Year-End Giving Messaging Can Make a Difference

2020 has been unlike any year in recent memory. Americans have witnessed economic losses from COVID-19, civil unrest as a result of racial injustice and a divided political atmosphere unlike any other. With these ongoing challenges, many nonprofits have struggled to find the right fundraising messaging.

Most experts are predicting that overall giving will decrease in 2020. Fundraising in an uncertain climate is always challenging. However, year-end campaigns offer a perfect opportunity to reach donors with content that provides hope and encourages giving. Year-end appeals in today’s environment should incorporate timely, relevant messaging that motivates donors. Here are some tips that can make a difference:

  1. Highlight the benefits of the CARES Act.
  2. The CARES Act offers key incentives to donors who plan to make a gift of cash this year. The usual limit on deductions for cash charitable gifts are suspended for 2020, meaning taxpayers can claim unlimited deductions on their 2020 returns. For non-itemizers, an above-the-line deduction of up to $300 is available for cash gifts to public charities.

  3. Inform your donors of other ways to give.
  4. Reminding your donors of giving options that offer additional tax benefits is always a good strategy, especially this year. Donors who traditionally make cash gifts may be open to alternatives. Your year-end communications should include a variety of noncash giving options. Sharpe Group offers personalized year-end publications that detail how donors can make the most of their giving this year.

  5. Remind your donors they can impact your mission.
  6. Offering your donors good news and highlighting the work of your organization will be especially impactful after months of stress, uncertainty and bad news. Remind your donors why they have chosen to give to your organization in the past and what a difference their generosity has made.

    Include a compelling cover letter that details how charitable contributions have allowed your organization to respond to the coronavirus crisis or how your organization has been able to weather the economic downturn. This is a good place to detail how your mission has been proceeding even while taking measures to keep everyone safe. Reiterate that their generosity can make a difference now and also help you prepare for any future unforeseen crises.

A successful year-end campaign can make a real difference for organizations whose fundraising goals have already been impacted. As the saying goes, “timing is everything.” Adding timely messaging to your year-end communications plan can resonate with donors who are considering how to continue their support amidst difficult economic times.

By Ainsley Willis, Sharpe Group Editor

 

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IRS Nips in the Bud a Gift Plan Too Good to Be True

In General Counsel Memorandum AM 2020-006, the IRS responded to a promoter’s request to affirm its legal conclusions that a taxpayer could escape forever capital gains taxation on appreciated property funding a charitable remainder annuity trust (CRAT). The property was to be closely held business interests, farmland and crops. The trust’s terms for the payment of the annuity trust amount and charitable remainder interest were unique. The recipient of the annuity trust would receive the greater of either 10 percent of the initial fair market value of the trust or the payments from a single premium deferred annuity for the five-year duration of the trust. The charitable remainder beneficiaries would immediately receive 10% of the initial fair market value plus $100.*

The specific guidance sought was three-fold:

  1. Did the arrangement qualify as a charitable remainder trust?
  2. The IRS found two fatal flaws. Firstly the payment to the annuitant was not in a permitted form as it was not a sum certain. Had the CRT been structured as a CRUT, presumably the formula would have passed scrutiny as it then would approximate a net-income-only CRT. Secondly the payment to the charitable remainder beneficiary, while it may be accelerated, must also be made at the termination of the annuitant’s interest.

  3. Were annuity payments also to be taxed as either ordinary income or a return of principal?
  4. A single premium immediate annuity (SPIA) creates a stream of payments that are only partially taxable, with each payment consisting of a portion that is a return of original investment and a portion that is income in the hands of a “natural person” as an individual. However, the rules are different if the SPIA is held by a charitable remainder trust. The fact that SPIAs are permissible investments for a CRT does not mean their taxation escapes being governed by the tier accounting rules. In other words, the CRT accumulates capital gain from its sale. Thus, it is very likely the payments to the annuitant are taxable as some combination of ordinary income and capital gain. The annual distributions would be taken from the current and any accumulated ordinary income from the annuity and then the accumulated capital gain from the sale of the funding asset. Only if the capital gain and ordinary income accounts have been zeroed out will there be non-taxable distributions of corpus.

