Special opportunity for a higher charitable deduction
Don’t miss out on the opportunity to inform your clients about a special provision in the Taxpayer Certainty and Disaster Tax Relief Act, signed into law on December 20, 2019 by President Trump. For cash donations made to public charities that are helping with qualified disaster relief efforts, the Act suspended the deduction limitations. Ordinarily, deductions of these contributions by individuals are limited to 60% of adjusted gross income. The provision is effective retroactively but also temporarily, covering 2018 and 2019 contributions as well as this year’s contributions so long as they are made before February 18, 2020. The limit still applies to contributions to donor-advised funds and supporting organizations.
So long, stretch IRA
Among the changes enacted by the SECURE Act, which became law on December 20, 2019, is a provision eliminating the so-called stretch IRA. This change, which came as a surprise to many wealth advisors, requires that non-spousal beneficiaries of a decedent’s IRA draw down the funds over a 10-year period, rather than giving them the option to take the distributions over the rest of their lives. Although exceptions apply for certain beneficiaries (such as a minor child, a disabled or chronically ill beneficiary, and beneficiaries who are younger than the decedent by fewer than 10 years), the new law is problematic for estate plans that contemplated allowing a high income-earning beneficiary to take advantage of lower income years later in life. The SECURE Act contains several other provisions designed to help Americans boost retirement savings, including new provisions for multi-employer plans, increasing the required age for starting distributions, automatic enrollment, and increases to IRA and 401(k) contribution limits.
Importantly, but for a few timing nuances, the SECURE Act left intact provisions for the popular “charitable rollover,” which permit qualified charitable distributions from a retirement account to a charity. Even though donor-advised funds are not permitted as rollover recipients, the technique is still quite valuable to generate tax savings for the donor and a boost for the charity’s finances.
Charitable planning is a must prior to sale of a business
A new decade frequently inspires closely-held business owners to start thinking about an exit strategy. Before your business-owner client starts putting out feelers to potential acquirers, be sure to counsel your client about the benefits of contributing an ownership interest to a charitable organization, especially to a flexible donor-advised fund at the community foundation. No doubt your client has substantial unrealized capital gains that have accrued in the business over the years. Upon a sale, capital gains tax will be triggered on the proceeds of the client’s asset. No capital gains tax will apply, however, to any portion of the business owned by a charitable organization. The charity will net 100 cents on the dollar for the portion it owns. So, in the case of an interest in the business owned by a donor-advised fund at the community foundation, the proceeds of the sale will create an immediate “charitable giving account” for the business owner to enjoy by recommending grants from the proceeds to favorite charities, in whatever amounts and according to whatever schedule the business owner desires.
Be careful, though, that you counsel your clients about securing a proper valuation for charitable deduction purposes at the time the business interest is contributed to the charity. In addition, it is critical that no deal is on the table at the time of the contribution. Don’t get caught in the step transaction trap that is a risk in any pre-sale gift to charity of real estate, closely-held stock, and other alternative assets.