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W E AL T H P L AN N I N G
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A TIME TO GIVE
2014 Year-End Tax Planning
Year-end is an opportune time to reflect, what we have done and what we have received in
the past months. As holidays are celebrated and many give thanks, it is also a season to give
back individually, and engage or reengage family in the spirit of philanthropy. There are
many things to consider. How can we have meaningful conversations around giving with our
families? How can we plan gifts to at once make an impact and optimize available income tax
benefits? The time to have the conversation and to plan our gifts is upon us.
SPEAKING OF GIVING
November 2014
As holidays approach, it is not uncommon for families to have conversations about charitable
giving. It is also a time when families will consider volunteering with their favorite charities
and reflect on how they might contribute to creating a better world for future generations.
Now is indeed an opportune time to talk about family philanthropy. Whether conversations
about philanthropy are held around a dinner table or during a more formal family meeting,
there are several ways to speak of giving to ensure that charitable intentions are fully
considered and that family members are encouraged to participate in the discussions and
subsequent planning. Here are several recommendations for how to make these conversations
productive and relevant for family members.
•
Share Goals and Values – When considering family philanthropy, it is critical that
the donor share with other family members his/her goals and values relating to the
importance of giving back to the communities and causes in which he/she believes. It
is important to share why giving is important, the details and decisions that inform
the gift(s), and how the donor’s motivations have evolved over the years.
Philanthropy can be quite a personal undertaking. The donor should not
underestimate how his/her charitable gifts might encourage and inspire other family
members to give. Statements relating to goals and values should be clear and concise,
and the donor should seek to inspire as well.
•
Give Examples of Personal Giving – After sharing why giving is important, the donor
may want to talk about how he/she gives. Providing examples of the kind of
organizations and causes he/she has supported in the past can provide a necessary
point of reference for future family giving. Charitable giving may include gifts of
financial resources, time or personal or professional influence. The donor may wish
to share with family members how charitable giving may include any of these
contributions. Also, it is important that the donor share how giving has made a
difference in the donor’s life and in the lives of others.
•
Ask About Interests – Within families, there may be many ideas and philosophies
about how to “make the world a better place.” Charitable giving is much more
meaningful when a gift can be made to causes and activities that are important to the
giver. When the donor is ready to take the plunge by making a single gift or starting a
family giving plan, he/she will undoubtedly want to gather information about the
causes and charitable activities that are important to each member of the family.
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•
Encourage Family Members to Think Differently – If the donor wants to increase the
likelihood that family members will participate in philanthropy, he/she will want to
make sure that while he/she shares ideas about giving – personal interests, passions
and favorite charities – he/she also encourages family members to explore new and
different causes and activities. In addition, the donor may want to set aside
philanthropic resources that will allow family members to make significant charitable
gifts based on their individual concerns, interests and passions.
•
Encourage Non-monetary Giving – Conversations about philanthropy are often
coupled with discussions regarding money and family wealth. This may be a difficult
topic to cover at a family gathering, but need not stifle a discussion around charitable
giving. There are so many ways to give. One way that families can instill a sense of
joy and purpose in charitable endeavors is to encourage younger family members to
join in volunteer experiences. Volunteering as a family is also one of the best ways to
teach children about the value of financial resources and the importance of sharing
those resources with others.
Ultimately, having just one conversation about charitable giving may not be enough. The
donor may need to have several conversations before he/she is successful in sparking interest
among family members. Philanthropy can often be the glue that holds families together.
However if there is not a strong commitment and connection to giving as a family, these
bonds may not hold up over time. Laying the groundwork for philanthropy by having open
conversations, engaging family members, clearly articulating expectations for participation
and creating opportunities for full participation are the best ways to ensure that philanthropy
will be a family affair for generations to come. Sharing goals and values with family members
and learning together is what matters most.
Planning to give
Once the decision is made to give, there are choices to be made around what to give and to
whom to give. Effectuating a gift to charity should involve tax as well as non-tax
considerations since, for many individual donors, maximizing the charitable deduction may
be just as important as optimizing the charitable impact of the gift.
Giving may be as simple as sending a check or making a contribution through a credit card
to a well-known U.S. public charity, or a more complicated gift to support foreign
philanthropic efforts or to a private family foundation. The type of property given and the
organization to which a gift is made will determine the extent of the income tax benefit
available to the donor for a charitable gift, both in terms of the applicable percentage of
adjusted gross income (AGI) limitation on the deduction and how the gift will be valued for
gift purposes (typically either basis or fair market value). Evaluation of potential tax benefits
should take into account the potential to deduct (carryover) any portion of the charitable gift
in excess of the deduction allowed in the current year in the following five tax years.
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What to Give
Donors can, and often should, consider all of their assets when making a gift – cash,
marketable securities, retirement accounts, even more illiquid assets such as a work of art, a
second residence or shares in a closely held corporation. Taking a holistic look at assets and
working with experienced advisors will help yield the best approach for funding charitable
giving.
•
Cash - Gifts of cash, whether by check or credit card, are easy and quick, and
they are subject to the most generous of the adjusted gross income limitations on
deductibility (50% of AGI for gifts to a public charity and 30% of AGI for gifts
to a private non-operating foundation).
