Category Archives: Charitable Planning

July 12, 2017

Donor-Advised Funds

Written by Jason Hiley

Americans donate billions to charity annually. If you give to charity, you need to know about one of the best tools to facilitate generosity: Donor-Advised Funds (DAFs).

DAFs date from the 1930s but did not become popular until the 1990s. DAFs act as vehicles for receiving gifts, often of appreciated stock, and then distributing cash grants to charities selected by the one making the donation. DAFs make the process of transferring appreciated stock and designating checks as simple as a bank’s bill-paying system.

All DAF donors receive a tax deduction on the date of transfer. You can also transfer stock during one calendar year and receive a deduction even if the DAF completes distribution of grant money to a charity in a subsequent year. According to Internal Revenue Service rules, you calculate the value of your donation and the resulting fixed deduction based on the average of the high and the low market price on the day of transfer. (You are responsible for computing
this value.)

After receipt, the stock you gifted is sold and the DAF, itself a charity, pays no tax on any capital gain realized. The proceeds may remain in cash or you may direct the DAF to invest those assets for potential further appreciation (usually in a professionally managed separate account). Any subsequent change in the value of the account does not change the amount you can deduct on
your taxes.

As the donor, you direct to which charities the DAF distributes assets. Officially, the DAF owns the assets and is not legally bound to use them as you direct, but it is exceedingly rare for a DAF to not follow the donor’s advice.

Most DAFs also maintain a database of 501(c)(3)  tax-exempt charities (based on those organizations’ IRS 990 filing) from which you chose. After you suggest an amount to gift and a charity to receive the gift, the DAF vets and processes your suggestion to ensure the organization qualifies as a public charity under the IRS code. DAFs also handle all record keeping and due diligence and can protect your identity if you want to give anonymously.

Donor-advised funds are the fastest growing charitable giving vehicle in the United States, with more than 269,000 donor-advised accounts holding over $78 billion in assets. To put that in perspective, the Bill and Melinda Gates Foundation has about $39.6 billion in assets.

Besides consider a DAF, here are other ways to make your charitable giving more significant:

Focus your effort. Passionate giving is more sustainable than spreading donations to every good cause or everyone who asks. Consider focusing your donations to just a few charities. Think through why you are giving and what you feel passionate about.

Find bang for the buck. Fund programs that produce the greatest effect for the least money and focus on long-term positive outcomes.

Include the next generation. You can include your children in the giving process or even help them gift some of their own money.

Talk to Your Financial Advisor. If you’re considering a DAF or want to learn more, give Hiley Hunt Wealth Management a call so that we can walk through the process together.

June 20, 2017

Advanced Philanthropy: Private Foundations

Written by Jason Hiley

For many affluent individuals, occasional gifts to a favorite charity may satisfy their charitable inclinations. The added incentive of an often substantial tax deduction, coupled with various estate planning benefits, is sometimes the driving force behind such charitable gifts. However, for some individuals, philanthropy is a far more serious endeavor, often involving a succession of substantial gifts of at least $5 to $10 million that may necessitate the need for control and general oversight. In such situations, a private foundation can be an ideal mechanism for managing a large, continuous charitable giving program.

How much do you know about private foundations?

Test your knowledge with this short quiz.

1.) True or False. The charitable deduction for contributions will be limited depending on the type of charitable organization that is ultimately receiving the gift from the private foundation and the type of gift being made.

2.) True or False. There are generally four types of private foundations: nonoperating; operating; company-sponsored; and supplementary.

3.) True or False. The three ways a private foundation can be structured are: a nonprofit corporation; a trust; and an unincorporated association.

Learn more about private foundations.

In its simplest form, a private foundation is a charitable, grant-making organization that is privately funded and controlled. When properly arranged and operated, a private foundation is an income tax-exempt entity, and tax deductions are permitted for individuals (donors) who donate to them.

Contributions to a private foundation are deductible for gift and estate tax purposes. The income tax deduction of gifts to a private foundation is a bit more complex. Generally, the deduction is based on the fair market value (FMV) of the gift (at the time of the gift) and is limited by the donor’s adjusted gross income (AGI). The charitable deduction will also be limited (to 20%, 30%, or 50%) depending on the type of charitable organization that is ultimately receiving the gift from the private foundation and the type of gift being made. Gifts that are not cash or publicly-traded securities, and that are valued at more than $5,000, require adherence to additional rules in order to ensure deductibility.

