Eight Strategies for Making Impactful Gifts in the Wake of COVID-19Submitted by American Endowment Foundation on May 18th, 2020
By Martin Hall & Sarah Tomeo Hertzog, Guest Columnists, Ropes & Gray LLP
As stories emerge of the unprecedented challenges faced by charitable organizations throughout the nonprofit sector as a result of the COVID-19 pandemic, many people are looking for ways to make contributions now that will have a meaningful impact. With the recently-enacted CARES Act, donors may receive increased income tax benefits while helping essential organizations. In particular, the CARES Act allows individuals who itemize their deductions to elect to deduct up to 100% of their federal adjusted gross income (AGI) for cash gifts made in 2020. The higher deduction limit applies to gifts for any charitable purpose, not just gifts related to the COVID-19 crisis. It covers gifts made to almost all charities; contributions to donor advised funds, supporting organizations, and private non-operating foundations are, however, outside its purview.
What strategies should donors use to make high-impact, tax-efficient gifts?
#1 – Think Broadly. Charitable organizations providing healthcare, financial support, housing, and other services to communities impacted by COVID-19 are shouldering the burden of the pandemic and require urgent donor support. Do not forget, though, that the health crisis has hurt organizations in all segments of the sector. Charities across the country have had to suspend revenue-generating services, cancel fundraising events, and furlough or layoff employees. It is critical that donors continue giving to the charities they ordinarily support, even if they are not on the frontline of relief efforts.
#2 – Give Cash. As outlined above, the CARES Act provides potentially more generous tax benefits for cash contributions in 2020. At the same time, the market’s decline has depressed the value of many assets and wiped out much, if not most, recent capital appreciation. Consequently, donors may want to consider making all or a portion of their current contributions in cash when evaluating how best to structure their gifts.
#3 – Be Flexible. The pandemic has required that many charitable organizations reevaluate their priorities and reallocate funding, and charities’ needs continue to evolve as the pandemic unfolds. Unrestricted support enables organizations to adapt nimbly to required changes. Both individuals and private foundations making new donations and grants can help organizations respond efficiently by foregoing gift restrictions for the time being and making general support gifts. Likewise, individuals and foundations may want to consider revising, loosening, or even eliminating restrictions imposed on gifts and grants previously made to enable the organizations to redeploy the funding. In particular, this latter strategy may permit donors to have a meaningful impact even when they do not currently have the financial means to make new gifts.
#4 – Capitalize on Others’ Expertise. Community foundations are uniquely positioned to assist localities affected by COVID-19 because they are familiar with the nonprofits serving their communities. Many such foundations have established relief funds designed to identify and distribute funding to local organizations providing support to people affected by the pandemic. For donors who want to direct their philanthropy to relief efforts, a gift to a fund hosted by a community foundation will help ensure that the donors’ gifts reach the charities that need it most and have the greatest impact.
#5 – Accelerate Future Gifts. Now is also an opportune time for donors who have made future commitments to charity – particularly cash commitments – to consider accelerating their gifts. With this approach, donors can provide increased funding to charities when they need it most, while taking advantage of a rare opportunity to offset up to 100% of their AGI with charitable contributions. For instance, donors might consider the following strategies:
- Donors with outstanding multi-year pledges with favorite charities may increase the impact of their pledges by accelerating some – or even all – of the payments to 2020.
- Donors who typically satisfy their annual gifts at annual fundraising events may provide much needed support by making cash contributions now in an amount equal to what they would have spent on tickets, auctions, or other fundraising opportunities. Many of these events have already been cancelled for 2020, even if scheduled for later in the year.
- Donors who are at least 59½ years old and have an IRA that they intend to bequeath to charity can generate valuable tax benefits while doing good by withdrawing an amount equal to all or a portion of the anticipated bequest now and contributing the proceeds to the charitable beneficiary in 2020. All of the resulting federal taxable income will be offset by the federal charitable deduction (state income tax consequences will vary by state), and the donor will reduce future required minimum distributions from the IRA and, therefore, future tax liability.
#6 – Consider Strategic Gifts of Assets. While gifts of non-cash assets do not qualify for the enhanced deduction limit under the CARES Act, this nonetheless remains an opportune time for gifts of certain assets. For instance, companies in some sectors of the economy – e.g., health and biotechnology, online retail, online media, and certain consumer goods – have held their value and in some instances appreciated during the pandemic. Whether the companies will sustain their value following the pandemic remains an open question, though. A well-timed gift of such securities can provide much needed help to charity while yielding a donor two valuable tax benefits – the avoidance of capital gains tax on the assets’ appreciation and a charitable income tax deduction. Alternatively, donors who hold assets whose value has been hurt by the pandemic and seems likely to decline further might consider gifting some or all of the assets now, rather than waiting until later in the year when the assets could be worth less.
#7 – Make DAF and Foundation Grants. For donors who have previously-funded donor advised funds (DAFs) or private foundations, now is the time to consider increased grant making from those vehicles. Although donors do not receive any additional tax benefits when their DAFs or foundations make grants, this strategy can enable donors to have a charitable impact without parting with personal wealth during periods of market volatility.
#8 – Do Not Forget About Split-Interest Gifts. For donors who want to make a contribution, but have reservations about giving away assets in light of current economic conditions, split-interest gifts continue to offer a valuable opportunity to have an impact, while retaining an income stream and generating a charitable income tax deduction. Although a cash contribution to a split-interest trust does not constitute a qualified contribution for the 100% AGI deduction provisions of the CARES Act, a cash contribution made to a qualified public charity in return for a charitable gift annuity should.
This article should not be construed as legal, tax, or investment advice, nor should it be construed as a legal opinion on any specific facts or circumstances. This article is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney, tax, and investment advisors concerning any particular situation and any specific legal, tax, or investment questions you may have.
Martin Hall is a Partner and Co-Chair of the Private Client Group at Ropes & Gray LLP, and Sarah Tomeo Hertzog is a Senior Career Associate at Ropes & Gray LLP. Mr. Hall is also a member of the AEF Council of Advisors.
We at American Endowment Foundation look forward to discussing your needs and interests in greater detail. Contact or call us at 1-888-660-4508 and let us discuss how donor advised funds can play a role in charitable planning and the growth of your financial practice.