An Interview with Audrey Blondin and Rose Blondin Shea
The Community Foundation recently sat down with Northwest Connecticut attorneys Audrey B. Blondin, recently named Connecticut Bar Association 2020 Citizen of the Law, and her daughter, Rose A. Blondin Shea, who is currently completing a certificate in non-profit management from UCONN, to discuss their work advising charitably inclined clients on leaving a legacy. Read more
An Interview with Audrey Blondin and Rose Blondin Shea
The Community Foundation recently sat down with Northwest Connecticut attorneys Audrey B. Blondin, recently named Connecticut Bar Association 2020 Citizen of the Law, and her daughter, Rose A. Blondin Shea, who is currently completing a certificate in nonprofit management from UCONN, to discuss their work advising charitably inclined clients on leaving a legacy.
NCCF: Tell us about your experience working with nonprofits in Northwest Connecticut.
AB: I have tried to instill in my children and grandchildren the idea of service over self, and leaving the world a better place than when you found it. I am blessed to have the opportunity to help others. My husband, Dr. Matthew Blondin, and I have worked with VOSH (Volunteer Optometric Services to Humanity) CT, for more than 20 years. In our personal philanthropy, and in advising clients as they leave their legacies, I am always aware that all of us are part of a bigger picture.
RBS: I became an attorney because I wanted to help people, and I wanted to help people give back. As a law student, I worked with Education Advocacy and the Animal Legal Defense Fund. Here in Northwest Connecticut, I have worked with the Little Guild of St. Francis, Kitty Quarters, and School on the Green. I recently established Friends of Litchfield Dog Park, a nonprofit with the goal of building a dog park in Litchfield. I work with local nonprofits as general counsel, assisting with employment contracts, waivers for events, bylaws, grant writing, bequest brochures, and with nonprofit incorporation.
NCCF: How do you advise your clients in Leaving a Legacy?
AB: The conversation starts with our initial intake forms. We ask how they would like their estate to be passed on, if they would like to leave a bequest. Some clients have children and grandchildren, and younger brothers and sisters. Charitable giving is not part of their legacy, but we always encourage clients to think about it.
RBS: Clients who know they want to leave a bequest usually want to leave a bequest to an organization they have a personal connection with. Often, they come in with a list of names and addresses of specific nonprofits they would like to support. There is sometimes discussion around whether the gift should be for something specific or left to the discretion of the nonprofit. When we have a client with no children who hasn’t mentioned leaving a bequest, we ask “have you thought about charitable giving? What are you passionate about?” Sometimes they just haven’t thought about it. It’s crucial that we have the conversation early in the estate planning process. We don’t want to get to the end and have a client say, “I just decided I want to leave a bequest.”
NCCF: Are there specific giving vehicles you recommend, such as charitable remainder trusts or charitable lead trusts?
AB: My philosophy is to keep it simple. If you believe in a nonprofit enough to leave them money, let them use it when and where they need to. The simpler and broader the gift, the easier and less costly it is for a nonprofit. Similarly, we encourage our clients to give a larger percentage of their estate to a smaller number of nonprofits, rather than giving, two percent of their estate to 30 nonprofits. I might suggest giving 30 percent to two or three nonprofits. The cost to communicate with all of those nonprofits about the bequests as well as preparing and mailing the checks comes out of the estate.
NCCF: You mentioned that you encourage your clients to keep it simple when it comes to charitable giving. How does the Community Foundation fit into that philosophy?
AB: This is a long-term partnership. When you are 30, you are writing wills that will be probated when you are 60. Over the years, we have seen bequests made to charities that no longer exist. I encourage clients to give to nonprofits that are stable, nonprofits that have a long history in the community. The Northwest Connecticut Community Foundation offers options that make that easier. Clients can leave a bequest to the Community Foundation to benefit specific nonprofits, or within a field-of-Interest, for example organizations that help animals, provide basic needs to homeless families or support education. They can even create a discretionary fund that can be used when and where there is the most need in their community. It’s crucial when leaving a bequest that there is a good structure in place where the bequest is received. The Community Foundation can provide that structure.
IRS Appraiser Qualifications
The Internal Revenue Service requires donors who claim charitable income tax deductions to substantiate the value of their charitable contributions. Charitable gifts of noncash assets valued in excess of $5,000 require a qualified appraisal for substantiation purposes. The current rules regarding qualified appraisals are the result of changes to the Internal Revenue Code from the American Jobs Creation Act of 2004 and the Pension Protection Act of 2006. Following those statutory changes, the Service developed proposed regulations in 2008. Nearly a decade later, the IRS published final regulations in T.D. 9836 (27 July 2018).
The Service's substantiation rules are strict. If these rules are not closely followed, a donor may lose his or her entire charitable deduction. Advisors should be prepared to explain these requirements, guide their clients through the process of substantiating charitable gifts and work with charities to meet the Service's requirements.
