Stable Charitable Giving Tools in a Challenging Market

February 5, 2023

The past several years have been as challenging a time as any we’ve faced in our lifetimes, with feelings of anxiety and uncertainty in a whole host of areas. In addition, market volatility in 2022 has left some donors feeling uncertain about making charitable investments at this time.

However, analysis of giving over time demonstrates that the smart use of appreciated assets, especially when also diverting tax liability for yourself or loved ones, can help you mitigate immediate concerns about economic volatility while remaining powerfully generous. There are several tools and options available that you can confidently utilize to impact the causes about which you are so passionate. This newsletter provides a basic overview of a few tools that are strong options for charitable investment, even during dynamic times.

Gifts of Real Estate

Do you own property that has appreciated? If you own a house or other personal residence, farm, commercial buildings, income-producing or non-income-producing land that has long-term appreciation and you would incur a significant capital gains tax upon selling it, you might consider the benefits of donating that property to Goshen College. These benefits include:

Avoidance of potential capital gains tax that might occur from a sale.
Availability of an income tax deduction for the full fair market value of the property.
Elimination of property tax burdens and maintenance costs.
Avoidance of other expenses that would be incurred upon the sale of real estate.

If you are looking to make a gift with real estate, you have a number of charitable giving options. These options include an outright donation, bequest, and a retained life estate. Each of these options results in charitable tax deductions and an avoidance of capital gains tax or estate tax. For the purpose of this newsletter, we are going to focus on the simplest and most common gifts of real estate.

An Outright Gift of Real Estate

If you are focused on making a gift of a specific value and have appreciated real estate (family home, family land, vacation home, etc.) that you no longer wish to own, then you might consider deeding the property to Goshen College as an outright gift.

To determine the value of your gift of real estate, you must:

Seek a qualified appraisal no more than 60 days before your donation is made.
Internal Revenue Service form 8283 must be attached to your tax return and the appraiser must sign that he or she is unrelated to you and meets all requirements for qualified appraisers.
Goshen College must acknowledge the receipt of the property on the 8283 form when the donation exceeds $5,000.
Goshen College will work with your professional advisor to explore any costs associated with donated property. If your property could have contingent liabilities, such as environmental cleanup costs, you must warrant that the property is free from such liabilities and agree to pay such costs if they arise in the future. In some cases, it may be appropriate to incur investigative costs (such as surveys for environmental contamination).

It is very important to seek advice from an attorney, CPA, or financial advisor before considering a gift of real estate. You should consult with your advisors to understand tax treatment of the real property and to project your income and determine whether your gift might exceed the annual deduction limit; if so, your excess may be carried over for five years after the gift is made.

Long-Term Capital Asset Property Gift Example:

The Smiths, who have an adjusted gross income of $100,000, bought their home 30 years ago for $120,000 and have seen it appreciate to a current value of $1.5 million. Their mortgage is paid off and their children have no interest in the property. They considered selling their home and giving the proceeds to charity. However, when they contacted their financial advisor, they learned that giving the home to a nonprofit would allow them to take a full, fair market value tax deduction while eliminating the substantial capital gains tax they would incur if they sold the property first and then donated the proceeds.

Since they can deduct 30% of their adjusted gross income (AGI) and carry over the deductions for five years, the Smiths ultimately found that they were able to make a bigger gift than they would have through more conventional methods. The result is that they will deduct $30,000 in the year the gift is made and another $30,000 in each of the five years that follow (presuming their AGI stays the same).

Bequests of Real Estate

A bequest of real estate is not immediate but occurs through your will or revocable trust where an organization is identified as a beneficiary upon your passing. If you desire to bequeath a specific piece of real property to a nonprofit organization, you will want to make the organization aware of your intent to leave the property as the (college/university/school/hospital/agency) may find a need to immediately evaluate it to determine whether it can ultimately accept the gift of the real estate. Tax deductions apply and this bequest, if accepted, would be deductible for estate tax purposes.

Your bequest can be specific, naming a specific piece of real property for Goshen College, or it can be contingent or residual and only become available to the organization after other bequests are satisfied.

Gifts of a Remainder Interest in Real Estate

Did you know that you can deed your home, farm, or vacation house and save taxes with a current deduction while still using the property for the rest of your life? An attractive option for donating real estate to an organization is the gift of a remainder interest. This arrangement allows you to give your home to Goshen College while retaining the right to live there for the rest of your life. Retained life estates are excellent giving vehicles if:

You would consider deeding your home, cabin, or farm to Goshen College if you can continue to live there rent-free.
Your property is not subject to mortgage or other obligations.
You do not need the proceeds of the sale of your home.
You do not wish for loved ones to take on the obligation of selling your property.
You are seeking to reduce estate taxes.

With a gift of a remainder interest, you can make a significant gift to Goshen College without decreasing your income or your living arrangements. With such an agreement, you retain the legal right to live in your home during your life. You would receive a charitable deduction based on the fair market value of your home minus the present value of the life tenancy you have retained. Additionally, any capital improvements you make may give rise to additional deductions. You will continue to be responsible for its taxes, structural maintenance, insurance, and upkeep during your life.

With respect to gifts of a remainder interest in a personal residence or farm, you would be entitled to a charitable contribution income tax deduction as calculated under the guidelines described in Reg. §1.170A-12. Consult with your advisors to explore this option.

With another strong year for the housing market, retained life estates may be a sound option for some this coming year.

The IRA

The Individual Retirement Account (IRA) has become a hot topic in recent years as many account holders are now making plans to pass on these assets to beneficiaries. In addition to versatile benefits, like retirement income, IRAs can be leveraged to give you longer-term tax benefits and provide charitable support to Goshen College.

