Private family foundations seek to simplify using donor advised funds

In April, the Wall Street Journal published an article that outlined a trend by private family foundations looking toward dissolving into donor advised funds as a way to simplify the administration of their families' charitable endeavors.

If you have other pockets of giving beyond the Omaha Community Foundation, you may find yourself in a similar position given the economic realities of today.  We have experience supporting hundreds of families and have specifically helped families convert private foundations into Donor Advised Funds.  We have guided them through the following steps:

• The family foundation's board resolving to terminate the existing foundation by dissolving it into a Donor Advised Fund
• Notifying the state of dissolution plans
• Paying outstanding liabilities and establishing an escrow account for remaining anticipated liabilities, including professional fees and excise taxes
• Finalizing the desired structure of the family Donor Advised Fund with the Omaha Community Foundation
• Making a final grant of non-escrow assets into the newly created Donor Advised Fund
• Filing a final Form 990-PF noting the Foundation's termination during that year

And it's not an all or nothing proposition.  We pride ourselves on adding flexibility to your giving.  We can support all of your private foundation's giving or serve as a complementary partner.  Either way, we value the tradition of giving that is already a part of your life.  Considering the benefits and convenience of opening a Donor Advised Fund through the Foundation is an important way to ensure that this tradition, and the joy it evokes, continues.

Short-term appreciation treated as ordinary income

While we have been fortunate to see some up tick in the markets as of late, don't rush to donate stock purchased less than a year ago in spite of its possible recent appreciation in value.  Stock needs to be held for at least the required long-term holding period, generally one year depending on how you originally acquired it, before it is a tax favorable asset to donate.  If appreciated stock is donated before an individual has held it "long-term" (generally a year), the value of any resulting charitable tax deduction must be reduced by the value of short-term gain (often taking the deduction back to an individual's cost basis).

So if you're fortunate to have some short-term investments that have appreciated this year - hold on to them.  You may want to consider donating them down the road.

Historic low discount rates make charitable lead trusts a boon for donors who have investments they anticipate growing more than 2%

Charitable lead trusts are trusts established and funded by donors.  These lead trusts then pay regular, periodic income to charity for a specified period of time set by the donor (10-years, 20-years, etc.).  At the expiration of that specified time period, the assets remaining in the trust are transferred in a tax favorable way in accordance with the donor's wishes.  Typically donors have the lead trust transfer to another generation or back to the donor, both as estate planning techniques.  Advantages for charitable individuals with this technique include:

The ability to remove assets from your estate (tax beneficial if your estate is of a taxable size)

• The ability to secure the transfer assets to heirs in the future today, while passing on any appreciation above the current 2.4% rate tax-free.

Stable tax-free income increases in charitable gift annuities given current rates

Donors interested in making a charitable gift in exchange for periodic, stable income (monthly, quarterly, or annually), will see lower taxes on income payments they receive in these arrangements.  If you:

• Are not receiving income from some of your investments, or
• Are not getting a good return on assets that may have some appreciation (which can be true of many investments in this climate), and
• Have charitable intentions,

A charitable gift annuity may be a giving technique to consider.  Under this arrangement:

1. You give cash or appreciated assets with little or no income or yield to the Omaha Community Foundation,
2. The Omaha Community Foundation pays you fixed payments on a schedule you choose during your life (and the life of a spouse, if of interest), and
3. A charitable gift is made in your name to that cause(s) of your choice from anything remaining upon your passing (and your spouse's passing, if you both receive income).

Direct IRA gifts from donors 70 1/2 or older to qualified charities, up to $100,000, tax-free in 2009

Donors age 70 1/2 or older can still make direct, tax-free charitable gifts from their IRA accounts to qualified charities through the end of this year (as provided for under the Emergency Economic Stabilization Act of 2008).  While required minimum distributions (RMD) have been suspended in 2009, this still may be a viable option for donors:

• Wanting to use IRA funds instead of out-of-pocket funds to make charitable gifts, and/or
• Wanting to strategically reduce (rather than reduce by virtue of unrealized losses) the value of their IRA so that their RMD in future years is lower.

Furthermore, interest remains in Washington DC in making this technique permanent.  The Public Good IRA Rollover Act of 2009  (H.R.1250) was introduced in the House of Representatives on March 2 and a companion bill (S.864) on April 22 in the Senate.  If enacted and reconciled in conference, legislation could make the current charitable rollover incentive permanent with the following changes:

1. It would allow donors who make IRA distributions to donor-advised funds, supporting organizations, and private foundations to qualify for the incentive (currently prohibited), and
2. It would allow donors age 59 1/2 or older to use IRA assets to establish charitable gift annuities or other gifts where the interest is divided between the donor and the charity both receiving benefits.

Further support for this was indicated by the Senate's April 2nd 2010 Budget Resolution (S. Con. Res. 13) which included an amendment, although non-binding, to extend and expand the current IRA charitable rollover law.

Opposition grows to President Obama's proposed cap on itemized charitable deductions

On April 2nd, the Senate passes its 2010 Budget Resolution (S. Con. Res. 13) with two amendments directly responding to President Obama's proposed cap on itemized charitable deductions. 

Under President Obama's proposal, the tax break for charitable contribution deductions would be capped at 28% instead of relating directly to the income tax bracket of the individual donor.  This would effectively increase the tax cost of making charitable contributions for families earning more than $250,000 or individuals earning more than $200,000 (currently, people in the upper tax brackets can get charitable tax breaks of 33 percent or 35 percent).  This proposal has come for as a strategy to help pay for health care reform.

The Senate's Budget Resolution amendments opposing such a cap included:

• Barring changing current tax laws to pay for healthcare reform with charitable contribution deductions, and
• Ensuring that organizations providing religious, educational, cultural, healthcare, and environmental services are not harmed by changes to the charitable giving deduction.

Legislation to simplify private foundation taxes introduced

S.676, introduced on March 24, would amend the Internal Revenue Code of 1986 to modify and simplify the excise tax on the investment income that private foundations pay. S.676 would remove the current two-tiered excise tax imposed on private foundations and replace it with one flat rate of 1.32%.

While the current, two-tiered system was designed initially with the hopes it would encourage private foundations to grant more money annually, it has actually had the opposite effect.  The tax imposed decreases from 2% to 1% in any year in which its charitable distributions exceed the average charitable distributions from the five previous tax years (as a percentage of assets year over year).  If a private foundation were to want to increase its giving substantially in any given year to a level it would not sustain annually, then it would be taxed at higher rates in the years following that increase since it increases the average distribution value on which the tax is based.

If you would like information regarding any of the above, please contact the Omaha Community Foundation at (402) 342-3458.