News and Legislation That Affects You
Keeping You Up To Date
Stay current on legislative changes that affect donors, nonprofits, businesses and advisors.
Proposed Treasury Regulations for Donor Advised Funds
SECURE Act and SECURE 2.0 Act: The Effect on Charitable Giving
IRA Charitable Rollover or Qualified Charitable Distribution
Personal Charitable Commitments: Pledges and Memberships
2017 Tax Cuts and Jobs Act: Potential Impact on Charitable Giving
Updated IRS Mortality Tables Impact Estate Planning
Proposed Legislation On Charitable Giving
Proposed Treasury Regulations for Donor Advised Funds
In November 2023, the U.S. Department of the Treasury and IRS released proposed regulations related to donor advised funds (DAFs) providing guidance on Sections 4966 and 4967 of the Internal Revenue Code. The proposed regulations can be found here.
The period for written comments closed on February 15, 2024, and a number of groups of which FFTC is a member submitted comments, including Council on Foundation, Community Foundation Awareness Initiative, NC Center for Nonprofits, and the Finance, Administration & Operations Group for Community Foundations. Significant concerns have been raised through this robust response about the negative impact that the proposed regulations would have on charitable organizations across the sector, especially DAF sponsors, donors, and other stakeholders.
In the proposed regulations, the Treasury created a number of new issues, left other questions unaddressed, and assigned overly broad definitions to several fundamental terms. Some examples include:
- The proposed definition of a DAF could result in other types of restricted funds being classified as DAFs, including certain designated funds, scholarships, field of interest funds, fiscal sponsorships, and funds with committees. Reclassification of these funds as DAFs would pose administrative challenges and create potential tax penalties to fund sponsors and their managers if unaddressed.
- The proposed definition of DAF advisors would be extended to include investment managers of DAF assets who are also the personal investment manager for a DAF donor. This would upend a widely accepted investment management practice among DAF sponsors whereby sponsors can work closely with financial advisors and investment managers to carry out the charitable goals of their clients.
The Treasury has scheduled a public hearing on the proposed regulations in Washington, DC on May 6, 2024. Several community foundation presidents will speak at the hearing.
Our team would be happy to discuss issues of DAF reform or other questions about FFTC Donor Advised Funds. Contact Doug Benson, General Counsel at dbenson@fftc.org or 704.973.4594
Further analysis by law firms representing tax-exempt organizations about the proposed regulations can be found at the links below:
Schell Bray Law Firm
McGuireWoods
SECURE Act and SECURE 2.0 Act: The Effect on Charitable Giving
Retirement funds have long been an effective asset for charitable giving, particularly for planned giving. While family members must pay income tax when withdrawing funds, charities do not, so giving directly to nonprofits results in tax-advantaged impact.
The Setting Every Community Up for Retirement Enhancement Act (“SECURE Act”), which became law in 2019, made charitable planning with retirement assets even more appealing. Now, the SECURE 2.0 Act (“SECURE 2.0”) signed into law in December 2022 builds upon the earlier Act and many of its provisions will impact the charitable sector.
IRA Charitable Rollover or Qualified Charitable Distribution
As a reminder, individuals who have reached age 70 ½ can make qualified charitable distributions (QCDs) of up to $100,000 each year to eligible nonprofit organizations from their traditional IRA or an inherited IRA. The $100,000 cap on QCDs is now indexed for inflation beginning in 2024 under provisions of the SECURE 2.0 Act signed into law by President Biden in December 2022.
While most distributions to public charities will qualify for the IRA rollover, as discussed below, some distributions to public charities (e.g., to supporting organizations) will not qualify. The following are issues to consider prior to making a QCD:
- Benefit to the Donor. QCDs will most likely benefit donors (1) who do not itemize; (2) who want to reserve their carryover for excess charitable gifts in prior years; (3) who are looking to reduce their AGI (e.g., to help lower Medicare costs); and (4) who live in states with no income tax (i.e. Florida, Nevada, Texas) because they have no state income tax to deduct against federal tax.
- Charitable Deduction. Some donors mistakenly believe that a QCD entitles them to a charitable deduction. This is not the case. However, a donor does not have to pay tax on income that would normally be taxable, so the result is substantially the same. To substantiate that the distribution is a QCD, the recipient charity(ies) must provide the donor with a written acknowledgement of receipt of the QCD and that no goods or services were provided by the charity(ies) in return.
- Retirement Plan. QCDs can be made only from an IRA, not other retirement savings plans, such as a 401k or 403b.
