Partnering with attorneys, CPAs and financial advisors like you is especially important in today’s economic climate as the need for philanthropic support becomes more critical to sustain and improve the quality of life in San Diego. That’s certainly the spirit we intend to capture in our latest updates:
- A charitable remainder trust (CRT) is a popular planning vehicle because your client is eligible for an up-front income tax deduction, a go-forward income stream and deferral of capital gains taxes. San Diego Foundation (SDF) is happy to share a rundown of the what, where, who, why, when and how of CRTs.
- As you work with a client who has established a private foundation, consider that at some point it might make sense to transfer all or a portion of the private foundation’s assets to a donor-advised fund at SDF. Our checklist for making a move is worth a skim to remind you of the many benefits.
- Keep in mind that charitable giving is important to your clients even during times of economic upheaval. Your clients still want to give to their favorite charities, so keeping an eye on evolving tax policy is crucial. SDF is here to help you and your clients take both a short-term and a long-term approach to making an impact in our region.
As always, we’re honored to be your first call whenever the topic of charitable giving arises. Our goal is to help your clients make a difference, especially during these uncertain times.
Charitable Remainder Trusts: What, Where, Who, Why, When and How?
If you’ve represented charitable families over the years, you’ve certainly heard the term “charitable remainder trust,” sometimes called a “CRT.” You might have even helped clients set them up.
For most attorneys, CPAs and financial advisors, CRTs don’t come along every day. Because a CRT can be such an effective planning tool in certain situations, it’s useful to have at least a basic level of knowledge about how they work.
Here are six important points to keep in mind.
1. What is it?
Your client establishes a CRT as a standalone trust. The trust pays an income stream to the client (and potentially other beneficiaries such as a spouse or children) for life or for a period of years. According to the trust’s terms, whatever assets are left when the income stream ends will pass to a charity, such as your client’s fund at SDF.
2. Where does the charitable deduction figure in?
Because the transfer of assets to the CRT is irrevocable, your client is eligible for an up-front charitable income tax deduction in the amount of the present value of the charity’s future interest, calculated according to IRS-prescribed rules and interest rates. Remember also that assets held in a CRT are excluded from your client’s estate for estate tax purposes.
3. Who is it for?
The ideal client to establish a CRT is typically someone who owns highly appreciated assets, including marketable securities, real estate or closely-held business interests. That’s because a CRT allows these assets to be sold within the trust without triggering immediate capital gains taxes, enabling the proceeds to be reinvested.
4. Why are some trusts called CRATs and CRUTs?
A “charitable remainder annuity trust” (“CRAT”) is a type of CRT that distributes a fixed dollar amount each year to the income beneficiary. Your client cannot make additional contributions to a CRAT. A “charitable remainder unitrust” (“CRUT”), on the other hand, is a type of CRT that distributes a fixed percentage (at least 5%) annually based on the balance of the trust assets (revalued every year). Your client can make additional contributions to a CRUT during their lifetime.
5. When is a CGA a better fit?
The tax laws permit a client over the age of 70 ½ to make a once-per-lifetime transfer from an IRA of up to $54,000 (2025 limit) to a CRT or other split-interest vehicle, such as a charitable gift annuity (CGA). This is sometimes called a “Legacy IRA.” Because the cost of setting up a CRT usually means that a $54,000 CRT is impractical, a client who wants to leverage the Legacy IRA opportunity may lean toward a CGA instead.
6. How can I learn more?
As is the case with any question you encounter from a client about charitable giving techniques, San Diego Foundation is honored to be your first call. We can help you navigate the options and identify strategies that are likely to best meet a client’s needs.
A Happier Alternative? Moving From a Private Foundation to a Donor-Advised Fund
The number of private foundations in the United States is nearing 150,000 with combined assets topping $1 trillion, so it’s no wonder that a lot of people immediately think about establishing a private foundation when they begin to explore structuring their charitable giving activities. You’re likely working with several clients who’ve established private foundations somewhere along the way.
Recently, though, the growth of donor-advised funds to nearly 2 million in number (with grants from these vehicles reaching $50 billion in some years) signals that many people are starting to use both a donor-advised fund and a private foundation. Some of your clients may even be considering transferring a private foundation’s assets to a donor-advised fund at SDF to carry out the family’s mission. This particular trend is on the rise, so take a moment to skim this checklist to help guide conversations.
“Reality check” the hassle. Day-to-day management and administration of a private foundation can become time-consuming, especially as the responsibilities fall to second- and third-generation family members. Even the first generation may realize at some point that administrative work is taking too much focus away from nonprofits, the community and making grants.
Review the tax rules. The IRS’s rules related to investments, distributions and “self-dealing” are complex. Over time, family members may become frustrated navigating the potholes of tax compliance. For instance, if a client plans to transfer all or part of a family business, now or in the future, it is critically important to communicate the benefits of using a donor-advised fund at SDF versus transferring the business interests to a private foundation (which can be disastrous from a tax standpoint).
Lean on a community foundation. Our team is happy to walk alongside you and your client through the steps to terminate a private foundation and move the assets to a donor-advised fund at SDF. The first step is for the board of the private foundation to approve the termination and capture that approval in meeting minutes or a consent of directors.
Set up a donor-advised fund. Your client can establish a donor-advised fund at San Diego Foundation and choose the name (e.g., Smith Family Foundation Fund). Similarly, selection and succession of fund advisors (who will handle grantmaking) can mirror the private foundation’s board structure. As a result, the donor-advised fund will look and operate a lot like the private foundation.
Make grants. The private foundation will distribute (“grant”) most of its net assets to the newly-established donor-advised fund. The private foundation will need to be sure it pays all of its liabilities and expenses before accounts are closed, so your clients will want to leave a reserve in the private foundation to cover final bills before completing the termination.
Finalize the termination. As long as the private foundation corporate entity is in good standing according to state laws, termination for tax purposes will be automatic and smooth because assets were transferred to a community foundation, a longstanding organization. The private foundation will then simply file an informational tax return with the Internal Revenue Service for its final year (even if it is a short tax year). The final step is for the private foundation to take any steps required for termination under the laws of any and all states in which it was registered, especially if the private foundation was organized in corporate form.
Whether your client is ready to transfer a private foundation this year or is simply evaluating options, please give us a call.
Philanthropy: It’s a Marathon, Not a Sprint
As 2025 continues to deliver twists and turns, it’s important to keep talking about philanthropy. Charitable giving is a vital strategy for your clients, even in times of economic uncertainty. Here are three trends to watch as you guide your clients through an unpredictable era and encourage them to look beyond the horizon.
1. Your clients still want to give
While overall giving may dip during economic downturns, most of your philanthropic clients will continue to support their favorite charities. Indeed, giving often rebounds quickly alongside economic recovery. Donor-advised funds, in particular, have shown resilience and even growth during economic shocks, providing a stable source of support for nonprofits and a flexible tool for your clients. This support is crucial because economic upheaval often increases community need, which in turn creates more demand for nonprofit services. Often, as was the case during the pandemic, donors rise to the occasion. By working with SDF, your clients can stay close to the tangible, local impact of their giving.
2. Legislation is still percolating
At the moment, key provisions of the Tax Cuts and Jobs Act (TCJA) are set to expire at the end of 2025, potentially impacting the charitable strategies you recommend to clients. Notably, though, on February 13, 2025, lawmakers in both the House and Senate introduced the Death Tax Repeal Act of 2025, aiming to permanently eliminate the federal estate tax and the federal generation-skipping transfer (GST) tax. Needless to say, if this act becomes law, the landscape of tax planning will change dramatically. On a happy note, under recently-proposed legislation, clients over the age of 70 ½ would be able to make Qualified Charitable Distributions (QCDs) to donor-advised funds at San Diego Foundation. Under current law, eligible fund recipients of QCDs are limited to designated, field-of-interest, unrestricted, and similar funds.
3. Focus on the future
Some of your clients may be wondering just how much they can truly accomplish through philanthropy, especially right now. The answer is a lot. Sometimes called “big bet philanthropy,” strategies to leverage charitable dollars to tackle systemic social issues are becoming more popular. “Long-haul” initiatives require sustained commitment, collaboration and capacity-building among both donors and the nonprofit organizations they support. Thanks to its mission to connect donors to community needs, we are in a unique position to work with your clients who want to pursue this form of charitable giving.
Even during economic upheaval, charitable giving remains a powerful tool for tax planning and durable community impact. Thank you for your continued work to help your clients maximize their positive influence on our community.
Learn More
For 50 years, we have partnered with an extensive network of wealth advisors, estate planning attorneys, tax planners and other financial advisors to help high-net-worth clients and families achieve financial planning objectives and charitable giving goals while maximizing tax deductions.
If you want to learn how we can help meet your clients’ financial planning and charitable giving goals in 2025, contact me at (858) 245-1508 or jrogers@sdfoundation.org.
