CLAT makes a sizable balloon payment to charity and then terminates.

Donor funds the CLAT with a fully paid insurance policy on Donor’s life. And maybe with some liquid assets. The insurance policy [1] doesnt throw off any taxable income (so it doesn’t produce a grantor trust problem) and [2] provides the means for the balloon payment.

Bottom line: Donor gets an up-front income tax charitable deduction for the initial present value of the charitable payout. Donor is able to use the CLAT to pass the “excess” insurance proceeds to Donor’s kids free of estate tax.

This type of CLAT, in my experience, is wielded by high-end financial planners who know the ins and outs of life insurance.

If you have questions about CLATs, send them to info@SHARPEnet.com. I’ll answer them next time.
 

By Jon Tidd, J.D.

Giving Through Charitable Lead Trusts

In our current economic environment, charitable lead trusts are appealing for certain donors who want to make a significant gift over time while having property ultimately returned to them or their heirs. Sharpe Group’s Giving Through Charitable Lead Trusts booklet highlights what this versatile gift planning tool can accomplish for your donors. Use this publication as an inclusion in a letter to select high-level donors, as support materials to accompany gift proposals or in a mailing to local financial advisors. Imprinted booklets allow you to add your organization’s logo and contact information to the front and/or back cover. Unimprinted booklets may be used by multiple fundraisers or departments and may be personalized via a stamp, sticker or business card. For more information about ordering Giving Through Charitable Lead Trusts, click here.

 

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The Time Is Now for Year-End Communications

Throughout 2020, Americans have revealed the depth of their generosity, giving to causes crucial to surviving the impacts of the pandemic and organizations that matter to them. However, the economic crisis impacted many donors’ ability to give, and continued economic uncertainty could impact giving into next year.

October, November and December are traditionally the three busiest months for fundraisers. Although nothing about this year has been traditional, nonprofits can expect the typical increase in giving driven by the holiday season and the end of the tax year. Therefore, an effective 2020 year-end campaign is especially important for many organizations’ financial well-being for next year and beyond.

With less than three months remaining in 2020, now is the time to ramp up communications. A well-executed year-end campaign requires preparation and proper planning. In a year unlike any other, messaging and timing are critical to the success of your campaign. Here are some tips and strategies:

  1. Tie in holidays and national events like Giving Tuesday but be aware that your message can also get lost so close to an election.
  2. An effective year-end campaign usually includes a targeted mailing as well as other means of communication. Send donors brochures, postcards, inserts in scheduled mass appeals or newsletters that detail ways to give this year. Utilize your website for fundraising and provide detailed information about giving to your organization. Be sure that your website is easy to read, user-friendly and up to date, especially for donors who choose not to give via an online portal. Your website should clearly outline ways to give, how to give and who to contact.
  3. Cash gifts are a key component of most year-end campaigns. Your messaging should include the advantages of cash gifts in 2020 due to the charitable provisions of the CARES Act. Remind your donors that mailed checks should be postmarked by December 31 or direct them to your online giving portal for a quick and simple gift.
  4. Traditional cash donors may be open to other giving options. Include communications that highlight the benefits of noncash gifts like stocks or mutual funds and making a qualified charitable distribution through a retirement plan. This year’s events have caused many donors to create or revisit their estate plans, presenting a great opportunity to inform your donor base how they can include your organization in a will, trust or other plans.
  5. Thanking your donors is an important step in any giving campaign. Sending an email, making a call or writing a letter thanking a donor can go a long way towards building a relationship. However you choose to thank your donors, be sure to provide insight on how their donation will help your organization by explaining your past year’s accomplishments and goals for the upcoming year. Following-up with donors is also an opportunity to suggest other beneficial ways to give that increase income, provide for others, reduce taxes or memorialize a loved one.

Whatever your campaign and messaging strategies, the time for year-end communications is now. If we can be of assistance with your year-end planning or in any other way, please contact us.

By Jana Lawyer, Senior Consultant
 

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A Problem for All

What problem?

The problem, in my opinion, is that flawed software pervades society.