  5. Was the built-in gain forever exempt from income taxation?
  6. Ordinarily, a CRAT does not pay capital gains tax when it sells the transferred property. The memorandum notes the realized capital gain, while not taxed to the CRT, will be taxed to the recipient of the annuity trust amount according to the tier-accounting rules. The memorandum noted that it is false to say the capital gain would never be taxed to the beneficiary in any amount.

Lessons learned & planning pointers

This ruling effectively grounded the launching of a scheme that would have had very little qualifying charitable intent and thus spared development programs the time and legal expense required to investigate these arrangements.

The IRS has a warning to promoters and, by extension, to charities:

In all cases using this structure, the validity of the CRAT should be challenged both on the basis of disqualifying terms in the instrument and subsequent operational failures, with the result under both theories being (1) the disallowance of any charitable deductions claimed for the value of the remainder and (2) the treatment of the trust as a taxable entity from its creation, causing the sale of any appreciated donated assets to be currently taxable to the trust (or its beneficiaries, if the gain is included in DNI) in the year of sale. In appropriate cases, an assignment of income argument should be made to tax the gain of the sale of assets by the trust to the grantors or to assert SECA tax liability against the trust grantors.

To be forewarned (hopefully) is to be forearmed!

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

 

Giving Through Charitable Remainder Trusts Booklet 

Our Giving Through Charitable Remainder Trusts booklet describes the different benefits of charitable remainder unitrusts and annuity trusts in a clear and understandable manner. The emphasis is on what these trusts can accomplish for your donors, not on simply how they do it. You can add your organization’s logo and contact information to the front and/or back cover of this booklet.

Click here to learn more about ordering imprinted publications.
 

 


* See Legal Advice Issued by Associate Chief Counsel for those who seek the details of the reasoning of the Office of Chief Counsel.
 
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Giving During Hard Times

A recent opinion column in USA Today by Una Osili and Patrick M. Rooney expressed the hope that charitable giving will remain strong despite the current difficult times. Their opinions are based on more than just hope; their careers have focused on serious philanthropic research at Indiana University Lily Family School of Philanthropy at IUPUI and the Giving USA Annual Report on Philanthropy.

Through the years, Osili and Rooney have studied the impact of economic recessions and other crises like 9/11, Hurricane Katrina and other natural disasters and the 2008 financial crisis after the Great Recession.

While it is clear Americans are very generous, and collectively they continue to give to the extent possible even during very difficult times, how will philanthropy fair during today’s multifaceted health, economic and social MEGA CRISIS?

2020 has been a troubling year in many ways. As the global pandemic unfolded, the stock market crashed, billions of dollars of household wealth evaporated and nonessential businesses were shuttered by stay-at-home precautions. This led to a tsunami of unemployment and multiple social justice issues that finally reached a boiling point.

If you followed the recent Sharpe Group blog posts, you will recall many anecdotal stories and examples of hope with neighbors helping neighbors, people helping strangers, churches providing food distribution, wealthy people making very large contributions and people of all incomes raising money to support those in need—inspiring stories of ordinary people making extraordinary gifts of their time, talent or treasure regardless of their age, social standing or financial status.

The USA Today column identified two pivotal questions:

  1. Will the initial surge in generosity continue?
  2. Will the economic woes negatively impact giving overall?

I believe the answer is a resounding YES … to both questions.

While recent studies of giving during economic recessions and disasters provide good points of reference, we really need to look back about 100 years for a period of comparable health, economic and social disruption. The period between the end of WWI and the beginning of WWII saw the effects of the Spanish Flu, the stock market crash and the Great Depression and wealth inequality issues.

