Interest Rates and Gift Planning

I’m a tax lawyer, not an economist, but in my experience and thinking, interest rates play a far bigger role in gift planning than tax laws.

Back in the early 1980s, when interest rates were sky-high, practically no one wanted a gift annuity. Those were the hey days of pooled income funds.

Today, in an environment of low interest rates, low inflation and a surging stock market, gift planning is much different from the early 1980s.

What I see these days is:

    • a fair amount of gift annuity traffic,
    • a fair amount of real estate and CRUT traffic and
    • a lot of interest in using IRA assets to make gifts

Which brings us to the total return pooled income fund. This is a PIF that pays out all of its  ordinary income plus all of its realized capital gains.

I don’t know of a charity that has such a PIF. IRS regs expressly approve such a PIF. It seems to me to make sense given the surge in the stock market. I believe that for some charities it would have a lot of marketing appeal.

By Jon Tidd

A Bit More on the SECURE Act

Some information you may find helpful.

First, for individuals who attain 70.5 years of age after 2019, the age at which RMDs must begin is raised to age 72. Age 70.5 continues to be the age at which QCDs (so-called IRA rollover gifts to charity) can begin to be made…but for individuals who haven’t reached age 72, the QCDs don’t count for RMD purposes because RMDs don’t have to begin until the year in which RMDs occur.  Please don’t blame me for this complexity.

Blame Congress.

Second, an apparent problem. For any individual able to make a QCD for a calendar year, the cap on the total amount of QCDs for the year is reduced by $1 for each $1 the individual contributes to his or her IRA for the year.

Is this going to be a major problem? Time will tell, but I believe it won’t be.

Reason: Almost all really sizable IRAs are created at retirement, when the retiree rolls money from a corporate pension or 401(k) plan tax-free into an IRA the retiree has created.

These are the IRAs from which sizable QCDs are typically made. And the retiree who owns such an IRA is typically going to play golf, travel or spend time with the grandkids rather than take another job and make IRA contributions.

Small QCDs that come from relatively small IRAs are just plain unlikely to be affected by the cap reduction imposed by the SECURE Act.

By Jon Tidd

The SECURE Act: A Good Gift Planning Opportunity?

Author note: This is an opinion piece. Feel free to disagree.

 

At the CGP national conference in New Orleans in October 2019, much discussion occurred in the Leadership session about the charitable gift planning opportunities under the SECURE Act, which was recently signed into law.

The SECURE Act eliminates the stretch-out IRA for non-spouse beneficiaries of a decedent’s IRA. Now, the non-spouse beneficiary must withdraw the entire IRA balance by the end of the tenth year following the decedent’s death.

For a high-earning beneficiary in his or her forties, fifties, or sixties, the tax hit may be tremendous.

Some in the CGP Leadership session argued that this tax hit creates a good opportunity for charities to promote the idea of leaving IRA assets to a CRT for the benefit of such a beneficiary.

One high-profile T&E lawyer I’ve encountered who works on such CRTs is on board as well.

I’m skeptical, although I’ve worked on such CRTs where the intended beneficiary is quite aged.

First of all, a CRUT will have to be used in a low-IRS-discount environment, such as exists currently. The 5-percent probability test will preclude using a CRAT in such an environment for all but the most senior beneficiaries. In January 2020, for example, when there will be a 2.0-percent IRS discount rate, a CRAT for the life of an individual younger than age 77 will flunk the 5-percent probability test.

Second, and more importantly, a CRUT for the life of someone aged 40-60 is going to run forever, practically speaking.

One way to deal with these two issues, which was raised at the CGP conference, is to leave the IRA assets to a CRAT or a CRUT for a fixed tern of 20 years. In my opinion, such a plan may work well for all concerned in some situations.

BTW, I’ve always liked the idea of leaving IRA assets to a CRT for a spousal beneficiary. I see it as a good way to provide and protect.

by: Jon Tidd, Esq

How Should Gifts Be Counted? Part III

Some charities count bequest provisions in wills of living individuals. Usually, the charity requires a copy of that portion of the will that provides for the charity.

