Recently, I attended the Alliance for Charitable Reform Summit for Leaders in Washington, D.C. and I came away with many thoughts for the near future of philanthropy. While there is still a lot to unravel from the recent passage of the Tax Cuts and Jobs Act of 2017, the shift in charitable giving is already being felt in the industry. I’ve been reading a lot of articles that have both positive and negative impacts on donors and charities and wanted to summarize my thoughts here.
Philanthropy in America had another interesting year in 2017. Larger donors were making larger planned gifts as online giving continued to morph and grow. Technology has and will continue to become an ever-increasing part of the philanthropic equation.
The second golden age of philanthropy has only just begun and there is still a large transfer of wealth coming. More donors are “giving while living” and turning to their professional advisors for guidance.
What’s on the horizon:
It will be interesting to see if The Universal Charitable Giving Act passes in 2018 which could provide a tax benefit to every donor at every income level who makes a charitable contribution (not just the itemizers). The Johnson Amendment also may play a huge part in shaping the future of the philanthropic sector.
2018 and beyond
It’s still early in this new tax environment, but we’re seeing an increasing number of individuals who are searching for new ways to structure their philanthropic goals due to the tax, investment and business changes being implemented in 2018. The reality is that some of these changes for individual taxpayers are in place for a short period of time. In some ways, making longer term tax and estate plans could be more difficult to do until the changes sunset in 2025. It’s likely we will see more changes over the next seven years.
The Tax Cuts and Jobs Act
Americans gave nearly $390 Billion to charities in 2016 of which 6% was given to DAFs. Historically, charitable giving in the United States has been roughly 2% of GDP. The Tax Act provides true tax clarity only for the next seven years, as some changes for individuals in 2018 will revert to the 2017 rates and laws in year 2026.
For the most part, charitable giving was not directly impacted by the new law, but there were other unintended consequences from the tax code that will impact both donors and charities. In part, this is why more holistic planning is becoming so important. The jobs act does have some negatives and positives that could potentially balance out to keep charitable giving at 2% of GDP this year:
- Charitable deduction stays intact
- Pease limitations repealed
- 5-year carry-forward provision stays intact
- Increased cash deduction limit to 60% in 2018 from 50% in 2017
- Gifts of appreciated assets are more valuable in 2018 than in 2017
- Income earners making roughly $400,000-$500,000 may pay more taxes making deductions more powerful
- Income earners making roughly $500,000+ may pay less taxes and have more discretionary income
- Bunching planning strategy for 90% of taxpayers now taking a standard deduction will encourage more thoughtful charitable planning for all clients
- Increased Standard Deduction for individuals to $12,000 and $24,000 for couples
- Increased Federal Estate Tax Deduction to $11.18 million for individuals and $22.36 million for couples
- Excise Tax on highest paid nonprofit executives
- Excise tax on the largest endowments for the largest universitie
How are charitable giving methods changing?
Donor-advised funds (DAFs) and endowments are growing. The amount in GivingUSA Data reports of contributions to these vehicles continues to increase. In 2012, DAFs represented 2.6% of total giving, in 2016 it represented close to 6%. That number would be a lot higher if you included endowments and other charitable gift types like private foundations and charitable trusts. “Bunching”, as noted earlier, will continue to encourage more interest in DAFs, Charitable Remainder Trusts (CRTs), Pooled Income Funds (PIFs), and other charitable vehicles that provide an immediate tax deduction. By 2020, we may see DAFs reach close to 10% of total giving each year which could equate to $30-40 billion moving into DAFs every year.
It’s important to note that in December 2017, the IRS issued Notice 2017-73, which permitted DAF grants to satisfy a donor's preexisting pledges.
Charitable Trusts and Charitable Gift Annuities (CGAs)
Charitable trusts have long been great charitable planning tools. The IRS has not publicly produced data on the charitable trusts since 2012 leaving us unsure of the current growth and trends. The economic and interest rate environment can and will determine when these tools are most favorable.
Charitable Lead Trusts (CLTs) continue to be great options even though the applicable federal rate (AFR) reached 3% in March. A grantor CLT can be used for ultra-high net worth income earners that experience variable income and are looking to bunch donations in a single tax year. Even though the federal estate tax nearly doubled, the ultra-wealthy will continue to use these tools during low interest rate periods to maximize what’s left to their heirs.
CRTs can be tools to manage a donation of collectibles or real estate. Flip Charitable Remainder Unitrusts (CRUTs) and Net Income with Makeup Charitable Remainder Unitrust (NIMCRUTs) are great ways to control tax and income and allow donors to create a lasting and impactful legacy.
CGAs are less and less in favor and create more risk for charities than do CRTs and PIFs. CGAs are becoming more of a tool of the past as advisors look to more creative endowment tools.
PIFs are an underused planning tool and will continue to increase in use over the next few years. It will replace more and more CGA programs for charities while helping more organizations create longer-term endowments. As donors are living longer, a PIF will guarantee a principal amount to the charity. The income will fluctuate for the donor based on investment returns. If the PIF has been created within the last three years (“young PIF”), then the charitable deductions are based on current AFR rates which, in most cases, will produce a substantially better tax benefit to the donor. More often, financial institutions and charities are exploring the use of PIFs in their giving options and platforms for donors.
If the stock market cooperates and the mergers and acquisitions world continues to be healthy, philanthropy will remain strong no matter the tax environment. Donors who can take advantage of some of the above strategies and work with their professional advisors to put in place charitable plans will ultimately increase their impact and help bring more capital to the space. Though 2017 was a strong year for philanthropy, fundraisers will continue to have headwinds and need to focus on telling their story and shaping their mission.