•
Appreciated Long-Term Property - When choosing the type of property to
donate, there may be situations in which a donor would want to choose
appreciated long-term capital gain property, such as low basis stock, instead of
making a cash gift. A gift to charity of appreciated long-term stock may be of
greater benefit than cash for a number of reasons. Giving stock may avoid capital
gains tax on the sale. In addition, now that high-income taxpayers are subject to
the additional 3.8% Medicare contribution tax, making a gift of appreciated
long-term stock instead of selling the stock can have the further benefit of
keeping a donor’s modified adjusted gross income below the level at which the
Medicare contribution tax comes into effect ($250,000 for joint filers or
surviving spouses, $125,000 for a married individual filing a separate return, and
$200,000 for other individuals).
•
Individual Retirement Account Distributions - Gifts from individual retirement
accounts (IRAs) may also be beneficial, but the tax law in this regard is currently
uncertain. In recent years donors age 70-1/2 and older have been able to make
gifts of up to $100,000 of their required minimum distribution from their
individual retirement accounts directly to qualified charities without bringing the
distribution into income. This provision expired December 31, 2013 and, as of
the date of publication, has not been extended. However, extender legislation has
been introduced and could be passed by Congress in the lame duck session. In
the past, extender legislation has been passed with retroactive effect, but a donor
who is required to take an IRA distribution is not granted an extension of time
beyond year-end to either take their mimimum distribution or direct it to charity.
Consultation with a donor’s tax advisor as to year-end IRA charitable planning
options is suggested.
•
Illiquid Assets - Gifts of illiquid assets can be more complicated for both the
donor and the recipient organization, so thoughtful planning is essential. When
making a gift of art, real estate or other illiquid assets, donors and their advisors
should start the process well before the end of the year. Including the recipient
organization(s) early in the planning can also help set expectations for all parties
from the beginning. Finally, the donor may need assistance from knowledgeable,
qualified appraisers to determine value for purposes of making a charitable
contribution of illiquid assets. Gifts of art involve other complicated rules which
can potentially limit the amount of a charitable deduction (including determining
how the donee organization will use the art) and for which a knowledgeable
advisor should be consulted.
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To Whom to Give
From the donor’s perspective, it is important to identify the tax status of the charity. For
example, donating to a U.S. public charity as opposed to a private foundation may allow for a
larger overall charitable deduction. The tax benefits of gifts to foreign charities may be
limited.
Giving Domestically - Charitable donations are deductible only if they are made to
qualified organizations, essentially charities, non-profit organizations and religious
organizations that are “organized or created in the United States or its possession or under the
laws of the United States, any State, the District of Columbia or any possession of the United
States, and organized and operated exclusively for charitable, religious, educational,
scientific, or literary purposes, or for the prevention of cruelty to children or animals.” 1 In
addition, the income tax deduction available for charitable gifts is limited based on the
donor’s adjusted gross income and the value of the property given, depending on the type of
charity to which a gift is made. The chart below provides a high-level summary of the
applicable limitations. However, each gift should be assessed individually in advance to
evaluate any expected income tax benefits.
Type of U.S. Organization
Public charity (including
donor advised fund and
private operating
foundations)
AGI Limitation
50% for cash
30% for long-term capital
gain property
Private foundation (nonoperating)
30% for cash
20% for long-term capital
gain property
Charitable remainder trust
with public charity as
remainderman
Charitable remainder trust
with private foundation as
remainderman
Same as public charity, and
deduction limited to present
value of remainder interest
Same as public charity, and
deduction limited to present
value of remainder interest
Deduction Based On
Fair market value for
publicly traded long-term
appreciated stock and other
long-term capital gain
property, including closely
held stock and real estate, as
well as “related use” tangible
personal property
Fair market value for
publicly traded long-term
appreciated stock; tax basis
for other long-term capital
gain property, including
closely held stock and real
estate
Same as public charity, and
deduction limited to present
value of remainder interest
Same as public charity, and
deduction limited to present
value of remainder interest
For taxpayers in higher income tax brackets, the charitable deduction may be subject to an
additional phaseout (the Pease limitation), which limits up to 80% of otherwise allowable
income tax deductions. However, the income tax limitation will not limit the non-tax
charitable impact of the gift.
1
See IRS Publication 78, List of Exempt Organizations and Publication 526 Charitable Contributions.
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Giving Internationally - In the wake of international disasters such as tsunamis and
earthquakes and recent global humanitarian relief and peace efforts, many charitably-inclined
individuals are making gifts to both domestic and non-U.S.-based international charitable
organizations. Indeed, interest in international charitable giving has increased significantly. 2
While this method of supporting international charitable causes may be efficient and timely,
gifts to non-U.S.-based or foreign charities may or may not be tax-deductible. The rules
regarding the tax deductibility for contributions to foreign charitable entities are quite
complex. As a result, international charitable giving has become a significant tax planning
concern for donors and their advisors.