Gifts valued above a certain threshold require the donor to obtain a qualified appraisal of the asset. This article will cover the general qualified appraiser requirements and explore the professional designations and education available for appraisers of various types of property.
General Appraiser Qualifications
In order to be considered a qualified appraisal, the valuation must be conducted by a qualified appraiser. Under Sec. 170(f)(11)(E), in order to be a qualified appraiser, an individual must earn “an appraisal designation from a recognized professional appraiser organization” or meet education and experience requirements set by the regulations. The individual must also regularly perform appraisals of this type and meet any other requirements in the regulations. The individual must also “not be prohibited from practicing before the Internal Revenue Service . . . at any time during the 3-year period ending on the date of the appraisal.” Sec. 170(f)(11)(E).
A “qualified appraiser” is defined in Reg. 1.170A-17(b)(1) as an individual with “verifiable education and experience in valuing the type of property for which the appraisal is performed.” The education and experience requirements may be met one of two ways. First, the appraiser may satisfy the requirement by successfully completing college-level or professional-level coursework in valuing the type of property being appraised and having two or more years of experience valuing that type of property. Reg. 1.170A-17(b)(2)(i)(A). Under Reg. 1.170A-17(b)(2)(ii), the coursework must be obtained from one of three sources: a professional or college-level educational organization, a generally recognized trade or appraiser organization or an employee apprenticeship or educational program similar to the educational options above.
Alternatively, the appraiser may satisfy the education and experience requirement by earning a “recognized appraiser designation” for the type of property to be valued. Reg. 1.170A-17(b)(2)(i)(B). This designation must be obtained from a generally recognized professional appraiser organization and the individual must earn the designation through demonstrated competency. Reg. 1.170A-17(b)(2)(iii).
The regulations define “type of property” as “the category of property customary in the appraisal field for an appraiser to value.” Reg. 1.170A-17(b)(3). Therefore, it is important to not only meet the education and experience requirements, but those requirements must be met specifically for the type of asset that is being valued. In other words, a qualified appraiser of real estate is not necessarily qualified to appraise life insurance. The appraiser must meet the requirements for each type of property in order to be recognized as a qualified appraiser of that type of asset.
The term “qualified appraisal” is defined as an appraisal “prepared by a qualified appraiser in accordance with generally accepted appraisal standards.” Reg. 1.170A-17(a)(1). The Treasury Regulations define generally accepted appraisal standards as “the substance and principles of the Uniform Standards of Professional Appraisal Practice, as developed by the Appraisal Standards Board of the Appraisal Foundation.” Reg. 1.170A-17(a)(2).
The Appraisal Foundation was created in 1987 to guide the promulgation of the Uniform Standards of Professional Appraisal Practice (USPAP). Congress adopted the USPAP in 1989. The Appraisal Foundation has an independent board, known as the Appraiser Qualifications Board (AQB), which establishes requirements and criteria for appraisals of real and personal property. The AQB’s Real Property Appraiser Qualification Criteria governs licensing for three different real estate appraiser qualifications: Licensed Residential, Certified Residential and Certified General.
Examples of Recognized Appraiser Designations
According to the AQB’s Real Property Appraiser Qualification Criteria, there are three classifications of real estate appraisers: Licensed Residential Real Property Appraisers, Certified Residential Appraisers and Certified General Appraisers.
Prior to obtaining one of these three classifications, an appraiser is classified as a Trainee Appraiser. The Trainee Appraiser must have 75 hours of qualifying education in the last 5 years and must work with a Supervisory Appraiser. No prior experience is required for Trainee Appraisers.
Licensed Residential Real Property Appraisers are qualified to appraise “non-complex one-to-four residential units having a transaction value less than $1,000,000, and complex one-to-four residential units having a transaction value less than $250,000,” per The Real Property Appraiser Qualification Criteria and Interpretations of the Criteria, effective May 1, 2018 (RPAQC). According to the AQB, a “complex one-to-four unit residential property appraisal” is “one in which the property to be appraised, the form of ownership, or the market conditions are atypical.” In order to qualify as a Licensed Residential Appraiser, an individual must attain 150 credit hours of qualified education, 1,000 hours of experience in no less than 6 months and pass an examination.
A Certified Residential Real Property Appraiser is qualified “to appraise one-to-four residential units without regard to value or complexity,” per the RPAQC. Individuals must complete 200 credit hours of qualified education, obtain 1,500 hours of experience in no less than 12 months and pass an examination in order to achieve this certification.
Finally, a Certified General Real Property Appraiser is qualified “to appraise all types of real property,” per the RPAQC . This certification requires the appraiser to complete 300 credit hours of qualified education, obtain 3,000 hours of experience and pass an examination.