The IRA is a great tool for growing and retaining your assets because the income from the account’s earnings can grow each year without being taxed. Consider the IRA as a versatile container that holds stocks, bonds, mutual funds, and other assets and works as a savings account that can provide significant tax breaks. Due to recent rule changes, they have also an increased significant burden on individual beneficiaries when IRAs are used to pass on inheritance to loved ones. It is important to understand the most strategic way to use your IRA savings for maximized benefit to you, your loved ones, and to your favorite causes.

Maximize Your Qualified Charitable Distribution

Because IRAs are structured as retirement accounts, there are generally parameters and penalties around withdrawing funds from the account prior to turning 59 ½ years old. Traditional IRAs require you to take an annual Required Minimum Distribution (RMD), as determined by the account balance and your life expectancy. While this traditionally started at age 72, the Consolidated Appropriations Act of 2023, which also includes the provisions of the Secure 2.0 Act, updates these rules. According to this new Act, beginning in 2023 the age has been raised to 73, and will be raised again to 75 beginning in 2033. Normally, these distributions to you would be subject to income taxes, which may impact your income bracket for that year.

However, for persons aged 70 ½ and older, there is a tax-smart option available. You are now eligible to make an annual Qualified Charitable Distribution (QCD), otherwise known as an IRA Charitable Rollover, which allows you to direct the transfer of up to $100,000 to public charitable organizations (excluding Donor Advised Funds, supporting organizations, and private foundations) each year directly from your IRA without treating the distribution as taxable income. (For married couples, each spouse can make a QCD of up to $100,000.) Funds in another type of qualified retirement plan can be transferred tax-free to an IRA, and then from the IRA directly to the charity as well. Starting in 2024, the Consolidated Appropriations Act of 2023 will also provide for an annual increase of the QCD limit by an amount to account for inflation. Donors may receive no goods or services in return for these contributions and must obtain written documentation of the contribution from each recipient public charity.

QCDs can be a method of giving that provides you with multiple benefits and can help you creatively fulfill gift pledges even during a fluctuating market period. Your charitable distribution of up to $100,000 may be counted as your annual Required Minimum Distribution. Your QCD is exempt from income tax and, for some donors, this can reduce your adjusted gross income, providing you with greater tax savings than a cash donation would and avoiding other potential impacts to Social Security or Medicare premiums. It is important to consult with your advisors to avoid any tax traps.

NEW – QCDs Can Now Fund Life Income Plans

The Consolidated Appropriations Act of 2023 also expands the definition of QCDs to now include one-time distributions that create life income plans comprising Charitable Gift Annuities (CGAs) and Charitable Remainder Unitrusts or Annuity Trusts (CRTs). The Act allows for this transfer to occur once in the lifetime of the IRA owner, who must be age 70.5 or older, and up to $50,000 in a single year. Spouses can each contribute up to $50,000 from their respective IRAs to a single CRT or for one joint-life CGA. The CGA or CRT must meet all legal requirements, and only the IRA owner and/or their spouse may receive payments from the CRT or CGA funded by the new QCD; no payments are allowed to children or others. Only new CRTs would qualify for this QCD, and a CRT created with the QCD cannot later receive other gifts from the IRA or other assets like stock or real estate. A CGA funded by the new QCD must have a payout rate of at least 5% and must be non-assignable. The Act prohibits the new QCD for deferred payment CGAs.

Name the Public Charity as the Beneficiary

Every IRA requires a named beneficiary. The participant designates on the beneficiary form who she or he wishes to receive the retirement benefits that remain after death, and if no beneficiary is named the beneficiary is governed by the plan’s terms. Account holders often name their spouse or a non-spouse heir, like their child(ren), sibling(s), other family member(s), or even close friend(s) as the beneficiary. While this can be a wonderful gift for a spouse or non-spouse heir, it is important to understand the full implications of providing an inheritance like this to your loved one. For example, depending on the type of IRA:

The SECURE Act was passed in 2020, requiring that a non-spouse heir must withdraw all funds within 10 years, potentially quite a tax burden on the beneficiary for this extended period. (This does not apply to a minor child, disabled beneficiary, chronically ill beneficiary, or a beneficiary who is less than ten (10) years younger than the participant.)
The tax burden may deplete the funds available to the heir. At death, if persons other than the surviving spouse or tax-exempt charities are beneficiaries of your retirement funds, these funds are potentially subject to estate taxes. Additionally, under income tax rates, the total income taxes on retirement plan assets can reduce the value received by heirs by more than 40%.

Alternatively, a nonprofit organization such as Goshen College can be named as beneficiary with the non-participant spouse’s consent. (Spousal consent is not required for an IRA, except in some states.) This is the easiest type of planned gift. The designation could take several forms:

As secondary beneficiary. For example, one’s spouse is named primary beneficiary to receive retirement benefits for his or her life, then the institution would receive payments of those benefits, but with the surviving spouse free to change the secondary beneficiary.
As contingent beneficiary, meaning that the institution would receive the benefits if the participant’s spouse pre-deceases him or her.
Goshen College could be named as beneficiary for a fraction of the account or for a stated cash amount.
If the person is survived by descendants, the designation could be to the surviving spouse first for his or her life and thereafter the balance in the account is divided between Goshen College and those descendants, as well as any other charities the participant desires.

If you have an IRA and you are considering naming Goshen College as a beneficiary, be sure to consult a lawyer or other tax advisor to properly execute that designation.

With smart planning, you can leverage real property and retirement plans to make transformational mission investments and gift commitments even during a dynamic market period. Just as we have in the past, we will move through these challenging times together and have never been more grateful for your continued support!

For additional information or to talk with advancement staff please email give@goshen.edu, or contact the Goshen College Advancement Office staff directly here.