AI and charitable planning, "catch up" contributions to boost IRA philanthropy, and the latest news

HELLO FROM THE COMMUNITY FOUNDATION

We hope the summer is treating you well.  As always, we appreciate the opportunity to work with you and your charitable clients.  This is the time of year when many clients are traveling and spending time with family, which means they may be having conversations about their favorite charities and the year’s plans for giving to favorite charities. To help you prepare for your clients’ questions when they return after summer holidays and travels, in this issue we’re sharing insights on a few topics that may be top of mind:

–AI is certainly a hot topic, even in discussions about philanthropy. We’re offering three suggestions for client conversations about AI and charitable giving, whether your clients are investors, nonprofit board members, or just curious.

–IRAs are a fabulous source of charitable gifts, not only through beneficiary designations, but also via the popular QCD tool for clients 70 ½ and older. Make sure you’re helping your philanthropic clients maximize their IRAs’ potential through catch up contributions. 

–Every year, the Giving USA report tells us about the state of charitable giving in America. 2022 numbers were down, although the total number is still inspiringly large. We’re also keeping you up-to-date on the latest tax news surrounding NIL money, along with an article to help you brush up on why the philanthropy conversation is so valuable to your practice.

Reach out anytime! It’s our pleasure to work with you as you help your clients achieve their charitable giving goals for this year and many years to come.

Happy summer! 

Scott Witzig, Executive Director, Morton Community Foundation

Advising clients about AI's impact on charitable giving

News about the capabilities of artificial intelligence has skyrocketed over the last few months. As attorneys, accountants, and financial advisors, no doubt you are watching these developments closely, both because of the potential legal issues involved and also because of the ways AI can enhance your work. 

Here are three suggested discussion points when your clients ask how AI might impact their philanthropy plans:

–For clients who serve on boards of directors of nonprofits or work for a nonprofit, AI could mean significant advancements in fundraising capabilities. From research to communications, generative AI could help fundraisers get their work done, which would be a welcome development in a profession that has been under stress due to a shortage of professionals and a challenging fundraising environment. 

–Some of your clients may be investing in AI companies. Pay close attention to this. While certainly not all AI ventures will make it, some AI startups will likely be very successful, creating huge financial gains for their shareholders. Talk with your clients about contributing shares of these companies to their donor-advised or other funds at the community foundation. Upon an eventual exit, the shares held by a donor-advised fund will not be subject to capital gains tax, allowing your client to support their favorite charities much more significantly than if the client waits to sell the shares and transfer the proceeds (minus the tax hit) to a charitable fund.

–While AI can certainly help your clients research their favorite charities, and similarly will also play a role in helping charities fundraise and carry out their missions, it’s important to remember that right now, in AI’s early stages, most AI results are still only as good as the prompts and instructions provided by humans. The key to getting the right answers is to ask the right questions, and sometimes asking the right questions is the hardest part.

As always, please reach out to the community foundation for help as you serve your charitable clients. Our team has deep, personal knowledge and experience in all areas of charitable giving, from tax deductibility rules, to planned giving techniques, to understanding the needs of our community and how your clients can make a difference in the causes they care about. We welcome the opportunity for human interaction as that becomes even more of a rarity! 

How “catch-up” contributions can boost clients’ giving

At the community foundation, we regularly work with legal, financial, and tax advisors like you to help clients reach their charitable goals. 

As a professional who regularly works with charitable clients, you are no doubt well aware of the tremendous benefits to both clients and charities when a client names a charity, such as a fund at the community foundation, as the beneficiary of an IRA or other qualified retirement plan.

So how can you help a client plan ahead to maximize a bequest of retirement fund assets, as well as support increased giving during the client’s lifetime? 

A great way to do this is by encouraging clients to maximize their IRA contributions—for many reasons:

–Taxable income “suppression” in the year of the contribution. 

–Tax-deferred growth until distribution—and now not required until age 73 of the account owner.

–Ease of changing a beneficiary designation to name the client’s fund at the community foundation, which will remove the assets from the client’s taxable estate at death and avoid income tax. 

–With retirement plans flowing to charity, leaning into highly-appreciated stock and other property at stepped-up values to make bequests to family or others, effectively erasing the unrealized capital gains for the recipients. 

Make sure your charitable clients don’t overlook an important tool in retirement savings maximization (and ultimately charitable giving) known as the “catch-up” contribution. This is the “extra” money that retirement savers aged 50 or older can stash away into their retirement accounts—and into more than one account as applicable. 

Advisors and clients might better think of this as a bonus opportunity rather than a “catch-up,” especially if a client has been maximizing their retirement savings all along. Additionally, of course, the catch-up contribution allowance helps a client make up for years when retirement contributions fell short due to earnings or savings interruptions due to layoffs, caregiving, high-expense years or similar circumstances.  

Thanks to the SECURE Act, catch-up contributions have created even more buzz about opportunities for retirement savings, especially as the rules are set to shift in 2024 and 2025. In any event, the effects can be impactful. For example, an extra $1,000 deposited annually from age 50 through 65 earning 6% on average could potentially deliver an extra $27,000 in retirement income at age 65. 

