Hudson Community Foundation (HCF) is committed to providing timely updates on legal and policy developments to help you and other professionals who advise philanthropic clients as part of best practices in charitable planning. In the spirit, donor-advised funds (DAF) and the rules governing these vehicles are topics that are shared more frequently in financial and even mainstream media. Our team is closely watching these regulatory developments.
In November 2023, the Internal Revenue Service issued proposed regulations that would change the way donor-advised funds are defined and how they operate. Especially leading up to the May 6, 2024 public hearings, the proposed regulations have created quite a bit of conversation. If you’d not yet heard about the proposed regulations, the April 19, 2024 letter to Treasury Secretary Janet Yellen, signed by 33 members of Ways and Means, brought attention to those watching these proposed regulations. The letter lays out concerns that “these regulations could have the unintended consequence of impeding charitable giving in our communities, particularly at our local community foundations.”
What happens now that all interested parties have submitted their comments? These regulations are proposed, not finalized. After the numerous letters to the IRS and public hearing, the Treasury and the IRS will review all the comments and decide on potential changes. Because there is much for the IRS to consider after the high volume of comments and ranking of other IRS and Treasury regulatory concerns, this will impact the amount of time it takes the IRS and the Treasury to potentially pass the regulations. Also, with an election year it is going to be a significant challenge for regulators to finalize this proposal before year-end. No one can predict what, when or whether they will be revised…if ever.
What is the impact? We do not see any changes currently to HCF’s program, as these are only proposed regulations. A large group of community foundations throughout the US believe the IRS will give serious consideration to the comments submitted, and not go forward with regulations that undermine the critical role DAFs play in American philanthropy.
The Pension Protection Act provided the IRS tools to address many of these concerns, such as prohibiting certain transactions between a DAF and a disqualified person. DAF sponsors have worked together to develop and implement strong and consistent policies and practices to prevent these abuses. The IRS has been encouraged to work with stakeholder community foundations to ensure that the final regulations achieve their stated goals and continue to allow robust and sustained grant-making charities across the country. You’ll hear from us when (and if) the proposed regulations, or some version thereof, go into effect and what to do about it.
As you track the issue, however, it’s important to remember that a DAF is just one of many types of funds your clients can establish at Hudson Community Foundation. Consider:
– A DAF is popular because it allows you or 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 and support charities that matter to them throughout the USA.
–Other types of funds at HCF can be just as effective as a donor-advised fund depending on the client’s objectives. In some situations, these other fund types are even more effective than a donor-advised fund to achieve a client’s goals.
–Field-of-interest funds and designated funds, for example, allow your or your client to support a charitable cause or organization that is important to them. Unrestricted funds help your clients support future needs in the community that can’t be predicted and can only be addressed through the HCF’s perpetual structure and mission to serve the community as a whole.
–A major advantage of field-of-interest funds, designated funds, scholarships, and unrestricted funds is that they are eligible recipients of the popular and tax-savvy planning tool called the Qualified Charitable Distribution, or “QCD,” available to your clients who have reached age 70 ½.
We look forward to helping serve charitable clients regardless of where the proposed regulations end up. We’ll keep you posted!
When you or your client are deciding to make a contribution to a fund at Hudson Community Foundation remember there are more ways to gift than from a checkbook. Here are other (and typically more tax-savvy) options to consider.
Marketable securities
Gifts of long-term appreciated stock to a donor-advised or other type of fund at the community foundation is always one of the most tax-savvy ways to support favorite charitable causes because capital gains tax can be avoided. Gifts of publicly traded stock, for example, are easy to transfer to a fund. HCF’s team can provide you and your clients with transfer instructions to make the process simple.
As is the case with a cash gift, the community foundation will provide a receipt for tax purposes, and the gift of stock will be valued at the shares’ fair market value on the date of transfer. When the community foundation sells the shares, the proceeds flow into the client’s fund without any reduction for capital gains taxes. This is because the community foundation is a 501(c)(3) charitable organization and therefore does not pay income tax. That would not have been the case, however, if the client had sold the stock first and then transferred the proceeds to a fund at the community foundation; the client would owe capital gains tax on the sale. Especially in cases where the client has held the stock a long time and it’s gone up significantly in value, the capital gains hit can be big.
Closely Held Business Interests
The HCF team is happy to work with you and your client to explore how the client might give shares of a closely held business to a fund at the community foundation. Not only will transfers be eligible for a charitable deduction during the year of transfer (and at fair market value if the shares are held for more than one year), but also these gifts could potentially reduce income tax burdens triggered upon a future sale of the business. Be sure to talk with our team well before any potential sale is in the works; otherwise, you could lose out on tax benefits. Gifts of closely-held business interests are powerful but can be difficult to administer.
QCDs from IRAs
As always, keep in mind that the Qualified Charitable Distribution (“QCD”) is a very smart way to support charitable causes. If your or your client is over the age of 70 ½, they can direct up to $105,000 (in 2024) from an IRA to certain charities, including a field-of-interest, designated, unrestricted, or scholarship fund at HCF. If your client is subject to the rules for Required Minimum Distributions (RMDs), QCDs count toward those RMDs. That means you or your client avoids income tax on the funds distributed to charity. Our team can work with you and your client to go over the rules for QCDs and evaluate whether the QCD is a good fit.
Real Estate
Your client’s fund at HCF can receive a tax-deductible gift of real estate, such as a condominium, home, or commercial property, in a variety of ways. An outright gift is always an option; lifetime gifts of real estate held by the client for more than one year are deductible for income tax purposes at 100% of the fair market value of the property on the date of the gift, which also avoids capital gains tax and reduces the value of your client’s taxable estate.
Life Insurance
Life insurance is an effective charitable giving tool, whether by naming a client’s fund at Hudson Community Foundation as the beneficiary or, in the case of whole life policies, naming the fund as beneficiary and transferring the policy itself. If your client transfers a policy, the client may be able to make annual, tax-deductible contributions to the community foundation to cover the premiums.
Sunsetting Tax Cuts and Jobs Act (TCJA) could drive charitable planning
As you read up on techniques to structure philanthropy plans for your high-net worth clients, we recommend reviewing the potential impact of the estate tax exemption sunset, as well as making sure you’re one of about half of advisors who are truly helping their clients with giving in the first place. The team at Hudson Community Foundation is happy to help you start the philanthropy discussion with clients; we understand that it’s not always easy, but important.
Charitable giving in an election year
Historically, charitable giving has been resilient in the midst of elections, keep in mind that some say political donations may eat into client’s budgets for charitable gifts. When you talk to your advisor or with clients about their philanthropy plans for 2024, you might pass along these trends so your clients can factor into their target gift amounts the potentially greater demand for funding community organizations. This is also a good time to remember that political donations are not tax deductible. This may seem basic, but it still is missed by some people who don’t track the rules closely.
We look forward to working with you in your charitable giving!
The team at HCF is a resource as you serve your philanthropic clients. We understand the charitable side and are happy to serve as a secondary source as you manage the primary relationship with your clients. This blog is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice.