- Eligible recipients. Distributions must be made to public charities only. QCDs to any of the following organizations will not qualify: [a] supporting organizations; [b] donor advised funds; or [c] private foundations. It is worth noting that a QCD to a community foundation designated fund, scholarship fund, field of interest fund, operating fund or unrestricted fund (that supports the community foundation’s grantmaking in the community) are allowed. Effective January 1, 2023, distributions to a split-interest gifts vehicle, such as charitable remainder trusts charitable lead trusts or gift annuity, do now qualify as QCDs up to $50,000 under provisions of the SECURE 2.0 Act. Couples may contribute up to $100,00 if funded by the IRAs of both spouses. The income beneficiaries of qualifying CRUTS or CRATs must be the IRA owner and their spouse, and payments must be established at a fixed rate of 5% or greater. A taxpayer may only make this transfer during a single tax year up to a maximum of $50,000. The $50,000 cap will be indexed for inflation for tax years after 2023.
- Limitations on QCD Amount. The income exclusion for QCDs is an aggregate amount, so if a donor makes QCDs from multiple accounts, the maximum total that may be excluded for that year is $100,000. The $100,000 limit is on a per individual owner basis, so it is possible for each spouse in a married couple to make $100,000 in QCDs (if they each own an IRA and otherwise qualify). The $100,000 cap on QCDs is now indexed for inflation beginning in 2024 under the SECURE 2.0 Act.
- Impact of Additional Contributions: Under prior law, no additional contributions were permitted after an individual attained the age of 70 ½. Under the SECURE Act, individuals who continue to have earned income can make additional contributions to their IRAs regardless of their age. Any additional deductible IRA contributions made after reaching age 70 ½ will reduce, on a dollar-for-dollar basis, the amount of a QCD that can be excluded from the donor’s income; however, the amount distributed to charity should be treated as an ordinary charitable contribution. Any additional contributions that do not reduce the amount of a QCD that can be excluded from income in the current year will be carried forward to future years.
- Required Minimum Distribution (“RMD"): A QCD can be counted when determining whether a donor has satisfied his or her RMD requirements. Under the SECURE Act and SECURE 2.0 Act, the age at which an individual must take an RMD increased from 70 ½ to 72 in 2019 and to 73 in 2023. As a result, a QCD no longer has the additional benefit of satisfying the RMD for individuals between the age of 70 ½ and 73. Despite this change, a QCD may still be the most tax efficient way for these individuals to make charitable gifts (e.g., in the case of non-itemizers who take the standard deduction).
FFTC does not provide tax or legal advice. The information contained herein is for educational purposes and is not intended to be a substitute for individualized tax, legal, or investment advice.
Personal Charitable Commitments: Pledges and Memberships
IRS regulations pertaining to Donor Advised Funds require that all final decisions about distributions from a DAF be made by the managing charity's board (e.g., the FFTC Governing Board). Grants from DAFs may only be made to 501(c)3 public charities. Grants may not be made to satisfy an individual's legally binding pledge, nor may they be used to pay tuition or membership fees or tuition.
Also, grants from a DAF may not be made to a charity that will provide goods or services to an individual in return for the grant, such as gala dinners, benefit tickets, sporting events tickets, alumni fees, or goods bought at charitable auctions, etc. In instances where the value of goods or services associated with the DAF grant does not equal the full grant amount, current IRS regulations are unresolved as to whether grants from a donor advised fund are permissible for the “charitable” portion.
Pledges. Under current guidance from the IRS, it may be possible to use your FFTC Donor Advised Fund to fulfill a pledge in certain circumstances. In general, if you have made a pledge (whether or not it is legally binding on you under applicable law), a grant from your DAF should be permissible if the three requirements discussed in Section 4 of IRS Notice 2017-73 are satisfied. These requirements are: (1) nothing more than incidental benefits will be received by you, your family or business, (2) the grant from your DAF does not reference the existence of a pledge, and (3) you do not attempt to claim another charitable deduction for the grant from the DAF satisfying the pledge.
It is preferable, however, in instances when you know you want to use your FFTC Donor Advised Fund for a “pledged” gift, that you complete the pledge form carefully stating your commitment only to “recommend a grant of $XXX from my FFTC Donor Advised Fund.” Alternatively, you might consider contacting your FFTC relationship manager to set up recurring grant recommendations from your FFTC Donor Advised Fund for the annual giving you regularly intend to your favorite nonprofits.