Additionally, the Appraisal Institute, a real estate appraisal association, offers an MAI designation. Short for “Member Appraisal Institute,” this designation is open to Certified General Real Property Appraisers who meet various requirements, including being of good moral character, holding a bachelor’s degree or higher and passing a comprehensive examination.
Real estate appraisers must also meet certain continuing education requirements. The USPAP offers two courses for continuing education: the 15-Hour National USPAP Course and the 7-Hour National USPAP Update Course. The 15-hour course is intended as an introductory course to the field, while the 7-hour course is a required update course, taken every two years.
Various organizations offer professional designations for valuations of business interests. These include the American Society of Appraisers, the American Institute of CPAs (AICPA) and the National Association of Certified Valuators and Analysts (NACVA). Each organization maintains its own standards for education and experience required to receive that organization’s certification.
The American Society of Appraisers offers two levels of credentials, the Accredited Member (AM) and the Accredited Senior Appraiser (ASA). Candidates for the ASA credential may apply to receive a designation in Business Valuation (BV). The BV designation requires a four-year college degree (or its equivalent) and either two years of full-time experience toward the AM designation or five years of full-time experience toward the ASA designation.
The AICPA offers an Accredited in Business Valuation (ABV) credential. This credential is offered to AICPA members who hold either a CPA license or a bachelor’s degree or its equivalent plus completion of AICPA’s course on professional conduct and standards. Candidates are required to achieve a passing score on the ABV examination. Individuals who have passed certain other examinations, including the ASA examination are not required to take the ABV examination prior to applying for the ABV credential.
Individuals who pass the ABV examination must then obtain the requisite experience. For CPAs seeking the ABV credential, 1,500 hours of experience in valuations in the preceding 5 years is required. Non-CPA candidates are required to reach 4,500 hours of experience within the preceding 5 years.
NACVA offers the Certified Valuation Analyst (CVA) credential. The CVA certification requires an active, valid CPA license or either a business degree or masters of business administration (MBA) plus “substantial experience in business valuation.” NACVA defines “substantial experience” as having two or more years of full-time business valuation experience, having performed 10 or more business valuations, or “being able to demonstrate substantial knowledge of business valuation theory, methodologies, and practices.” Applicants must attend a training program, submit references and pass an examination.
NACVA also recertifies the Certified Business Appraiser (CBA) and Master Certified Business Appraiser (MCBA) credentials for current certification-holders. These designations were originally offered by the Institute of Business Appraisers (IBA). The IBA was acquired by NACVA in 2008. In 2016, NACVA suspended the issuance of new CBA and MCBA credentials. Holders of the CBA and MCBA credentials are able to recertify by complying with NACVA’s other credential recertification requirements.
In addition to real property criteria, the AQB also publishes The Personal Property Appraiser Qualification Criteria. These criteria require applicants to have completed either 30 college-level credit hours or to have attained an associate’s degree or higher. Additionally, applicants must complete 120 classroom hours, including the 15-Hour Personal Property USPAP Course (including the final examination), a 45-hour course including a final examination and 60 credit hours related to the field of appraisal, with an emphasis on personal property.
Additionally, the AQB requires applicants to have 700 hours of experience appraising personal property. The individual must also have either “[a] minimum of 1,800 hours of market-related personal property appraisal experience . . . of which at least 900 additional hours are in the area(s) of specialization” or “[a] minimum of 4,500 hours of market-related personal property non-appraisal experience . . . in area(s) of specialization” or “[an] equivalent combination of market-related personal property appraisal experience and market-related non-appraisal experience in area(s) of the appraiser’s specialization based upon a minimum ratio of 1 year to 2.5 years,” per The Personal Property Appraiser Qualification Criteria.
The AQB also requires applicants to obtain 70 hours of continuing education every 5 years, including 20 hours of valuation theory coursework and either the 15-Hour Personal Property USPAP Course or the 7-Hour Personal Property USPAP Update Course every two years.
The American Society of Appraisers offers Personal Property (PP), Gems and Jewelry (GJ) and Machinery and Technical Specialties (MTS) designations to appraisers. Each of these designations requires specialized coursework and experience in valuation of various types of assets. For instance, the PP designation covers a number of types of personal property, including various types of art, antiques, clocks, dolls and toys, firearms, furniture, sports collectibles and memorabilia, stamps and textiles.
Applicants for a PP designation must meet a number of prerequisites, including passing a 4-hour specialty examination, meeting PP-specific education requirements, having a college degree or its equivalent and having 2 years full-time experience toward the AM designation or 5 years toward the ASA.