In addition to the advantages of a tax deduction (which is generally not exclusive to private foundations), private foundations may also offer an array of other benefits. Because a private foundation is typically established to manage a long-term charitable gifting program, it may, in turn, highlight the philanthropic presence and identity of the donor within the community and/or a particular charitable cause. It can also serve to create a family charitable legacy while, at the same time, protecting individual family members from the pressures of other charitable appeals. Finally, a private foundation can serve as an appropriate mechanism for controlling distributions to a charity(ies), as well as determining which charities the foundation will benefit.

On the Technical Side

When a private foundation is established, there are two issues that need to be addressed. First, what type of private foundation should the donor establish? And second, how should the private foundation be structured? There are generally three types of private foundations: 1) nonoperating; 2) operating; and 3) company-sponsored. Each type of foundation has specific characteristics that make it appropriate for a particular situation. There are also strict requirements and guidelines that must be followed for each type of foundation.

The most common type of foundation is nonoperating. Essentially, a donor, or group of donors, makes contributions to the foundation, which, in turn, makes grants to a charity(ies). In this case, the donor has no direct participation in any charitable work. There are several variations of this type of foundation.

On the other hand, in an operating foundation, the foundation may have direct involvement in charitable causes (e.g., an inner city youth center), while retaining the tax benefits of a “private” foundation (although, in some respects, operating similarly to a “public” charity). To qualify as an operating foundation, it must also meet several requirements and tests.

In addition, a company-sponsored foundation can be used when the majority of contributions are from a for-profit corporate donor. Generally, this type of foundation operates similar to a non-operating foundation. It is usually managed by corporate officers and has the added benefit of allowing some contributions to accumulate over time. This can help the foundation make continual grants when corporate profits are low (a time when, ordinarily, contributions would be otherwise forgone).

After careful thought is given to the type of foundation to be established, the foundation’s structure should be taken into consideration. There are three ways in which a foundation can be structured: 1) as a nonprofit corporation; 2) a trust; or 3) an unincorporated association.

There are a number of factors to be weighed when deciding on which structure is best. Generally, if the donor intends to keep the foundation in existence permanently, a nonprofit corporation or trust may be a better choice. Additional considerations include: state and local laws governing private foundations; the type of foundation; the type of donor; assessing the need or desire to make future changes or delegate responsibilities; and personal liability issues.

Complex, Yet Effective

Creating and maintaining a private foundation is much more involved than the use of more traditional charitable giving mechanisms (e.g., charitable remainder trusts (CRTs)). Therefore, legal and accounting professionals who have experience with private foundations must play a significant role in such an endeavor. In addition, due to the added complexity and need for highly specialized legal and tax expertise, the expenses for design, set-up, management, and grant administration in a private foundation will generally be substantial. Typically, a private foundation is only viable for individuals who intend on making periodic gifts in excess of $5 million.

Certainly, the private foundation allows today’s philanthropist the opportunity to manage substantial charitable gifts, as well as the ability to actually become involved in charitable work, if he or she so chooses. It also affords the donor the opportunity to be recognized for charitable giving, while solidifying his or her philanthropic legacy. This article serves as a general overview of a very complex planning area. Like all advanced planning issues, appropriate counsel should be sought in order to meet the goals and objectives of all involved parties.

Quiz Answers: 1) True; 2) False; and 3) True

December 21, 2015

Giving Thoughts

Written by Andrew Hunt

As year-end nears, we hope you’ve saved time in your busy holiday schedule to pause and give thanks. At Hiley Hunt Wealth Management, we have so very much to be thankful for! To share our gratitude, we’d like to give you some thoughts. Thoughts on giving, that is.

As the London-based Charities Aid Foundation (CAF) describes it, “The impulse to give, to help others if you can, is a natural human instinct.”

It’s easy for that “data point” to get buried in the barrage of news we read to the contrary. But what if we adopt the same long-term perspective for investing and personal giving alike?

If you view our global capital markets close up and colored by the heat of the moment, it’s easy to grow disheartened and lose faith in the market’s ability to prevail. That’s why, as an investment advisor, we are forever stressing how important it is to consider your investments from a comfortable distance, through the clarifying lens of empirical evidence, and in the context of patiently participating in decades of rich – and likely enriching – human enterprise.

