Just in time to commemorate our 90th anniversary next year, The Dallas Foundation welcomes Matthew Randazzo as our new chief executive officer.
Matthew will be only the second president and CEO in the Foundation’s history. He comes to us from the National Math and Science Initiative, a Dallas-based group that works in 40 states to improve math and science achievement. While his background in public education and policy aligns perfectly with the Foundation’s efforts to strengthen early learning opportunities, this transition offers a natural opportunity to reflect on how we can better address other issues facing our community while continuing to provide the stellar service you and your clients deserve.
Matthew officially begins his full-time role at the Foundation on May 15, but he’s been on a listening tour since January, talking to donors and advisors such as you. If you’d like to schedule a meeting with Matthew after he comes aboard, I would be happy to coordinate. As we begin this new chapter at the Foundation, our top priority remains being an expert resource on philanthropy for you and your clients.
To that point, you’ve told us that you benefit from practical information, so this issue of Giving Counsel includes insight from Russell James about how the new tax law could affect charitable giving, and an article describing ways to talk about giving with your clients. You might find the story about donor John Humphries interesting if you have clients who know they want to give but don’t know where to start.
We can take them on site visits, arrange volunteer opportunities for them or perform due diligence on charities they want to support. John’s story illustrates the importance of timely planning with assistance from experts such as you and The Dallas Foundation. We are here to serve as your philanthropic partner, helping you make your clients’ philanthropy as rewarding and financially wise as possible.
Wishing you all the best,
Gary W. Garcia
Senior Director of Development
Table of Contents
- How the 2018 Tax Law Makes Planned Giving More Powerful
- A Charitable Legacy Created Just in Time
- Sharing Stories Can Help in Contemplating Legacies
- 2018 Professional Advisor Seminar
How the 2018 Tax Law Makes Planned Giving More Powerful
Professor Russell James, J.D., Ph.D., CFP®
Director of Graduate Studies in Charitable Financial Planning
Texas Tech University
Many have worried about the negative impact of the new tax law on charitable giving. A higher standard deduction means fewer itemizers. Non-itemizers can’t use charitable tax deductions. But as I point out here, the new tax law makes charitable giving more attractive for many high-wealth and high-income donors.
For those still using them, charitable deductions became more valuable because: (1) effective combined income tax rates rose for many in higher-tax states due to the cap on state tax deductions, (2) marginal federal income tax rates rose for those in the bubble range of $200,000 to $416,700 for individuals, (3) Pease amendment cuts to charitable deductions were eliminated and (4) income limitations on charitable deductions for gifts of cash were raised from 50 percent to 60 percent. Beyond this, other changes have made gifts of appreciated assets – and all the planned-giving vehicles using appreciated assets – much more attractive than last year.
Gifts of Appreciated Assets
One of the biggest tax advantages in charitable giving is the double benefit donors get when donating appreciated assets instead of cash. By giving appreciated assets, like stocks, held for more than one year, the donor (1) gets a charitable tax deduction for the full value of the asset and (2) avoids all capital gains taxes. If the donor’s favorite local charity doesn’t know how to deal with gifts of stock, no problem. The donor simply transfers the stock to a donor-advised fund and then has the fund write a check to the charity.
A donor can even do a “charitable swap” to keep an identical portfolio after the gift. For example, instead of giving $10,000 cash to a charity, the donor gives $10,000 of stock that he originally bought for $5,000. The donor then takes the $10,000 cash he would have donated to charity and instead uses it to immediately buy identical stock, replacing the donated shares. The donor not only gets a $10,000 tax deduction, but he now owns stock with a $10,000 basis instead of a $5,000 basis. The charitable swap wipes out all capital gains taxes on the appreciated stock. The new tax law didn’t change the rules for avoiding capital gains taxes by giving appreciated assets, but it did substantially change the capital gains tax rates.
Capital Gains Tax Rates Just Increased
Did you miss that headline? Under the new tax law, capital gains tax rates went up. A lot.
“But wait,” you say, “federal capital gains taxes didn’t change in the new law.” No, but if you don’t live in one of the nine states (Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming) that have no state capital gains taxes, then your capital gains tax rates almost certainly went up. Last year, if you paid state taxes on a capital gain, you probably got a break on your federal taxes. This year, you almost certainly won’t. This is either because you are already over your $10,000 deduction limit for state and local taxes or because, unlike last year, you can’t use the deduction for paying state capital gains taxes since you will now be using the new higher standard deduction. Either way, the federal tax benefits for paying state capital gains taxes have disappeared. This means your effective combined federal and state capital gains tax rate went up substantially.
