By Professor Christopher P. Woehrle, J.D., LL.M
What a wild ride 2020 has been for our economy and especially investors! As of this writing, the S&P 500 has recovered most of its losses from a peak decline of 30%. The Federal Reserve Board is resolved to keep interest rates near zero for the foreseeable future. The SECURE Act raised the required minimum distribution age to 72. Soon thereafter, the CARES Act suspended RMDs for 2020 as well as allowed deductibility of cash gifts to public charities up to 100% of AGI.
In addition to continuing the education on these developments, your organization should be strategizing about accessing popular sources of support, including gifts of cash, before the end of the year.
Qualified charitable distributions
Both the SECURE and CARES Acts left unchanged at age 70½ the eligibility to make a distribution from an IRA to a public charity. The donor may exclude from gross income up to $100,000 of the aggregate amount of qualified charitable distributions (QCD). A QCD operates like a backdoor tax deduction since it reduces the amount of the required minimum distribution. Since the Tax Cuts and Jobs Act of 2017 dramatically reduced the number of itemizers and thus the deductibility of giving, your donors should give more and more thought about the use of QCDs from IRAs.
Donor advised funds
In its annual study of donor advised funds (DAFs), the National Philanthropic Trust noted for the ninth consecutive year there was growth in all key metrics: number of individual DAFs, total grant dollars from DAFs to charitable organizations, total contributions to DAFs and total charitable assets in them. During the 2014-2018 cycle, the annual rate of growth in the number of DAFs has been 17% according to the National Philanthropic Trust. During the same period, the growth rate for contributions to them has been nearly 100%.
Donors of all ages and philanthropic interests continue to use them. Your charity needs to be front and center on the minds of your donors as a worthy grantee from a DAF.
Charitable gift annuities
The volatility of the past year makes locking in gains to be annuitized through a charitable gift annuity attractive. However, the historically low Section 7520 interest rate environment represents traps for unwary charities and opportunities for most donors. Here’s how:
Emerging risk for charities
For a charity’s gain on the sale of its charitable gift annuities to avoid taxation as unrelated business income, the value of the annuity to the donor must be less than 90% of the value of the property exchanged for the annuity. Annuities issued at the recommended American Council on Gift Annuities rates to younger donors might fail this requirement. So long as the Sec. 7520 rate is 0.6% or higher, the charitable remainder will exceed 10%. If less than 0.6%, there is risk of incurring unrelated business income tax. Accordingly, the payout rate will need to be reduced. Although a donor can elect to use a Sec. 7520 rate from one of the preceding two months, the charity is limited to the interest rate “at the time of the exchange” per Sec. 514(c)(5) of the Code.
Opportunity for donors
Although the deduction for a charitable gift annuity is lower when the Sec. 7520 rate is low, the amount of each payment excluded from income under Sec. 72 will be higher. Since the majority of taxpayers are taking the standard deduction, how much of the annuity is a tax-free return of principal will be of even greater interest. To maximize the tax-free portion of the payments, donors will be electing the lowest Sec. 7520 available.
Leading with the appeal to support the good works of your institution remains the best practice. Notice how the deductibility of contributions may be becoming less of a factor under current law. But, of course, the income and transfer tax laws may be dramatically altered depending on the results of the upcoming elections. Stay tuned.
Sharpe Group has four publications your organization can personalize and print to send to your donors encouraging yea-rend giving. For more information, click here. ■
Christopher P. Woehrle is professor and chair of the tax & estate planning department at the College for Financial Planning in Centennial, Colorado. As one of Sharpe Group’s technical advisors, Chris is a frequent contributor to Give & Take and authors Sharpe Group blogs.