Difficulty with Strict Compliance
As discussed above, the personal property appraiser designation includes appraisers of artwork. However, changes in the law in the mid-2000s caused difficulty for many appraisers who had the requisite experience, but did not have the formal education or appraiser designations required. In 2006, Sotheby’s submitted comments in response to the IRS’ transitional guidance regarding the appraisal requirements published in Notice 2006-96. In its letter, Sotheby’s requested that the IRS reconsider the then-newly-created rule requiring qualified appraisers to either hold an appraisal designation or meet both the education and experience requirements. Sotheby’s contended that “[b]ecause Sotheby’s specialists are already employees of one of the leading appraisers of art and antiques in the world, they generally do not also seek recognition from a separate appraisal organization.” It also noted that “[v]ery little coursework—at any level—exists that is relevant to valuing rare art or collectibles. For many of the specialists’ areas of expertise, there is no coursework at all.” Therefore, Sotheby’s contended, the rules could cause many experienced appraisers to fail to be considered “qualified appraisers.” Despite Sotheby’s contentions, the IRS maintained the requirement of an appraisal designation or both education and experience in its final rules.
Cryptocurrency is an encrypted form of digital virtual currency. This is a relatively new type of asset that has rapidly gained popularity in recent years with the rise of Bitcoin. Given the fairly recent creation of cryptocurrency as a category of property, IRS regulations and industry standards have not yet produced appraisal standards that are common to other well-established categories of property.
While for other types of property, obtaining a professional designation satisfies the appraiser qualifications, there is no such designation yet available for appraisers of cryptocurrency. Likewise, it appears that there are very few, if any, college-level courses regarding valuation of cryptocurrency. Therefore, individuals who hold themselves out as appraisers of cryptocurrency and the donors who seek their services must exercise caution. If the IRS finds fault with the appraiser’s qualifications, the entire charitable income tax deduction from the gift of cryptocurrency may be denied.
Individuals who offer qualified appraisals of cryptocurrency should be up front about their qualifications. Appraisers of other intangible personal property type assets, such as life insurance, may be able to claim the requisite experience to be considered a qualified appraiser of cryptocurrency.
In May 2018, the AICPA submitted comments to the IRS regarding Notice 2014-21, in which the IRS provided guidance on virtual currency. The AICPA suggested that the IRS should treat valuation of cryptocurrency donations in the same manner as donations of publicly traded stock. “The rationale is that the prices for these publicly traded stocks are available on established exchanges, thus not requiring a qualified appraisal,” stated the AICPA. “The same is true for most, if not all types of virtual currencies. That is, various exchanges publish the value of the currency on any given day.” The AICPA suggested that the IRS implement a rule that allows the taxpayer to “document, and calculate the average of, the fair market value on at least two exchanges (at the date and time of the contribution) and the basis of the virtual currency contributed.” Despite the AICPA’s efforts, the IRS has not implemented such a rule.
Valuation of life insurance for charitable deduction purposes can be complex. The deduction for such a gift is generally the lesser of the donor’s cost basis (usually the premiums paid) or the value of the policy. Most often, the cost basis does not exceed the value of the policy. Nevertheless, as a noncash asset, a gift of life insurance in excess of $5,000 is required to have a qualified appraisal by a qualified appraiser. The valuation of the policy will be determined by the qualified appraiser. In many cases the value may be based either on the policy’s replacement value if it is paid in full or the policy’s interpolated terminal reserve value (ITRV) if the policy is not paid in full. While the major appraisal associations do not offer specific credentials in valuation of insurance policies, many offer certification in intangible assets, either as a specialization within another field or as a standalone credential. For example, the American Society of Appraisers offers an “Intangible Assets” specialty within the Business Valuation field.
Alternatively, some senior donors may receive a quote for life settlement of the policy. Several firms specialize in life settlement valuations. The life settlement value may exceed the cash value of the policy. In that case, the value of the policy will consist of the donor’s cost basis (premiums paid), an ordinary income element (the difference between the policy’s basis and cash value) and capital gain (the difference between the policy’s cash value and the life settlement value). Under Rev. Rul. 2009-13, the IRS ruled that charges for the cost of insurance would reduce the donor’s basis. However, that rule was abolished with the passage of the Tax Cuts and Jobs Act of 2017. Therefore, with a life settlement policy and a qualified appraisal, the donor is now able to deduct both the policy’s cost basis and capital gain.
When evaluating the qualifications of an individual who holds himself or herself out as a qualified appraiser of life insurance, consider whether the individual already holds an appraiser designation from a well-respected appraisal organization as well as substantial education and experience valuing life insurance. This may include advanced degrees in the study of insurance or years of experience in the field of insurance.
A Cautionary Tale
In Reg. 1.170A-13(c)(5)(iv), there are a number of circumstances listed in which individuals who might otherwise be qualified are excluded from being considered a “qualified appraiser.” These include when the appraiser is the donor, a “party to the transaction in which the donor acquired the property being appraised,” the donee, anyone employed by or related to one of the aforementioned parties or “an appraiser who is regularly used by” the donor, donee or a party to the transaction in which the donor acquired the property “who does not perform a majority of his or her appraisals made during his or her taxable year for other persons.”
