Almost all charitable organizations have one thing in common. They rely on donor support to carry out their tax-exempt purposes. However, attracting donors and receiving sufficient funds to continue operations year-to-year is often challenging and timeconsuming, requiring valuable resources that an organization might or might not have. Following is a guide for charitable organizations that want to elevate their pitch to potential donors by highlighting the tax planning benefits available to your charitable organization and the donor.

Income Tax vs. Estate Tax

It is important to understand which type of tax most concerns the donor. In most instances, it will be the immediate benefits: “Will I get an income tax deduction from this donation, and how much will it save me in income taxes?” But focusing solely on the immediate benefits ignores the value of a proper charitable giving provision within an estate plan.

The donors most sought after, those with significant assets, likely have an estate that is or will be subject to estate tax. With the current estate tax rate at 40 percent and the estate tax exclusion (the amount that can pass to a decedent’s heirs free of estate tax) set to be cut in half in 2026, these high net worth individuals are likely to consider charitable planning as a means of mitigating or eliminating future estate taxes.

Understanding the Assets

Not all assets are equal when it comes to charitable giving. For example, donating a minority interest in a closely held corporation may not provide the same charitable deduction benefits as a gift of publicly traded securities. In addition, the gift of the closely held corporation generally results in greater complexity for the charitable organization, often leading to compliance issues that a nonprofit might not have the resources to address properly.

Donors often are willing to use retirement funds for charitable giving. Retirement fund distributions are taxable at ordinary income tax rates, whether received by the original owner of the fund or a beneficiary. Retirement plans are also subject to estate tax if the owner has a taxable estate. The ultimate tax rate on inherited retirement funds can exceed 40 percent. As such, the donor can generate significant tax savings by leaving retirement funds to a charity, generally higher than tax savings achieved by donating other estate assets.

During life, a donor meeting the age requirements can also make a qualified charitable distribution from their retirement plan directly to a charity and exclude the distribution from income. Because those distributions will count as part of their required minimum distribution, donors can get a greater overall tax benefit by using this strategy for their charitable giving.

Nonprofits that understand and can discuss the tax consequences of donating different kinds of assets to both the donor and the charitable organization will go a long way to protecting the organization and impressing the donor. Organizations should have a written policy that addresses the types of donations they can and will receive. This will help guide discussions with potential donors and provide guidelines for minimizing risk to the organization.

Charitable Trust Strategies

Many high-net-worth individuals explore using trusts to accomplish some of their charitable giving. These types of trusts can provide both income tax and estate tax savings to the donor and can also provide a significant benefit to the charitable organization beneficiary if structured and funded correctly. Two types of charitable trusts are generally used; a Charitable Remainder Trust (CRT) or a Charitable Lead Trust (CLT). A CRT has a non-charitable beneficiary during the term of the trust, with the remainder payable to a charitable beneficiary. A CLT is the reverse, with a charitable beneficiary during the term of the trust and the remainder payable to a noncharitable beneficiary.

Charitable Remainder Trust: Donors preferring to receive income tax benefits generally use a CRT. The donor will typically fund a CRT with low-basis assets that the CRT will then generally sell. The gain recognized on the sale will then pass to the non-charitable beneficiary over the term of the CRT, which allows the non-charitable beneficiary to spread the tax effects of the gain over multiple years instead of in one year. Often a charitable organization will help manage a CRT, on the one hand, to relieve some of the administrative burdens, but also to maintain greater control over the trust investments to ensure a greater remainder value for the organization.

Charitable Lead Trust: Donors generally use a CLT for estate planning purposes either to limit future appreciation and “freeze” the value of the assets included in the gross estate or to provide a charitable benefit without giving away an incomeproducing asset. Donors can claim an income tax deduction for a portion of the transfer to the CLT, but if they do they will essentially recapture that deduction in future years when they will be responsible for paying income tax on the earnings of the CLT. If they do not claim an income tax deduction, then the CLT itself claims a charitable deduction when payments are made to the charitable beneficiary.

