When it comes to charitable giving, most donors think of cash – its liquidity and immediate benefits make it a viable option. However, legacy gifts and complex assets can provide unique and important advantages to nonprofits that deserve greater consideration. Understanding the potential benefits and risks associated with these types of donations is essential for advisors seeking to guide their clients toward lasting impact.
Planning for impact
Legacy giving, often referred to as planned giving, involves designating all or a portion of one's wealth or assets to a charity through wills, trusts, or beneficiary designations. These contributions can provide immediate support upon the death of the donor or create an ongoing stream of financial assistance, ensuring that the donor's philanthropic intentions continue to have a meaningful impact over time. Understanding different ways to structure these gifts can significantly increase their impact, as illustrated by the following examples of legacy donations made through donor-advised funds (DAFs).
- Support for children's hospitals: A donor allocated a portion of a DAF to a children's hospital focused on mental health, providing ongoing support for critical services and demonstrating a commitment to vulnerable populations. By earmarking 5% of the DAF's year-end balance for this purpose each year, the donor ensures ongoing support for essential services, demonstrating a commitment to current and future needs.
- Giving to charity during and after life: By actively giving during their lifetime and planning for future gifts, a donor can prove their impact by ensuring that their philanthropic values continue long-term.
- Arts Scholarship Funding: A donor who created a scholarship for aspiring artists recommended that the DAF sponsor provide a grant each year to ensure that the scholarship is funded long after their lifetime. By ensuring that this scholarship is funded for years to come, the donor not only provides immediate support, but also instills a tradition of philanthropy that can be passed down through the generations, encouraging family members to embrace philanthropy.
- Continuing family generosity: Provisions for children to continue philanthropic efforts ensure that the values of compassion and social responsibility remain integral to the family legacy, especially as family participation in charitable giving continues to decline.
- Commitment to building the university: One donor pledged $30 million toward a new building at their alma mater, spurring educational growth and creating a lasting legacy of commitment to education and community development.
Maximizing value for charity
Donating complex or illiquid assets can often bring greater benefits to nonprofits than cash gifts. While selling these assets can be tricky, their intrinsic value can greatly enhance a charity's mission. In many cases, the long-term advantages of these assets outweigh the immediate financial benefits of cash donations, allowing organizations to use them more effectively.
Despite this potential, many charities are reluctant to accept non-cash assets, particularly those that are not publicly traded, because of the complexities involved in managing and liquidating them. However, DAF sponsors can offer solutions that help donors convert these assets into cash for charitable giving. For example, a donor may wish to donate a piece of real estate to a charity that does not have the resources to sell and convert the real estate into cash value. Instead of selling the real estate, paying the corresponding capital gains taxes and reducing the portion of the asset that is devoted to charitable purposes, they can donate it to a DAF. The DAF sponsor facilitates the transfer, often completing transactions within weeks. Many of these donations may not occur without such support, as donors face significant tax implications when liquidating assets independently.
Tax policy considerations
The government signaled more than 100 years ago that charitable giving is good behavior that should be incentivized by a tax deduction, recognizing that donated assets are not income and, therefore, not taxed as such. Inheritance and complex estate gifts fall into that category, meaning that assets and gains are not taxed if donated to an Internal Revenue Code Section 501(c)3 public charity. Unfortunately, there have been recent efforts to change the tax treatment of these gifts or to reduce the tax incentive to give them.
- Legislative “reform” efforts, such as the Charitable Giving Acceleration Act, would delay the deduction for gifts of complex assets to a DAF-sponsored charity until the asset is liquidated and, in some cases, until it is given to a public non-DAF charity. This would decouple the time of deduction from when the donor relinquishes legal control of the asset, significantly reducing the amount donors can give.
- Recent Treasury and Internal Revenue Service regulations have threatened the participation of a trusted financial advisor in the DAF granting process. Proposed regulations released last year could effectively remove a key player from the process by penalizing charities and advisers alike, reducing the availability of expertise when donating complex assets or creating legacy structures.
- Most troubling, lawmakers are scrambling for tax revenue to pay for tax changes coming in 2025. With key parts of the Tax Cuts and Jobs Act expiring, Congress is facing a price tag of 4+ trillion dollars to expand provisions and sources of underutilized assets, such as those donated to DAFs, are on the table.
Looking ahead
As $80 trillion passes through the Great Wealth Transfer over the next two decades, the value of complex assets and legacies will only increase for charities seeking to maximize their impact. Along with the high possibility of changing the Tax Code in 2025, changes like the above could severely limit the impact donors can make in their communities as needs continue to grow. Advisers need to understand how these gifts will be treated in the future and protect clients from being seen as sources of income for future tax reforms.