In James Tarpey v. United States, No. 2:17-cv-00094 (2019), the U.S. District Court for the District of Montana held that an appraiser was not qualified under Reg. 1.170A-13(c)(5)(iv). James Tarpey formed a nonprofit, known as Donate for Cause (“DFC”), to facilitate the donation of timeshares. While Tarpey hired two appraisers, Ron Broyles and Curt Thor, to conduct appraisals, Tarpey and his sister, Suzanne Tarpey, also conducted appraisals for DFC.
The court noted that Tarpey relied on advice from his CPA, George Schramm, that Tarpey was qualified to be an appraiser of non-real property. However, the court also stated that “[t]he record fails to establish, however, that Schramm, or any other professional, ever advised Tarpey that he met all of the criteria to serve as a qualified appraiser for his scheme within the meaning of the Treasury Regulations.” In its ruling, the court held that “all of the appraisers lacked sufficient independence from DFC to be considered ‘qualified appraisers’ under the Treasury Regulations.”
While this is somewhat of an extreme case, it highlights the need for donors to educate themselves and seek the advice of knowledgeable and trustworthy advisors regarding the Service’s requirements for appraisals and appraisers. If a client proposes an individual as a potential qualified appraiser for a specific gift, the advisor’s inquiry should focus both on whether the appraiser meets the education and experience requirements and whether the appraiser is related to the parties involved in the transaction.
It is essential for donors seeking charitable deductions for gifts of noncash assets to understand their need to properly substantiate their gift. In many circumstances, substantiation for the charitable gift of noncash assets will require the services of a qualified appraiser. With the Service’s rigid approach to appraiser qualifications, a misstep could lead to a lost charitable income tax deduction. Given the stakes involved, it is important for the donor’s advisor to be able to assist the donor in determining where to turn when looking for an appraiser. Therefore, it is highly recommended that advisors help their clients find appraisers credentialed in the type of property transferred whenever possible. When there is no direct credential available for the type of property donated, the donor and advisor must be diligent in selecting an individual who is both highly educated and experienced in the field and sufficiently independent from the parties involved in the transaction.
New Decade Nonprofit Trends
Author: A. Charles Schultz, JD, AEP®
As we approach the new decade, what trends will emerge for successful nonprofits?
There are several reasons to be optimistic about giving in the new decade. The economy is strong and there is high employment. Public and private stock, homes and commercial real estate values are all solid. A strong economy, high employment and solid asset values generally lead to increased giving.
However, there also will be challenges. With the passage of the Tax Cuts and Jobs Act in 2017, the number of itemizers declined from around 30% in 2017 to about 10% by 2019. Because some donors are no longer itemizing, they may be less likely to make charitable gifts. Even though many loyal donors will continue to give, there is expected to be a fairly flat growth trend for the traditional annual fund.
In addition, many nonprofits are having difficulty replacing senior donors who pass away with new younger donors. While the number of nonprofits has been increasing, total donor numbers have remained generally flat over the past few years. Competition for annual fund donors will continue to increase, especially for midsized nonprofits. All nonprofits will need to expand their tents by increasing the number of new, younger donors.
Based on these giving positives and challenges, there are four major trends that will be evident during the new decade. These are growth in annual funds through IRA rollover gifts, greater fundraising success for charities that are marketing gifts of stock and land gifts, continued significant growth for donor advised fund (DAF) gifts and a blossoming of boomer generation bequests.
"New Annual Fund" with IRA Rollover Gifts
Annual fund giving is the lifeblood of all nonprofits and is essential in funding charitable programs. Loyal donors faithfully support each organization through annual fund gifts. Nonprofits should steadily build annual fund giving — both for current support and because loyal donors are candidates for future major, blended and planned gifts.
The next decade presents two big challenges and one golden opportunity for annual funds. The challenges for annual funds include the reduced number of itemizers (from about 30% in 2017 to 10% today) and the limited number of new younger donors who are replacing the seniors who pass away. The golden opportunity is to grow a "New Annual Fund" through IRA rollover gifts.
Many organizations have been building their annual funds for decades. In the early years of an annual fund, there is often modest growth between years one and three, greater growth from years three to five and increased momentum and growth from years five to 10.
It is quite probable that the pattern for a New Annual Fund from IRA rollovers will be quite similar. When individuals who are over age 70½ start making qualified charitable distributions (QCDs) from their IRAs, they are likely to continue those gifts each year. Because QCDs may fulfill their required minimum distributions (RMDs), many QCD donors increase their traditional annual fund gifts by 15% to 25%. Under federal tax rules, the RMD increases each year, thus there is an incentive for individuals to make larger IRA rollover gifts each year.