Payment Terms: Both a CRT and a CLT can be structured either as an annuity or a unitrust. An annuity is calculated when the trust is funded, and the income beneficiary—the non-charitable beneficiary of a CRT or the charitable beneficiary of a CLT—will receive the same amount each year for the term of the trust. The annuity is generally calculated to allow for a residuary payment to the remainder beneficiary when the trust terminates, but if the trust assets lose value over time, the annuity payments may fully deplete the trust assets. A unitrust payment helps to hedge against a potential loss in the value of the assets in the trust. The unitrust payment is a percentage, typically between five and ten percent, calculated annually using the fair market value of the trust assets as of a defined date. This means that the annual payment owed to the income beneficiary will either increase or decrease as the assets of the trust increase or decrease. In other words, it puts all beneficiaries on the same side, benefitting if the assets are properly invested to allow for future growth.

Other Considerations

Many, if not most of the families we work with who are charitably inclined, want a charitable legacy that will carry on through the generations. They are often provided with the option of creating their own private foundation or contributing to a donoradvised fund, allowing all family members to plan for charitable giving together. While these recommendations will provide them with a method for maintaining their charitable giving into the future, they are not the only options that can and should be provided to donors. One often overlooked option is to find a charitable organization whose exempt purpose resonates with the family and help fund an endowment that can provide a lasting income stream to the organization. If fundraising for an endowment is done properly, and the organization can speak to the family’s desire to have a charitable legacy that will continue for years, then both the donor and the organization benefit.

Read the full Fall issue of Insights, the HBK Nonprofit Solutions quarterly newsletter.

In 2019 Congress passed a law changing the required distribution rules for inherited IRAs in what is called the SECURE Act. These rules apply to all other qualified retirement plans such as 401(k) plans. Before the SECURE Act distributions from inherited retirement accounts could be spread over a beneficiary’s life expectancy (known as the Stretch IRA).

The SECURE Act ended the Stretch IRA for the vast majority of taxpayers requiring the assets in an IRA to be paid out on or before December 31st of the tenth calendar year following the death of the IRA owner (the “10-Year Rule”). The 10-Year Rule applies to inherited IRAs from an IRA owner who died after 2019. Inherited IRAs before 2020 still benefit from the Stretch IRA rules.

An exception to the 10-Year Rule applies where the IRA is left for one or more certain beneficiaries known as “Eligible Designated Beneficiaries” who generally can qualify for the lifetime payout that applies in a manner similar to Stretch IRA. Eligible Designated Beneficiaries include the IRA Owner’s surviving spouse, the IRA Owner’s minor children, a disabled or chronically ill beneficiary, or a beneficiary who is no more than 10 years younger than the IRA Owner. However, an IRA that is left for a non-Eligible Designated Beneficiary must meet the 10-Year Rule.

Prior to the IRS issuing proposed regulations in February 2022, it is safe to say all tax professionals interpreted the SECURE Act to mean that the 10-Year Rule did not require annual distributions (required minimum distributions or RMDs). We concluded a beneficiary could take distributions at any time during the 10-year period as long as the IRA assets were fully distributed by December 31st of the tenth calendar year following the death of the IRA owner.

The proposed regulations surprisingly require annual RMDs and then the inherited IRA must be totally distributed by December 31st of the tenth calendar year following the IRA owner’s death. For example, if an IRA owner died June 10, 2020, after having begun RMDs, the IRA beneficiary of the inherited IRA was required to receive an RMD starting in 2021 and each year thereafter and all remaining assets of the IRA must be distributed by December 31, 2031.

Many beneficiaries of inherited IRAs subject to the 10-Year Rule did not take RMDs out in 2021 and 2022. The penalty for not meeting the RMD requirements is 50% of the amount required to be distributed. The IRS just announced that no penalties will apply for the failure to take RMDs subject to the new rules in 2021 and 2022. The penalty for not taking RMDs from an inherited IRA will first apply for the 2023 year.

There is no indication the IRS will allow those who did take RMDs in 2021 and 2022 from an inherited IRA subject to the 10-Year Rule to repay those RMDs and claim a refund for 2021 or reduce their 2022 taxes. However, a beneficiary of an inherited IRA subject to the 10-Year Rule who received an RMD in 2022 can put it back in the IRA within 60 days of receipt and avoid paying tax on the RMD in 2022.

The RMD rules have become too complicated and require an understanding of all the subtle facets of the rules to ensure the best result. Please contact a member of the HBK team to discuss your specific circumstances.