For example, if you were living in California paying top rates, selling a $1 million zero-basis asset last year would have netted you $681,668. You would have paid $133,000 to the state of California and $238,000 to the federal government, getting a federal tax deduction worth $52,668 ($133,000 x 39.6 percent). That same sale today nets you $629,000, because the old federal tax deduction disappeared. The bottom line is that your effective combined capital gains tax rate went from 31.8 percent in December to 37.1 percent in January. Of course, avoiding this (now higher) tax becomes even more important, making gifts of appreciated assets even more attractive.
Income From Gifts of Appreciated Assets
Beyond just avoiding these higher capital gains taxes, sophisticated planned giving allows donors to both avoid the capital gains taxes and take income from those assets for life. Using the previous example, selling the asset yields $629,000 after taxes. But you could instead gift the asset to a charitable remainder trust, sell it with no capital gains taxes, and earn income off the entire $1 million, undiminished by capital gains taxes.
If you don’t want the hassle of setting up a charitable remainder trust, you could give the asset to a charity in exchange for a charitable gift annuity to get a similar result. Earning income from $1 million instead of $629,000 with planned giving is a good deal. More to the point, it is even better than last year’s deal of earning income from $1 million instead of $681,668. And because these extra benefits come from tax avoidance and not from the charity, the ultimate charitable impact of the donation stays the same.
The New Power of Bunching Charitable Deductions
The biggest downside for charitable giving in the new tax law is that a higher standard deduction means fewer itemizers, and fewer itemizers means fewer people who can use a charitable tax deduction. But donor-advised funds can change this calculus. Donors with sufficient flexibility can now pick a target year to itemize, transfer several years’ worth of charitable giving to a donor-advised fund in advance, and take a big deduction only in the target year. During off years, the donor’s favorite charities still receive checks from the donor-advised fund. In this way, no charitable deductions are wasted during the off years when the donor is taking the standard deduction. (There is also a way to bunch deductions by temporarily placing an income-producing asset into a grantor charitable lead trust, but this is rare.)
The power of deduction-bunching makes large planned-giving arrangements more attractive, because these tend to produce a single, large initial charitable deduction. Using a charitable remainder trust (or charitable gift annuity) in the previous example to earn lifetime income from the full $1 million also generates an immediate tax deduction of over $100,000. Although the planned-giving arrangement lasts as long as the donor, all the charitable deductions arrive up front in one lump sum. Under the old tax law, we might have preferred these deductions to be spread out, anticipating regular annual itemizing. But under the new law, bunching the deductions up front in the target year, and opting for the higher standard deduction afterward, will be more valuable for many donors.
Capital Gains Increased Too
You may not have noticed this, but corporate stock just got a lot more valuable. Whether you agree or disagree with cutting the corporate tax rate, there is no doubt that a lower corporate tax rate increases profits and makes stocks more valuable. This tax cut made small businesses more valuable too, cutting the rates for getting profits out of those businesses as well. For this reason, when those shares or businesses are sold, they will now be worth more money.
This increase in the value of stocks and closely held businesses means more people with more highly appreciated assets. Avoiding the (now larger) capital gains taxes on these (now larger) capital gains just got more important. Planned giving, anyone?
John Francis Humphries was a kind, complicated man in his early 70s. He was opinionated and generous, introverted but eager for connection. He wanted to use his financial assets to benefit others, but he wasn’t sure how to make that happen.
“Some people would love to have their name on the side of a building, but John just couldn’t warm up to that,” said friend and neighbor Allie Mysliwy. “He had no interest in a memorial to himself.”
But Humphries fretted about what would happen to the assets he had accumulated and wanted to explore his options. So Mysliwy introduced Humphries to The Dallas Foundation. Mysliwy, who had learned about the value of working with a community foundation while living in the Seattle area, thought we had the right expertise to assist Humphries with his philanthropy.
“He was so worried about all that. You all were terrific in helping him find cause areas and specific nonprofits he adored,” Mysliwy said. “You guys really, really came through for him.”
