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Donating business interests: Why a fund at the community foundation is the ideal recipient

If your client base includes business owners, you probably weren’t surprised by this observation in a recent Wall Street Journal article about the “stealthy wealthy”: “Behind a paycheck, the largest source of income for the 1% highest earners in the U.S. isn’t being a partner at an investment bank or launching a one-in-a-million tech startup. It is owning a medium-size regional business.”

What’s more, the chances are very good that most of your business-owner clients are charitably-inclined. Indeed, more than 90% of small business owners have supported charities and community activities in the last year.

This means that you and other tax and estate planning advisors ought to have at least a basic level of knowledge about the benefits and mechanics of giving closely-held business interests to charity. When properly executed, this technique can be extremely effective to achieve the client’s financial and philanthropic goals.

Here are three very important components of this strategy:

Stop before you use a private foundation.

Some of your business owner clients probably have established a private foundation. But the private foundation is not the ideal recipient of private business interests.

Donating closely-held stock to a fund at the community foundation is generally more tax effective than giving it to a private foundation due to several key differences in how the IRS treats these gifts. When your client donates closely-held stock to the community foundation, your client can typically deduct the full fair market value of the stock, up to 30% of adjusted gross income and also avoid paying capital gains tax on any appreciation.

By contrast, if your client donates the same stock to a private foundation, the deduction is limited to cost basis up to only 20% of AGI, which is a significantly less favorable tax outcome.

Mind the timing. 

Encourage a business owner client to start planning for a gift of closely-held stock before putting out feelers to potential acquirers and absolutely before any part of a deal is inked. This is crucial because a gift to charity will avoid substantial unrealized capital gains that have accrued in the business over the years only if the gift and the sale are genuinely separate events, avoiding the step transaction doctrine. Careful planning will help ensure that the client’s fund at the community foundation will receive 100 cents on the dollar for the portion of the stock it owns and the deduction won’t be thrown out. 

Respect the rules for valuation. 

Counsel your clients about securing a proper valuation for charitable deduction purposes at the time the business interest is contributed to the fund at the community foundation. Valuation has always been a critical factor in any type of tax or estate planning strategy. Recently, the additional wrinkle presented by the Supreme Court’s decision in Connelly v. United States makes things even more interesting. The Connelly decision impacts the way business interests are valued for estate tax purposes. In Connelly, the Supreme Court held that life insurance proceeds indeed ought to be included in the value of a company without offsetting the redemption obligation. This could translate to higher taxable estates for your business owner clients, creating further incentive to leave a portion of closely-held stock to charity. The decision is also a reminder that careful planning can potentially avoid pitfalls.

As always, please reach out to the community foundation when the topic of charitable giving arises in client conversations. Most of the time, we can help. If not, we will absolutely point you in the right direction.

Weighing the options: Private foundation or donor-advised fund?

When you’re working on the charitable components of a client’s estate or financial plan, one of the first areas you’ll likely explore is the structure. Certainly you are familiar with both private foundations and donor-advised funds as useful charitable giving tools. Before you jump into one or the other for a particular client, though, it’s important to review the similarities and differences between the two so that you can best achieve your client’s goals. 

To help you evaluate a client’s options, here are three common myths about the differences between private foundations and donor-advised funds.

Myth #1: Donor-advised funds are all the same and only private foundations can be customized

Private foundations will always differ from donor-advised funds in important ways, not only because of their status as separate legal entities and the deductibility rules for gifts to these entities, but also because of the opportunities to customize governance. But it is a mistake to assume that a donor-advised fund is a cookie-cutter vehicle. Indeed, “donor-advised fund” is simply a term used to describe the structure of a fund and its relationship with a sponsoring organization such as a community foundation. The donor-advised fund vehicle itself is extremely flexible. Here’s why:

–Donor-advised funds are popular because they allow your client to make a tax-deductible transfer of cash or marketable securities that is immediately eligible for a charitable deduction. Then, your client can recommend gifts to favorite charities from the fund when the time is right. 

–A donor-advised fund at the community foundation is frequently a more effective choice than a donor-advised fund offered through a financial institution. At a community foundation, your client is part of a community of giving and has opportunities to collaborate with other donors who share similar interests. Plus, the community foundation is itself local and is deeply knowledgeable about the needs of our region and the nonprofits meeting those needs. 

