‍Tax Return Reviews, Types of Funds, and the Latest Donor-Advised Fund News

‍Tax Return Reviews Help Clients Level up Charitable Giving Plans

Tax time has its silver linings! Going over a tax return with a client helps start a productive conversation about ways to plan gifts more effectively. As you scan 2023’s charitable contributions, talk with your client about whether those charitable gifts were made with cash or with other assets, and then steer the conversation toward discussing the most effective assets to give to charity during 2024 and beyond. 

Here is a four-point checklist that can help you advise your clients about the range of charitable giving options: 

• Remind clients that cash is not king when it comes to charitable giving. Cash is typically not the most tax-effective form of charitable giving. Instead, encourage clients to consider giving highly-appreciated assets, including publicly traded stock, to their fund here to support their favorite charities.   

• Think even beyond stock. American households’ most valuable assets are retirement accounts and personal residences, not cash. For clients who are age 70 ½ and older, direct transfers from an IRA (known as a Qualified Charitable Distribution) to an unrestricted fund with us. 

• Reach out to us for assistance! Make it easy on yourself and your client. We are happy to help you and your client evaluate the best assets to give to a donor-advised or other type of fund here.

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• Close the loop on IRS reporting. Remember that the reporting requirements are different for noncash gifts to charity versus cash gifts. Make sure you are familiar with IRS Form 8283, which must be filed with any tax return claiming a deduction for noncash assets valued at $500 or more. The IRS expects strict adherence to the terms of the form, especially the requirement for a qualified appraisal. We can handle the confirmation of receipt and a commitment to document and notify the IRS if disposition occurs within three years.

Opening up the full range of charitable giving options for a client can help you structure a holistic estate and financial plan that meets their objectives for family wealth, philanthropy, and tax effectiveness. Please feel free to reach out anytime to discuss techniques and strategies. 

‍Fund Types Tailored to Your Clients’ Charitable Goals

Just as each of your clients has a unique estate plan and financial plan, each of your philanthropic clients needs a unique charitable giving plan. For example, for some clients, giving shares of highly-appreciated stock consistently every year to their fund with us makes the most sense for their charitable goals and their mix of assets. For others, leaving a bequest to us to support specific areas of interest is the best fit for the client’s financial situation and community priorities.  

We offer charitable giving vehicles to meet a wide range of clients’ needs, and in many cases, a single client can benefit from setting up multiple funds of different types. Here’s a quick primer on a few of the most popular fund types:

CFGC Unrestricted Funds

We have our finger on the pulse of the community’s most pressing issues. An unrestricted fund allows your client to support community needs that can’t be identified until the future. One of the biggest benefits of a Community Foundation is its perpetual structure that allows clients and their families to offer support to nonprofits that evolves as priorities in the region shift. 

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Donor-Advised Fund

A donor-advised fund enables your client to establish a specific account for charitable giving. Your client makes tax-deductible contributions of cash (or, ideally, stock or other highly-appreciated assets) to the fund, then recommends grants to favorite charities. 

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Field-of-Interest Fund

Clients who want to target their giving to specific areas of community need (such as education, health, environment, or the arts) can set up a field-of-interest fund to establish parameters for grantmaking under the ongoing guidance and expertise of the Foundation’s staff.  

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Designated Fund

A designated fund allows a client to direct giving to a specific agency or purpose. Over time, our staff manages the distributions from the fund according to the terms established by your client.

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Scholarship Fund

Clients can set up funds to support students’ educational pursuits based on the parameters and application requirements they outline with help from our team of experts.

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Agency Fund

An agency fund is similar to a designated fund except, in the case of an agency fund, the source of the initial contribution is the beneficiary nonprofit organization itself, not a donor or donors as is the case with a designated fund. If your client serves on boards of directors of charities, they’d likely be interested in learning more about agency funds. Indeed, if you represent nonprofit organizations and their board members in your practice, it’s helpful to keep in mind that organizations frequently establish agency funds with us to set aside endowment reserves or rainy-day funds. Our team is adept at navigating the specific accounting standards that are unique to this type of arrangement.

Here’s a pro tip: If you represent clients who are age 70 ½ and older, consider recommending a Qualified Charitable Distribution from a client’s IRA to an unrestricted fund with us. All fund types noted above are eligible recipients, except the donor-advised fund.

We look forward to working together to discover the type of fund (or funds!) that could be a good fit for each client’s unique charitable giving needs. 

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Donor-Advised Funds: Recommended Reading

Our team tracks legislation, legal developments, trends, news, and innovative strategies for all types of charitable giving so that we can keep fund holders and their advisors up to date. Recently, donor-advised funds have been the subject of conversation within financial and estate planning circles, as well as a trending topic in philanthropy, related to a set of proposed regulations issued by the IRS late last year. The IRS has scheduled public hearings on the proposed regulations, set for May 6, 2024.

As just one of many types of funds your clients can establish with us, the donor-advised fund is popular because it allows your client to make a tax-deductible transfer of cash or marketable securities that is immediately eligible for a charitable deduction. Then, the client can recommend gifts to favorite charities from the fund to meet community needs as they emerge. Our team has compiled a list of articles we’d recommend if you’d like to dig deeper into the topic of donor-advised funds. Of course, we welcome your questions and comments, so please reach out anytime!  

• The Donor Advised Fund Research Collaborative’s recently released study of donor-advised funds reported that the majority of donor-advised funds make at least one grant per year, and the national average annual “pay-out rate” for all donor-advised funds is 18%. Donor-advised funds are frequently deployed as a tool to help philanthropists who have a wide range of financial capacity, from a little to a lot, organize their charitable giving; consistent with that function, the study found that nearly half of all donor-advised funds carry balances less than $50,000

• The proposed IRS regulations related to donor-advised funds are attracting significant interest in legal circles. To dig into the legal issues, you might check out this article in Financial Advisor because it includes commentary from professionals in the field. You can also check out the Council on Foundations’ comments for additional insight.

• For a big-picture look at the state of donor-advised funds, including the relevance of recent research and the status and implications of the proposed regulations, check out this article in Wealth Management and this article in Think Advisor.

• Finally, our local attorney recently shared this Bloomberg article with our team, and we thought we would share it with you.

While these materials are useful for gaining an understanding of the current situation, at this point, no one can predict what will happen with the proposed regulations—whether and how they will be revised or when they might become effective, if ever. As always, our team is staying on top of the issues. We’ll keep you posted!