Population and wealth trends will continue to have an impact on charitable giving. In 2020, charitable giving reached a record $471.44 billion in the United States.1 It’s anticipated to rise 4.1% in 2021 and 5.7% in 2022.2 Ninety percent of high-net-worth (HNW) families donate to charity in the United States.3 Only 17% of these wealthy donors indicate that their primary motivation for charitable giving are the tax benefits.4 They operate under the premise that charitable giving doesn’t need to be hazardous to their wealth. For this group, increases in individual tax rates by the Biden administration5 will likely result in increased giving due to the increased value of the charitable deduction. Additionally, the Biden proposal to increase capital gains as well as eliminate step-up in basis6 at death should also result in more of the traditional charitable giving strategies as part of a client’s estate planning (that is, charitable trusts, donor-advised funds (DAFs) and private foundations (PFs)). Additionally, non-charitable trusts (for example, dynasty trusts and spousal lifetime access nongrantor trusts) will continue to gain popularity to take advantage of Internal Revenue Code Section 642(c).7
IRC Section 642(c)
Section 642(c) permits an unlimited charitable income tax deduction for distributions made from a non-charitable trust to charity if such a distribution is specifically allowed by the trust.8 In addition to the unlimited charitable income tax deduction, the 3.8% net investment income tax obligation is shifted to charity. It’s important to note that it’s very difficult, if not impossible, to reform/modify a trust to add this provision. Consequently, include charitable distribution provisions in newly drafted non-charitable trusts to prevent losing such a valuable unlimited trust deduction in the future.9 This is particularly the case with modern dynasty trusts. Discretionary trust distribution provisions to charity are very different than a limited power of appointment from trusts to charities.10
Family Values and Legacy
Many families that use these non-charitable trusts for charitable giving realize that family goals aren’t the same as philanthropic goals but that successful philanthropy can reinforce family values and, thereby, strengthen a family legacy.11 Typically, many families accomplish the promotion of social responsibility and successful philanthropy by using PFs, DAFs, community foundations, pooled income funds, charitable remainder trusts and charitable lead trusts. Non-charitable trusts are now another popular way for them to promote social responsibility and successful philanthropy. The development of charitable giving with non-charitable trusts results from the evolution and popularity of the modern directed trust, which, when combined with active family involvement, has provided a powerful charitable giving alternative.12
Modern Directed Trust
The modern directed trust13 is usually structured so that the directed administrative trustee in a modern directed trust jurisdiction takes direction from a distribution committee that’s usually comprised of family as well as trusted family advisors. Most of these trusts are drafted as discretionary trusts.14 The distribution committee members and their advisors act as mentors for the younger family members on the committee as well as for the beneficiaries. It’s recognized that the key time for beneficiary development is generally between ages 20 and 40 (that is, the Millennial’s age bracket).15 In addition to making direct distributions to charities, some families also prefer to actively participate in charities. Millennial distribution committee members and beneficiaries generally prefer that distributions be made to their favorite charities, many of which they often volunteer for and exhibit other forms of activism to support.16 Many trusts have provisions to supplement a beneficiary’s income if they decide to be employed by a charity at the expense of taking a higher paying private sector job. Some non-charitable trusts have provisions that state that once a trust reaches a certain value, or the beneficiary’s net worth attains a certain level, the trust must distribute the excess to a charity either directly or indirectly. This approach ensures that the family gets together to focus on charitable giving and their social responsibilities.17 Some trusts will also match a beneficiary’s charitable contribution. This assumes the beneficiary would make a donation after receiving a trust distribution versus the trust making the distribution.
Purpose trusts also provide another new and unique approach to charitable giving.18 These are trusts that exist for a purpose and don’t have any beneficiaries.19 Once the purpose is accomplished, the trust protector frequently reforms these trusts to add family and/or charitable beneficiaries. Many times, a charitable gift may take place on the completion of the purpose. The most common version of the purpose trust is a pet trust involving both the care of a pet and an ultimate gift over to a pet charity. Purpose trusts have greatly expanded beyond pet trusts and can generally be used for any legal purpose.20 A popular purpose is to provide for a philanthropic cause that doesn’t qualify for a charitable income tax deduction. Examples of non-deductible charitable contributions include contributions earmarked for certain individuals for economic, medical or educational needs, the value of time for services volunteered for charity, gifts to nonprofits that aren’t charities, political donations and various social causes.