Generally speaking, an individual taxpayer who makes contributions to foreign
governments or foreign, non-U.S.-based charities may not claim an income tax charitable
deduction. There are certain exceptions however. Gifts made to public charities located in the
United States that conduct charitable activities abroad are entitled to an income tax charitable
deduction, as are charitable contributions to U.S. “friends of” organizations. Under income
tax treaties with Canada, Mexico and Israel, certain contributions to Canadian, Mexican and
Israeli charities may be deductible. In addition, a U.S. private foundation can make a grant to
a foreign charitable organization if either of two “tests” is satisfied: the expenditure
responsibility test or the equivalency test. These tests require the private foundation to comply
with somewhat complex reporting and procedural requirements and obtain substantial
information regarding the foreign charity’s operations and management. However, if the
private foundation meets the requirements of either of these two tests, grants to foreign
charitable organizations will be considered “qualifying distributions” and the private
foundation may avoid tax penalties. 3
While U.S. tax laws encourage charitable gifts in an international context, the donor who
wants to receive an income tax charitable deduction for gifts made to non-U.S.-based
charitable organizations must comply with rather restrictive rules. To ensure that
contributions to foreign charities will qualify for an income tax charitable deduction and do
not run afoul of anti-terrorism restrictions, it is necessary and advisable for donors and their
advisors to thoroughly scrutinize donations to foreign charities and conduct significant due
diligence to ensure that relevant laws and regulations are complied with before making gifts
to charitable organizations that are located overseas and well before the end of the year.
SIMPLIFYING GIVING
For families who are involved in formal grantmaking through a private foundation, coming
together around philanthropy may cause more frustration than fulfillment. There are
numerous (and often time consuming) requirements associated with participating as a
foundation director or trustee: filing an annual federal tax return for the foundation,
registering with the Secretary of State in the state of incorporation, and fulfilling the
“qualified distribution” requirement, among others.
2
According to the 2013 Charitable Giving report derived by the Blackbaud Index, International Affairs
organizations had the greatest increase in overall charitable giving in 2013 (13.2%).
In addition to tax considerations, donors who wish to make charitable gifts to foreign charitable organizations
should be aware of the anti-terrorism provisions outlined in the USA PATRIOT Act and Executive Order 13224.
Specifically, the PATRIOT Act provides guidelines and restrictions to ensure that donors do not inadvertently
provide funding to “individuals and entities that commit, or pose a significant risk of committing, acts of
terrorism.”
3
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Additionally, for some family members who are engaged in grantmaking through a private
family foundation, coming to a consensus around which charitable organizations to support
may prove challenging. For example, if three adult siblings serve as the directors for their
family foundation, each sibling may have differing opinions about which charitable
organizations the foundation should support each year. This challenge may be exacerbated if
the siblings are geographically disbursed and prefer to support charities in their own
communities.
Although private foundations can be wonderful vehicles for charitable giving, in some
circumstances having the family come together around philanthropy may have become more
frustrating than fulfilling. Alternately, a family may want to consider a donor advised fund,
which is a charitable giving vehicle established and maintained through an existing public
charity, often a community foundation. Advisors to the account can recommend grants from
the fund to other qualified public charities, thus allowing family members to continue the
practice of grantmaking. Unlike the numerous duties imposed on the directors or trustees of a
private foundation, donor advised funds place few responsibilities on the individuals who act
as advisors to the accounts. Although advisors may make investment and distribution
suggestions, the sponsoring charity for the donor advised fund program is responsible for any
and all compliance duties.
For families who are looking for a less complex and less burdensome alternative to a
private family foundation, a donor advised fund may be the perfect solution.
CONCLUSION
Year- end truly is the season of giving. Whether individuals and families are interested in
tailoring or expanding their current approach to philanthropy, donors should consider taking
advantage of the holiday season to reconnect with their families and communities through
charitable acts of giving. In order to maximize time spent celebrating with friends and family,
work with knowledgeable advisors to navigate planning and effectuating gifts.
FOR MORE INFORMATION
As a premier financial firm, Northern Trust specializes in life-driven wealth management
backed by innovative technology and a strong fiduciary heritage. For 125 years we have
remained true to the same key principles – service, expertise and integrity – that continue to
guide us today. Our Wealth Planning Advisory Services team leverages our collective
experience to provide financial planning, family education and governance, philanthropic
advisory services, business owner services, tax strategy and wealth transfer services to our
clients. It is our privilege to put our expertise and resources to work for you.
If you’d like to learn more, contact a Northern Trust professional at a location near you or
visit us at northerntrust.com.
Special thanks to Amanda Andrews, Second Vice President, Wealth Planning and Tax Strategy;
Tim Bresnahan, Vice President, Philanthropic Services; Marguerite Griffin, National Director of
Philanthropic Services; and Suzanne Shier, Wealth Planning Practice Executive and Chief Tax
Strategist for their contributions to this piece.
(c) 2014, Northern Trust Corporation. All rights reserved.
Legal, Investment and Tax Notice: This information is not intended to be and should not be
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treated as legal advice, investment advice or tax advice. Readers, including professionals,
should under no circumstances rely upon this information as a substitute for their own
research or for obtaining specific legal or tax advice from their own counsel.
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