If it were up to me, I’d use the “two sets of books” approach discussed last time in connection with pledges. For “public consumption” I’d have a minimum age requirement, such as age 75. I’d also include future bequests in a separate category.

On the closely held second set of books I’d want detail on [a] the likelihood the bequest provision will come into play, and [b] some discussion of the time range the provision will likely come into play.

This discussion of bequest counting is closely related to the discussion of counting pledges.

There are various ways of — arguments as to ways of — counting charitable remainder trusts. If it were up to me, I’d opt for simplicity.

Why simplicity? Any method of counting CRTs is artificial.

There are two simple ways of counting. One is to count the amount transferred to the trust. The other is to count the charitable contribution amount calculated, typically, by the donee organization’s software.

I’d use the charitable contribution amount. Not simply for the sake of simplicity, but also because the software discounts (however imperfectly) for the time value of money.

Perhaps the best simple way to count CRTs is to show two columns: [1] the amount transferred to the trust, and [2] the corresponding charitable contribution amount. If I were a board member, that’s the simple presentation I’d like to see on the closely held set of books.

Anyway, this whole discussion of counting has been heavy on concepts and light on details for a particular reason. The conceptual approach to gift counting allows one to see the forest. The detailed approach is to look at individual trees.

I’d be interested in certain trees but generally prefer to view the whole forest.

by Jon Tidd, Esq

How Should Gifts Be Counted? Part II

Last time, we considered situations in which the donee organization receives an asset currently.

Now let’s look at some situations in which the donee is sure or pretty sure of receiving assets not currently but over time.

The most common such situation is a pledge that is solid. “Solid” meaning likely to be paid.

Charities routinely “book” all pledges at “face value” for fundraising purposes. FASB rules, which are neither rules of law nor rules of fundraising, requires unconditional pledges to be “booked” as income for accounting purposes.

I’m not concerned with the accountants’ books, but I am concerned with the development office’s books.

If it were up to me, these would be my prescriptions for counting pledges for fundraising purposes:

  1. I’d have two sets of fundraising books.One for public consumption, the other just for certain individuals high up in the charity’s food chain. The first set of books would be for “rally round the flag” purposes. The second set of books would be aimed at hard, cold reality.
  2. The first set of books wouldn’t include “junk” but would aim to lift spirits.
  3. The second set of books, the closely held set of books, would mainly focus on big pledges and the likelihood of their being paid.
  4. This set of books, for example, might contain detail about George, who has made a $5 million pledge, and his family members, not all of whom share George’s charitable intent.

This second set of books might lead to a board member’s approaching George with a request to “tighten up” the pledge. I’m assuming here that the board member knows George well and knows how to approach George discretely.

Big pledges, in my experience, are typically papered up so that they’re enforceable. Such a pledge is “tightened up” from a legal standpoint but still might not be paid. The second set of books can lead to high-level, informed discussions not about counting this sort of pledge, but about how both to ensure payment and to avoid conflict with family members.

Click here to read Part III.

by Jon Tidd, Esq

Steps for Successful Year-End Giving and Beyond

The end of one year and the beginning of another always marks a busy season for those engaged in charitable gift development activities. Recent tax law changes and economic factors give us more reasons to make our “to-do” lists.

“To do” at the end of 2019

  • December 31 falls on a Tuesday this year. Have staff on call to help expedite gifts of stock or other noncash assets donors wish to make before the end of the year for credit on their 2019 returns. Donors may be inclined to bunch deductions or prepay pledges for this purpose.
  • Keep a watchful eye on discussions of possible tax policy changes. Your donors and their advisors will be following the news, and you’ll want to know what is being talked about and what might be proposed in Washington.
  • Remind donors age 70½ and older of the option to give directly from their IRA. This important incentive may offer an attractive way for some donors to make a new gift or fulfill a prior commitment before the year ends. IRA gifts must be received by December 31 to count as a qualified charitable distribution (QCD) for 2019.
  • Watch stock market valuations and be prepared to remind those who have made gifts of securities in the past, as well as other donors who have made larger cash gifts, they may wish to take advantage of market conditions to complete gifts of appreciated securities prior to year-end. Some donors may wish to make a larger gift this year in order to itemize, instead of taking the standard deduction.
  • Offer to be of help to last-minute donors. Many of your best donors may not stop to think about additional gifts this year until the week between Christmas and New Year’s Day. Let them know you’re there to help in this final, busy week of the year. Make sure your online giving portal is easy to find and use.