Purpose trusts are becoming a very useful tool for Millennials who are leading the way in charitable giving and volunteering. They typically want to ensure that their donations are impactful and effecting real change. More than 75% of Millennials make donations to charity, which is more than any other age group.21 Seventy percent of Millennials believe their parents aren’t as committed to charitable giving as they are. Thirty-two percent of Millennials versus 14% of Baby Boomers and the Silent Generation combined believe that they give back through impact and social investing.22 Both intergenerational family trusts (that is, dynasty trusts) as well as purpose trusts can be structured to allow for impact and social investing to accommodate the charitable giving desires of these Millennial beneficiaries.23
Charitable LLCs
Charitable limited liability companies (LLCs) have also been gaining popularity in the last several years.24 The charitable LLC is generally preferred to the PF because it’s not subject to the PF restrictions and limitations (for example, 5% fair market value (FMV) distributions, excess business holdings, jeopardy investments, self-dealing and taxable expenditures).25 Additionally, many families believe that the charitable LLC provides greater flexibility and allows them to better accomplish their philanthropic goals. This is particularly important when the proposed activities and expenditures aren’t permitted by a PF. Another important advantage of charitable LLCs is that they’re more private than PFs because there’s no requirement to file a Form 990-PF, which is public for all to view.26 If desired, the charitable LLC can be dissolved and liquidated with assets being distributed back to the members. Additionally, the charitable LLC has no attorney general oversight as is the case with many PFs because the attorney general typically has the authority and oversight regarding the administration of assets dedicated for charitable purposes.27
Charitable LLCs aren’t generally set up for tax reasons. They’re tax neutral.28 Contributions to the charitable LLC aren’t tax deductible like they are with a PF, which is limited to 20% or 30% (long-term capital gains) of the donor’s adjusted gross income with a 5-year carryover. However, contributions of appreciated stock made to charity from a charitable LLC will produce an income tax deduction based on FMV, thus avoiding capital gains on the contribution. Additionally, income realized from the charitable LLC isn’t exempt from income tax. It’s a pass-through entity for tax purposes. Consequently, the tax consequences flow through to the members. If there’s no dividend or income, then there’s no flow through to the members. The charitable LLC can generally avoid estate taxes at death by planning so the charitable LLC assets/shares pass to charity via a PF or some other charitable vehicle or combination of charitable vehicles.29
Beneficiary Quiet Provisions
Beneficiary quiet provisions30 provide another popular alternative for keeping charitable intentions private until the family is ready to make them public. Clients will typically elect to use beneficiary quiet provisions for both their charitable and non-charitable trusts. Beneficiary quiet trusts allow a client to elect to withhold trust information from a beneficiary until some point in the future.31 Not all states have beneficiary quiet statutes. Most of the top no income tax boutique dynasty trust states have these statutes.32 Consequently, if the trust is sitused and properly administered in one of these states, the beneficiary quiet provision can be elected and trust information be kept private from beneficiaries until some point in the future.33 This may also apply to charitable beneficiaries with trusts sitused in certain states.34 It’s important to note that 28% of wealthy donors stopped giving to charitable organizations as a result of their receiving too frequent solicitations from the non-profit organizations.35 Consequently, privacy regarding a family’s charitable intentions has become very important to many families.
An Evolving Issue
Charitable giving remains and continues to evolve among HNW families. Charitable donations are made for both deductible and non-deductible causes. Charitable trusts, DAFs and PFs all remain popular charitable giving vehicles. However, non-charitable trusts now also provide another powerful source for charitable giving. Privacy regarding charitable giving is also a growing and popular trend for many families. Ultimately, charities benefit, regardless of the motives and planning of each family. The glass is definitely half full for charitable causes.
Endnotes
1. Lilly Family School of Philanthropy, “Giving USA 2021: In a year of unprecedented events and challenges, charitable giving reached a record $471.44 billion in 2020” (June 15, 2021), https://philanthropy.iupui.edu/news-events/news-item/giving-usa-2021:-in-a-year-of-unprecedented-events-and-challenges,-charitable-giving-reached-a-record-$471.44-billion-in-2020.html?id=361.
2. Lilly Family School of Philanthropy, “The outlook for charitable giving,” (Feb. 19, 2021), https://blog.philanthropy.iupui.edu/2021/02/19/the-outlook-for-charitable-giving/.
3. Bank of America, “The 2018 U.S. Trust Study of High-Net-Worth Philanthropy” (2018), www.privatebank.bankofamerica.com/articles/2018-us-trust-study-of-high-net-worth-philanthropy/.
4. Ibid.
5. Christina Wilkie, “Democrats’ $3.5 trillion budget package funds family programs, clean energy and Medicare expansion,” CNBC (July 14, 2021), www.cnbc.com/2021/07/14/democrats-3point5-trillion-budget-package-funds-family-programs-clean-energy-medicare-expansion.html; Emily Cochrane, “House Democrats Outline Tax Increases for Wealthy Businesses and Individuals,” New York Times (Sept. 12, 2021).
