Since the 1970s, the Baby Boomer generation (those born between 1946-1964) has been fanatically studied. Are there patterns that can help us understand how this generation of 80 million thinks about charitable giving? Can we use the knowledge we have of Boomer psychographics and demographics to prescribe appropriate planned giving and estate planning tools? Over the next three decades, the Boomer audience will be the most critical group for charity in the United States, because more than 70% of charitable gifts already come from individuals born before 1964.1
Let’s examine the fundamental concepts and techniques for managing planned giving strategies with the Boomer demographic. I’ve identified 10 key issues of concern to Boomers and presented solutions based on those concerns. I encourage advisors to further research these suggested charitable solutions for their Boomer client base.
Categories of Boomers
Before attempting to understand the psychographics of the Boomer generation at large, the most important place to begin is introducing what many experts believe are two distinct categories of Boomers: “Early Boomers” and “Generation Jones” (Gen Jones). See “Baby Boomer Cohorts,” p. 48.
Both Early Boomers and Gen Jones were born into a post-war time of abundance and embodied a “stick it to the man” attitude that embraced youth culture—but understanding the “why” behind the optimism of the Early Boomers and the competitive drive of Gen Jones is essential to understanding the charitable intentions of the entire Boomer generation.
In a recent book, A Generation of Sociopaths, author Bruce Gibney describes the Boomer generation “individually and as a group, unusually sociopathic.”2 Gibney cites mental health data showing Boomers have significantly higher levels of antisocial traits and behaviors, which include a lack of empathy, improvidence, disregard for others and egotism, more than other generations. While distilling an entire generation into one single bold descriptor as “sociopathic” is extreme, the Boomers have for decades been considered the “me generation.”3
Boomers are philanthropic;4 however, they choose to support charity in different ways than other generations. To understand this, one doesn’t have to look any further than the meteoric growth of donor-advised funds (DAFs) over the past two decades.5 Many charities believe advisors are the catalyst for the expansion of new assets into DAFs; however, it has much more to do with Boomers’ psychographics about philanthropy that makes DAFs appealing to them. The majority of Boomers want to control the process and be more involved before making a significant gift. In a 2016 study, 65% of Boomers said they would be more likely to give if they felt solicitations from institutions demonstrated that the institution “really knew them.”6 In a 2018 study, Boomers agreed that the ability to see the impact of their donations would have a significant bearing on their decisions to give and that understanding the impact of their most recent gift’s return on investment would motivate them to make more significant gifts to charity.7 Finally, in the recent two decades, the unrestricted annual gifts to colleges and universities have plummeted as Boomers tightly restricted donations to their alma maters to control a purpose centered on the Boomers’ interests rather than the charities’ priorities.
1. Fewer Boomers Itemize
Since the Tax Cuts and Jobs Act of 2017 (TCJA), approximately 21 million households moved from regularly itemizing to using the higher standard deduction.8 Many charities worry that losing the deduction benefit could put a damper on some Boomers’ charitable intent. While donors assert that income tax incentives aren’t the primary reasons why they support charity, their actions suggest income tax incentives are essential.9 As previously mentioned, Boomers are currently the most charitable generation, and if they reduce their support of charities because of losing their income tax incentives, this could be harmful to charitable giving.
Solution 1: Early Boomers under age 70½: Charitable bunching of a DAF. A strategy that allows individuals to continue to donate and receive income tax benefits is to bunch donations, either directly to a charity or a DAF, in specific years while limiting contributions in other years. When individual taxpayers contribute by bunching donations, they combine multiple years of “regular” annual charitable contributions into a single year. In the bunching years, the relatively significant contributions, in combination with other itemized deductions that can’t be timed this way (that is, mortgage interest and state and local tax deductions), increase the likelihood of exceeding the standard deduction and thus provides the taxpayers with additional tax savings. By using a DAF, donors can make grants to charities at their regular pace without worrying about the income tax incentives.
For clients to take an interest in charitable bunching, it has to make economic sense to them. An additional strategy that might support the concept of bunching is to promote a simultaneous Roth individual retirement account conversion in the same tax year as bunching to generate more taxable income that can be deducted intentionally.