Both the traditional annual fund and the New Annual Fund must have multichannel marketing programs. A consistent marketing program will encourage senior donors to increase giving. In the book Good to Great, author James Collins emphasizes the importance of "pushing the flywheel." With consistent small pushes, the flywheel moves faster and faster until there is "almost unstoppable momentum." Success for nonprofit organizations comes from a steady growth in a favorable program. By continuing to market the "New Annual Fund," charities are continually pushing the flywheel.
This marketing will produce many IRA rollover gifts and substantial New Annual Fund revenue. How much revenue may be expected from the New Annual Fund? To some extent, it depends on the number of loyal donors who are over age 70½. Based upon surveys of Crescendo seminar classes, many nonprofits report 40% to 65% of their loyal donors are over age 70½. Because these organizations find that a significant percentage of their loyal donor base is in this category, there are likely to be many individuals who could and will make large IRA gifts.
The Investment Company Institute reported IRA balances were over $9 trillion in October 2018. With an estimated $3 trillion to $5 trillion in the loyal donor IRA pool, there should be sustained growth in your New Annual Fund revenue. While the time it takes for a marketing program to mature is often between three and 10 years for most organizations, the cumulative effect could be significant. The New Annual Fund may equal 20% to 40% of the existing annual fund.
Assume that a large university has an annual fund that is producing $2 million. This success has been built up over the past eight decades and represents a significant commitment of both staff and financial resources. The potential result for a consistent IRA gift marketing program is to generate a New Annual Fund that may produce an additional 20% to 30% of the existing fund. If the higher percentage could be reached with a New Annual Fund marketing program, the university may add $500,000 and raise $2.5 million per year. Several universities have passed the $500,000 IRA rollover level after three years of consistent marketing.
A 20% to 30% increase in annual fund amounts is possible with an effective IRA rollover marketing campaign for three to five years. Research with CPAs indicates that 70% to 85% of donors with large IRAs take a single RMD in October or November. Therefore, the majority of IRA rollover gifts are made during the fourth quarter of the year.
A persuasive IRA rollover campaign includes a multichannel marketing effort each September, with an extended postcard, eNewsletter headers, eBlasts and social media posts. These multiple contacts are designed to encourage loyal donors to make an IRA rollover gift.
Gifts of Land and Stock
Dr. Russell James is a leading researcher of philanthropy in America. In his 2018 article, "Cash is Not King for Fundraising: Gifts of Noncash Assets Predict Contributions Growth," James analyzed gifts of cash and appreciated property.
He compared the success of charities that marketed cash-only gifts in 2010 and 2015 with those who marketed gifts of cash, stock and land during both years. James discovered that the charities marketing gifts of appreciated property had greater success in raising both cash and noncash gifts.
Midsized charities are nonprofits with $3 million to $10 million in annual gift revenue. The midsized charities that were raising cash-only gifts in 2010 had essentially no growth in giving between 2010 and 2015. Midsized charities that were promoting gifts of cash, land and stock enjoyed giving growth of 7.3% per year over those five years.
There was also a clear benefit for large organizations with over $10 million in annual gift revenue. If large organizations promoted cash-only gifts, they experienced 4.8% growth per year. They grew from a median gift of $27 million in 2010 to $34 million in 2015. However, the large organizations that promoted gifts of cash, land and stock enjoyed 6.2% growth per year. Giving to these organizations increased from $51 million in 2010 to $68 million in 2015.
The more powerful statistic is that this increased growth of 2.4% (6.2% versus 4.8%) when compounded over multiple years results in much larger total giving. The median 2015 gift amount for nonprofits that promoted cash, land and stock donations was $68 million. This was double the median gift amount of $34 million for those large charities that marketed cash only gifts. Doubling the total gifts over time by marketing both cash and noncash gifts is a stunning statistic! The "cash only" nonprofits lost 50% of their potential gifts by not marketing gifts of stock or land.
During the next decade, there is likely to be limited growth in the total number of donors. As a result, there will be substantial competition for donor dollars. Thousands of midsized and large charities will discover that they must market stock and land gifts or their cash giving will stagnate at the current level. When these nonprofits become proactive in their marketing, there will be a significant growth in stock and land gifts during the new decade.
Donor Advised Funds
A donor advised fund (DAF) involves a gift of cash, stock or land to a public charity, with the donor and family members designated as grant advisors. The charity manages and invests the fund and makes distributions for charitable purposes. DAFs are frequently sponsored by community foundations, religious foundations and other nonprofits.
The DAF donor generally receives a full fair market value deduction for cash or appreciated property gifts. The donor or designated family members may advise the charity to make DAF grants. While the parent charity owns the fund assets, most charities that administer DAFs will attempt to follow the DAF advisors' recommendations. Nearly all DAF grants are made to qualified Sec. 501(c)(3) organizations.
During the next decade, DAFs will continue to experience explosive growth. In 2017, the National Philanthropic Trust reported the existence of 285,000 DAFs. Donors gave $23 billion to DAFs and made $16 billion in grants in 2017. The net increase of DAF principal was $7 billion plus investment growth.