6. Ibid.
7. Al W. King III, “Important Trust Trends,” Trusts & Estates (June 2021).
8. Al W. King III “Charitable Giving With Non-Charitable Trusts,” Trusts & Estates (June 2015); Al W. King III “Are Incentive Trusts Gaining Popularity?” Trusts & Estates (October 2017).
9. See supra note 7.
10. Ibid.
11. See supra note 8.
12. See supra note 7.
13. Modern directed trust laws provide a family and its advisors with the ability to participate in trust decisions involving investments and distributions. Often, family members and/or close family advisors serve as the investment and distribution committee members. The grantor may also generally serve on the investment committee. Regarding investments, the directed trust provisions allow for either a sophisticated asset diversification model with alternative investments, direct private equity, real estate, etc. or provide the ability to remain entirely liquid with cash. Alternatively, the ability to hold a single position in a public or private security without diversifying is an option. The distribution committee allows for as many or as few family members and their advisors as desired. This is an important committee to promote family values with trust distributions. Sometimes, the directed administrative trustee will also play a key role on the family distribution committee. Alternatively, the directed administrative trustee may be the only distribution committee member. Additionally, the liability standard for serving on an investment and/or distribution committee is typically gross negligence and/or willful misconduct, thereby providing additional liability protection. See Al W. King III, “Drafting Modern Trusts,” Trusts & Estates (December 2015).
14. Al W. King III, “How Long-Term Trusts Can Assist With Uncertainties Like COVID-19” Trusts & Estates (August 2020).
15. Al W. King III, “Interesting Trends With Millennials and Trusts,” Trusts & Estates (February 2021).
16. Ibid.
17. See supra notes 8 and 15.
18. Al W. King III, “Trusts Without Beneficiaries—What’s the Purpose?” Trusts & Estates (February 2015).
19. Alexander A. Bove, Jr., “Rise of the Purpose Trust,” Trusts & Estates (August 2005), Alexander A. Bove, Jr., “The Purpose of Purpose Trusts,” Asset Protection Strategies Volume II: Planning with Domestic and Offshore Entities, Chapter 9 (2005); Alexander A. Bove, Jr., “Rise of the Purpose Trust,” Trusts & Estates (August 2005); Alexander A. Bove, Jr., “The Purpose of Purpose Trusts,” Probate & Property (May/June 2004); Alexander A. Bove, Jr., “Trusts Without Beneficiaries: Planning With Purpose Trusts,” Boston Bar Association (Oct. 21, 2014); Alexander A. Bove, Jr. and Ruth Mattison, “The Purpose Trust Becomes a Work of Art,” Estate Planning (October 2016).
20. Ibid.
21. See supra note 15.
22. Ibid.
23. Ibid.
24. Philanthropy News Digest, “Chan Zuckerberg Initiative Highlights Popularity of LLCs, Concerns” (Dec. 4, 2015), https://philanthropynewsdigest.org/news/chan-zuckerberg-initiative-highlights-popularity-of-llcs-concerns.
25. Al W. King III, “Preserving Family Values by Encouraging Social and Fiscal Responsibility With Modern Trust Structures,” Allied Professionals, Orange County, Calif. (September 2017); Al W. King III, “The Next Tsunami- Charitable Giving with Non-Charitable Trusts,” Boston Estate Planning Council, Boston (May 2016).
26. Ibid.
27. Michael Schwartz and Daniel Dykes, “The Chan Zuckerberg Initiative,” Trusts & Estates (April 2016); Cal CPA, “Charitable LLCs,” CalCPA (Aug. 1, 2016), www.calcpa.org/news/2016/07/29/charitable-llcs.
28. See supra note 25.
29. Ibid.
30. A beneficiary quiet trust typically allows for trust information to remain confidential from one or more selected beneficiaries until instructed otherwise by the grantor/advisor/trust protector, as opposed to the typical right to trust information/accounting provided to beneficiaries. See Al W. King III, “Should You Keep a Trust Quiet (Silent) From Beneficiaries?” Trusts & Estates (April 2015).
31. See Al W. King III, “Privacy, Not Secrecy, Is Still Important to Families” Trusts & Estates (August 2019).
32. Alaska, Delaware, Nevada, New Hampshire, South Dakota, Tennessee and Wyoming.
33. See supra note 31.
34. Varies by each state attorney general and approach to charitable beneficiaries.
35. See supra note 3.