Solution 2: Early Boomers over age 70½: Qualified charitable distributions (QCDs). The first Boomers turned age 70 in 2016, and the majority of Boomers will be over 70 when the provisions from the TCJA sunset in 2025. Many Boomers who can afford to donate some, or all, of their required minimum distributions can benefit by assigning the income to charity instead of having to itemize a cash contribution through a QCD.
The QCD allows a donor to direct transfers to a qualified charity of up to $100,000 per year of tax-deferred IRA assets. Funds that have been already distributed from the IRA to the IRA owner and are then donated to charity can’t qualify. A QCD offers more advantages than taking a taxable IRA distribution and subsequently contributing the proceeds to a charity because having the IRA owners take their distributions can negatively cause:
• An increase in income taxes on Social Security benefits.
• Limits on the current deduction of the charitable contribution of IRA distribution proceeds due to adjusted gross income (AGI) limitations.
• A decrease in the number of donors over 70½ who’ll itemize their deductions after January 2018 because of the TCJA.
• An increase in Medicare insurance premiums.
IRA QCD requirements:
• The donor must be at least 70½ when the distribution is requested.
• The distribution has to be made from an IRA.
• The distribution is required to be direct to the public charity. The charity must be a public charity, or private foundation (PF) that may receive general contributions, not a DAF or Internal Revenue Code Section 509(a) supporting organization.
• The donor can’t exclude more than $100,000 as a QCD annually.
• A charity’s written confirmation should include a statement that no goods or services were provided to the donor.10
2. Family Dynamics
Boomers came of age during a period of U.S. history when the complexity of family life increased dramatically. Marriages were delayed or forgone, divorce rates climbed to all-time highs, rates of cohabitation soared and out-of-wedlock childbearing became more commonplace.
Compared to other generations, Boomers are much more likely to be divorced.11 In fact, in 2009, over 58% of unmarried Boomers were single through divorce. These divorces don’t always occur when individuals are young. In 2010, roughly 25% of all divorces occurred among individuals ages 50 and older, now known as “Gray Divorce.”12 A blended family involves a second (or more) marriage of spouses who have children from previous marriages. A spouse may wish to provide for his current surviving spouse but also wants assurance that at the survivor’s death, his remaining assets will transfer to his children from a previous marriage. He may also want to include a charitable bequest to several organizations. (See “Growth in Divorce Rates,” p. 50.)
Most older Boomers were raised in a very structured and well-disciplined household. Their mothers stayed home to raise the children. Because many Boomers’ family dynamics are divergent from how they grew up, Boomers are seeking solutions for their complex family structures to leave their estate to their loved ones and charitable organizations.
Solution: Qualified terminable interest property (QTIP) trust with charitable bequest. For many Boomers who are concerned with their beneficiary structure if they predecease their current spouse, a QTIP trust increases the odds that the charity (and other loved ones) will receive the bequest, which is irrevocable at the death of the grantor. On the surviving spouse’s death, the remaining assets in the trust will be included in her estate for purposes of determining the estate tax obligation, unless a formula waiver is involved.13 The trust remainder typically will pass to beneficiaries from the first-to-die spouse, whose assets initially funded the QTIP. This may be very important in a situation in which the surviving spouse might not be inclined to make provisions for the same beneficiaries as the first--to-die spouse. The QTIP, however, can’t be terminated until the surviving spouse dies.
Additional point: An increasing number of Americans ages 50 and older are in cohabiting relationships. Since 2007, the number of cohabiting adults ages 50 and older grew by 75%.14 This increase is faster than that of other age groups during this period and is driven by the aging of Boomers.15 In cases in which a QTIP isn’t able to be used because a couple isn’t legally married, a non-qualified testamentary charitable remainder trust (CRT) can accomplish many of the same objectives of providing for a surviving spouse and subsequently for charitable and non-charitable beneficiaries.16 In general, IRC Section 642(c) permits an estate or non-grantor trust, other than a simple trust, a charitable contribution deduction in place of the IRC Section 170 charitable deduction for individuals.