Cut to the chase: The problem extends far beyond charitable fundraising, but let’s focus on a major difficulty facing charities today. It’s getting an IRA beneficiary distribution from a financial institution.

You may ask, is this a software problem? Answer: Yes.

The financial institution’s tax reporting software reports to the IRS any distribution from an IRA. The software reports the distribution as being made to the named owner of the IRA.

Turns out, this reporting is correct while the individual who established the IRA is living. The problem is that when the individual dies and leaves the IRA to a charity, the software will report a distribution from the IRA to the charity as a distribution to the deceased individual, because his or her name is still on the IRA.

Such reporting would be incorrect of course. That’s why the financial institution insists that the charity set up an “inherited IRA” in its own name, so that a distribution from the “inherited IRA” to the charity will be reported correctly as a distribution to the charity.
There’s more to this story, but that is another story.

In my personal life, I’ve grown less than fond of automatic or robot customer service I’ve encountered on the telephone. Recently, for example, I dealt with one of these automated systems in trying to obtain phone and internet service from a major telecom. Getting the service was fairly painless. Making a change to the service afterward proved, however, to be frustrating to the point of impossible. The “individual” I dealt with over the phone threw up obstacle after obstacle.

Planned giving donors, who are mainly north of age 70, are less likely than PG officers to encounter the sort of problems described here. The one notable exception I’ve encountered was the husband (surviving spouse) of a woman who left her IRA to her college. He was flabbergasted that the IRA custodian made the college jump through hoops to get its IRA beneficiary distribution.
 

By Jon Tidd, J.D.

 

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Employees Can Be Donors Too

One of the challenging, yet rewarding, aspects of development work is understanding the motivations of donors, especially those capable of significant gifts. Here I offer four examples of major donors, “hidden in plain view,” addressing an identical problem with slightly different motivations.

For each of these examples, the need being addressed is the disruption of employment prospects and the inability of law students and graduates to sit for the bar examination due to COVID-19. Note how their own experiences shaped their desire to give.

Dean Danielle Conway, Penn State Dickinson Law, gave $125,000 to a fund to help students navigate financial difficulties. Having graduated Howard University Law School with emergency loans to pay bills until her financial aid materialized, Dean Conway noted: “Those emergency loans were the difference between showing up for class ready to work and being anxious about not being able to pay my bills.”

Paul Caron, a Cornell Law graduate, nationally known tax scholar and dean of Pepperdine’s Caruso School of Law, gave $125,000 to Pepperdine. Part of his motivation was inspired by the Gospel of Matthew: “We are enormously grateful for the opportunity to serve in these roles at Pepperdine and believe it is only right for us to try to live out the University’s commitment to Matthew 10:8, ‘Freely ye have received, freely give.’” Dean Caron had previously endowed a scholarship at the law school and has also been a prodigious fundraiser, including securing the $50 million naming gift of the law school.

Antony Page, dean of the Florida International University College of Law made a “$200,000 planned gift” for the establishment of scholarships supporting law students who are first-generation college graduates. Page noted a scholarship during his days at Stanford Law permitted him the flexibility to pursue a career in academe.

Finally, a Harvard Law graduate, Laura Rosenbury, currently dean of the Levin College of Law at the University of Florida, committed $25,000 for an endowment providing scholarships to graduates of historically black colleges and universities and $75,000 supporting students with unexpected expenses incurred by COVID.

Interestingly, none of the deans who made gifts were alumni of the schools they supported. Perhaps their unstated motivation was to lead by example.

By Professor Chris Woehrle, Chair & Professor of Tax & Estate Planning Department, College for Financial Planning, Centennial, Colorado

 

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Language & Research Tips for Planned Giving Officers

Language

If you’re a PG (planned giving) officer, you work on situations involving older individuals. Typically, individuals north of age 70. These individuals are, for the most part, what I call “traditionalists.” In particular, most of them were educated in the traditional use of the English language.

In traditional use, one does not write, for example: “A student was barred from class because they didn’t have a mask.”