A native of St. Louis, Missouri, Humphries later moved to Dallas and graduated from Jesuit High School. He earned a degree in architecture from the University of Notre Dame and an MBA from the University of Dallas. He combined those degrees into a long and successful career at HKS, the Dallas-based architectural firm.
His business acumen and sense of design also led to a parallel career as a real estate investor, landlord, and neighborhood activist. Humphries bought a modest house in a neighborhood of bedraggled Victorian homes just north of downtown. That area, now neatly tended and known as the State Thomas Historic District, sits just east of the booming construction along McKinney Avenue.
He invested in rental houses, both in the State Thomas area and across Dallas, and became a diligent, generous landlord. Tenants delivered checks in person, and Humphries always took time to talk with them, Mysliwy said. When they fell on hard times, he sometimes took them in.
But after decades of collecting art, maintaining rental properties, and managing businesses, Humphries felt ready to let loose of some objects and responsibilities. He loved traveling, especially to Italy, and wanted to do more of it. That’s when Mysliwy suggested that he work with The Dallas Foundation.
Humphries met several times with Senior Director of Development Gary Garcia and Chief Philanthropy Officer Helen Holman to discuss his charitable interests and to visit nonprofit agencies vetted by the Foundation. That gave him a chance to meet program staff and ask lots of questions, Garcia said. Humphries eventually decided to set up designated endowment funds for a handful of local agencies. His philanthropic plan allowed him to experience the joy of giving during his lifetime while establishing an income source that would allow him to continue his passion for travel.
“He loved the fact that he wasn’t going to burden loved ones with settling his complex estate, and that we would honor his wishes,” Garcia said. “John also loved the fact that The Dallas Foundation would monitor these charities and reallocate the money if a charity strayed from its mission or ceased to exist.”
Garcia said he enjoyed working with Humphries and had assumed they would periodically evaluate his philanthropic plan, as the Foundation does with all fund holders. But Humphries died unexpectedly in August 2017 after a fall.
“We miss him,” Garcia said. “Dallas lost an incredibly generous man. It’s an honor for the Foundation to keep his memory alive by supporting the organizations he chose to endow.”
“Professional advisors do their most valuable service in that zone where the practical meets the profound,” said Susan Turnbull, founder of Personal Legacy Advisors, LLC.
They help clients confront poignant, deeply personal questions such as: What will I leave behind after I die, and what will happen to those assets? What do I want people to remember about me? Then advisors help clients develop detailed, executable plans that reflect the answers to those questions.
Turnbull, the featured speaker at The Dallas Foundation’s 2018 Charitable Planning Seminar, urged audience members not to avoid profound questions. She offered strategies to help those weighty conversations go more smoothly.
“The best way to get into those big questions is through stories,” Turnbull said.
A former journalist, Turnbull said advisors can use the power of stories to help clients identify the values they want to pass on to future generations. The idea of sharing stories is less intimidating to most people than contemplating their legacies. A story is simply something that happened – an action.
You can start with small stories and, over time, wind up with an authentic understanding of what matters most to your clients. For example, if you ask a client, “What did you do this weekend?” her response might be, “I went to the lake with my grandchildren.”
That simple response is rich with details to explore: Is there a family house on the lake? Who usually goes with you to the lake? What are your favorite memories from being there? Ask clients to share favorite memories – stories – of people or events that influenced them. Who and what would they like to influence in the future? Clients’ answers can help you better understand their values, and that can guide the process of developing financial and estate plans.
Some clients may realize they have a lot to say to the people they will leave behind – accumulated wisdom, hopes, regrets, expectations, advice and family lore. As long as clients appear motivated by concern and not control, advisors could encourage them to draft an “ethical will.” The concept of ethical wills dates back centuries to medieval Jewish tradition, but modern ethical wills are basically letters that offer love and guidance to future generations. Turnbull called them the “missing piece of an estate plan.”
Turnbull stressed that when advisors help clients tackle the profound questions of planning a legacy and not just the technical questions, it deepens the client-advisor relationship. That can lead to tangible benefits such as client loyalty and referrals, but it has an intangible benefit for advisors too.
“The legacy you help your clients create is part of your legacy,”she concluded.
For more about ethical wills and using stories to shape legacy documents, visit personallegacyadvisors.com.