3. ERISA Changes to Planning
The Employee Retirement Income Security Act of 1974 (ERISA) is considered one of the primary explanations for why defined-benefit (DB) plans peaked by 1985 and today are nearly extinct. Most Boomers have participated in a defined-contribution (DC) plan throughout their careers. They’re the first generation to have accumulated a significant part of their wealth in retirement plans, and most clients (and sometimes advisors) underestimate the complexity these assets add to the estate-planning process. To understand this monumental change to estate planning, consider that in 1974, only 18% of all retirement assets were held in DC plans and IRAs (62% were in DB plans), and in 2019, more than 60% are in DC plans.17
Today, a stretch IRA can be a useful estate-planning tool because the longer the IRA lasts, the more investment growth can be shielded from taxes. Whether it’s the threat of a beneficiary losing the lifetime stretch because of the SECURE Act18 currently being discussed by legislators in Washington, D.C. or the fact that a majority of beneficiaries aren’t financially responsible for managing stretching the payment, Boomers might consider funding a testamentary CRT using their retirement assets to create an automatic stretch IRA.
Solution 1: Qualified testamentary CRT as beneficiary of Boomers’ IRA. From an income tax perspective, using assets in a retirement account (or any asset considered income in respect of a decedent (IRD)) that have never been taxed can result in tax savings to the donor’s heirs. When a qualified CRT receives IRD assets to fund the life income interest for the donor’s heirs, neither the CRT nor the beneficiary will be subject to immediate income taxes on these assets. Separately, donors can leave non-IRD assets in their wills or trusts to other heirs, which assets qualify for basis step-up.
The donor’s estate document establishing the funding source for the CRT should reference an active CRT and ideally should be in existence before the donor’s death. However, it’s also allowable for the terms of the CRT to be in a will or revocable living trust and become activated when the CRT is funded. The CRT will have an income rate established by the donor, who also selects the income beneficiaries and charities that are to receive the remaining trust assets. Although the annuitants for a charitable gift annuity (CGA) are limited to two, there may be multiple income beneficiaries with a CRT. The trust document should include the name of the trustee, which should be an institution that has experience in administering qualified CRTs.
4. Wealth Transfer Window
Boomers control the majority of ultra-high-net-worth (UHNW) households. Although only .2% of households have exposure to federal transfer taxes,19 the consequences of failing to plan over the next five years could be a missed opportunity for this group with a net worth typically higher than $20 million. UHNW Boomers place a greater priority on inheritance than an average cohort of Boomers, but they still have different views because many of the wealthy Boomers don’t believe their children are prepared to receive a large inheritance. More wealthy Boomers are interested in giving assets to children during their lifetimes with a phenomenon U.S. Trust refers to as “investing in their children as they are growing.”20 Before advisors assume that wealthy Boomers will resist irrevocably giving away assets before 2025 to capitalize on the higher exemptions, they may be surprised how receptive their clients are to the notion of giving away more assets during the Boomers’ lifetimes.
In proposed regulations issued Nov. 21, 2018, the Internal Revenue Service amended Treasury Regulations Section 20.2010-1 to conform with the temporary increase in the basic exclusion amount for estate and gift tax enacted by legislation within the TCJA.21 For lifetime gifts or estates of decedents dying after Dec. 31, 2017 and before Jan. 1, 2026, the TCJA increased the amount to $10 million, indexed for inflation after 2011.22 Therefore, the amount for 2018 was $11.18 million and rose to $11.4 million in 2019. The proposed regulations would amend Treas. Regs. Sec. 20.2010-1(e)(3) to match to the TCJA’s increase in the exclusion amount and changes regarding the cost-of-living adjustment.
For example, Gary Smith, who’s single, has made post-1976 taxable gifts of $9 million, and all were sheltered from gift tax by the cumulative $10 million in basic exclusion amount allowable on the dates of the gifts. If Gary dies after 2025, when the basic exclusion amount is again $5 million, the special rule will allow the applicable credit amount against Gary’s estate tax to be based on a basic exclusion amount of $9 million.23 The proposed rules will be effective as soon as they’re finalized.
Solution: Super grantor charitable lead annuity trust (CLAT) for wealth transfer to children. To lock in the higher federal transfer exemptions, advise clients to use more CLATs with the primary objective of transferring wealth to their children. Most advisors are familiar with the use of a CLAT as an “estate freeze” technique for UHNW households. A CLAT is sometimes best described as a “CRT in reverse” because the roles of charitable and non-charitable beneficiaries are reversed. In a CLAT, a charity leads by receiving an income interest for a certain period, after which non-charitable beneficiaries (typically the grantor’s children) receive the remaining trust principal.