–The community foundation can work with you and your client to build a charitable giving plan that extends for multiple future generations. That is because the team at the community foundation supports your clients in strategic grant making, family philanthropy, and opportunities to learn about local issues and nonprofits making a difference. 

Myth #2: Deciding whether to establish a donor-advised fund or a private foundation mostly depends on size

The size of a donor-advised fund, like the size of a private foundation, is unlimited. The United States’ largest private foundations are valued well into the billions of dollars. Information about private foundations, ironically, is not so private. The Internal Revenue Service provides public access to private foundations’ Form 990 tax returns. That is not the case for individual donor-advised funds.

Similarly, donor-advised funds are not subject to an upper limit. Although information on the asset size of individual donor-advised funds is not publicly available, anecdotal information indicates that some donor-advised funds’ assets may total in the billions of dollars.

Indeed, a donor-advised fund of any size can be an effective alternative to a private foundation, thanks to fewer expenses to establish and maintain, maximum tax benefits (higher deductibility limitations and fair market valuation for contributing hard-to-value assets), no excise taxes, and confidentiality (including the ability to grant anonymously to charities).

The net-net here is that the decision of whether to establish a donor-advised fund or a private foundation–or both–is much less a function of size than it is other factors that are tied more closely to the objectives a client is trying to achieve. 

Myth #3: Donor-advised funds and private foundations are mutually exclusive

Make sure you’re aware of the benefits of using both a donor-advised fund and a private foundation to accomplish clients’ charitable goals. For example:

–Donor-advised funds can help meet the need for anonymity in certain grants, which is typically difficult using a private foundation on its own.

–A donor-advised fund can receive a client’s gifts of highly-appreciated, nonmarketable assets such as closely-held stock and real estate, and benefit from favorable tax deduction rules not available for gifts to a private foundation.

–An integrated donor-advised fund and private foundation approach can help a client balance and diversify investment and distribution strategies to ensure that giving to important causes remains steady even in market downturns.

Some private foundations are even considering transferring their assets to a donor-advised fund at the community foundation to carry on the foundation’s mission. Terminating a private foundation and consolidating giving through a donor-advised fund is sometimes the best alternative for a client when the day-to-day management and administration of the private foundation has become more time-consuming than expected and is taking time and focus away from nonprofits, the community, and making grants. 

Along these lines, some families find that the tax rules related to investments, distributions, and “self-dealing” have become harder to navigate and are perhaps even preventing the family from maximizing tax benefits of charitable giving. Finally, the administrative load of managing a private foundation sometimes becomes overwhelming, especially if the family members who handled these functions initially have retired, passed away, or simply become busy with other projects.

The bottom line here is that we encourage you to reach out to the team at the community foundation any time you are evaluating how to structure a charitable giving plan to achieve both your client’s charitable goals and financial goals. Our team is here to help. In many cases, the community foundation’s tools and services are a great fit for your client’s needs. If not, we will point you in the right direction.

Trust matters: Your clients’ go-to resource for community impact

As attorneys, CPAs, and financial advisors, you know very well that trust is at the foundation of your relationships with clients. Your clients are seeking a similar level of trust with the people and organizations that are helping carry out their philanthropic wishes.

Fortunately, trust in charities has shown an increase after a recent dip. According to the 2024 Edelman Trust Barometer and the Independent Sector’s “Trust in Nonprofits and Philanthropy” report, trust in nonprofits rebounded by 5 points to 57% in 2024, following a four-year decline. This increase positions nonprofits as the most trusted sector compared to government, business, and media. Still, nonprofits face challenges and concerns about maintaining this trust, including general skepticism about institutions, as well as increasing expectations that charities demonstrate transparency and accountability.

As you work with your charitable clients, keep in mind that the Community Foundation of Harrisonburg and Rockingham can help bolster clients’ trust in their favorite charities. Here’s how: 

Trustworthy information about particular charities

The community foundation is a valuable source for objective, timely information about specific charities and the impact of particular programs. By working with the community foundation, your clients can leverage a transparent and trustworthy avenue for learning about how best to make a difference for their favorite causes.  

