By Mary Quilici Aumack, CEO
In March the Coronavirus Aid, Relief and Economic Security (CARES) Act was passed to help mitigate the rapid and devastating economic impacts of Covid-19. There was focus on employer and employee support, such as the Payroll Protection Program. However, there also were provisions designed to stimulate philanthropy.
In 2020, for taxpayers using the standard deduction, there is an ability to deduct charitable contributions made in cash up to $300. For corporations, the deductibility of cash contributions was increased from 10 to 25 percent of taxable income.
In 2020, for taxpayers who use itemized deductions, the adjusted gross income (AGI) limit for deductibility of cash contributions to charity was increased from 60% to 100%. All previous limits on cash and non-cash contributions still apply. The CARES Act portion is in addition to the previous limits. Incremental contributions under the CARES Act must be in cash and made to a public charity; they may not be to a private foundation, supporting organization, or donor advised fund.
In light of these significant one-year changes in the tax law, there is an opportunity to reach out to clients to discuss:
- Whether they would like to take advantage of these opportunities, and
- In light of these changes, whether they should consider accelerating income in 2020.
Start with your clients who typically give at the maximum levels already. Some may not even know about this opportunity. They may choose to accelerate the payment of a pledge or give more than they typically would to a struggling nonprofit they support.
POSITIONING FAMILY FUNDS UNDER THE CARES ACT
A donor may not wish to make an extremely large donation to a non-profit, but rather would like to see the benefit portioned over a specific time period. One compelling option is a family fund. The family fund can be fully endowed or have sunset provisions.
If Donor Advised Fund contributions are precluded under the legislation, why is a family fund okay? Think of a family endowment like a scholarship endowment at a university. Donations to this type of fund are allowed. These funds differ from donor advised funds in important ways:
- They MUST grant.
- With an endowment the grant levels will be established using the prudence guidelines set by UPMIFA (Uniform Prudent Management of Institutional Funds Act), typically between 3-6% of a rolling average balance.
- A fund with a sunset clause will grant (equally or not) over a specific number of years. Once the beneficiary or purpose is set, it can only be changed through a formal process of notice and mutual agreement with the sponsoring organization.
ONE EXAMPLE
Mr. & Mrs. Logan have planned a family endowment of roughly $5M as part of their estate plan, utilizing their retirement assets. The endowment has specific beneficiaries and/or purpose and will grant in perpetuity. The establishment of this fund reduces the taxable estate for estate tax purposes but does not provide any INCOME tax benefit.
Now, given the planning opportunity under the CARES Act, Mr. & Mrs. Logan decide to make a donation to establish the fund in 2020. There are several key results:
- In addition to still reducing their taxable estate, the donation in 2020 now qualifies them for an income tax deduction;
- The fund will start granting NOW instead of after the death of Mr. and Mrs. Logan, providing immediate benefit and strengthening the community.
ACCELERATING INCOME
Some families may wish to increase AGI to make significant gifts in 2020. There are many ideas for this:
- Accelerate exercising certain stock options
- Convert a traditional to IRA to ROTH IRA
- This is a uniquely interesting option because a family may choose to make a gift NOW that was originally intended as part of their estate plan. By converting to a ROTH IRA, they have the benefit of increasing AGI (if desired), and also eliminating the issues of leaving IRA funds to heirs, particularly in light of the recently enacted SECURE Act.
- Do not defer an expected bonus or payment for services
WORKING WITH A COMMUNITY FOUNDATION
A community foundation is a public charity that can work with your clients to establish family funds.
We support donors in many key ways:
- Working with families to find the best solutions for their philanthropic goals;
- Vetting beneficiaries to ensure mission/purpose is followed;
- Providing platforms for beneficiaries to share best practices and strengthen capabilities; and
- Investing funds per donor intent (often in partnership with the family’s wealth managers).
If you have a client(s) who may benefit from a discussion with us, please contact the Foundation.
Learn more about our services at cfoscc.org or call 408.995.5219.