A super CLAT, or grantor defective CLAT, blends elements of both the grantor and non-grantor CLAT format. Boomers who are selling highly appreciated assets, such as real estate, stocks and closely held businesses, and are exposed to long-term gains, depreciation recapture and ordinary income, could surely benefit from timing those gains with a sizable charitable income tax deduction. As with a grantor CLAT, the super CLAT’s items are included in the donor’s gross income, and therefore, the donor is allowed a charitable income tax deduction for the present value of the charitable interest. Should the donor fail to survive the trust term, then a portion of the income tax deduction claimed in the year of funding is recaptured on the donor’s final income tax return.24 As with a non-grantor CLAT, the super CLAT’s remainder beneficiary is typically the donor’s children; therefore, the donor may also claim a transfer tax deduction for the charitable interest.
Advisors must exercise extraordinary care in drafting and administering a super CLAT to ensure the settlor realizes the expected tax benefits. The authority for a super CLAT is limited to approximately seven to eight private letter rulings that can’t be relied on by a donor. A wealthy donor interested in both the income and estate tax advantages of a super CLAT may consider requesting a PLR.25 Some experts have stated that as long as the terms are straightforward, and the retained power is a reliable method (that is, an unrelated third party has authority to acquire and replace trust assets), a PLR shouldn’t be necessary.
Furthermore, if the grantor doesn’t have a significant impending taxable event when the charitable income tax deduction is beneficial, but rather solely an estate tax planning concern, a regular non-grantor CLAT established as a complex trust is more straightforward because the advisors can follow the general
IRS-approved specimen documents.26
5. The Healthiest Generation
Dr. Kenneth H. Cooper, author of the 1968 best-selling book, Aerobics, says, “baby boomers led an unprecedented fitness revolution, into a kind of golden era of health.”27 In 1968, less than 24% of American adults exercised regularly; by 1984, that figure rose to 59%.28 And, in large part due to Boomers’ exercise obsession, the average life expectancy has increased. With DB plans becoming nearly extinct, studies suggest most pre-retirees want to plan for guaranteed lifetime retirement income. A survey by TIAA-CREF reports that 84% of adults polled want a guaranteed income stream in retirement, and 46% are concerned they’ll run out of money.29 However, only 14% have purchased some guaranteed annuity to secure a steady stream of lifetime income.30 The combination of higher life expectancy and shortage of annuity income can represent a risk that Boomers will deplete their savings and investments.
Solution: Immediate charitable gift annuity (CGA) to protect against longevity risk. Although it functions in much the same method as other split-interest gifts, a CGA isn’t technically a deferred gift. A CGA is a bargain sale transaction in which the taxpayer transfers cash or other assets to a charity in return for the charity’s promise to make annuity payments to one or two individuals for their lifetimes. CGA payments are backed by the general assets of the charity, as opposed to other life income arrangements (for example, CRTs), in which distributions are backed only from the trust principal.31 CGAs can provide a surrogate for fixed income during retirement in an environment of low interest rates that may linger for decades. (See “Immediate Charitable Gift Annuity Rate,” p. 54.)
6. Business Succession Planning
According to a comprehensive survey completed recently by UBS, 41% percent of business owners expect to exit their business over the next five years.32 Most of these business owners are at or approaching traditional retirement age and part of the Boomer cohort. Among business owners who plan to exit, about half intend to sell, while 20% want to leave the business to family.33
Boomers are considered workaholics, and their careers are a strong anchor in their lives. For a Boomer business owner, succession can be a very emotionally charged conversation because most likely, his self-identity is wrapped up in his business. Any reluctance to discuss succession planning on the part of the business owner is a significant risk, considering the owner should either have his children involved in the business or have a team of advisors and potential buyers in place in many cases years before the sale.
Solution: Charitable stock bailout. When a family business owner is philanthropically motivated, is planning to transfer his business to his children and would like to reduce the taxable earnings from the company, a charitable bailout can be an effective strategy. This technique can help the donor achieve his charitable objectives, avoid capital gains tax and distribute excess cash that’s currently accumulated in the corporation tax free.