Wide-ranging expertise about community needs

At its core, the community foundation is committed to achieving impact. This means that our team keeps a finger on the pulse of local needs, whether related to social services, health care, education, the environment, the arts, community development, or any other community priority. With a deep understanding about community needs, the community foundation team can be an excellent sounding board for your clients who want to learn which charities are addressing each need and how those charities are measuring results. 

Broad set of tools for structuring charitable gifts

The community foundation can help establish a tax-efficient structure to achieve each client’s goals for community impact. Available vehicles include not only donor-advised funds, but also other types of funds such as designated funds to support specific charities and field-of-interest funds to address particular causes, as well as multi-generational funds to involve clients’ children and grandchildren. The community foundation offers your clients a flexible and effective way to manage charitable giving by simplifying their giving processes and maximizing potential tax benefits.

Generational shifts: Fulfilling clients’ charitable wishes

Chances are, you’ve already begun to notice that a major transfer of wealth is happening as your Baby Boomer clients establish financial and estate plans to pass their wealth to their Gen X and Millennial children.

Chances are, you’ve already begun to notice that a major transfer of wealth is happening as your Baby Boomer clients establish financial and estate plans to pass their wealth to their Gen X and Millennial children.

The dollars involved are eye-popping. Most attorneys, financial advisors, and CPAs have seen the Cerulli study’s estimate that $124 trillion in wealth in the U.S. will transfer through 2048. The research estimates that most of this wealth–$105 trillion–will pass directly to children, grandchildren, and other heirs. And, notably, the study estimates that $18 trillion will flow to philanthropy. 

As the transfer of wealth gains momentum, advisors have a major opportunity to position themselves as trusted experts who can help clients not only structure efficient lifetime and estate gifts to heirs, but also help ensure that clients’ charitable wishes are achieved. It’s crucial for advisors to know that the community foundation is here to help incorporate philanthropy into clients’ financial and estate plans.  

Here’s why this is so important:

–There’s a knowledge gap. Clients may not be aware of the options and benefits of charitable planning. Even many of your affluent clients may still be writing checks to their favorite charities, not realizing that gifts of appreciated stock, for example, can be more tax-efficient, and that tools at the community foundation, such as donor-advised funds, can be incredibly useful.

–Next-level strategies are key. Your ultra-wealthy clients will likely need to implement sophisticated strategies for transferring assets smoothly and tax-efficiently. Clients want to maximize the results of their charitable gifts while also protecting their families’ interests. Leaning on the community foundation to help structure gifts of complex assets, such as closely-held business interests, can make a huge difference in reducing a client’s tax bill and achieving meaningful community impact.

–Legacy planning starts now. It’s tempting to put off addressing a client’s wishes to support favorite charities in an estate plan. “We’ll look at that in a few years,” is a common but less-than-ideal approach. That’s because charitable bequests are best addressed as part of a comprehensive estate and financial plan. Naming a fund at the community foundation as the beneficiary of a client’s IRA, for example, is an extremely tax-efficient way to accomplish charitable wishes.

Our team is here to augment your expertise in charitable giving strategies. Not only will you be better able to meet clients’ needs, but you’ll also strengthen relationships and improve client retention. Please reach out to learn more about how the community foundation can help your clients make a lasting impact with their wealth while achieving their financial goals.

ICYMI: Three things you need to know about tax legislation

Keeping up with an ever-evolving landscape of tax legislation can be a full-time job! Many attorneys, CPAs, and financial advisors regularly ask the community foundation to provide a refresher course on the potential tax changes on the horizon in 2025, especially those that might impact charitable planning techniques. 

Here’s a quick rundown of three things you need to know:

–Sunsetting provisions of the Tax Cuts and Jobs Act of 2017. The TCJA’s scheduled expiration at the end of 2025 will revert key tax policies to pre-2017 levels, potentially affecting charitable giving incentives. For example, the top individual tax rate is scheduled for a bump from 37% to 39.6%, potentially increasing the benefits of charitable tax deductions for your high-income clients. At the same time, the limit for cash donations to public charities is slated to drop from 60% of AGI to 50%, reducing the deduction for some of your clients. Finally, the estate tax exemption is scheduled to drop to approximately $7 million per individual. Because the exemption would nearly be cut in half, and therefore more estates would be subject to tax, a larger subset of your clients could benefit from charitable bequests to avoid estate tax. All of this assumes, of course, that intervening legislation won’t prevent the sunset. 