“A student” is singular. “They” is plural. Modern Deacons of Discourse say this way of writing is acceptable. It isn’t acceptable when writing for traditionalists.

Also note the misuse of words, which grates on some traditionalists, including me. In particular, the words “verbal” and “verbally” are widely misused. “Verbal” means both spoken and written. It does not only mean spoken. If you mean to write that someone, for example, can get spoken approval, write “spoken.”

IMO, every good-sized PG program should have a copy editor. If I were running such a program, my copy editor would be a retired 70-to-75-year-old high school English teacher.

Research

It’s often necessary for a PG officer to do research. A common type of research is to find out how “peer institutions” do something.

IMO, such research is a big mistake and a big waste of time.

I’m often asked, for example, “How do other schools do this?” My response is always, “I don’t know, and I don’t care.” Why this response? Because I’ve learned that highly respected charities can and do have badly flawed practices. My concern, always, is that my clients do things the right way. The right way isn’t to follow the crowd or follow the leader. The right way is to follow sound advice.

And BTW, beware of opinions posted on the internet. Opinions posted on the internet often masquerade as the law. Anyone’s opinion—mine or anyone else’s—is just that. An opinion. Even expert opinions are sometimes flawed. I like to ground my thinking in the facts. Opinions, I’ve learned, are often fuzzy on the pertinent facts.
 

By Jon Tidd
 

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Recapping Sharpe Online Academy’s Planned Giving #101–An Introduction

Sharpe Group’s new Online Academy debuted last week with Planned Giving #101—An Introduction to Planned Giving, featuring presentations by Sharpe Group Senior Consultants and Senior Vice Presidents Joe Chickey and John Jensen, and me. Development professionals across a broad cross section of charitable missions joined us virtually to learn the tools of charitable gift planning as well as state-of-art techniques in marketing and management of planned giving programs.

Joe and John emphasized how comparatively simple practices can improve both the impact of and dollars attributable to a sustained planned giving effort.

I overviewed two techniques of life-income giving: charitable remainder trusts and charitable gift annuities. One of our audience’s insightful questions centered on the relative unattractiveness of the charitable remainder annuity trust compared to the charitable gift annuity. Even if a gift annuity and annuity trust paid identical rates, the certainty of the gift annuity payment from the issuing charity could be the deciding factor. Coupled with the relative low cost and simplicity of establishing gift annuities, they have proven to be the superior alternative for many donors.

During the course of the four-hour presentation over two days, presenters and attendees shared the primacy of charitable intent over the “selling” of income and transfer tax advantages to donors. While the tax incentives may impact the timing and amount of gifts, donors know tax savings do not pay for gifts.

The Sharpe Group team’s next presentation is on September 29 and 30: Planned Giving #102—Structuring Blended Gifts. Join us to learn how carefully structured combinations of current and deferred gifts enable those balancing multiple financial priorities to make larger gifts than they thought possible even during these unprecedented times of a global pandemic and economic stress. For more information and to register, click here. We look forward to seeing everyone in the virtual classroom.

By Professor Chris Woehrle, Chair & Professor of Tax & Estate Planning Department, College for Financial Planning, Centennial, Colorado
 

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IRS Form 8283

Form 8283 is really two different forms having two different purposes. The main purpose of the first page (Section A) is to report gifts of marketable securities having a value greater than $500 and other gifts for which a “Qualified Appraisal” is not required. The main purpose of the second page (Section B) is to report gifts for which a “Qualified Appraisal” is required.

The donor (or the donor’s appraiser) is required to fill out Form 8283. The charitable donee signs Section B only for gifts reported in Section B.

You can stop reading at this point. I’ve told you everything you need to know about Form 8283. But you may find the story I’m about to tell instructive. The story involves a PG officer, who has been trained as a lawyer, who was ordered by her supervisor to fill out Form 8283 for a donor.

Question: What was wrong here?
Answer: Everything.

First, is a Form 8283 filled out by a charity’s employee any good for tax purposes?

Simple answer: No. Re-read the second paragraph.

