Assignment 8: Other tools and techniques Flashcards
Bargain Sale
- 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.
Gift of debt-encumbered property
- 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
Computing Gain Element for Bargain Sale
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
Gift of Residence or Farm with Retained Life Estate
Remember Five Deduction Exceptions:
- Gifts of remainder interests in charitable remainder trusts
- Gifts of lead interests in charitable lead trusts
- Gifts of undivided partial interest in the entire property owned by the donor
- Gifts of remainder interests in a personal residence or farm
- Qualified conservation donations
Retained Life Estate
- 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)
Life Estate Calculation
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)
Life Estate Gift Acceptance
- 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?
Conservation Easements
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
Four Types of Conservation Easements
- Preservation of land for outdoor recreation or for hte education of the public
- Protection of a natural habitat
- Preservation of open space
- Preservation of historically important land or historic building
Valuation of Conservation Easements
- Determined by qualified appraisal
- Based on comparable sales, if any
- Or FMV with no restriction minus the FMV with restriction = value of the gift
AGI Limitation of Conservation Easement
Generous!!!
- May deduct up to 50% of AGI
- Up to 100% of AGI for qualified farmers
- Either case, allows a 15-year carry forward
Pooled Income Fund Stats
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
Pooled Income Fund
Donor–>PIF–>Charity
Donor
PIF Advantages
- 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
PIF Disadvantages
- 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
PIFs–Can be used post-sale
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
Giving Circles
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
Giving Circle Features and Benefits
- 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
International Giving
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!!
International Intermediaries
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
“Charitable” Limited Liability Companies
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”
LLCs Form of Entity
- 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
LLC–Implications
- 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
Impact Investing Defined
- 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
Four Characteristics of Impact Investing
- Intentionality
- Investment with return expectations
- Range of return expectations and asset classes
- Impact measurement
Impact Investing via DAFs
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
Qualified Opportunity Zones
- 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
Preferential Tax Treatment for QOZs
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
Concerns about QOZ
- 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
Jeffersonian Dinner
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?
Philanthrocapitalism
- 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
Catalytic Philanthropy
- 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)
