Last month, The Chicago Community Trust gave me the opportunity to attend the Heckerling Institute on Estate Planning, one of the premiere estate and wealth planning conferences in the country. Over 3,400 attendees—primarily lawyers, accountants, financial advisors and trust officers—spend five days discussing recent cases and legislation, and sharing best practices and sample language. In more recent years, the organizers have added tracks for trust officers, elder law specialists and charitable giving.
The content is pretty technical, but I always walk away with ideas that can be immediately applied to the work we do. In reverse order, here are my top five takeaways related to charitable giving from this year’s Heckerling:
5. Courts continue to review deductions taken and the accompanying appraisals, particularly for gifts made at death.
At one of the sessions, presenters discussed several cases where the deduction claimed was significantly reduced or all together denied. Many of the cases involved conservation easements where the donor contributed land to a trust to restrict commercial or residential development. However, the vast majority of cases involved situations where the donor simply did not follow the rules.
For example, in one case, courts denied a $33 million deduction because the donor failed to supply basis information for the donated LLC interests on the Form 8283. The donor was also dinged with an accuracy penalty equal to 40% of the tax underpayment. In another case, the court denied a deduction for a house and the furniture in it. Finally, in a case where the decedent left the balance of her estate to charity, courts significantly reduced the estate tax charitable deduction because the charity had not received either the shares or the value of those shares. The court upheld an over $4 million deficiency notice and an over $800,000 accuracy-related penalty.
These cases all highlight the importance of reading and following the rules for gift substantiation set forth in the Internal Revenue Code and Regulations. In all cases, the taxpayer bears the burden of meeting the requirements.
4. The trend continues for trustees to provide full disclosure.
Tom Abendroth, a partner at Schiff Hardin LLP, led an excellent session about the trustee’s duties to provide information to beneficiaries under the Uniform Trust Code (“UTC”). He discussed how the duty to disclose often gets jumbled in caselaw with the duty to account, yet they are separate duties.
Although there are many variations to this duty, the trend among states is to require greater disclosure. For example, Illinois’ version of the UTC, which became effective on January 1, 2020, dramatically expanded the classes entitled to information. Even where it is not required, disclosure promotes trust between the trustee and beneficiary and non-disclosure can be used to show bad faith.
For charities, this is very good news because the default rules often increase their access to information allowing them to better protect their interests.
3. Strike a balance between your desire to protect older clients with their desire for self-choice.
Mary Radford, a professor of fiduciary law at Georgia State University, provided some very practical recommendations for anyone who routinely works with older clients, particularly women. Her first recommendation was to be careful when arriving at conclusions when an older person’s behavior changes. Rather than being a sign of dementia or incapacity, the change in behavior can be a response to living a very structured life or doing what has always been expected. She cautioned that guardianship should be the last solution because of the proven, negative, psychological effects it has on that person.
Radford’s second recommendation was for the sector to become more aware of the financial scams targeting older individuals. Older individuals make good targets because financial literacy declines 2% each year after age 60, yet confidence in financial acumen remains intact while being trusting of others increases as we age. In addition, older individuals often fail to report their victimization because they are afraid social services or family members will institutionalize them or have a guardian appointed.
Older individuals are often our most loyal donors. It’s up to us to provide balanced responses and share our knowledge of financial scams so they may avoid them.
2. The SECURE Act creates opportunities to have additional conversations about charitable giving.
As many in the philanthropic community know, retirement assets often make the best gifts to charity. In 2019, many charities saw an increase in qualified charitable distributions (“QCDs”) from donors’ individual retirement accounts (“IRAs”), particularly as the number of taxpayers who itemize decreased under the Tax Cuts and Jobs Act. The Setting Every Community Up for Retirement Enhancement Act (the “SECURE Act”), which became effective on January 1, 2020, impacted QCDs and also created an opportunity for those who are charitably minded.
First, the SECURE Act continues to allow donors who are 70.5 to make QCD gifts. However, if the donor makes IRA contributions from 70.5 onwards and also makes a QCD, then the donor must reduce the amount of the QCD claimed by the amount of the donor’s IRA contribution. In other words, the donor recaptures any post 70.5 contributions that were deductible.
Second, the SECURE Act creates an opportunity to discuss whether to use the balance of an IRA to fund a testamentary charitable remainder trust (“CRT”). The SECRUE Act requires the balance of an IRA to be distributed within 10 years after death, unless it’s given to the owner’s spouse, minor child or certain other individuals. A testamentary CRT could be used to increase the payment period beyond 10 years, reduce estate taxes and change the characterization of the tax for the beneficiary. If after a few years, the beneficiary realizes he or she does not need the money, then the beneficiary can give the interest away and receive a charitable income tax deduction.
1. Donor advised funds (“DAFs”) are no longer evil.
Over the years at Heckerling, I’ve noticed that the attitude in the legal community about DAFs has gradually become more positive. This year in particular, several speakers talked about how DAFs, in certain circumstances, have become their number one choice. Here are some of their top reasons:
- IRA and Retirement Assets. Natalie Choate said DAFs are her number one choice for naming as the beneficiary of a client’s IRA or other retirement assets. They allow donors to change charities easily as opposed to completing and submitting a new beneficiary designation form. Also, DAF sponsors are better equipped to deal with IRA administrators than other less sophisticated charities.
- Private Foundation Termination. One presenter noted an easier termination process with DAFs because usually a private foundation does not need to notify the IRS of termination and there’s no termination tax due. Also, as we at the Trust well know and have long advocated for, DAFs allow family to be involved and accommodate multiple charitable interests.
- CRT and CLT. Another presenter discussed how naming the DAF as the charitable beneficiary provides flexibility to donors who might wish to change the charities who they wish to support.