–Potential expansion of charitable deduction. Proposals like the Charitable Act aim to introduce a universal deduction for non-itemizers, broadening tax incentives for your clients across income levels. The bill is still popular among industry leaders and appears to have maintained momentum since it was introduced. 

–Consequences remain to be seen. Above all, the 2025 “cliff” may trigger the first major tax code rewrite in decades, which in turn surely would have a ripple effect in many areas of your clients’ lives, including within the charities your clients support. Post-TCJA, for example, charitable giving dropped by as much as $20 billion, according to one study, in the wake of reduced tax benefits. 

The team at the community foundation stays on top of legal developments at the intersection of tax policy and charitable giving. We keep our fingers on the pulse of potential implications for you, your clients, and the charities they support, and we are here to help you navigate the changes.

For clients who love local causes, the community foundation is the place

Most of your philanthropic clients likely support a wide variety of charities year after year. The causes they support represent a range of motivations, including personal experience, a role as a volunteer or board member, family tradition, or alignment with values and community priorities. 

Many of the charitable organizations your clients support are local. That’s important to note because it means that your clients are especially well-positioned to lean into the community foundation’s unique position as the hub for charitable giving and local knowledge.

Here are three reasons that matters:

–Clients can tap into the team’s knowledge about specific organizations, including financial information, data about the impact of a charity’s programs, and observations of an organization’s areas of greatest need.

–Clients can choose from a variety of fund types depending on what they’d like to achieve. A designated fund, for example, allows your client to set aside tax-deductible dollars that are dedicated to supporting a specific organization. Through the community foundation’s services, funds are distributed over time to the charity while the assets remaining in the fund are protected from the charity’s creditors. Another example is an unrestricted fund, which leverages the community foundation’s extensive research about the needs of the community and the nonprofit programs that are addressing those needs.

–Clients can work with the community foundation to leave a bequest to an endowment fund to support community needs for generations to come. As a perpetual organization, the community foundation ensures that charitable giving stays strong in our region to address important needs as they evolve over time.

Of course, if your client establishes a donor-advised fund at the community foundation, the fund can support local causes as well as causes across the country.

As the hub for your clients’ charitable giving, our tools and our team are dedicated to helping your clients achieve their charitable goals both near and far. Working with the local community foundation, no matter what a particular client’s charitable priorities may be, is itself a strong show of support for philanthropy right here in our community. 

Scenarios to consider as tax time approaches

As attorneys, CPAs, and financial advisors, you are well aware that you have clients’ attention when tax season rolls around. This makes it a great time to cover tax planning strategies for the current year and beyond. To help incorporate charitable giving topics into your tax season client conversations, we’ve put together tips to address three scenarios where the community foundation can assist your efforts. 

Evaluate QCDs sooner rather than later. 

If: Your client missed the 2024 deadline for a Qualified Charitable Distribution. 

Then: Make sure the client took an RMD for 2024 (if required to do so). Start planning now for 2025 QCDs, paying very close attention to the required process. QCDs are an excellent tool for your clients who’ve reached the age of 70 ½ to give to a designated, field-of-interest, or unrestricted fund (donor-advised funds are not eligible), but if the client waits until the last minute at year-end, there might not be time for the transaction to be completed by December 31 as required. Plus, QCDs executed early in the year can help avoid negative effects of the “first-dollars-out rule” so that the QCD can count towards your client’s 2025 RMD.

Watch for charitable giving opportunities in business succession planning.

If: Your client is beginning to consider exit strategies for a closely-held business.

Then: Reach out to the community foundation right away. Gifts of closely-held stock to a charitable fund can be a very useful component of a business succession plan. That’s because a client can gift shares of the business, which in turn means that no capital gains tax will apply to the gifted portion when the business eventually sells. The proceeds of the gifted shares flow into the fund to be used for your client’s charitable priorities. Keep in mind that timing is crucial; if a deal is in the works at the time the shares are transferred to the charitable fund, the charitable deduction is in jeopardy. 

Consider gifts of appreciated stock early in the year.