As the end of 2020 nears, manufacturers should begin thinking about their taxes. Join Jim Dascenzo, CPA and Peter Roupas, CPA, JD to discuss tax planning strategies specific to manufacturing companies. Key opportunities discussed will include:

• Research and Development (R&D) tax credit
• Bonus Depreciation
• IC-DISC
• LIFO Inventory Valuation
• Accrual vs. Cash Basis

  Download the materials.

On Monday, September 21st, the IRS issued final regulations addressing the ability of trusts and estates to deduct administrative expenses, despite the 2017 Tax Cuts and Jobs Act’s suspension of miscellaneous itemized deductions through 2025. The final regulations largely mirror the proposed regulations issued in May (read our article on the proposed regulations, IRS Issues Proposed Regulations on Trust and Estate Deductions).

Most importantly, the final rules provide guidance on the treatment of expenses which result in excess deductions – deductions exceeding a trust or estate’s income in the final year that are passed on to beneficiaries when the trust or estate terminates. Consistent with the proposed rules, the final rules provide that the excess deductions retain the character of the specific underlying expense, and require fiduciaries to categorize the excess deductions into one of three categories – an administrative expense that is deductible when computing adjusted gross income (i.e., an above-the-line deduction), a non-miscellaneous itemized deduction that is not subject to the 2% limitation (e.g., state and local income taxes), or a miscellaneous itemized deduction that is subject to the 2% limitation and disallowed through 2025 under TCJA (e.g., investment management fees).

The final rules also confirm that the character and amount of the excess deductions is determined by allocating the deductions among the trust or estate’s income as provided under IRC §652. Those regulations provide that all deductible expenses directly attributed to a certain class of income are allocated to that class of income, and that deductions which are not directly attributable to one class of income may be allocated to any item of income at the trustee’s discretion provided that a proportionate amount of the deduction is allocated to tax-exempt income, as applicable. This discretion presents an opportunity to maximize the tax benefit of the excess deductions.

As an illustration, consider the following updated example from the final regulations. Assume an estate’s income and deductions in its final year are as follows: total income of $6,500, consisting of taxable interest of $500, dividends of $3,000, rental income of $2,000, and capital gain of $1,000, and total deductions of $17,500, consisting of probate fees of $1,500, estate tax preparation fees of $8,000, and legal fees of $2,500 (collectively, IRC §67(e) deductions), personal property taxes of $3,500 (itemized deductions), and rental real estate expenses of $2,000. There are two beneficiaries – A (75%) and B (25%).

Pursuant to the regulations under IRC §652, the $2,000 of rental real estate expenses are allocated to the $2,000 of rental income. The executor may, in his discretion allowed under the regulations, allocate the $3,500 of personal property taxes and $1,000 of the IRC §67(e) deductions to the remaining $4,500 of income (thus maximizing the amount of the excess deductions which are considered above-the-line deductions). Therefore, the excess deductions on the termination of the estate are $11,000, consisting entirely of IRC §67(e) deductions which are deductible when computing gross income. Beneficiary A will be allocated $8,250 of above-the-line deductions, and beneficiary B will be allocated $2,750 of above-the-line deductions.

Conclusion
The final regulations provide clarity on determining the character and amount of, as well as the method for allocating, excess deductions that beneficiaries of a terminated estate or non-grantor trust may claim on their individual income tax returns. Under the rules, fiduciaries have discretion which allows them to maximize the tax benefit of these deductions. Please contact your HBK advisor to discuss how these final regulations may impact your tax situation.

Your business has likely been negatively impacted in some way by COVID-19, even if some industries—certain retailers, household staples manufacturers, technology companies—were better positioned for the unforeseen effects of a pandemic. Still, few companies have been insulated from the overall erosion of value. If you were thinking of selling your business or otherwise planning an exit strategy, here are a few practical considerations:

• The impact of COVID-19 on exit strategies. It may be prudent for business owners contemplating a sale, or already in negotiations, to first weather the pandemic storm before completing the transaction. In fact, they might not have a choice. Many potential buyers will shy away from deals due to uncertainty or lack of financing. On the other hand, companies and/or private equity groups with strong balance sheets could be looking to capitalize on the opportunity to buy at a discount. Conversely, this could be an advantageous time if you are looking for strategic expansion opportunities. Be mindful of these market dynamics.
• The impact of COVID-19 on valuation date and purpose. Most companies didn’t begin feeling the effects of the global pandemic until early March—perhaps earlier for companies whose supply chains depend on foreign manufacturers. The impact of government-imposed lockdowns and social distancing weren’t seen until the last half of March. And we still don’t know how long the demand shock will persist. In times of uncertainty, what was known or knowable as of the selected “valuation date” is of great importance. For business owners with valuations currently underway:
• If the valuation is for estate purposes, a lower value as of the alternate valuation date may be preferable if the date of death was prior to the economic impact of COVID-19.
• If gifting or other transfers are part of your estate plan, now could be a favorable time to lock in supportably low values.
• If you have an ESOP, the trustee may consider it necessary to update the year-end 2019 valuation for Q1 2020, especially if you expect ESOP share transactions.
• The impact of COVID-19 relative to calculating damages. Plan for litigation activity on the heels of COVID-19—for breach of contract, business interruption or a multitude of other claims. You should be proactively gathering the data you’ll need to calculate damages while the information and your recollections are fresh. Key data include costs to remedy supply gaps, changes in forecasted performance, and correspondence from suppliers regarding delays and from customers cancelling orders. Such information could be difficult or impossible to obtain or recreate months or years down the road.
• The impact of COVID-19 on marital litigation strategy. If you are going through a divorce and your or your spouse’s business is part of the marital estate, consult with an attorney about how the COVID-19 crisis might impact litigation strategy and timing. It could make sense to either postpone or accelerate certain litigation steps and/or modifications.

If you have questions or concerns about how the COVID crisis has affected the value of your business, contact your HBK professional. We’re ready with the expertise and counsel to help you make good decisions. Call (412) 431 – 4460 or you can contact me at rzahner@hbkvg.com.

The economic uncertainty that has accompanied the COVID-19 pandemic has depressed values of public and private companies alike. But uncertain times also create planning opportunities. For private business owners, company survival is understandably top priority, but if your business is positioned to weather the storm, now could be a good time to consider certain estate and exit-planning strategies that benefit from lower enterprise valuations.

Gifting. If your estate plan includes gifting ownership, you might consider accelerating those gifts in the short-term to take advantage of depressed value. Lower values mean you’ll use less of your lifetime gift exclusion, or that your exclusion will cover a larger percentage of the gifts than it would have just months ago—or months from now if value rebounds.

GRAT. You might consider leveraging Grantor Retained Annuity Trusts (“GRAT”) or other trust strategies that transfer portions of company ownership out of your estate, which will leave any rebound in value and subsequent growth also outside your estate. The current low interest rate climate complements the GRAT strategy as it lowers the yield on the annuity payments that the grantor takes back from the trust.

Taxable or non-taxable estate planning. If you are administering a taxable estate, you could benefit from the alternate valuation date—six months after the date of death—which allows your business appraiser to account for the effects of COVID-19 in the appraisal. On the other hand, if the estate is not taxable and the death occurred during the pandemic, it may be wise to use the alternate valuation date in anticipation of a rebound in value, which would allow you to take advantage of the additional basis step-up.

Estate planning and your exit strategy might not be your most pressing issues in the coming days or weeks, but the depressed valuations resulting from the COVID-19 turmoil do present opportunities for planning that would be wise to consider. Having these discussions with your estate planning advisors now could prove immensely beneficial in the long run.

The IRS just announced new guidance in Notice 2020-20 stating that the due date for filing Forms 709 (United States Gift and Generation-Skipping Transfer Tax Return) and making payments of Federal gift and generation-skipping transfer tax is automatically postponed to July 15, 2020. These returns would have been due on tax due April 15, 2020. This relief is automatic and there is no need to file Form 8892 (Application for Automatic Extension of Time to File Form 709 and/or Payment of Gift/Generation-Skipping Transfer Tax). If additional time is needed to file a gift tax return after the July 15, 2020 due date, an extension can be filed to extend the due date to October 15, 2020. Any gift tax payments will be due on July 15, 2020. Any payments not received by this date will begin to accrue interest and penalties.