From a charitable giving perspective, the greater the IRA balance, the more opportunity there is for a client to give later to a fund at the community foundation. What’s more, higher IRA balances can motivate your clients to deploy a Qualified Charitable Distribution strategy, with its many benefits:

–Beginning at age 70 ½, your client can make Qualified Charitable Distributions (QCDs) up to $100,000 in 2023 ($200,000 for married couples) and indexed for inflation beginning in 2024.

–QCD assets can be distributed to a designated or field-of-interest fund at the community foundation or to another qualifying public charity.

–QCDs can count toward Required Minimum Distributions for clients who are required to take them.

All in all, IRAs are the most prolific retirement savings vehicle in the United States, accounting for nearly 33% of the $33 trillion of total retirement assets as of December 2022. But regardless of the retirement savings vehicle, contribution maximization—and aided by so-called catch-up contributions—is a winning strategy for wealth building, family gifting, and charitable giving. 

Our reading selections…

Giving is down, but the total amount-–nearly $500 billion—is still impressive

Just reported in June by Giving USA was a rare decline, 3.4%, in charitable giving by Americans in 2022. Though giving totaled nearly $500 billion, officials cited high inflation and the stock market’s pullback as reasons for the decline from $516 billion of total giving in 2021. Despite households’ financial pressures, 64% of giving came from individual donors. Dig into this compelling (and free!) infographic for a comprehensive look at the state of philanthropy in America. 

NIL collectives: DOA?

NIL collectives have been all the rage in some higher education circles, but that may be changing. Contributions to these entities may not be tax-deductible after all, according to the IRS in a May 23, 2023 memo. This development serves as an excellent reminder that private benefit and charitable tax exemptions do not mix well. 

Even more reasons to talk about philanthropy with your clients

If philanthropy is not a regular topic of your client conversations, you may be missing out. Not only can it be an easy icebreaker, but also studies have documented strong organic client growth through such conversations. And as this article points out, the combination of client dissatisfaction, wealth transfer, and the affluence of future generations spells o-p-p-o-r-t-u-n-i-t-y for advisors.

This newsletter is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice. 

THE TRIPLE POWER OF THE IRA BENEFICIARY DESIGNATION, THE IRS'S BIGGER BUDGET, AND NOT-TO-MISS NEWS AND TRENDS

Hello and Happy May!

As you and other advisors emerge from a busy tax season, your attention may be turning to estate and financial planning for your clients, which could include how to capture charitable bequests through IRA beneficiary designations. Like us, you're likely also watching and wondering how the IRS's increased budget may affect your high income-earning clients and their charitable giving plans. And, as always, you want to keep up with the latest news and planning trends that will help you serve your philanthropic clients. We're covering all of those topics in this newsletter.

As always, the Morton Community Foundation is here to help you and your clients navigate the various options for charitable giving. We’ll help give you the insights and confidence you need to develop plans that enable your clients to provide the charitable support they intend while also keeping the clients’ activities well within the boundaries of the law.    

It is our honor and pleasure to work with you and your clients. We look forward to talking with you soon!

–Morton Community Foundation…Scott Witzig, Executive Director

Retirement plans to charity: Understanding the “trifecta” of tax benefits

Over the last few months, many advisors have noticed an uptick in client inquiries about leaving their IRAs and other retirement plans to charity. If you’re wondering why, it likely has a lot to do with the buzz about Qualified Charitable Distributions, which allow those who’ve reached the age of 70 ½ to direct up to $100,000 annually to qualified charities (such as a designated or field-of-interest fund at the community foundation), avoiding both the need for an RMD (if they’ve reached age 73) and the income tax hit. 

It’s probably more than just the QCD, though, that has spurred your clients to ask questions. More and more, charitable planning with IRAs and other qualified retirement plans is a topic in financial and mainstream media. A case in point is a September 2022 article in the Wall Street Journal, irresistibly titled “Win an Income-Tax Trifecta With Charitable Donations.” If you subscribe to the Wall Street Journal, the article is well worth your time. 

When your client names a public charity, such as a donor-advised or other fund at the community foundation, as the beneficiary of a traditional IRA or qualified employer retirement plan, your client achieves extremely tax-efficient results. Here’s why:  

First of all, the client achieved tax benefits over time as the client contributed money to a traditional IRA (or to an employer-sponsored plan). That’s because contributions to certain retirement plans are what the IRS considers “pre-tax”; your client does not pay income tax on the money used to make those contributions (subject to annual limits).

Second, assets in IRAs and qualified retirement plans grow tax free inside the plan. In other words, the client is not paying taxes on the income generated by those assets before distributions start in retirement years. This allows these accounts to grow rapidly. 

Third, when a client leaves a traditional IRA or qualified plan to a fund at the Morton Community Foundation or another charity upon death, the charity does not pay income taxes (or estate taxes) on those assets. By contrast, if the client were to name children as beneficiaries of an IRA, for example, those IRA distributions to the children are subject to income tax, and that tax can be hefty given the tax treatment of inherited IRAs. 