If: Your client’s stock portfolio made big gains last year.

Then: Evaluate whether it might be wise to make gifts of appreciated stock to a fund at the community foundation early in the year, rather than waiting until the end of the year. If certain stock positions are high right now, it’s worth considering whether a gift in the very near future could be a good move to maximize charitable dollars. As a reminder, gifts of stock to a public charity are eligible for a charitable deduction in the amount of the stock’s fair market value at the time of transfer. And, when the stock is sold so that its proceeds can be deployed to further your client’s charitable goals, no capital gains tax will apply.

Our goal is to be your go-to sounding board for any client situation where charitable giving is an option. Please reach out anytime you and a client are discussing philanthropy. In most cases, the community foundation can help. Even if our tools are not a fit, we will point you in the right direction! 

The Tax Cuts and Jobs Act expires in 2025? What’s next?

We all know that the new year and a new administration brings lots of potential change. What is going on that you need to know about to serve your charitable clients?

At the top of the list of issues we’re watching is what might happen with the Tax Cuts and Jobs Act (TCJA) of 2017. As a quick refresher, the TCJA introduced several changes that significantly impacted charitable giving in the United States. These changes are set to expire at the end of 2025, and their potential extension factors into charitable planning techniques.

The TCJA lowered individual income tax rates across the board, which in turn decreased the tax savings for each dollar donated, making charitable contributions slightly less attractive from a tax perspective. What’s more, TCJA provisions nearly doubled the standard deduction. (In 2025, the standard deduction is $15,000 for single filers and $30,000 for a married couple filing jointly.) This increase led to a dramatic reduction in the number of taxpayers who itemized their deductions. As a result, fewer taxpayers could claim charitable deductions, potentially discouraging giving among those who previously itemized. Indeed, research estimated that U.S. charitable giving fell by about $20 billion in 2018, the first year the TCJA was in effect.

In addition, the TCJA roughly doubled the estate tax exemption, which has reached $13.99 million per person for 2025. The higher exemption has diluted purely tax-driven motivations for charitable giving among wealthy clients. With fewer estates subject to tax, many advisors are working with a smaller pool of clients for whom charitable bequests are a useful technique for reducing taxable estates.

Naturally, tax policy plays a role in your clients’ charitable giving behaviors, and certainly the giving behaviors following TCJA reflected tax policy’s influence. Nevertheless, studies have shown that most donors are motivated by factors other than saving taxes.

Despite the many unknowns, what we do know is that something will happen in 2025 that influences charitable planning. Although TJCA provisions are set to expire at the end of 2025, it’s too soon to determine exactly how you should advise your clients about their charitable planning strategies. Note three potential outcomes of tax policy developments this year:

–If lawmakers extend the current TJCA provisions, existing patterns of charitable giving are likely to continue, with a potentially continued reduction in overall donations due to the higher standard deduction and estate tax incentives that motivate only ultra-affluent clients.

–If the TCJA’s provisions expire without replacement, and the tax code reverts back to pre-TJCA rules, it could lead to an increase in charitable giving as more taxpayers return to itemizing deductions and face higher marginal tax rates. Plus, a lower estate tax exemption would create a strong incentive for more of your clients to pursue lifetime and legacy gifts to charity to reduce taxable estates.

–New tax legislation could introduce different incentives for charitable giving. For example, the proposed Charitable Act aims to create a universal charitable deduction, which could encourage giving across all income levels. For an uplifting read that includes compelling points about the role of the nonprofit sector and the history of charitable giving, check out this letter that was issued late last year to congressional leaders urging them to enact a charitable deduction for taxpayers who do not itemize.

We’re watching, just as you are, to see what happens, and we’ll keep you posted!

Even charitable giving benefits from a budget plan!

Planning and budgeting our annual expenditures is a common activity, but how many of us actually plan and budget our charitable giving?

The new year is a great time for professional advisors to urge their clients to assess (or reassess) charitable giving with the goal of supporting favorite charities and also remaining fiscally cautious. With intentionality and a little planning, this strategy also helps the nonprofit organizations.