A traditional charitable bailout includes the following steps:
1. To work most optimally, the business should be a C corporation and not an S corporation (S corp).
2. Because the value of the shares donated to charity would likely be over $10,000, an appraisal will be required to substantiate the gift.34
3. The corporation’s owner transfers stock in the corporation to a charity.
4. The corporation subsequently redeems the stock from the charity using the corporation’s cash.
5. Both the gift of the stock and its redemption are income tax free.
When the charity is public, and if the donor has a long-term gain, the donor can use an income tax deduction for the fair market value (FMV) of the stock. The donor’s advisors must understand that if the gift is made to a charitable organization that isn’t a public charity (that is, a PF), the income tax deduction is limited to the donor’s basis.35 The capital gains on the redeemed stock is passive income and isn’t considered unrelated business income tax (UBIT) to the charity.
The charitable bailout technique can also be useful with family succession planning because if parents and children each own shares in the corporation, the parents can limit their ownership stake by transferring their stock to a CRT, which shares the company could then redeem. The children must be shareholders before the redemption, and the corporation must have sufficient cash, for this strategy to be effective.36 The company must have cash because a redemption by a note is a prohibited act of self-dealing for a qualified CRT, although at least one PLR approved a note.37 One of the benefits of the gift and repurchase method is that the corporation can repurchase the shares over several years as it generates cash.
7. Future Income for Old Age
According to the Transamerica Center for Retirement Studies, roughly three out of five Boomers plan on continuing employment past the traditional retirement age of 65.38 The U.S. Bureau of Labor Statistics reports also confirm that the average retirement age is significantly increasing.39 Many Boomers need to work, but many also want to work. Many affluent Boomers who can afford to retire don’t have any intention of doing so, in part because they associate retirement with old age and reject the term “senior citizen.” The typical Boomer believes “old age” begins at 72 and typically feels nine years younger than his chronological age.40
Most retirement studies reinforce a conundrum observed that explores Boomers’ receptivity to annuities. Studies confirm the importance Boomers place on retirement income and, in particular, that income is guaranteed. However, studies consistently show most Boomers are skeptical about annuitizing assets to create a guaranteed income.
Solution: Deferred CGA to age 75. With Boomers both working longer and rejecting the idea of old age, a deferred CGA can resonate with an individual between ages 55 and 65 who plans to work past 65 and benefit from a current income tax deduction. If the average Boomer envisions old age to begin at 72, he won’t likely consider an annuity unless it’s an existing tool that can help him plan for his financial future in old age.
A deferred CGA is a contract between the charitable organization and a donor that provides payment of a fixed income to one or two annuitants, and payments begin at a future date chosen by the donor. A longer delay between the creation of the deferred CGA and the commencement of payments results in a higher annuity rate. Boomer donors view a deferred CGA as an attractive supplement to their retirement plan. Additionally, a contract can be created specifying a range of future annuity start dates (referred to as a “flexible deferred CGA”), one of which may trigger the income to the donor. If the donor decides he wants the income before age 75, it can be established at any time, and the rate is based on the age the income begins.
In this example for a single 60 year old, the charitable deduction for funding a $10,000 flexible deferred CGA is $2,920.80 (approximately 30% of the transaction is the actuarial present value of the remainder interest to charity). (See “Flexible Deferred Charitable Gift Annuity,” p. 55.)
8. Overweighted Equities
In its 2017 Global Investment Survey, Legg Mason revealed that Boomers were the most likely to identify with a “somewhat aggressive” overall risk tolerance for long-term investing.41 Boomers were underweight in fixed income relative to the appropriate U.S. target-date funds, while Millennials were more conservative, overweighting to fixed income by the same means of comparison.42 Boomers have historically not invested as much in fixed income because it’s possible during their adult lives they’ve witnessed gradually lower interest rates beginning from the 1970s to 2019.
High income Boomers in the twilight of their careers have an opportunity to make a deferred gift to charity that creates an immediate income tax deduction and provides income during retirement. This may help to potentially address being underweighted in fixed income as many Boomers transition to retirement and may wish to prevent selling equities at inopportune stock market capitulations.
Solution: A young (that is, in existence for less than three years) pooled income fund (PIF). There’s an opportunity for charities to start a new young PIF for donors in this historically low interest rate environment. The current Section 170(c) charitable deduction that a young PIF will generate for a donor is staggering for this type of life income arrangement compared to either a CRT or CGA. In many cases, the deduction is twice as significant as a CRT.