It might help to think about charitable giving from the same vantage point. Thanks to research-oriented organizations such as CAF, http://givingusa.org/, GivingPledge.org and many others, the evidence on our giving proclivities becomes clear, with much room for optimism to be found.

Myanmar, one of the world’s poorest nations, is also THE most generous. In its annual World Giving Index, CAF assesses “generosity” on three levels: helping strangers, donating money to a charity, and donating time to an organization. Based on its most recent data, CAF found that Myanmar ranked highest in donating both time and money, with a whopping 92 percent of those surveyed allocating a portion of their hard-earned money to charity.

Some of the world’s wealthiest families have been dedicating the majority of their wealth to philanthropy. Most recently, Mark Zuckerberg and his wife Priscilla Chan made headline news by informing their newborn daughter that they were going to pledge 99% of their Facebook shares to a giving mission, to make the world a better place for her.

GivingPledge.org has been quietly accumulating a collection of similar pledges for years from ultra-wealthy families, both famous and unknown. As Warren Buffett described in his pledge: “Were we to use more than 1% of my claim checks (Berkshire Hathaway stock certificates) on ourselves, neither our happiness nor our well-being would be enhanced. In contrast, that remaining 99% can have a huge effect on the health and welfare of others.”

Most of the rest of us appear to be doing our bit as well. For example, according to a June 2015 Giving USA press release: “Americans gave an estimated $358.38 billion to charity in 2014, surpassing the peak last seen before the Great Recession.” The figure represented the highest level of giving measured in the organization’s 60 years of reporting on it, with more than 70 percent of the donations coming straight from individual donors. Here’s to us regular folk!

Will our giving cure all that ails the world? The evidence tells us this might be a tall order indeed. But we’ll echo one of the lesser-known GivingPledge.org participants, Indian-American businessman and 5-Hour Energy mogul Manoj Bhargava: “We may not be able to affect human suffering on a grand scale but it will be fun trying.”

We wish you and yours a prosperous and fun-filled 2016.

We would love to invite you to learn more about Hiley Hunt Wealth Management and who we serve in Omaha, NE –Financial Planning and Investment Management.

June 8, 2015

Plan Your Giving

Written by Jason Hiley

There are numerous complex tax rules regarding charitable contributions, so it is advisable to seek professional guidance to help you evaluate your own personal situation. Generally speaking, if you itemize your deductions on your tax return, gifts to qualified charities are deductible in the year they are made.

Most people simply write a check or donate cash for their charitable contributions; however you may be missing out on an additional tax savings that could help stretch your charitable dollars farther.

Rather than donating cash, a gift of long-term (held more than 12 months) appreciated stock or mutual funds will result in two tax benefits.  You will be able to deduct the fair value of the stock as an itemized deduction, and you will also avoid the realized gains that would be associated with the sale of the appreciated shares.

For example, let’s say you plan to donate $20,000 to your favorite charity.   To do this you plan to sell stock worth $20,000 you purchased several years ago for $10,000.  After the sale of the stock, you would owe federal capital gains tax of 15% on the gain (state tax may also apply), resulting in a tax bill of $1,500.

If however you donate the $20,000 in stock to the charity, the charity will avoid paying taxes on the sale of the stock.  You enjoy the additional benefit of never having to pay taxes on the stocks appreciated value resulting in a tax savings of $1,500!

Accelerate Charitable Contributions for Larger Impact

Consider giving more in years where you are subject to higher income tax rates for maximum benefit.   If your income fluctuates from year to year, or you have a significant event that spikes your income for a single year, accelerating your giving may produce bigger tax savings.   If you like the idea of accelerating your contributions from a tax perspective, but dislike the idea of uneven contributions from year to year, consider opening a Charitable Checkbook® at the Omaha Community Foundation (www.omahafoundation.org).

When you donate cash or appreciated securities to a Charitable Checkbook®, you are eligible for a tax deduction in the year the donation is made.  You are then able to decide on the timing of your grants to charity – there is no requirement to direct a grant from your account in a given year.  You can take the deduction in one year, and spread the gift to the actual charities out over several years.

