Assignment 8: Other tools and techniques

Question 1

Bargain Sale

Answer 1

• A transaction in which donor receives less than full market value of property transferred to the charity
• Transaction is treated as part sale, part gift, with donor’s basis allocated proportionally between the gift and sale amounts
  E.g. property valued at $100,000, sells to charity for $50,000. He has made a gift for the difference between FMV ($100k) and sale price ($50k). Charitable deduction then is $50k.

Question 2

Gift of debt-encumbered property

Answer 2

• Treated as a bargain sale
• Gift value is net of the loan
• Loan results in income to the donor (to the extent that loan exceeds the basis)
• Allocated proportionally between gift and deemed sale, i.e. amount of loan
• Ask donor to consider loan repayment prior to the gift

Question 3

Computing Gain Element for Bargain Sale

Answer 3

Juan sells a piece of land worth $1M to charity, for which he paid $200k (basis). Sells to charity for $500k.
- total basis of $200k is allocated across the gift and sale portion.
- Since he sold for half price, the basis is allocated 50/50
- He received $500k for the land and his allocated basis is $100k (50% of $200k basis)
- the gain, then, is $400,000, which at 15% capital gain rate, would be $60,000 tax due
- Another way to calculate: (SP/FMV) x (FMV - B)
($500k/$1M) x ($1M - $200k) = $400k gain
NET RESULT = Juan receives $500k from sale portion
- Minus $60,000 capital gain tax
- Plus tax savings on having given away $500,000, at, say 35% or $175k
- Net cash flow of $615,000 to donor ($500,000 + $175,000) - $60,000 = $615,000

Question 4

Gift of Residence or Farm with Retained Life Estate

Answer 4

Remember Five Deduction Exceptions:

1. Gifts of remainder interests in charitable remainder trusts
2. Gifts of lead interests in charitable lead trusts
3. Gifts of undivided partial interest in the entire property owned by the donor
4. Gifts of remainder interests in a personal residence or farm
5. Qualified conservation donations

Question 5

Retained Life Estate

Answer 5

• Can give a personal residence (including a vacation home), farm, or ranch, while retaining the right to live there
• Transfer is made by deed, not through a trust
• Charity will get property without restrictions
• Deduction is for remainder interest
• Donor gets a current charitable deduction for FMV, less present value of retained life estates
• Written agreement is essential
• cost of maintaining the property should be the responsibility of the life estate beneficiary (charity)

Question 6

Life Estate Calculation

Answer 6

Factors in valuing the remainder interest:

• Age of donor(s) or term of the agreement
• Value of building, it’s useful life, and it’s salvage value
• Value of the land
• 7520 rate (used as discount rate)

Question 7

Life Estate Gift Acceptance

Answer 7

• Will a charity want the property? Don’t assume!
• They may not want to enter into such an agreement with an aging donor, who will continue to live in the property that is effectively the charity’s
• How would charity intervene if the donor does not keep the place up or pay taxes and insurance?
• What happens if donor wants to sell and move out? Or if she has to go into a nursing home?

Question 8

Conservation Easements

Answer 8

Remember the five exceptions for charitable tax deductions…
5. qualified conservation donations

Qualified Conservation Gift

• Must be a contribution of a qualified real property interest
• Must be legally binding
• Must be permanent
• Must restrict the use, modification, and development of property, like parks, wetlands, and historic structures
• Qualified organizations receiving property must be committeed to preserving the property pursuant to the conservation-related restriction and must have the resources needed to do so
• Must be exclusively for conservation purposes

Question 9

Four Types of Conservation Easements

Answer 9

1. Preservation of land for outdoor recreation or for hte education of the public
2. Protection of a natural habitat
3. Preservation of open space
4. Preservation of historically important land or historic building

Question 10

Valuation of Conservation Easements

Answer 10

• Determined by qualified appraisal
• Based on comparable sales, if any
• Or FMV with no restriction minus the FMV with restriction = value of the gift

Question 11

AGI Limitation of Conservation Easement

Answer 11

Generous!!!

• May deduct up to 50% of AGI
• Up to 100% of AGI for qualified farmers
• Either case, allows a 15-year carry forward

Question 12

Pooled Income Fund Stats

Answer 12

Steadily declining since 2010

2010: 1, 402 PIFs with total assets of $1.31B
2104: 1,267 PIFs with total assets of $1.21B

Not so popular anymore

Question 13

Pooled Income Fund

Answer 13

Donor–>PIF–>Charity

Donor

Question 14

PIF Advantages

Answer 14

• Income beneficiary receives income for life
• May include the donor, donor’s spouse, children or other beneficiaries
• Donor can make small gifts without legal costs
• Provides a partial income tax charitable deduction (based on remainder interest computed using fund’s highest income in past three years)
• Donor can contribute appreciated property, doing so avoide tax on long-term capital gain contributions

Question 15

PIF Disadvantages

Answer 15

• Fund operation is hard to understand
• Fund startup and maintenance expenses for charity
• Once started, charities may feel stuck with it
• Income today tends to be quite low
• Many charities restrict contribution to cash and marketable stocks
• PIF cannot receive or invest in tax-exempt securities
• Beneficiaries retain the ability to receive only ordinary income

Question 16

PIFs–Can be used post-sale

Answer 16

If a business has been sold and a large gain realized, a PIF might make the list of things to consider to offset that gain, while providing modest income for the donor

Question 17

Giving Circles

Answer 17

Increasingly popular

• 1,087 giving circles
• 13 nationwide GCs; 9 organized online
• At least 150,000 people involved
• Women GCs most common
• Identity-based groups growing: 60% of GCs
• 37% of GCs have given at least $375.25M since inception; possibly $1.29B for all

Question 18

Giving Circle Features and Benefits

Answer 18

• people get together and pool money
• they educate themselves about giving
• look into specific charities
• together they are able to make a larger more intentional gift
• they ultimately give more and give better
• they also make friends, build a network, and have fun in the process

Question 19

International Giving

Answer 19

Grants to foreign charities

• it is possible to make grants to foreign charities, special rules apply. Some options for doing so include:
• Make a grant to a US based “friends of” organization that supports the foreign grantee
• Work with an intermediary (US-based)
• Exercise “expenditure responsibility” over the foreign grant
• Complete “equivalency determination” to show that the foreign grantee is similar to a US public charity
• -Expenditure responsibility and equivalency determination needs more expertise!!