The loss of jobs and wealth did impact giving. IRS figures indicated a dip for several years in the early 1930s and a slow recovery to the giving levels of the Roaring Twenties. This was similar to what was seen after the Great Recession and the financial crisis of a decade ago, which saw a two-year drop and then a slow recovery which culminated in record levels of giving during the past three years.

So what does this mean for giving in 2020? It will certainly be a challenging year, but I am confident those who can give will and those who cannot make gifts wish they could. Depending on what happens, charitable giving is likely to dip this year and next, then recover and rebuild to record levels.

By Barlow Mann, General Counsel
 
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The 5% Probability Test … And How to Avoid It

In the late 1970s, the IRS announced it would apply a new test to charitable remainder annuity trusts (CRATs)—the 5% probability test (5% Test).

If there was more than a 5% probability that a CRAT would be exhausted during the payout recipient’s life, no federal income tax charitable deduction would be allowed with respect to the CRAT. Some years later, the IRS made it crystal clear if a trust set up as a CRAT flunked the 5% Test, it wouldn’t qualify as a CRAT.

The 5% Test only applies to a CRAT for one or more lives.

It doesn’t apply to a CRAT for a fixed term of years, a CRUT or a gift annuity. The IRS hasn’t said whether it applies to a charitable lead annuity trust (CLAT) set up to run for an individual’s life.

Now, in our low-interest-rate environment, which some economic experts predict will last for a couple more years, it’s basically impossible to set up a CRAT for life that won’t flunk the 5% Test. Why? Because the IRS discount rate (0.6% as of this writing) is the assumed earnings rate of a CRAT. Low earnings mean early exhaustion.

But the IRS said in recent years there’s a provision that can be put in a CRAT instrument that will make the 5% Test inapplicable to the CRAT.

What provision? A provision that basically says if a required CRAT payout would drop the value of CRAT assets below 10% of the CRAT’s initial asset value, the CRAT trustee shall not make the payout, and the CRAT shall thereupon terminate and distribute all of its assets to charity.

Historically, in times of low inflation and low interest rates, fixed payment plans (CRATs and gift annuities) have been in demand. Given the damage to the U.S. economy in 2020, perhaps low inflation and low interest rates will prevail for some years and thus make CRATs and gift annuities attractive to donors.
 

By Jon Tidd
 

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Two Important Questions

In recent days, I’ve been asked two timely questions:

  1. Is it OK for a college to contribute funds to organizations leading protests for racial justice?
  2. Is it OK for a school to establish a scholarship fund just for members of a certain racial group?

These are questions of law, not policy.

The first question is answered by examining the exact wording of the college’s tax-exempt purposes. This wording is set forth somewhere—maybe in the college’s bylaws, maybe in some document submitted to a government entity (e.g., the IRS application for tax-exempt status or the application to the state for recognition as a nonprofit corporation) or in a mission statement crafted a long time back by some lawyer connected to the college (e.g., the college’s 1970 general counsel).

I prefer to examine the bylaws or a document submitted to a government entity. These are highly unlikely to reflect bias or just one individual’s preferences. A mission statement is less reliable in this regard.

In any event, a charity can spend its funds only in furtherance of its stated tax-exempt purposes. If the call is close, it needs to be made in a written opinion of a competent attorney.

The “formal” answer to the second question is no. Scholarship funds need on paper to skirt race, religion, gender, national origin and single parenthood. Title IX comes into play here as well as some U.S. Supreme Court cases dealing with constitutional issues.

One way to finesse Title IX and constitutional problems is, for example, to set up a scholarship fund to provide for individuals who have a demonstrated interest in African American history (clearly within the realm of an educational purpose).

But caution: Setting up such a fund is not a DIY project. The skills of an expert lawyer are required. In particular, the selection of scholarship recipients needs to follow a basically race-neutral procedure.
 