With a little reflection and financial planning, you can become a more proactive philanthropist.  Like Bill and Jane, you may find this approach more rewarding in a personal and financial sense.

May 20, 2015

Taking a Proactive Approach to Philanthropy

Written by jasonhiley

Jane smiled as she read the note from a recent graduate -a recipient of the scholarship fund she and her husband Bill had begun shortly after retirement.   Passionate about education, the couple began giving annually years ago to their alma mater, the place where they first met as young teachers’ assistants.

Education is their lifelong passion.  At the core of their belief system is a desire for all children to have access to higher education, regardless of financial circumstances. Thanks to some careful estate planning, Bill and Jane knew that the scholarship fund would continue beyond their lifetimes leaving a legacy of which they could be proud.

Bill and Jane are not unique; many of us hold philanthropic causes close to our hearts that we wish to further. However, many of us are reactive rather than proactive in our philanthropic pursuits; we dedicate our charitable resources to support charities of others rather than those about which we care most deeply.

In order to become a more proactive philanthropist, you will need to do some reflection and spend some time planning your course of action.

Identify Your Passion and Select a Charity

If you haven’t already, begin by identifying the cause(s) that matter most to you.  The following questions may be helpful in this process:

  • What issues are you most passionate and excited about?
  • What people or events have most shaped your values and beliefs?
  • What is the most enjoyable charitable experience you have ever had?
  • What problems in the world do you find most troubling?
  • What injustices do you see on the news that make you angry?

After identifying a cause, the next step is to determine the charity/charities to which you will contribute.  If you don’t already have an organization in mind, there are a number of resources available to assist you in selecting a charity. The websitewww.charitynavigator.org is an excellent online resource for finding charities with a national focus.  The site allows you to browse charities by category, view top ten lists based on various criteria, or review thousands of charitable ratings.   In addition to the information about specific charities, the site also offers a host of other tips and resources to help you make the most out of your charitable giving.

If you would like to concentrate your efforts locally, Nonprofit Association of the Midlands (www.nonprofitam.org ) will be launching an online database called Community Compass in the next few weeks.  This comprehensive database will have publicly available data on every non-profit organization and program in Nebraska and in 19 counties in Southwest Iowa.

Plan Your Giving

There are numerous complex tax rules regarding charitable contributions, so it is advisable to seek professional guidance to help you evaluate your own personal situation. Generally speaking, if you itemize your deductions on your tax return, gifts to qualified charities are deductible in the year they are made.

Most people simply write a check or donate cash for their charitable contributions; however you may be missing out on an additional tax savings that could help stretch your charitable dollars farther.

Rather than donating cash, a gift of long-term (held more than 12 months) appreciated stock or mutual funds will result in two tax benefits.  You will be able to deduct the fair value of the stock as an itemized deduction, and you will also avoid the realized gains that would be associated with the sale of the appreciated shares.

For example, let’s say you plan to donate $20,000 to your favorite charity.   To do this you plan to sell stock worth $20,000 you purchased several years ago for $10,000.  After the sale of the stock, you would owe federal capital gains tax of 15% on the gain (state tax may also apply), resulting in a tax bill of $1,500.

If however you donate the $20,000 in stock to the charity, the charity will avoid paying taxes on the sale of the stock.  You enjoy the additional benefit of never having to pay taxes on the stocks appreciated value resulting in a tax savings of $1,500!

Accelerate Charitable Contributions for Larger Impact

Consider giving more in years where you are subject to higher income tax rates for maximum benefit.   If your income fluctuates from year to year, or you have a significant event that spikes your income for a single year, accelerating your giving may produce bigger tax savings.   If you like the idea of accelerating your contributions from a tax perspective, but dislike the idea of uneven contributions from year to year, consider opening a Charitable Checkbook® at the Omaha Community Foundation (www.omahafoundation.org).

When you donate cash or appreciated securities to a Charitable Checkbook®, you are eligible for a tax deduction in the year the donation is made.  You are then able to decide on the timing of your grants to charity – there is no requirement to direct a grant from your account in a given year.  You can take the deduction in one year, and spread the gift to the actual charities out over several years.

With a little reflection and financial planning, you can become a more proactive philanthropist.  Like Bill and Jane, you may find this approach more rewarding in a personal and financial sense.