Question 20

International Intermediaries

Answer 20

US-based 501c3 orgs:

• CAF America
• Give2Asia
• King Baudouin Foundation (Europe and Africa)
• International Community Foundaton (Mexico)
• Council on Foundations NGO Source–helps grantmakers streamline and save on their international giving for a nominal fee

Question 21

“Charitable” Limited Liability Companies

Answer 21

LLCs: CZ Initiative

• In 2015, Mark Zuckerberg and Priscilla Chan, announced their charitable initiative with the birth of their daughter
• The initiative would be funded, over time, with 99% of their Facebook stock, then valued at $45B
• Purpose: “advance human potential and promote equality in areas such as health, education, scientific research and energy”

Question 22

LLCs Form of Entity

Answer 22

• A Limited Liability company
• Concept is not new (Emerson Collective–Steve Jobs’ wife)
• the LLC structure provides operational flexibility
• traditional grantmaking
• strategic investments–impact investing
• political advocacy (because not charitable)
• Structure retains privacy–single-member LLC
• Retains donors’ control–underlying Facebook stock, ability to exit, governance

Question 23

LLC–Implications

Answer 23

• No tax benefits yet; they have simply moved wealth around their own balance sheet
• All tax consequences of whatever is done within the LLC flow through to the personal returns of the owners
• They keep all “doing good” options open
• $3B on medical research
• $24M investment in Andela, trains engineers in Africa (a for-profit enterprise)
• Meta–Canadian AI start-up

Question 24

Impact Investing Defined

Answer 24

• Challenges traditional view that social and environmental issues be addressed only by charitable dollars and that market investments should focus on financial returns
• Definition from Global Impact Investing Network (GIIN)

Impact investments are investments made with the intention to generate positive, measurable social and environmental impact alongside a financial return

Question 25

Four Characteristics of Impact Investing

Answer 25

1. Intentionality
2. Investment with return expectations
3. Range of return expectations and asset classes
4. Impact measurement

Question 26

Impact Investing via DAFs

Answer 26

Impact Assets

• Direct impact investing with DAFs
• 568 impact investment positions and $1B in assets
• Donor makes a $5k minimum tax deductible gift into a DAF
• Funds inside a DAF are invested–positive social and environmental returns
• Use DAFs to make grants to charities

Marin Community Foundation + Impact Assets
- Venture Impact Fund–donors identify and support ventures via grants; financial returns come back to DAF at MCF

Question 27

Qualified Opportunity Zones

Answer 27

• Qualified Opportunity Zones (QOZ) were created by the Tax Cuts and Jobs Act of 2017
• Spur economic development and job creation in distressed communities
• 8,700 designated QOZs
• This is not a charitable tool, but an impact investing tool

Question 28

Preferential Tax Treatment for QOZs

Answer 28

Investors can defer tax on any prior gains in a Qualified Opportunity Fund (QOF) until the earlier of the date on which the investment in a QOF is sold or exchanged, or Dec 31, 2026

If QOF is held:

• Longer than 5 years, 10% exclusion of deferred gain
• More than 7 years, 15% exclusion of deferred gain
• At least 10 years, the investor can permanently exclude from taxation any capital gains that accrue after their investment in a QOF; increase the basis of any investment held in a QOF for 10 years to 100% of its FMV on the date it is sold or exchanged
• *The longer the fund is held, the more benefits

Question 29

Concerns about QOZ

Answer 29

• Benefits investors–not communities
• No rules or tests requiring investments produce public benefits, nor to hire workers from or provide services to local communities
• Selected tracts are questionable as “low-income” communities
• Have structural advantages that would attract investments even before OZs were created

Question 30

Jeffersonian Dinner

Answer 30

Catalyzed by a Question

• Gathering of 10-12 carefully chose changemakers for a particular cause (interesting mix of backgrounds)
• Curated questions with a good facilitator (e.g. education reform “Who is your favorite teacher of all time”, plans for a new film center “What movie is your favorite guilty pleasure and why?”, technology “What technology innovation in the last ten years has most changed your life?”)
• Not a fundraiser–works well for a cause that does not even have a charity working on the issue
• Purpose is networking, field-building, consciousness-raising, organizing
• Can work with nonprofits–if you have a program on your dream list, who are the stakeholders?

Question 31

Philanthrocapitalism

Answer 31

• Many levers to pull to create effective change
• Social businesses
• Associations
• Political giving
• Houses of worship
• Informal networks
• Nonprofits
• Legislation
• Think Tanks
• PR to influence public opinion

Question 32

Catalytic Philanthropy

Answer 32

• Define a goal, and pull all the levers
• If the goal is to reduce drug use in high schools, what are some of the levers that might be pulled?
• Possible levers:
• -fund a nonprofit to educate students and teachers
• -fund a company to create training materials
• -fund a public relations campaign (i.e. this is your brain on drugs campaign)