Benefits of a year-long giving strategy include:

  • Helping nonprofit organizations meet their budgets throughout the year, which can save staff from concern about meeting constituents’ ongoing needs.
  • Avoiding the year-end scramble and making your tax-deductible gift available this year instead of next (for example, those making a QCD from an IRA directly to an unrestricted or field-of-interest fund at TCF would be providing fiscal benefits to those organizations in this calendar year).
  • Increasing predictability of cash flow (your own and the nonprofits) and therefore being proactive, not reactive, with your support.
  • Providing time to include children and grandchildren as a learning experience.
  • Exploring options for more complex gifts, such as closely-held business interests or charitable remainder trusts, that might provide tax benefits as well as meet charitable goals (rather than waiting until the last minute!).

Here’s a sample evaluation process to help clients assess their charitable budget:

  1. Review all your charitable donations from the last three years and compile totals for each organization. (TCF fundholders can check this information through their donor portal.)
  2. Then, think about these questions. The answers could help determine whether to continue your support at historic levels or consider putting your donation on hold to revisit at another time.
  • Which charities are the most important to you?
  • Are you personally involved (serving on the board of directors or a regular volunteer)? You may wish to continue your historic lel
  • Are there any organizations on your list that you supported primarily because the organization was raising money for a capital campaign, or because you were helping out a friend who is involved with that organization?
  • Are you comfortable with what you know about the organization, its leadership and its mission and vision? Are dollars being deployed towards programs in a way you understand and support?
  • Are there any new organizations you’re interested in supporting?
  1. Add up your total giving over the last three years and then divide it by three to get your average. Is that number doable this year? If not, reduce it to a level that fits within your financial situation. Or, if you expect your income and assets to increase this year, consider taking your charitable giving budget up a notch.
  2. Set a target for the total amount of support you wish to provide for each organization and the timing of that gift.
  3. Keep in mind that TCF can help with the discovery and discernment process as well as provide insight into how your gift might help the organization. (For example, organizations may be able to use your gift to leverage even more donations as a match or challenge during April’s Great Community Give.)

Don’t forget to review our Giving Back Guide, which includes mission, history and impact information of 65 local organizations!

Navigating decisions with high net-worth clients around funds, private foundations and multi-generational legacies

Charitable giving is always an important strategy to discuss with your clients. Many high net worth individuals are philanthropic, of course, and charitable gifts reduce taxable income and avoid estate taxes. Charitable giving strategies are particularly relevant as you and your clients address the possibility of increases in income and capital gains taxes for high earners as well as increased estate taxes due to the looming exemption sunset.

What’s also notable is research indicating that the number of “ultra high net worth” families (over $30 million) has increased dramatically over the last two decades. Globally, 157,000 individuals represented $14.2 trillion in 2004 and by 2024, 426,000 individuals represented $49.2 trillion of wealth. Fast forward to 2027, and this group is expected to grow to over 500,000. America alone is home to 756 billionaires and many of the world’s millionaires–nearly 22 million people.

So why does this matter to you? It matters because wealthy families will rely increasingly on their attorneys, CPAs, and financial advisors to help them navigate savvy tax planning strategies, including charitable giving. And many of these families are very generous, so don’t underestimate your clients’ desire to get involved in charitable giving.

Indeed, you may already be working with families who use private foundations to fulfill their charitable giving goals. In many instances, these private foundations were established by previous generations before donor-advised funds became widely available. As donor-advised funds become more popular, for lots of good reasons, please reach out to our team to explore a parallel strategy where your clients can carry out their charitable intentions using both a donor-advised fund and a private foundation.

In some cases, your clients may want to consider closing a private foundation and transferring the assets to a donor-advised fund because of the many administrative and tax benefits, as well as the value of being able to lean on the foundation’s knowledgeable team. Our team can help walk through the steps for shutting down the private foundation, which include securing board approval, making sure final expenses will be covered, transferring the assets to a donor-advised fund, filing the appropriate dissolution documents with the state, and submitting the private foundation’s final tax return reporting its dissolution and transfer of assets.

Whether your client pursues philanthropic goals through a private foundation, donor-advised fund, or combination of both, we are here to help! Please reach out to our team to discuss the ways your clients can support causes that align with their values and passions, create a lasting legacy that extends beyond their lifetime, involve multiple generations in philanthropic efforts, and foster an overall sense of family unity and shared purpose.