Impending transfer of hundreds of billions magnify benefits of using tax laws, trusts and incentives
By Robin Roenker
Over the next 50 years, Kentuckians will likely transfer more than $707 billion in wealth to the next generation, according to a 2010 study commissioned by the Kentucky Philanthropy Initiative.
While some of those funds will undoubtedly pass to immediate heirs, a significant portion will go to philanthropy – helping fuel Kentucky’s nonprofits, higher education, the arts, community development initiatives and more.
Both the University of Louisville and the University of Kentucky have seen a marked rise in private donations in recent years.
“Two years ago, the University of Louisville was raising about $65 million a year. Last year, we were able to raise about $242 million. We’ve seen a steady increase,” said Keith Inman, UofL’s vice president for university advancement.
“We now have 50,000 donors at all levels and process almost 100,000 gifts annually,” said Michael Richey, University of Kentucky vice president for philanthropy. “In the last couple of years, we’ve grown dramatically. In fiscal year 2016, we raised over $208 million in new commitments” – more than double the $97.4 million in gifts, pledges, and expectancies UK raised in 2011.
Part of the uptick can be linked to the retiring baby boomer generation that includes an estimated 5 million retired or soon-to-retire households with net worths of $1 million or more, according to a Wall Street Journal post earlier this year.
“Since Congress passed the law that anyone over age 70½ or older can transfer up to $100,000 per year tax-free from an IRA to a qualifying charity, we see folks, the baby boomer generation, who have income coming in from their retirement accounts that, in a lot of cases, is excess income,” said Jason Gresham, vice president of wealth management and trust services at Kentucky Bank in Lexington. “And that can be fully taxable as ordinary income if they elect to take it, versus making donations to a charity. So, [opting for philanthropy] can become something that they can get some benefit from, versus just taking an income they don’t actually need.”
Financial incentives to giving
Giving to charity doesn’t have to be difficult, said Vicki Buster, CPA, JD and partner with MCM CPAs and Advisors in Louisville. One easy way of spreading your wealth is simply to designate a charity as a beneficiary on your IRA.
“You get the form from Vanguard, or wherever your IRA is housed, and you designate a beneficiary, which could be a charity. It doesn’t have to be 100 percent given to a charity; you could say 5 percent to my church. It’s as simple as that,” she said, noting that rules sometime may require surviving spouses to sign off designations.
The next logical step, Buster said, is to designate a charity as a beneficiary in your will, with the assistance of an attorney.
“Most people designate $10,000 to my church, or $10,000 to the Red Cross, something as simple as that, he said. “It’s typically in the body of the will, or it’s in a codicil to the will.”
But for those who are thinking of making long-term or very sizable charitable contributions, experts recommend working with a CPA, a wealth management advisor and an attorney specializing in estate planning in order to investigate the array of trusts and endowment options available to you.
“One of the first things I do is talk with my clients to identify whether they have a cause that they feel strongly about that they want to help fund,” said Gresham. “Secondly, we sit down and talk about what’s the most important asset to give, something that, from a tax standpoint, they have a lot of appreciation (in value) in. It could be land, maybe artwork, stocks or bonds, or even retirement accounts. We look at what asset is going to be the most impactful for their estate and for the charity.”
Terri Stallard, an attorney and member with McBrayer, McGinnis, Leslie & Kirkland LLC in Lexington, agreed: “A lot of times, there are a lot of tax reasons [to donate]. If you have highly appreciated property, there are some great planning opportunities with charities, whether it be a private foundation or a community foundation.”
Stallard offered this example: If you’re a client wanting to sell your highly appreciated property and diversify, you would likely face a capital gains tax of at least 30 percent. But if you put the property into a charitable remainder trust and the trust sells it, you’re able to essentially convert assets into higher-yielding investments without triggering a tax on the resulting capital gain; the trust principal would go to the charity at death, but you, as the donor, would draw a fixed annual income on it through your lifetime.
Another option is the charitable lead trust, which works roughly in the reverse. As Gresham explained: A charitable lead trust pays income to a charity for a period of years, and then the principal passes back to you, your family members or other heirs.
Even the consideration of whether to establish your own private family foundation or instead contribute to an already existing community foundation can have various tax implications. For example, with a private foundation, for gifts of cash, an income tax deduction of up to 30 percent of the donor’s adjusted gross income is allowed, while a deduction of up to 50 percent of AGI is allowed for gifts of cash or other non-appreciated property to a community foundation, Stallard said. In setting up their own private foundations, donors have complete control of the assets and how they are distributed, while with community foundations, donor control may be more limited.
Currently, the lifetime exemption – the amount IRS allows you to give heirs without taxation – is set at $5.45 million, so for estates that exceed that threshold, philanthropy becomes an especially attractive option.
“We see families that have exceeded the federal lifetime exemption, so they know that funds are going to start to go to a significant federal income tax. They would much rather see those assets go to a charitable organization than simply to the federal government,” said Gresham.
Advocating for additional tax incentives to encourage philanthropic giving is one of the major thrusts of the Kentucky Philanthropy Initiative, said Joe Clabes, president of KPI, a 501(c)3 entity launched to continue the work of the Kentucky Philanthropy Commission, which Gov. Steve Beshear created by executive order in 2008.
KPI sponsors the well-attended annual Kentucky Summit on Philanthropy each fall.
The current Endow Kentucky Tax Credit program, launched in 2010, offers a tax credit for contributions to a certified community foundation. “The idea is to expand the basket of funds controlled by the local communities, which are permanent,” Clabes said.
There are currently eight certified community foundations in Kentucky: the oldest, Blue Grass Community Foundation in Lexington, celebrates its 50th anniversary next year. The newest, the Russell Springs-based Lake Area Foundation, was established following the passage of the Endow Kentucky Tax Credit, Clabes said.