This announcement comes just days after the Department of the Treasury and the IRS announced the due date for both filing Federal Income Tax Returns and making certain Federal Income Tax Payments was postponed from April 15, 2020 until July 15, 2020.

On December 20 the President signed into law two spending packages that will fund the government through the rest of the fiscal year. Included in the spending packages were the Setting Every Community Up for Retirement Enhancement (SECURE) Act, and a number of tax provisions, many of which may have an impact on your future financial planning. HBK is currently reviewing these important provisions and will be providing a more in-depth look at what many of these provisions may mean for you. For now, the following provides a quick overview of some of the more impactful provisions:

SECURE Act Provisions

• The age at which individuals need to start taking required minimum distributions (RMDs) has increased from age 70 ½ to age 72 (note that this increase only applies for individuals who have not reached the age of 70 ½ on or before December 31, 2019);
• There is no longer an age cap for individuals to make contributions to Individual Retirement Accounts (IRAs);
• Inherited IRAs must now be paid out over a ten (10) year period, and cannot be stretched out over the lifetime of the non-spouse beneficiary;
• Up to $10,000 held in a Section 529 plan may now be used to pay off student debt; and
• Up to $5,000 may be withdrawn, penalty free, from a Section 401(k) plan in order to help with the costs of childbirth or adoption (income taxes still apply).

Other Tax Provisions

• Many taxes that were enacted as part of the 2010 health care reform law have been repealed, including the 2.3% medical device excise tax and the 40% excise tax on high-cost health insurance plans (known as the “Cadillac tax”);
• A number of tax credits have been extended, including the work opportunity tax credit, credits for energy-efficient homes, and credits for health insurance costs of eligible individuals;
• The high tax rate on investment income of private foundations has decreased from 2% to 1.39%;
• The transportation fringe benefit tax that was imposed on tax-exempt organizations by the Tax Cuts and Jobs Act of 2017 has been eliminated; and
• The changes made to the tax rates imposed on children’s unearned income (known as the “kiddie tax”) have been eliminated, so that the income will no longer be taxed at the higher tax rates of trusts and estates, but will now be taxed at the highest marginal tax rates of the child.

Maybe Tony Soprano was living dangerously but no one expected James Gandolfini to die at age 51, including Gandolfini. The popular actor who played the lead role on the long-running TV cable series “The Sopranos” left behind an estate valued at more than $70 million. But his will was so poorly planned that nearly half of it is likely to go to the IRS.

When the flame went out for the flamboyant Prince, the international pop star was 57 and clearly not past his prime, recording and touring and still acclaimed for his energy and intensity on stage. Ironically, he was an artist meticulous about the business of his music yet he left no will, and it will likely take a decade or longer to sort out the distribution of his enormous wealth.

Only a few of us have to be concerned about how to plan for reducing estate taxes. For 2016, the estate and gift tax exemption is $5.45 million per individual, up from $5.43 million in 2015. That means an individual can leave $5.45 million to heirs and pay no federal estate or gift tax. A married couple can shield $10.9 million from federal estate and gift taxes. More than half of U.S. states do not have an estate tax. So for most of us, the issue is how we want our assets distributed, how they will be managed and making certain we leave a meaningful legacy for our family.

No one wants to confront his or her own mortality. We don’t want to think about it, and that often translates into ignoring planning for it. But what will happen to a business where ownership is shared if one owner dies without a buy-sell agreement in place? Many times successful businesses fail without adequate succession planning. What about considerations for certain family members, like a child with long-term healthcare needs? Would it be appropriate to leave a lump sum of money or control of a business to a child who won’t handle it responsibly? And what if you became physically or mentally unable to make important decisions about your assets? So for the majority of us, estate planning is more about how our assets pass on to our beneficiaries and making certain our intensions are met rather than payment of taxes. Planning often boils down to identifying your goals and objectives and executing key documents such as a will, a durable power of attorney and advance medical directives, and occasionally, in particular for individuals with more substantial assets, one or several types of trusts.

HBK CPAs & Consultants and HBKS Wealth Advisors have collaborated on an Estate Planning Series that addresses key issues of the complete process, including details on the legalities of transferring wealth and assets to heirs, beneficiaries and successors for individuals and businesses.