The largest DAF nonprofit is affiliated with Fidelity. In 2018, Fidelity Charitable had 123,114 giving accounts. Grant values from Fidelity DAFs have steadily increased to $5.2 billion in 2018. Vanguard, Schwab, Morgan Stanley and many other financial institutions have similar charitable affiliates with DAFs.
Community and religious foundations also have seen dramatic growth of DAFs. Many donors appreciate the convenience of funding a DAF with cash or an appreciated property gift and then making grants at a later time. The DAF also has a very attractive benefit — children, nephews, nieces and other family members may be included as advisors. Donors view this family member involvement as beneficial for teaching good values to heirs.
A DAF is simple to create and much less expensive than a private foundation. DAFs may be funded with $10,000 or more, depending upon the minimum requirement of the DAF organization.
Nearly all DAF grants are made to public charities. Most community and religious foundations report that they make annual distributions of 10% to 14% of DAF fund balances. While critics have expressed concern that some DAFs are essentially parking charitable funds without making adequate distributions, the giving data shows that DAFs are generally making larger distributions than private foundations.
DAFs are available through charitable organizations affiliated with large financial service companies (Fidelity, Vanguard, Schwab and others), community foundations, religious foundations and other nonprofits.
During the next decade the "DAF Other Nonprofit" category is likely to grow significantly. Many larger nonprofits have been creating DAFs because their major donors request them. In order to avoid sending their major donors to the nearest community foundation, religious organization or financial services company fund, nonprofits of all sizes will consider DAFs in the future.
The Chronicle of Philanthropy surveys gifts to the Philanthropy 400 nonprofits each year. In 2018, approximately 24% of the total gifts to the Philanthropy 400 were to DAFs. The percentage of DAF gifts to mega-charities will continue to grow.
Wealth in America grew significantly in the early years of this century. In 2007, the U.S. Federal Reserve reported net household wealth to be approximately $65 trillion. While net worth declined in the 2008 downturn, over the next decade there was a significant economic recovery and unemployment moved below 4%.
As a result, the stock markets recovered and the Standard and Poor's 500 Index reached an all-time high. In addition, housing recovered and the home equity of Americans rebounded. The Federal Reserve reported that net household wealth in America had grown to over $100 trillion by 2018.
In a 2016 article on "The Future of Wealth in the United States," the Deloitte accounting firm projected the future net household worth of the Boomer generation. By 2028, the Deloitte projection shows the Boomer generation with a net household worth of $52 trillion. Boomers will be the wealthiest generation in history. The Boomer generation inherited wealth from the Silent generation (born 1930 to 1945) and had the advantage of their prime working years occurring during the time when America was the clear dominant economic power in the world.
Because the Silent generation started to turn 65 in 1995, the approximately 20 million surviving members of that generation passed age 65 between 1995 and 2010. Approximately 2,800 individuals turned age 65 every calendar day. Between 2020 and 2030, about 2600 members of the Silent generation will pass away each calendar day.
The much larger generation of Baby Boomers started to turn 65 in 2010. With larger families and an increased number of children, there were substantially more Boomers born each year between 1946 and 1964 than for the Silent generation during 1930 to 1945. Between 2010 and 2030, approximately 10,000 Boomers will turn age 65 each day. The 78 million Boomers are expected to have 8,500 "Graduation Days" each day from 2030 to 2054 (most Boomers will pass away in their mid to late 80's).
In their 2009 article "A Golden Age of Philanthropy," Dr. Paul Schervish and Jason Havens provided detailed projections for the probable transfer of Boomer wealth. Their projections cover the time period from 2007 through 2061. In 2014 dollars, with 1% growth of typical estates from 2027 to 2061, they project $2.31 trillion in charitable bequests. For the prime Boomer distribution period from 2028 to 2054, a linear extrapolation produces a Boomer bequest estimate of $1.76 trillion. A reasonable estimate for Boomer bequests during that time period is a minimum of $1.5 trillion.
Commentators have noted that 2018 bequest maturities did not reach the projected Schervish numbers. When Dr. Schervish spoke at the 2017 Practical Planned Giving Conference, your author stated, "Paul, your numbers are correct. Based upon my three decades of experience, the donor potential is real, but the nonprofit bequest marketing programs were not sufficient. If 2,000 large and midsized nonprofits create solid multichannel marketing programs, we will surpass your bequest numbers!"
New Decade Predictions
Prediction I: Annual Funds — 90% of the new decade growth in annual fund gifts will come from IRA charitable rollovers.
Prediction II: Gifts of Stock and Land — Nonprofits that market cash, land and stock gifts will grow their gift revenue at an annual rate that is 3% higher per year than those marketing cash-only gifts. The increase in gifts by 2030 with 3% greater giving growth is 34%!