The Endow Kentucky incentive has been a tremendous success thus far: “We’re looking at over $20 million in contributions to all of our endowed funds and not quite $4 million in tax credit generated since the creation” of the tax credit, Clabes said. “It’s a 5-to-1 return. There are very few tax credits that yield anything like that. It’s something that’s working.”
For the first five years of the program, the available tax credit was only $500,000 annually – a pool routinely exhausted within 10 days of the July 1 start of the fiscal year. For the current fiscal year, the credit baseline was raised to $1 million, and at press time roughly $120,000 remained, according to Clabes. He anticipates those funds to quickly be allocated as end-of-year contributions come in.
The way it works is: If you’re a high-wealth donor in the 39.6 percent tax bracket who contributes $50,000 to a community foundation, you would receive $10,000 directly off your Kentucky state tax bill. “So then it feels like a $40,000 gift,” said Clabes. “You also get $3,000 from your standard charitable deduction off your state tax bill, and you’d also get your federal deduction. So that $50,000 gift, when it goes through the books, would actually feel more like a $17,000 donation. But you had a choice of where that $33,000 has gone, rather than to taxes.”
Universities’ endowment efforts evolving
At UK, the impact of philanthropy is visible. The recent $65 million overhaul of the Gatton College of Business and Economics building – financed entirely through philanthropy – is just one example of the ways private dollars are helping advance the university’s reach and mission.
In fact, the effects of philanthropy on UK’s campus are everywhere, Richey said. Private gifts are playing a key role in the development of a huge new student center, set to open in 2018. In September, UK renamed its new academic science building the Don and Cathy Jacobs Science building, thanks to the Lexington family’s $10 million gift. The new Lewis Honors College, set to open its doors in fall 2017, was funded by a $23.5 million commitment by UK alum Thomas Lewis. And in April, UK announced its first named department within a college: the F. Joseph Halcomb III M.D. Department of Biomedical Engineering.
Richey’s Office of Philanthropy – which changed its name from the Office of Development last year to better reflect its mission and priorities – continues to explore opportunities for additional UK departments and colleges, as well as faculty positions and scholarships, to be endowed with future gifts.
“Our endowment sits at a little over $1.2 billion now. And the next step of our fundraising will be to work to develop a stronger scholarship endowment and scholarship program at UK. That will be a priority. We need to grow our endowment by at least $250 million for scholarships,” said Richey. “We’re considering a campaign launch in the fall of 2017.”
“UK’s philanthropy program is evolving as a major voice of philanthropy for the university,” said UK President Dr. Eli Capilouto. Rebranding as the ‘Office of Philanthropy’ “allows the university to create and encourage a new culture of private investment in our mission. Philanthropy unifies us as a community of scholars as we embrace our commonwealth and its dreams, needs, challenges and opportunities.”
At UofL, philanthropy has also been a tangible driver of research and academics, said Inman, from support of the university’s research in spinal-cord injuries and heart health to its Henry Vogt Scholarship program, which provides full in-state tuition at UofL to students with a 31 ACT score or above.
Both universities have successfully leveraged the importance of private funds for higher education – not only to their alumni but to a broader audience of donors.
“We finished a $1 billion capital campaign in just 7½ years,” UofL’s Inman said. “We had 34,000 alumni donors in that campaign and 38,000 non-alumni donors.”
As legislative funding for higher education becomes increasingly strained, philanthropy plays an increasing role in securing the future of Kentucky’s colleges and universities.
“Theoretically, philanthropy is infinite, whereas state budgets are very finite,” Inman said.
Supporting Kentucky communities
Another ambition of the Kentucky Philanthropy Initiative is to ensure every county in Kentucky is represented by a designated, dedicated fund at one of the state’s community foundations, a goal it’s close to meeting, said Clabes.
“Community foundations are kind of like a nonprofit financial investor for mission-oriented, legacy-oriented people,” he said.
Increasingly, donors want to share their charitable dollars with a specific place – their home communities – and, as a result, community foundations have seen an increase in the number of contributions designated for a specific countywide fund, said Lisa Adkins, president and CEO of Blue Grass Community Foundation. She alluded to BGCF’s Clark County Community Fund and Woodford County Community Fund as prime examples of this trend.
“They’re basically building unrestricted funds to make their community the best community it can be,” Adkins said. “In Clark County, they have changed the trajectory for oral health in their community, by underwriting access to dental care through the public schools. Woodford County provided laptops to middle schoolers this year.”
The ultimate goal of such community foundations is to make giving easy.
“We really try to ensure that giving is simple, effective and rewarding,” Adkins said. “We want to help build a charitable culture, so that all the communities we serve can be the most generous and engaged places they can be.”
BGCF awarded roughly $6.5 million in grants last fiscal year to hundreds of nonprofits across Central and Eastern Kentucky representing causes from animal welfare and human services to the arts and environment.
“We support and can find matches for all of the individualized passions of our donors,” Adkins said.
BGCF’s Good Giving Challenge (BGgives.org), coming into its sixth year, will run from Tuesday, Nov. 29 through Dec. 31, with more than 120 local charities participating. The annual online fundraiser began as means of allowing area nonprofits to tap into the momentum in online giving nationally, Adkins said. “Year after year, our nonprofit participants report that they get contributions from new donors they’ve never connected with before.”
The Challenge has raised more than $5 million for Bluegrass-area charities to date – some via large donations, but also many that are $50 or less. “We work with donors of all sizes,” Adkins said. “We want to create this rich giving culture. We believe great things happen in giving communities.” ■
Robin Roenker is a correspondent for The Lane Report. She can be reached at [email protected].
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