Memberships. You can use your FFTC Donor Advised Fund to pay for membership dues at a charity (e.g., a museum or house of worship) if two requirements are met:
- The charity must be verified by FFTC as a qualifying 501(c)3 public charity.
- The membership must be 100% tax-deductible and provide only incidental benefits.
To be “incidental,” the value of membership benefits cannot exceed the LESSER of $110 or 2% of the recommended grant. If the value of membership benefits is too high to qualify as incidental, you must waive the membership benefits in order to recommend a grant from your FFTC Donor Advised Fund to pay the membership dues. Note: many nonprofit organizations will not accept grants from donor advised funds for membership dues because of this issue, so we recommend consulting with the organization before recommending a grant from your DAF.
Updated IRS Mortality Tables Impact Estate & Charitable Planning
In May 2022, the Treasury Department issued proposed regulations which change the life-expectancy factors used in charitable planning techniques that take into account a donor’s life expectancy (or the life expectancy of another individual). These techniques include split-interest trust transactions calculated using the IRS “7520” rate to value the remainder or reversionary interest, e.g., annuities, interests for life or term of years, and remainder or reversionary interests, such as are created in qualified personal residence trusts, charitable remainder trusts, and charitable lead trusts.
The new tables, based on data compiled from the 2010 census, use more recent life-expectancy data and assume a longer life expectancy at all ages. An individual’s life expectancy under the new tables is increased by between 1.5 and two years, depending on age. And while these changes may not seem significant, they are favorable to the taxpayer for some, but not all, types of planning.
More recently, in Treasury Decision 9974, the IRS has mandated that the 2010CM mortality tables must be used when computing the deduction for split-interest gifts made on or after June 2, 2023. Donors no longer have a choice to elect between the 2000CM tables and the 2010CM tables when calculating life expectancy. The Treasury Decision can be read here.
A good summary on the estate planning opportunities during this interim can be found here and IRS information about the actuarial tables is available here. Relative to lifetime charitable trusts, the impact of the proposed regulations can be summarized as follows:
- For charitable remainder trusts (CRTs) with terms based on life expectancies, donors will generally receive a lower charitable deduction under the new tables.
- For charitable lead trusts (CLTs) with terms based on life expectancies, donors will generally receive a higher charitable deduction under the new tables.
Our team would be happy to discuss the implications of the current or proposed IRS tables with you as you consider these estate planning techniques and how to advance your charitable goals. Contact Doug Benson, General Counsel at dbenson@fftc.org or 704.973.4594.
FFTC does not provide tax or legal advice. The information contained herein is for educational purposes and is not intended to be a substitute for individualized tax, legal, or investment advice.
Proposed Legislation Impacting Charitable Giving
In recent years, members of Congress have proposed legislation that would impact charitable giving. The ACE Act was proposed with the intent of increasing charitable distributions from donor advised funds, and The Charitable Act was proposed to significantly increase the universal charitable deduction for non-iteming taxpayers. These legislative efforts have garnered little to no momentum thus far, and the Proposed Treasury Regulations (2023) on donor advised funds will likely be the focus near term. Below are summaries of the earlier proposed bills.
The ACE Act
The Accelerating Charitable Efforts Act (the “ACE Act") was introduced in the Senate in June 2021 and included proposed changes to the rules for administration of donor advised funds (DAFs) and private foundations. The bill included both incentives and penalties to drive philanthropic behavior and increase distributions from community foundations and other DAF sponsors to qualified charities. In 2022, a House version of the ACE Act was introduced that mirrored the proposals of the Senate bill.
As of February 2024, the Senate version of the proposed ACE Act has no additional co-sponsors, and neither the Senate nor House version of the bill have received general support. The goal of accelerating the flow of charitable dollars is commendable, and efforts are underway within the community foundation field to formulate proposals for DAF reform that are more effective approaches to those set forth in the ACE Act.
The Foundation continues to monitor the bill and will post updates if the ACE Act is revised, presented for vote, or its provisions are added to other proposed legislation.
The Charitable Act
The Charitable Act was introduced in February 2023 and would provide a universal tax deduction for individuals taxpayers who do not otherwise itemize. The deduction would be limited to one-third of the standard deduction allowed to such taxpayers, up to $4,500 for individuals and $9,000 for joint filers. It has been referred to the Senate Finance Committee without additional sponsors, but unlike the ACE Act, has received more general support.
FFTC does not provide tax or legal advice. The information contained herein is for educational purposes and is not intended to be a substitute for individualized tax, legal, or investment advice.
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