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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Gift Annuities for Young Individuals

Recently, I had a discussion with an experienced gift planning officer who had a trustee wishing to set up a gift annuity for a 58-year-old family member.

I believe age 58 is way too young for a gift annuity. The annuity will run forever, and the benefit to the issuing organization will be zilch.

But that’s not the only way to think about the situation.

First, the trustee may know this, may want to provide for a needy family member and may have in his back pocket a far larger reward for the charity of which he’s trustee. In this case, the charity is well-advised to grin and bear it.

Second, there may be a way to accommodate the trustee and still reap a good benefit for the charity. What I’m about to describe can work, but doesn’t always work.

The trustee sets up two gift plans.

No. 1 is a CRAT for a fixed term of years. Let’s say 12 years, which will run until the 58-year-old is age 70.

No. 2 is a 12-year deferred payment gift annuity, which will begin making payments at the point in time when the CRAT terminates.

The only catch is that the trustee needs to deploy about $150,000 for this plan to work—$100,000 for the CRAT and $50,000 for the DGA. But $100,000 alone in a one-life gift annuity results in no benefit to the charity.

Something to think about.

By Jon Tidd

 

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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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