So, if your client is deciding how to dispose of stock and an IRA in the client’s estate plan, intending to leave one to children and the other to charity, leaving the IRA to charity and the stock to children is a no-brainer. Remember, the client’s stock owned outside of an IRA gets the “step-up in basis” when the client dies, which means that the children won’t pay capital gains taxes on the pre-death appreciation of that asset when they sell it. 

Here’s the net-net:

Traditional IRAs are often poor vehicles for your clients to use to leave a family legacy. Instead, if a client is charitably inclined, traditional IRAs are likely better deployed to posthumous philanthropy if other assets, such as appreciated stock, are available to leave to children and other heirs. 

The Morton Community Foundation is always happy to work with you to ensure that your clients are maximizing their assets to fulfill their charitable giving goals. 

Tax scrutiny: Should clients worry about the IRS’s bigger budget? 

A major portion of the $80 billion scheduled to be invested in Internal Revenue Service upgrades is earmarked to “increase tax compliance among wealthy taxpayers and businesses,” according to the IRS’s plan. Indeed, the IRS is investing upwards of $47 billion toward enforcement efforts, an amount that towers over the next-largest item on its spending plan, which is just over $12 billion slated for technology enhancements.

Little doubt remains that your high income-earning clients can expect more oversight and less room for error. This reality is of concern to attorneys, accountants, and financial advisors who are responsible for helping their clients adhere to the tax laws with integrity. 

If you’d like to dig into the details about the IRS’s newly-secured tens of billions of dollars, you can peruse the agency’s Inflation Reduction Act Strategic Operating Plan submitted April 5, 2023 by IRS Commissioner Daniel I. Werfel. The 150-page plan covering 2023 - 2031 speaks primarily to five areas of priority spending:

• $47.4 billion to increase tax compliance among wealthy taxpayers and businesses.

• $12.4 billion for technology enhancements.

• $8.2 billion to recruit and retain a highly skilled, diverse workforce.

• $7.5 billion targeting taxpayer service improvements.

• $3.9 billion for cybersecurity.

Significant operational efficiencies are anticipated, and the heightened compliance efforts will generally apply to taxpayers making more than $400,000 annually. What’s raising eyebrows is that high-income earners and thus, donors to charity—and the financial professionals who serve them—should likely expect more in terms of attention, oversight, and audits. 

According to the plan, “segments of taxpayers with complex issues and complex returns where audit rates are minimal today, such as those related to large partnerships, large corporations, and high-income and high-wealth individuals,” will be areas of focus. 

The new-hire ramp up and technology implementation will take some time, per experts, with some believing that 2022 tax returns will be less subject to scrutiny than those in future years. But, the agency also has a three-year window to initiate an audit, giving it time to look back. 

Of specific importance to the charitable community is Objective 3, Initiative 4 (PDF page 66 of the plan), which states: “The IRS will increase enforcement activities to help ensure tax compliance of high-income and high-wealth individuals.” 

Increasing right along with the enhanced scrutiny is the need for solid charitable planning advice to assist your high net-worth clients. The Morton Community Foundation is an ideal partner, offering secure and efficient vehicles for charitable giving—including the precise tax documentation and compliance that the IRS expects. 

Indeed, a silver lining for advisors and their clients who work with the Morton Community Foundation may be that the added potential IRS oversight plays to the foundation’s strengths. By offering donors fully-vetted grantee organizations, plus gift execution, documentation and compliance services, your charitable clients who’ve established donor-advised, field-of-interest, designated, or other funds at the community foundation can rest more easily knowing that their philanthropy is being handled as intended and able to withstand questioning, whether your clients are funding their contributions with Qualified Charitable Distributions, highly-appreciated stock, or complex assets such as closely-held businesses and real estate.

We look forward to working with you and your clients as we navigate a new era of IRS scrutiny.  

Here's what we're reading

As you talk with your clients about charitable giving, are you leading with tax benefits? Deferring philanthropy topics until November and December? Not looking at the big picture? If so, you may want to rethink your approach, according to a recent article. The article also points out the importance of engaging specialists to assist you in advising a client about how to make a difference in the community. The team at the Morton Community Foundation specializes in charitable giving and community impact. We’re just a phone call away. 

Our team also enjoyed digging into the latest study on family philanthropy, particularly because it reinforced so many of the best practices we already deploy here at the Morton Community Foundation as we work alongside you to help your clients and their families make a difference in the lives of others for generations to come. We look forward to working together on practical solutions to engage your clients, their children, and their grandchildren in comprehensive philanthropy planning that moves the needle for the organizations and causes they care about. 

Finally, as the dust settles on tax season, and as we look ahead to what the charitable deduction might look like in future years, we appreciated the perspectives in this piece about the surprising benefits of a complex tax code. More proof that it is always possible to look on the bright side! 

The team at the Morton Community Foundation is a resource and sounding board as you serve your philanthropic clients. We understand the charitable side of the equation and are happy to serve as a secondary source as you manage the primary relationship with your clients. How can we help you in your practice? Call: 309.291.0434, or Email: info@cfmorton.org. This newsletter is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice.