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Community Connection
Professional Advisors Edition July 2020

Eyebrow-raising IRS Relief for Required Minimum Distributions

In the CARES Act, passed on March 27, 2020, Congress eliminated this year's Required Minimum Distributions from IRAs, 401(k)s, and 457(b) and 403(b) plans. The end of March, however, was too late for people who had already taken Required Minimum Distributions for 2020.

To remedy this situation, the IRS issued Notice 2020-51 on June 25, which allows taxpayers to replace Required Minimum Distributions taken year-to-date. Taxpayers now have until August 31 to replace the funds, and this includes replacing funds from an inherited IRA. Furthermore, taxpayers can replace multiple distributions because the "one rollover per year" provision does not apply for 2020.

Why does this matter to you and your philanthropic clients?

First, the ruling itself is unusual, in that the IRS seems to have engaged in what could be construed as lawmaking. We're keeping an eye on rulings like this to gain an understanding of the reach of the IRS during times of crisis.

Second, for your clients over 70 ½ who were already planning to give their Required Minimum Distributions to charity this year, nothing has changed about their ability to do so. Be sure to take a careful look at each client's 2020 tax situation. It could still be most advantageous for a client to make a Qualified Charitable Distribution instead of forgoing the Required Minimum Distribution or replacing the funds through the special rollover provisions now in place for 2020.

Donor Privacy Protections Now Official

Many of you have been tracking developments related to the disclosure of donor identity and proposed IRS regulations to clarify the rule's applicability.

You may recall that focus on this issue increased on July 30, 2019, when a Montana federal district court judge set aside the IRS's Revenue Procedure 2018-38. Under that Revenue Procedure, the IRS had removed the Schedule B disclosure requirements for Section 501(c)(4) and several other forms of tax-exempt entities.

Because the court based its ruling wholly on procedural grounds, advisors still remained concerned that information could be accessed by the public regarding clients' contributions to 501(c)(4) social welfare organizations and 501(c)(6) trade associations.

That concern has now been laid to rest. The IRS's final regulations, effective on May 28, 2020 (which may be applied to returns filed after September 6, 2019) retained the provisions in the proposed regulations requiring that only 501(c)(3) charitable organizations and 527 political organizations report names and addresses of substantial contributors during a taxable year.

The net-net here is that your clients who are giving money to certain organizations that are tackling controversial social issues on either end of the political spectrum are less likely to have their identities revealed, sparing your clients from potential harassment. In an era when more and more people are mobilizing to stand up for their beliefs and causes, the IRS's nod to free speech and privacy is likely to be a welcome development.

Donor-Advised Funds: Working Hard for Our Community

Donor-advised funds are a popular charitable giving tool. And right now is a perfect time to evaluate this planning strategy for your clients.

In recent years, donor-advised funds have been one of the fastest-growing philanthropic planning tools in the marketplace. Donor-advised funds are popular because they allow an individual or family to make a tax-deductible transfer that qualifies as a charitable contribution, and then recommend grants to favorite charities from the fund when the time is right. A donor-advised fund operates a lot like a checking account for charity, and it's established according to IRS guidelines that provide tax advantages for the donor as well as administrative efficiencies.

In the midst of the Covid-19 pandemic, giving from donor-advised funds at community foundations is accelerating. This is creating a significant boost for nonprofits and people in need. Indeed, the global healthcare crisis is precisely the reason that many donors established donor-advised funds in the first place: To be ready to give when needs are the highest.

According to a recent survey conducted by the Community Foundation Public Awareness Initiative, grants from donor-advised funds among the 64 community foundations surveyed increased nearly 60% in March and Apri 2020 compared with March and April 2019.

To be sure, donor-advised funds can be an important "lifeline" for community organizations during periods of hardship, as noted by Bruce Hopkins , a University of Kansas School of Law professor.

Consider working with your clients to activate their existing donor-advised funds or establish new donor-advised funds to help respond to the needs created by Covid-19. A donor-advised fund helps the community right now and also allows your clients and their families to build a nest egg to address our community's needs during future crises.

Important Reminders: QCDs and CLATs

Our recent communications have highlighted the unique importance of Qualified Charitable Distributions (QCDs) and Charitable Lead Annuity Trusts (CLATs) in today's market conditions. Given the critical needs facing our community right now, the team at the community foundation wants to reiterate the value of these two planning tools. We're inviting you to contact us if you have any questions about how these charitable giving techniques can help you and your clients immediately support people in need.

In the case of Charitable Lead Annuity Trusts, some experts are heralding a " golden age of CLATs " because of the convergence of historically low interest rates and depressed asset values. The timing may never be better for your clients to use a CLAT to create an income stream to charities, thereby satisfying their current goals for amping up philanthropy in this period of extreme need, and simultaneously establish a future gift to heirs with the trust's remainder.

Don't overlook Qualified Charitable Distributions, either, as a way to meet the urgent needs of the charities your clients want to support. The Coronavirus Aid, Relief, and Economic Security (CARES) Act waives Required Minimum Distributions for most taxpayers. The provision includes not only distributions from 401(k)s and IRAs, but also defined benefit pension plans and 457 plans. Taxpayers who have reached 70½ years of age still can take advantage of the Qualified Charitable Distribution, enabling a taxpayer to direct up to $100,000 from an IRA to qualified charities. The distribution is not included in taxable income.