Prediction III: Donor Advised Funds — DAFs will grow substantially because many nonprofits will join financial, community and religious foundations in offering donor advised funds. New decade DAF gifts will comprise 30% of total gifts to the Philanthropy 400.
Prediction IV: Boomer Bequests — Nonprofits who build a large "Boomer Bequest" pipeline during the new decade will receive 25% to 35% of their 2030-2040 budgets from bequest maturities.
Author's Note: This is the third decade your author has made predictions. In 1999 he predicted "Seven Golden Years of Planned Giving From 2000-2007." He predicted that a majority of seniors would be internet users by 2010. At the NCPP Conference in 2009, he predicted that marketing to seniors would move from 90% print and 10% electronic in 2010 to 90% electronic and 10% print by 2020. Readers are welcome to comment on any predictions in this article and may send a note to the editor.
Benefits of Bunching Charitable Gifts
With the doubling of the standard deduction in 2018, the number of taxpayers who itemized deductions declined substantially. In 2017, nearly 30% of taxpayers itemized, but with the larger standard deductions, only about 10% of taxpayers will itemize this year.
The standard deductions in 2018 doubled to $24,000 for married couples and $12,000 for individuals. The married standard deductions increased to $24,400 in 2019 and $24,800 in 2020. Individual standard deductions are one-half the married number. What tax planning strategy might benefit generous taxpayers who know there is a large standard deduction and still desire to help a favorite charity? Let's consider the options for two generous families – John and Mary Jones and Harry and Susan Green.
Both couples pay $8,000 in state and local taxes and $7,000 in home mortgage interest. They each give $8,000 to their favorite charity each year. Their total itemized deductions are $23,000 per year. Because the standard deduction is larger than their $23,000 in itemized deductions, John and Mary take the $24,400 standard deduction in 2019 and $24,800 amount in 2020. Their total deductions over two years are $49,200.
Meanwhile, Harry and Susan decide to "bunch" their charitable deductions. They give $16,000 in 2019 and nothing in 2020. Because their 2019 itemized deductions of $31,000 are more than the standard deduction, they elect to itemize their deductions. In 2020, they take the standard deduction of $28,800. Their total deductions are $55,800.
Bunching Charitable Deductions
Family Deductions for 2019 and 2020
Harry and Susan
John and Mary
By "bunching" their deductions, Harry and Susan increase their tax savings from their charitable gifts. The $6,600 increased deductions may save $1,848 in their 28% federal and state income tax brackets.
Editor's Note: If your combined state and local tax, home mortgage interest and charitable gift deductions are close to the married or individual standard deductions, you may want to visit with a tax advisor about "bunching" your charitable gifts. Making larger charitable gifts every other year could be an excellent tax-saving strategy.
Exempt Organizations 2020 Agenda
Independent Sector, The National Council of Nonprofits, The Council on Foundations and other associations are focused on their 2020 agenda. While the appropriations bill that passed in December 2019 repealed the Sec. 512(a)(7) parking tax and simplified the private foundation excise tax, there remain four main priorities for 2020.
Universal Charitable Deduction – The above-the-line charitable deduction will continue to be a priority. Because the Tax Cuts and Jobs Act of 2017 doubled the standard deductions, the number of itemizers declined over the past three years. About 30% of taxpayers itemized in 2017 and an estimated 10% will itemize in 2020. With fewer itemizers, there has been a decline in the number of annual fund donors. The universal charitable deduction is a solution for this challenge. David L. Thompson of the National Council of Nonprofits noted, “2020 will be devoted to building support for this essential solution.”
Sect. 512(a)(6) Silo Tax Repeal – Under Sec. 512(a)(6), nonprofits must maintain separate records and pay tax on each separate legal entity. The gains on one trade or business may not be offset against losses on another subsidiary. Thompson noted, “The silo tax forces nonprofits – but not for-profits -- to keep every trade or business separate for accounting and tax purposes and pay taxes on each separately.” Thompson considers this a punitive tax and seeks clarification from Treasury on how it should function.
Overreach of Executive Compensation Tax – Under Sec. 4960, there is a 21% excise tax on compensation over $1 million for officers of applicable tax-exempt organizations (ATEOs). Some ATEOs may be affiliated with private corporations. If officers of the private corporation volunteer for the ATEO, the 21% excise tax may apply.
Legacy IRA – The Legacy IRA Act expands the options for IRA gifts. It is supported by a coalition of DC organizations and associations. The Legacy IRA Act would permit IRA owners over age 65 to transfer up to $400,000 per year from an IRA to a charitable gift annuity, remainder unitrust or remainder annuity trust.
Editor’s Note: The challenge for all of these agenda items is that current legislative policy requires a “pay-for” to offset the cost. Nonprofits will need to find creative and politically acceptable offsets to move forward with this 2020 agenda.