The larger current Section 170(c) deduction is specifically authorized in the Treasury regulations by using the IRS’ applicable formula to calculate the present value of the remainder interest in an asset that’s gifted to a young PIF. Because it’s new, the PIF doesn’t have a highest annual rate of return from the prior three years.43 For 2019, this IRS formula creates a deemed “highest annual rate of return” of only 2.25% for all 2019 gifts to a PIF that was established less than three years ago. (See “Comparison of Deduction,” p. 56.)
For example, Mary Adams, a 55-year-old donor, makes a $1 million gift to a young PIF in 2019; then, her current 2019 charitable deduction is $582,570. Compare that to a standard 5% CRAT, which would only generate a $326,010 deduction; there’s a much higher charitable deduction for the PIF. Additionally, compared to a CRAT, a young PIF doesn’t require the same tax filing/reporting, four-tier accounting and other administrative burdens, such as excise taxes, for failing to administer a CRAT properly. Finally, PIFs don’t require a 10% remainder test present with CRATs. Therefore, a young PIF can be established on the life of a very young donor or perhaps even for a Boomer’s grandchild.
9. No Downsizing
The downsizing among households in their early retirement years is less common today than in decades’ past.44 There are significant cultural and attitudinal differences that exist between Boomers and older residents in senior living communities.45 Boomers generally would rather have home health care in old age than move from their homes.
Solution 1: Charitable retained life estate (RLE). An RLE is an ideal planning vehicle for donors who wish to live in their homes the rest of their lives and make a testamentary gift of their property to charity, yet enjoy a current and potentially substantial charitable income tax deduction. The partial interest rules that often prevent these types of gifts have an exception that makes gifts of personal residences attractive. Under this exception, a donor can give a personal residence, ranch or a farm to charity and retain the use of it for the rest of her lifetime.46 The donor can use an income tax deduction for the present value of the remainder interest.
The property must be used by the donor as a residence but doesn’t have to be the donor’s principal residence; a vacation home may be a personal residence.47 A personal residence includes all the land used in connection with the residence.48
Solution 2: Add a charitable reverse mortgage to an RLE. Some charities will permit combining an RLE along with a CGA. Although this type of arrangement is desirable to donors (because they also receive an annuity income determined by the present value of the remainder interest in the property), the concept of pairing these two together is quite rare. If, however, a charity agrees to this transaction, the donor must complete an RLE agreement with the charity that complies with the required tenets of a life estate.
After the first step of establishing an RLE is completed, the donor can negotiate with the charity to exchange the remainder for a benefit of an annuity payment based on the present value of the remainder interest in the retained life estate. Of course, the charity must be registered to issue CGAs under state law and must be willing to assume the risks associated with issuing CGAs.
10. Rise of the LLC
Limited liability companies (LLCs) have grown sharply as Boomers have amassed their wealth. In the last 25 to 30 years, the rise in the number of business organizations filing to operate as LLCs mirrored the rapid pace of the state statutes. By the end of the 20th century and throughout the early years of the 21st century, it became apparent that the LLC had taken its place in the mainstream, typically in the business areas of finance, real estate and the professional and business service sectors. In 2019, 65% of all sales across New York City are commercial properties owned by LLCs, and in the high-end residential market in Manhattan, 72% of condo sales over $10 million involved an LLC.49
A multi-owner LLC is automatically taxed as a partnership by default, while LLCs with one owner are “disregarded entities” taxed like sole proprietorships. However, some LLCs may choose to be taxed as an S corp by completing an election. More new LLCs might use S corp election to take advantage of the new pass-through tax deduction created by the TCJA.
Solution 1: Outright gift of LLC interests to a public charity. Because the majority of LLCs are historically taxed as partnerships, both the donor and the charity need to be aware that these gifts can result in unfavorable tax consequences. A gift could result in the realization of ordinary income by the donor when the partnership has unrealized receivables or appreciated inventory or any investment tax credit subject to recapture known as “hot assets.”50 The charities don’t necessarily pay UBIT by merely holding a partnership interest so long as the income only is derived from passive income such as dividends, interest, most rents from real property and gains from the sale of assets.51 Under those conditions, an outright gift to a public charity could be feasible; however, contributions of partnerships to either a PF or CRT would generally be prohibited under self-dealing and other related rules. Another potential limitation for a gift of LLC/partnership is the difficulty of complying with the IRS guidelines for obtaining a qualified appraisal, which must be completed if the gift is greater than $5000.
