When it comes to charitable giving, most donors think of cash—its liquidity and immediate benefits make it a go-to option. However, legacy gifts and complex assets can offer unique and significant advantages to nonprofits that deserve greater consideration. Understanding both the benefits and potential risks associated with these types of donations is essential for advisors seeking to guide their clients toward making a lasting impact.
Planning for Impact
Legacy donations, often referred to as planned giving, involve designating all or a portion of one’s estate or assets to a charity through wills, trusts or beneficiary designations. These contributions can provide immediate support on the donor’s passing or create a continuous stream of financial assistance, ensuring that the donor’s philanthropic intentions continue to make a meaningful impact over time. Understanding the various ways to structure these gifts can significantly enhance 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, ensuring ongoing support for critical services and demonstrating a commitment to vulnerable populations. By designating 5% of the DAF’s year-end balance to this cause annually, the donor ensures ongoing support for essential services, demonstrating a commitment to both current and future needs.
- Charitable giving during and after life: By actively donating during their lifetime and planning for future gifts, a donor can witness their impact while ensuring their philanthropic values continue long-term.
- Scholarship funding for the arts: A donor who established a scholarship for aspiring artists recommended that the DAF sponsor make a grant each year to ensure that the scholarship is funded well past their lifetime. By ensuring 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 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’s legacy, especially as household participation in charitable giving continues to decline.
- University building commitment: A donor pledged $30 million for a new building at their alma mater, fostering educational growth and establishing a lasting legacy of dedication to education and community development.
Maximizing Value for Charitable Purposes
Donating complex or illiquid assets can often yield greater benefits for nonprofits than cash gifts. While selling these assets can be complicated, their intrinsic value can greatly enhance a charity’s mission. In many cases, the long-term advantages of these assets surpass the immediate financial gains of cash donations, allowing organizations to use them more effectively.
Despite this potential, many charities are reluctant to accept non-cash assets, especially those that aren’t publicly traded, due to the complexities involved in managing and liquidating them. However, DAF sponsors can provide solutions that help donors convert these assets into cash for charitable giving. For example, a donor may want to donate a piece of real estate to a charity that doesn’t have the resources to sell and convert the real estate into cash value. Instead of selling the real estate, paying associated capital gains taxes and reducing the share of the asset that’s devoted charitable purposes, they can gift it to a DAF. The DAF sponsor facilitates the transfer, often completing transactions within weeks. Many of these donations might not happen 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, acknowledging that assets donated aren’t income and, therefore, aren’t taxed as such. Legacy and complex asset gifts fall into that category, meaning the assets and gains aren’t taxed if donated to an Internal Revenue Code Section 501(c)3 public charity. Unfortunately, there have been recent attempts to change the tax treatment of these gifts or reduce the tax incentive to give them away.
- Legislative “reform” efforts, such as the Accelerating Charitable Efforts Act, would delay the deduction for gifts of complex assets to a DAF-sponsoring charity until the asset is liquidated and, in some cases, until it’s granted out to a non-DAF public charity. This would uncouple the timing of the deduction from the time the donor gives up legal control of the asset, severely undercutting the amount donors may give.
- Recent Treasury and Internal Revenue Service regulations have threatened the participation of a trusted financial advisor in the DAF giving process. Proposed regulations released last year could effectively remove a key player from the process by penalizing charities and advisors alike, reducing the availability of expertise when donating complex assets or setting up legacy giving structures.
- Most concerningly, lawmakers are on the hunt for tax revenue to pay for tax changes coming in 2025. With the expiration of major pieces of the Tax Cuts and Jobs Act, Congress is facing a $4+ trillion price tag to extend the provisions, and sources of untapped assets, like those being donated to DAFs, are on the table.
Looking Forward
As $80 trillion transitions over the next two decades through the Great Wealth Transfer, the value of complex assets and bequests will only grow for charities aiming to maximize their impact. Coupled with the major opportunity to change 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. Advisors must understand how these gifts will be treated in the future and protect clients from being viewed as revenue sources for upcoming tax reforms.