By Jon Tidd
 

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“I Am Ready for My Closeup, Mr. DeMille”: Planned Giving’s “Moment”

As the country rides out the pandemic while contemplating the meaning of both social unrest and volatile financial markets, many of the nation’s most impactful charities are bracing for reduced philanthropic support. EAB, a higher education and technology consulting firm, surveyed 110 development executives about their predictions for COVID-19’s impact on fundraising. The survey also asked the executives to include their organizations’ responses to it.1 Fortunately, the generosity of prior generations of supporters will provide them a buffer to endure this decline.

However, now with so many individuals under home quarantine, it might be counterintuitively easier to connect with long-time donors and even those newer to an institution. The lockdowns remind us of how social we are.

The Zoom meeting or other videoconferencing platform gives fundraisers a safe medium to connect. While personal one-to-one visits will always be best for forming the deepest connections, virtual meetings have now proven to be another tool.

Of course, the other tried and proven means is through written communications, including newsletters and brochures, which continue to be vital. The June 3rd issue of the Chronicle of Philanthropy, “Planned Giving Is Having a Moment During the Pandemic” by Eden Stiffman highlights how some organizations have communicated to donors with tact and sensitivity as part of staying connected. And the outreach has been productive. The Southern Poverty Law Center received more than 50 new bequest commitments—a significant increase over a similar period from the prior year.

The Response to the Pandemic

The responses to the EAB survey contained three strategies of particular note:2

1. “Increasing planned giving training anticipating an increase in estate giving interest.”
2. “We have adjusted and increased our communications and virtual engagement opportunities … to ensure that we remain top of mind.“
3. “Emphasizing development communications, consistent messaging and attitude of gratefulness in external communication channels.”

We at Sharpe Group could not agree more and have been advising our clients to follow these strategies for decades!

Using Your Most Valuable Expertise

Since planned giving professionals are often the most experienced “experts” in the search for their institutions’ legacy supporters, the current environment is not the time to hide.

Social distancing has given all the opportunity to reflect deeply about the people and institutions that have meant and continue to mean the most. Though the lethality rates of COVID-19 are unknowable, it has inspired the thoughtful to ponder their legacy. And, for some, philanthropy is an important component of it. They can be part of the next generation of future support that enables their favorite charities to rebuild or build up the margin of error in order to endure.

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

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1. The respondents are anticipating a notable decline. Over forty percent of the respondents anticipate a decline of 10% or more; twenty percent a decline of 20% or more. Million-dollar commitments are most at risk for being delayed or unfunded. Read more here.
2. The details of the EAB survey can be found here.

An Important Tax Court Case About Giving Real Estate

The Guest case shows how to reap benefits from and avoid problems with a real estate gift.

The donor in Guest wrote a letter to Charity stating that he, by the letter, gave two properties to Charity. Wanting the gift but not wanting to be in the chain of title, Charity wrote back to the donor that it accepted the gift and asked that the donor await Charity’s transfer instructions.

Next, Charity approached a real estate investment group (the “K Group”). Charity and the K Group made a deal. Charity would instruct the donor to deed the two properties to the K Group who would sell the properties and remit the sale proceeds to Charity.

In fact, that’s what happened. The matter wound up in the tax court, which considered two basic questions: Had the donor made a charitable gift? If so, when did the donor make the gift?

The court held that [1] the donor did make a charitable gift and [2] the donor made the gift when he deeded the two properties to the K Group.

To understand this holding, one must grasp that the federal tax law doesn’t always follow state law. Under state law, the donor never transferred the properties to Charity … Charity never received a deed from the donor. Under federal tax law, however, the gift was formed by the exchange of letters and the donor’s transfer to the K Group pursuant to Charity’s instructions.

So, the donor got a charitable deduction, and Charity was never in the chain of title. A terrific outcome.

Caution: Don’t try this “at home.” A Guest transaction requires expert handling by a skilled tax lawyer.

By Jon Tidd

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Mixed Results for Giving in 2019

The first quarter of 2019 began with the DOW and other stock market indexes seeing a significant decline. There were growing concerns over the economy, which created a challenging environment for charitable giving. By mid-year, half of the charitable organizations indicated their fundraising results were flat or down compared to the previous year. The economy and stock markets both improved in the second half of 2019, and income, net worth and GDP increased accordingly.

Though charitable giving appeared to enjoy a rebound, would it be enough to make up for the slow start during the first half of the year?

Three recently released reports show mixed results for charitable giving in 2019. They include: The Fundraising Effectiveness Project (FEP), research established by the Association of Fundraising Professionals and the URBAN Institute; The Charitable Giving Report, conducted by the Blackbaud Institute; and Giving USA 2020: The Annual Report on Philanthropy for the year 2019, published by the Giving USA Foundation and researched by the Indiana University Lilly School of Philanthropy at IUPUI. Together, the three reports provide an intriguing look at charitable giving for 2019, particularly gifts from individuals. Based on each report, giving from individuals either fell 1.4%, grew 1% or grew 4.7%. A few of the highlights of each report are included below:

The Fundraising Effectiveness Project Report (AFP & the URBAN Institute):

  • 2019 donor revenue was 98.64% of 2018.
  • Small, medium and large contributions fell, 1.1%, 1% and 1.4% respectively.
  • Most of the gift revenue came from donors of $1,000, totaling 84.47%.
  • Total number of donors fell 3%.

The Charitable Giving Report (Blackbaud Institute):

  • Charitable giving grew 1% in 2019.
  • Online giving was 8.7% of total fundraising.
  • Gifts to large organizations fell 0.7%. Giving increased 3.2% for medium and 2.2% for small organizations.
  • The average age of U.S. donors was 63.
  • December was the most generous month, and about one-third of giving occurred in the final three months of the year.

Giving USA 2020: The Annual Report on Philanthropy for the year 2019 (Giving USA Foundation):

  • Total charitable giving from individuals, bequests, foundations and corporations was an estimated $450 billion, an increase of 4.2% (2.4% adjusted for inflation) over the prior year.
  • Giving by individuals totaled an estimated $310 billion, rising 4.7% (2.8% adjusted for inflation) in 2019.
  • Giving by foundations rose slightly to $76 billion, an increase of 2.5% (0.7% adjusted for inflation).
  • Giving by charitable bequests was estimated at $43 billion and was basically flat for the year, HOWEVER BEQUEST REVENUE WAS THE FASTEST GROWING SOURCE OF GIFT REVENUE BETWEEN 2017 AND 2019, RISING 9.5% AND OVERALL TOTALING MORE THAN $120 BILLION IN CURRENT DOLLARS.
  • Giving by corporations saw the largest increase of just over 13% totaling $21 billion (an increase of 11.4% when adjusted for inflation).
  • All in all, 2019 turned out to be a pretty good year for giving after a relatively bad start.
    Additional information may be located at:

    By Barlow Mann, General Counsel

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Real Estate-Funded Gift Annuities

Some individuals who own real estate like the idea of swapping the real estate for a gift annuity. Especially if they’ve grown tired of managing the property and see the gift annuity as a good way of replacing the income the property provides.

This can be a good deal for the donor. And a bad deal for the charity. Why a bad deal? Because the charity assumes a lot of risk.

The chief risk is that when the charity sells, it won’t realize nearly what it expected to realize.

The donor may be OK with the charity agreeing to base the annuity payment on the amount it receives from selling the property.

There’s a problem with this idea, however. The problem stems from the fact that a gift annuity arrangement is a contract, and a contract is not formed until there is a meeting of the minds. If the annuity payment is to be based on the amount the charity receives from selling, there is no meeting of the minds until after the sale occurs.

This means that for tax purposes the donor hasn’t made a completed transfer to the charity until there’s a sale, which exposes the donor, on audit, to any gain realized on the sale.