Solution 2: Charitable LLC in lieu of a PF. One method to override the PF rules is to establish an LLC that isn’t subject to the same reporting rules under Section 501(c)(3) and can more easily invest in for-profit companies, as well as provide traditional philanthropic support.
Some affluent Boomers, notably Laurene Powell Jobs (Steve Jobs’ widow), have established these entities to carry out their philanthropy.52 Although these arrangements are controversial and question the definition of “philanthropy,” the modus operandi of Boomers has always been to be willing to challenge the status quo. Millennial Mark Zuckerberg followed Laurene’s lead by transferring the majority of his Facebook shares to a newly formed Delaware LLC known as the “Chan Zuckerberg Initiative.” These entities invest in companies that fit within the parameters of its philanthropic mission. When this entity wants to make a gift to a Section 501(c)(3), it can then earn a charitable income tax deduction. For example, the Chan Zuckerberg Initiative may make gifts of appreciated Facebook stock, which produces a charitable income tax deduction at FMV and wouldn’t trigger any capital gains recognition on the contribution.
Will the charitable LLC concept continue to grow in popularity? The founder of eBay, Pierre Omidyar, has formed a similar entity. In particular, the wealthy entrepreneurs in Silicon Valley are interested in this type of venture philanthropy.
Endnotes
1. Bruce Debosky, “Giving in the last third of life,” Planned Giving Design Center, www.pgdc.com/pgdc/giving-last-third-life?utm_medium=email&utm_campaign=website&utm_source=sendgrid.com.
2. Carolyn Gregoire, “Are Baby Boomers A ‘Generation Of Sociopaths’?” (March 21, 2017). This article reviews the book A Generation of Sociopaths: How the Baby Boomers Betrayed America (March 7, 2017) and cites an interview with author Bruce Gibney.
3. https://en.wikipedia.org/wiki/Me_generation.
4. Retirees are expected to donate about $6.6 trillion in cash and $1.4 trillion in volunteer services during the next 20 years as Boomers retire. See Maria Di Mento, “Baby Boomers Poised to Give $8 Trillion, Study Says,” Chronicle of Philanthropy (Oct. 22, 2015), www.philanthropy.com/article/Baby-Boomers-Poised-to-Give-8/233873.
5. In recent years, at least five of the 10 largest charities, by dollars, raised annually, are donor-advised funds.
6. “2016 Connected Nonprofit Report,"Salesforce.org.
7. Mark Rovner and Pam Loeb, “The Next Generation of American Giving,” Blackbaud Institute, www.michiganfoundations.org/sites/default/files/resources/Next-Generation-of-Giving-Blackbaud-Study.pdf.
8. Professor Christopher Hoyt, Lecture Outline at the Heckerling Institute, Orlando, Fla. (Jan. 22, 2019).
9. “Giving USA Report.” Charitable giving by individual Americans in 2018 suffered its most significant drop since the Great Recession of 2008-2009. Tax policy is the primary reported cause of the decrease in millions of Americans (particularly Boomers) no longer itemizing.
10. See Internal Revenue Code Section 170(f)(8) or Internal Revenue Service Publication 1771.
11. I-Fen Lin and Susan L. Brown, “Unmarried Boomers Confront Old Age: A National Portrait,” The Gerontologist 52, No. 2 (2012).
12. Susan L. Brown and I-Fen Lin, “The Gray Divorce Revolution,” The Journals of Gerontology, Series B, Vol. 67, Issue 6.
13. For a comprehensive explanation of qualified terminable interest property arrangements, see Charles A. Granstaff, “Portability + QTIP,” Trusts & Estates (August 2014).
14. Pew Research Center analysis of the Current Population Survey, www.pewresearch.org/fact-tank/2017/04/06/number-of-u-s-adults-cohabiting-with-a-partner-continues-to-rise-especially-among-those-50-and-older/.
