Donors May Forego Tax Benefits By Using Cash - BNY Mellon Wealth Management

Tom Burroughes

10 August 2021

Philanthropists may be overlooking the ability to use non-cash resources to fund their goals, an oversight that is particularly significant in light of rising market valuations, a new report from BNY Mellon Wealth Management has said.

The US firm recently issued its 2021 Annual Charitable Gift Report, which uncovered potential opportunities for donors to receive more tax and financial benefits from their gifts, as well as other forces at work. The report tracked the charitable activity of more than 100 nonprofit organizations during 2020.

More than three quarters of donors with charitable gift annuities established in 2020 were funded with cash assets and only 16 per cent funded with non-cash assets, the report said.

“Given the benefits of funding gift annuities with securities that have appreciated in value, this is a significant opportunity that donors are overlooking. They may be foregoing significant tax benefits by funding five- or six-figure gift annuities with cash,” the report said.

The comments come at a time when the pandemic has encouraged donors to unleash more resources than in a more normal environment. Additionally, proposed tax hikes by the Joe Biden administration on areas such as capital gains have sharpened a focus on whether to use charitable gifts as a shelter against tax.

A new development from the report demonstrated that more than half of the nonprofit organizations issuing gift annuities had at least one “underwater gift,” which can pose serious financial, regulatory and reputational risks if not managed proactively.

Effective identification and management of current underwater gifts, as well as gifts that are projected to go underwater, is vital for non-profits to manage the financial risks inherent in issuing gift annuities to protect their reputations as responsible stewards, and to cultivate future gifts from their donors.

“The events of 2020 had a far-reaching financial impact on many nonprofit organizations tasked with meeting a greater demand for services and a decline in revenues due to COVID-related lockdowns,” Crystal Thompkins, head of philanthropic solutions at BNY Mellon Wealth Management, said. “Many of these organizations also experienced a decline in new life income gift funding in 2020. Against this backdrop, we proactively worked with clients to rethink how they could realize income and tax benefits from charitable giving, along with helping nonprofit clients to manage risk in their portfolios.”

DAFs
Donor advised funds continue to be an important part of the philanthropic landscape, with grants distributed through the BNY Mellon Charitable Gift Fund increasing by 85 per cent over the prior year. March and April of 2020 saw an increase of 92 per cent in the number of grants recommended by donors versus the same period in 2019. Estimates indicate that grant disbursements from the largest DAFs for the first six months of 2020 are up close to 30 per cent from the same period in 2019.

“During times of economic uncertainty – when capacity for charitable giving may be limited – donors with DAFs are well positioned to provide critical funding to nonprofits when it’s most needed. In addition to offering a simple and flexible option for charitable giving, DAFs are also now being used in creative estate and tax planning strategies to promote legacy, family and next generation giving,” Thompkins added.

Charitable gift annuities rose in June last year. CGAs rose sharply, with gifts in June outnumbering gifts in December for the first time in the seven-year history of this report.