Second, the PG officer didn’t know whether a “Qualified Appraisal” was required for the asset given to her organization. Nor did I. (I’m always short on the facts … I just couldn’t tell from the information the PG officer was able to provide me.)

Is this situation unusual? Nope. Any number of times donors or their advisers, for example, have demanded that the charitable donee sign Section B for gifts of marketable securities reported on Section A (re-read the second paragraph). This, by the way, is an invitation to the IRS to audit the donor.

How important is Form 8283? Let me put it this way: If Form 8283 isn’t filled out completely and correctly, case law teaches that the federal income tax charitable deduction to which the form pertains can be disallowed entirely. That’s important.

BTW, the 2019 Form 8283 only pertains to 2019 federal income tax returns. That’s important too. You can view the 2019 Form 8283 online.

 
By Jon Tidd

 
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Sharpe Index: State of Nonprofits in the Pandemic

You may be wondering if there is really a need for one more report during the pandemic. Though we are inundated with figures and graphs and charts and tables these days, we think there might be room for one more … one that comes directly from you and your peers and shares what life looks like today from a fundraiser’s perspective.

Sharpe Group recently conducted an anecdotal survey of nonprofit clients to see how they are faring in the current environment. The questions focused on fundraising and budget impacts and organizational changes as a result of the coronavirus pandemic.

We collected responses from 91 organizations with a variety of missions for the “Sharpe Index: State of Nonprofits in the Pandemic.” This survey is not intended as a scientific study but rather to share anecdotal data about how nonprofits across the country have been impacted and how they are adjusting to these unusual circumstances we are in.

We believe these responses give a snapshot of what’s happening in the field and how organizations are adapting with an eye to the future. These are experiences shared by fundraisers for fundraisers. We hope you find the report illuminating.

Download the full report: Sharpe Index: State of Nonprofits in the Pandemic

Thanks to all our nonprofit partners for participating!
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Year-End Giving 2020: Start Early, Later or Both!

2020 started out pretty well with the economy and stock market booming. Things looked good … and then they didn’t. In January, a “flu-like virus” appeared on the other side of the globe. By February, a global pandemic had been declared, and the U.S. economy had slipped into a recession, ending the longest period of economic expansion (more than ten years) ever.

In March, the stock market crashed by more than a third, and a severe economic contraction continued. The GDP experienced a large fall in the second quarter, and unemployment figures exploded. Growing social and political unrest compounded the economic problems.

All of these events have impacted the philanthropic world, and many fundraisers have experienced a dramatic reduction in revenue and fundraising results.

The end of the year 2020 is approaching: What is your plan for year-end fundraising? “Business as usual” will probably not be good enough, nor will dusting off last year’s plan and going through the motions. Why?

Yet another wild card in the 2020 fundraising calendar is the national election that is likely to see more marketing than ever before. This could lead to unprecedented “static” on every communications channel.

One relatively simple strategy is to minimize overlap with anticipated political messaging that will drown out your appeals. Adjust your messaging to occur before and after the election, particularly the three weeks or so leading up to November 3 and the week or so afterward. This may mean pushing up a year-end mail appeal to September or early October and adjusting your email and social media campaigns as well.

The year-end giving season is usually the most generous time of the year, so don’t let the election derail your plans. Instead, adjust and start early, then give things a short breather and end the year strong with an extra effort in November and December.

Traditionally, the weeks between Thanksgiving and December 31 mark a period of widespread generosity. This is a time when people are conditioned to give to others. Remind your donors how their gifts impact your mission and how they can maximize their charitable gifts by taking advantage of the opportunities afforded by the charitable provisions of the CARES Act, qualified charitable distributions from IRAs, gifts of stock if the market is high, donor advised funds and boosting or bunching deductions with planned gifts, etc.

When the dust settles, there will likely be an overall decrease in philanthropic activity, but those who have adjusted their plans for giving during the critical year-end period should fare better than those who did not.

For materials to help you encourage year-end gifts, click here.

By Barlow Mann, General Counsel
 

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