One Year In: How New Tax Laws are Impacting Charitable Giving Vehicles

By December 27, 2018 January 1st, 2019 Giving & Philanthropy

The end of the calendar year represents one of the busiest times for charities as many donors look to make donations before the end of the tax year. 2018 was the first year in which the Tax Cuts and Jobs Act of 2017 was enacted, which meant that this was the first year in which nonprofits witnessed those changes and their impact on donor decision making.

Over the course of the last year, Graham-Pelton has also observed these changes and their subsequent outcomes. We now have the opportunity to share what we’ve learned, across sectors and regions.

First, an important distinction: in our firm’s collective experience and opinion, we do not subscribe to the idea that tax laws drive giving. Donors are inspired to make meaningful and transformational gifts because they connect to the mission, vision, and impact of an organization. (This is especially true when we referring to stretch gifts and transformational gifts.)

However, it is important to understand how the tax laws impact high-net-worth donors and what trends are emerging so that fundraisers can predict and respond appropriately.

In an effort to fully understand the trends and recommendations that financial advisors are considering and offering in response to these new tax laws, I spoke with Charles C. J. Platt, a Vice President at Fiduciary Trust of New England, and a member of several charitable boards, including Miss Hall’s School, a Graham-Pelton client.

As a result of the changes to the tax law, three trends have emerged related to charitable giving: the tactic of “Bunching,” an increased use of Donor Advised Funds, and a sharpened focus on Qualified Charitable Distributions.

Bunching

The new tax law has increased the standard deduction so couples making more standard itemized deductions might not receive a benefit from their charitable giving. As a result, some financial advisors are recommending that their clients “bunch” their giving or make a large gift (that is some multiple of their typical annual gift to charity) and ask the charity to spread the donation over a multi-year period.

For example. Jane and John Smith typically make a $30,000 gift to their alma mater’s Annual Fund. As a result of the new tax law, they might make one gift of $120,000 in 2018 and ask their alma mater to distribute the gift over the next four years (FY 2018, 2019, 2020, and 2021). Jane and John would itemize a $120,000 gift this year but would take the standard deduction for the next three years.

The takeaway: It is important for charities to accommodate “bunched” gifts and ensure your frontline fundraising team, database team, and stewardship teams are prepared to solicit, track, and recognize bunched gifts appropriately.

Donor Advised Funds

For the same reasons that make bunching attractive to donors and their financial advisors, more donors are also electing to create and use Donor Advised Funds. Once donors establish and make an irrevocable contribution into the Donor Advised Fund, they receive an immediate tax benefit but have the flexibility of recommending grants and gifts over time without the annual minimum distributions or reporting mechanisms that are required of foundations.

Donor Advised Funds have become even more popular in light of the new tax laws as donors may choose to make a large contribution, take the tax benefit and itemize in that year, but then take the standard deductions in subsequent years while continuing to give to their favorite charities. (Different financial institutions have established different minimums for establishing Donor Advised Funds.)

Again using the above example of Jane and John Smith, the couple might choose to put $120,000 into their Donor Advised Fund in 2018 and itemize. Then, in 2019, 2020, and 2021, they will take the standard deduction but still donate $30,000 to their favorite charity in 2019–2021 through their Donor Advised Fund.

The takeaway: It is important for charities to keep in mind that unlike foundations, donors who use Donor Advised Funds are not required to complete 990s so it can be more difficult to ascertain how much and where donors are contributing. Donors also cannot make multi-year pledge commitments through a Donor Advised Fund.

Qualified Charitable Distributions

Finally, as a result of the tax law changes, Qualified Charitable Distributions (QCD) have come into sharper focus for financial advisors working with clients more than 70½ years old who must take the Required Minimum Distribution from their retirement accounts. These deductions can help reduce their clients’ taxable income and thus lower their tax bracket. There is no one-size-fits-all approach, but financial advisors are analyzing more closely which combination is best for each client.

The takeaway: Charities should have established policies about how to accept such gifts from their donors, and frontline fundraisers should be prepared to offer the vehicle as an option.

From a fundraiser’s perspective, we know that donors are not inspired by tax laws; they are inspired by supporting the missions of charitable organizations who make a difference, aided by the professional fundraisers who connect donors with those meaningful organizations. That said, equipping ourselves with basic knowledge of the giving trends that have emerged as a result of these new tax laws will further empower us to help donors and to elevate philanthropy across our communities and around the globe.

Note: Donors should discuss their charitable gifts with their legal and tax advisors before making gifts or exploring the use of the giving vehicles referenced above.

Erica Pettis is a Managing Consultant at Graham-Pelton. Contact her by email or by calling 1-800-608-7955.

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