15. Ibid.
16. Paul Caspersen, “QTIPs and Testamentary CRTs,” Trusts & Estates (October 2015).
17. Investment Company Institute, “The U.S. Retirement Market, First Quarter 2019” (June 19, 2019). In 1974 only 18% of the $369 billion in retirement assets were in defined-contribution (DC) plans and individual retirement accounts (the other 82% was in defined-benefit plans), and in 2019, more than 60% are in DC plans and IRAs, which are worth approximately $30 trillion.
18. Setting Every Community Up for Retirement Enhancement Act, H.R. 1994.
19. Joint Committee on Taxation, “History, Present Law, and Analysis of the Federal Wealth Transfer Tax System” (March 16, 2015), www.jct.gov/publications.html?func=startdown&id=4744.
20. Richard Eisenberg, “How Boomer Parents Feel About Leaving Inheritances,” Forbes (Jan. 21, 2016), www.forbes.com/sites/nextavenue/2016/01/21/how-boomer-parents-feel-about-leaving-i)nheritances/#4124395877ac.
21. REG-106706-18.
22. IRC Section 2010(c)(3)(c).
23. Treasury Regulations Section 20.2010-1(c)(2).
24. See IRC Section 170(f)(2)(B).
25. Some of the private letter rulings in which taxpayers have received favorable rulings: PLR 9224029 (March 13, 1992), PLR 9247024 (Aug. 24, 1992), PLR 9407014 (Nov. 18, 1992), PLR 9810019 (Dec. 5, 1997), PLR 199922007 (Feb. 10, 1999), PLR 199936031 (June 10, 1999), PLR 200010036 (Dec. 13, 1999), PLR 200747001 (Aug. 3, 2007).
26. Revenue Procedure 2007-45.
27. Sarah Mahoney, “The Rise and Fall of the Fitness Generation,” AARP The Magazine (April/May 2014).
28. Ibid.
29. “Most People Want Lifetime Income, But Do Not Know How To Make It Happen,” Financial Advisor Magazine (Feb. 5, 2015), www.fa-mag.com/news/most-people-want-lifetime-income-but-don-t-know-how-to-make-it-happen-20729.html?section=93.
30. Ibid.
31. Revenue Ruling 80-281.
32. UBS, “Who is the boss? Business ownership: Who’s in, who’s out and who’s holding back” (Feb. 8, 2018), www.ubs.com/us/en/investor-watch/who-is-the-boss.html.
33. Ibid.
34. The donor will need to file Form 8283. Rev. Rul. 80-213, Rev. Rul. 83-120.
35. Section 170(e)(1).
36. See PLRs 200720021 (May 18, 2007) and 9338046 (June 30, 1993).
37. See PLR 9347035 (Aug. 31, 1993).
39. www.bls.gov/careeroutlook/2017/article/older-workers.htm.
40. D’Vera Cohn and Paul Taylor, “Baby Boomers Approach 65—Glumly,” Pew Research Center (Dec. 20, 2010).
41. https://blog.commonwealth.com/uncovering-investing-trends-across-generations.
42. Ibid.
43. See Treas. Regs. Section 1.643(c)-6(e)(4).
44. Aimee Picchi, “Real estate headache: Baby boomers who will not sell their homes,” CBS News (June 6, 2018), www.cbsnews.com/news/housings-big-problem-boomers-arent-downsizing/.
45. Erin G. Roth, et al., “Baby Boomers in an active retirement community: Comity interrupted,” The Gerontologist, Vol. 52, Iss. 2, at pp. 189–198 (2012).
46. Section 170(f)(3)(B)(i), IRC Section 2055(e)(2) and IRC Section 2522(c)(2).
47. Treas. Regs. Section 1.170A-7(b)(3); Rev. Rul. 75-420.
48. See, e.g., PLR 8202137 (Oct. 19, 1981) (donation of the remainder interest in 77.33 acres of a 173.78-acre property held to be deductible).
49. Will Parker, “The rise of the anonymous LLC; Tracing the rapid growth of New York’s favorite property investment vehicle and its controversial drawbacks,” The Real Deal, https://therealdeal.com/issues_articles/the-rise-of-the-anonymous-llc/.
50. See IRC Section 751(a).
51. IRC Section 512(b).