If a charity is willing to assume the risk, is willing to agree up-front to a specific annuity payment regardless of how much it gets from selling, there are a couple of ways to diminish the risk:

One is to issue a deferred payment gift annuity, deferred for, say, one or two years. This buys the charity time.

Another is for the charity to get its own assessment of the property’s real value and then to discount this value, say, by 10- or 20%. This provides a value cushion.

Personally, I wouldn’t agree to issue the annuity except in extraordinary circumstances … such as an ideal property in a strong and rising real estate market and a great donor. Even then, I’d strongly prefer a flip unitrust to a gift annuity.

By Jon Tidd
 

Giving Real Estate Imprinted Publications

Need something quickly or have a tight budget? Sharpe’s stock booklets and brochures are the most cost-effective solution. Read more about imprinted publications to learn how to add your organization’s logo and contact information to the front and/or back of one of our standard publications.

Giving Real Estate

A companion piece to Giving Securities, this booklet emphasizes the many gift opportunities open to those who own highly appreciated real property. Donors in areas with rapidly increasing real estate values or who hold the majority of their wealth in real property will benefit from Giving Real Estate.

Click here to learn more about ordering this booklet.

Note About the CARES Act

If you have recently ordered, or have been considering, Sharpe Group’s Giving Real Estate booklet, we are making a complimentary insert available highlighting charitable provisions in the CARES Act to include in mailings to your donors.

Click here to learn more.

Questions & Answers About Giving Real Estate

Questions & Answers About Giving Real Estate provides answers to some of the most commonly asked questions about giving real estate, including types of real estate one can give, how to continue to live at the property once donated and the advantages of making a real estate gift.

Click here to learn more about ordering this brochure.

 

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How the IRS Discount Rate Affects Gift Calcs

The IRS discount rate (7520 rate) has a big effect on charitable remainder annuity trust (CRAT), charitable lead annuity trust (CLAT) and gift annuity calculations but has almost no effect on unitrust calculations.

CRAT calculations: The 7520 rate adversely affects two CRAT calculations: [1] the charitable remainder calc and [2] the 5% probability calc … because the 7520 rate is the CRAT’s assumed earnings rate. The less the CRAT is assumed to earn, the less the charitable remainder beneficiary is projected to receive and the sooner the CRAT is projected to run out of money.

CLAT calculations: A low 7520 rate boosts the CLAT payout value, which increases the CLAT’s tax leverage.

Gift annuity calculations: A low 7520 rate lowers the charitable contribution; but it increases the tax-free portion of the gift annuity payments. It also increases the capital gain that’s realized if the annuity is funded with appreciated stock.

Bottom Line: A low 7520 rate is good for cash-funded gift annuities set up by individuals who don’t itemize.

Unitrust calculations: The value of a charitable remainder unitrust (CRUT) remainder is almost unaffected by the rate, as seen from this table (recipient is aged 70):
 

 
The table shows there is little to be gained by electing a prior month’s higher 7520 rate in the case of a CRUT. What’s mainly achieved is the hassle of filing a 7520 rate election with the tax return on which the CRUT is first reported.

The reason the CRUT remainder value is almost unaffected by the 7520 rate is that the 7520 rate is not the assumed earnings rate of a CRUT. The 7520 rate only bears on how the payout frequency affects the CRUT remainder value.

The payout frequency has a larger effect on the remainder value than does the 7520 rate. The greater the frequency, the lesser the remainder value.

By Jon Tidd
 

Sharpe Personalized Publications

Every donor communications plan requires informational, motivational and educational content for different types of gifts. Sharpe Group publications offer your donors up-to-date information on gift structures that may help them give more than they thought possible.

Use Sharpe Group’s online platform to personalize and order printed brochures targeted to your donors–uniquely styled with colors and images that brand your organization’s message and mission.

Choose an accent color and cover image from the provided selections, or upload your own image and your full-color logo to create a brochure that aligns with your fundraising strategy and fits your organization.
 

Click here to learn more.

 

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