After the year-end giving season, be prepared to hit the ground running in January. You may find the things you do early in the new year will help ensure the results you need next December and beyond.

“To do” early in 2020

  • Thank your donors for their 2019 year-end gifts as soon as possible. A phone call or visit to select donors can set the stage for discussions about their giving for 2020.
  • The winter months are historically a good time to remind donors about the importance of estate planning. The recent holiday season may have brought loved ones to mind, making this a good time to communicate about ways to make gifts to provide for others.
  • The early months of the year can also be a good time to remind donors about using their IRAs to make their gifts. Each donor is limited to $100,000 and the “early birds” may get more “worms.” Consider informing loyal older donors of the advantage of this type of gift before they take IRA withdrawals or direct gifts elsewhere.
  • Consider sending a “Giving Guide” or tax guide to larger donors as the tax season starts.

SHARPE newkirk consultants can help you plan your fundraising for 2020 and beyond. Contact us to start a conversation at 901.680.5300 or info@SHARPENET.com.

How Should Gifts Be Counted?

I get this question a lot.

The answer isn’t provided by tax law, because the tax law is unconcerned about gift counting.

Nonetheless, the tax law applies to the date of gift, for example. As a result, a counting decision in some situations — say, when to count a year-end gift — may wind up being based on the tax law. May.

Let’s take a different tack. Every charity should have a written gift counting policy that has been approved by the Board. Such a policy is needed for a capital campaign, of course. Such a policy also may be needed to measure a fundraiser’s performance.

Lots of big-league charities, however, either have no gift counting policy or have a woefully inadequate gift counting policy.

Given this fact, here are my general prescriptions for gift counting in certain situations in which the charity receives something currently:

  1. Cash gifts: Count the amount of cash received as of the date of receipt. Easy, except in the case of credit card gifts, which we’ve discussed.
  2. Stock gifts: Count the value of the stock (average of high and low) as of the date of receipt.
  3. Life insurance: If a charity is given ownership of a life insurance policy, it should count the cash surrender value of the insurance policy.
  4. Gift annuities: I’d count the charitable contribution amount as calculated by the charity’s software. It’s not necessarily the best way to count, but it’s simple and precise.
  5. Something the charity is going to sell as soon as possible: Something such as a small collection of figurines. I’d count the sale price.

These prescriptions are not based on law, just on common sense.

More next time.

by Jon Tidd, Esq

Get IRA Checkbook Gifts in Early

As we approach the end of the year, many nonprofits experience their highest level of donations. This rush of individual gifts, and holiday vacations, can sometimes slow down organizational processes of depositing and receipting gifts. For almost all types of gifts, this delay has no tax consequences.

For example, if a donor mails a check to a nonprofit, that donation is deductible the moment the mail carrier picks up the letter. Gifts from credit cards are transferred nearly instantly and are also immediately deductible. However, this convenient timing circumstance is not true for a relatively new type of gift: The IRA checkbook QCD gift.

QCD stands for Qualified Charitable Distribution. This is an ideal gift for donors age 70½ or older. These donors are forced to take required minimum distributions (RMDs) out of their IRAs or face a 50% penalty. These RMDs count as income. But, a QCD transfers funds directly from the IRA to a charity, counts against the RMD, and doesn’t count as income. A donor can give up to $100,000 per year this way, even if their RMD is much less. For many reasons, having no income (via the QCD) is better than having income and a deduction.

The IRA checkbook is a growing phenomenon where financial institutions allow account holders to have a checkbook for their IRA account. Instead of requesting a transfer from the IRA custodian, the account holder simply writes a check whenever funds are needed. Combining these two tools is the IRA checkbook QCD gift. The donor simply writes a check to the charity from an IRA checkbook. That gift can qualify as a QCD. The IRA custodian reports the distribution on Form 1099-R, counting towards the RMD. The donor reports the distribution as a non-taxable QCD on the donor’s tax return. This is a convenient way for donors to make QCD contributions throughout the year.

