The “I’s” Have It: Two Topics for Professional Advisor Client Meetings 

Philanthropic advisors tell us that two topics are paramount as their clients consider their options for structuring charitable giving in the current economic environment: interest rates and the IRS.

First is the notion that rising interest rates can increase the attractiveness of certain charitable remainder gift vehicles. Wealth planning priorities are impacted by interest rates, and charitable components of estate and financial plans are no exception. When interest rates are high, clients may want to look closely at annuity vehicles that leave a remainder gift to charity, such as a charitable remainder annuity trust or a charitable gift annuity.

Creating a charitable remainder annuity trust in a high interest rate environment, versus a low interest rate environment, drives down the present value of a client’s income stream, which means the value of the remainder passing to charity is relatively high and, therefore, so is the client’s upfront tax deduction for the charitable portion of the gift.

Charitable gift annuities are also becoming more appealing to philanthropic clients, for different reasons. Thanks to the recent increase in rate of return assumptions for charitable gift annuities, this planned giving vehicle is now more attractive to donors who like the idea of a higher payout rate for their lifetime annuity.

Second, projected increases in the IRS’s ranks may be attracting more interest than actual tax hikes. The Inflation Reduction Act is now law, and while the Act did include changes to a few income tax provisions, many tax professionals are viewing the Act’s $80 billion in funding increases for the IRS to be the bigger headliner.

Some commentators worry that the IRS still may not be able to build its staff and update technology as quickly as the legislation anticipated. Nonetheless, financial advisors, attorneys, and accountants are taking note. In all likelihood, shoring up the IRS’s operations means that the chances of client audits will increase. Unusually large charitable deductions are often cited as a potential trigger for an IRS audit.

Now is the time for professional advisors to ensure their clients understand the rules for charitable deductions and commit to keeping track of donations in detail. Establishing a donor-advised fund at Rose Community Foundation is an easy way for clients to organize and track their annual giving.

Some clients make a single, tax-deductible transfer of highly-appreciated stock each year to their donor-advised fund. The proceeds from the sale of that stock are then used for distributions from the fund to the client’s favorite charities. In this situation, no matter how many different charities benefit from the fund, the client still has just one receipt to keep track of charitable donations for income tax deduction purposes.

Please reach out to Judy Altenberg, director of donor funds and legacy giving, for information about lifetime and legacy giving.

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