However, a timing problem can arise at the end of the year. This is a QCD gift must qualify under both the normal charitable deduction rules and the QCD rules. These QCD rules require action by the custodian, not just the account holder.

What happens if the donor writes a check to the charity from an IRA checkbook and the charity doesn’t cash the check until January? The IRA custodian does not act in the earlier year. The 1099-R Form issued by the custodian will not include the QCD in the earlier year. The IRS can penalize the donor for 50% of the undistributed RMD in the earlier year. Although the QCD will count in the later year when the check is finally deposited, this is small consolation to a donor who has to pay the 50% penalty. In order to avoid the penalty, the charity should deposit the check in enough time so that the funds will transfer out of the IRA prior to the end of the year.

Notes. See IRC §§ 408(d)(8)(C), 408(d)(8)(B)(i)

By Russell James

What Are the Most Common Problems in Gift Planning? Part IV

Last time, we looked at credit card gifts and some of the problems with these gifts…including the credit card fee.

We left off with an equation for figuring the amount Doris should charge to her credit card so that after the 2.5% credit card fee, the charity winds up with $10,000:

X – .025X = $10,000

Solving for X is easy. Combine the terms on the left-hand side of the equation: X – .025X = .975X. This means .975X = $10,000. Which leads to: X = $10,000/.975 = $10,256 (to the nearest whole dollar).

If it were up to me, I’d make this approach part of my organization’s gift acceptance policy.

It’s not clear, by the way, how much Doris gets to claim as a charitable contribution. Can she claim $10,256 (the amount with which she parts) or $10,000 (the amount the done organization receives)? The tax law doesn’t say. The amount she should claim is the call of her accountant or other tax return preparer. If I were in Doris’s shoes, I’d claim $10,256, on the grounds the tax law is unclear.

So much for credit card gifts.

What are some other tricky gifts?

Answer: Any gift can be tricky. You would come to this conclusion if you were in my shoes.

Actual case: Donor mails a $20,000 check to Charity to set up a gift annuity. Charity’s bank presents the check to Donor’s bank for payment. The check is returned…NSF. Charity’s bank again presents the check for payment.  Again the check is returned…still NSF. Donor gets wind of this and transfers plenty of money to his checking account. Too late, too bad. Charity’s bank will not present the check for payment a third time. Donor’s intended gift fails.

Lesson learned: Gift planners should beware!

by Jon Tidd, Esq

What Are the Most Common Problems in Gift Planning? Part III

Last time, we looked at credit card gifts…and some of the problems with these gifts.

There’s one more problem, a common problem, with credit card gifts, which arises when the donor wants to establish a gift annuity with a credit card.

Let’s take the case of Doris, aged 79, who wants to set up a $10,000 gift annuity with a credit card. Doris calls Charity’s PGO, makes an agreement over the phone (later to be reduced to writing), and promptly charges her card $10,000 in favor of Charity.

The problem is, Charity isn’t going to receive $10,000 for the annuity. (I know, a lot of charities eat the fee, which I don’t like.) Charity’s going to receive $10,000 less a 2.5% fee. (I know, not all CC companies charge the same fee…we’ll use 2.5% just for discussion purposes.)

This means Charity is only going to receive $9,750…a bad deal for Charity, in my opinion.

The question is: How much should Doris charge to her card so that Charity receives a net amount of  $10,000?

This is a first-year algebra problem. In algebra, the unknown amount is always X. That’s the amount Doris should charge.

A 15-year-old freshman algebra student writes:

X – .025X = $10,000

The student writes this equation because [a] she knows to convert the fee from a percentage to a decimal number, and [b] she knows that this equation produces a figure for X that allows Charity to net $10,000.

I’ll give the answer for X next time (meanwhile, solve for X yourself), and then we’ll look at some other problem assets.

by Jon Tidd, Esq