Rising interest rates — and rising costs — are squeezing many nonprofits. Here’s how you might adjust your giving plan to help maximize your impact.
Many donors want to witness the impact of their charitable giving, say Stephanie C. Buckley, head of trust philanthropic services, and Bill Bardwell, senior philanthropic trust advisory specialist, both from Wells Fargo Private Bank in the Wells Fargo Wealth & Investment Management division. No matter what cause you support — the arts, disaster relief, education, global development, the environment, medical research — major and everyday donors find joy in seeing the effects of their giving at work in their lifetimes.
That could be more challenging in the current economy as nonprofits are squeezed by rising operational costs. But it’s also possible to ease those challenges through well-planned charitable giving.
Here, Buckley and Bardwell dive into some of the unique conditions nonprofits and donors face today and share suggestions for starting, continuing, and strengthening your charitable giving plan for maximum impact.
What are donors’ key goals and concerns in 2023?
Despite the worries that rising interest rates are causing in some aspects of wealth planning, such as credit and borrowing, Buckley and Bardwell feel that most clients of The Private Bank are not worried about their power to give today but instead are more motivated than ever to help others. They may also have more resources: Equity investments saw gains throughout the main pandemic months, and spending on vacations, entertainment, and other pursuits was down. Many of them may also have donor advised funds and/or private foundations or may be using strategies such as charitable lead trusts to fund their charitable giving into perpetuity in some cases.
What are nonprofits’ key goals and concerns in 2023?
The main worries of nonprofits are around inflation and rising costs, say Buckley and Bardwell. Inflation has made the cost of providing services more expensive, and nonprofits are challenged to meet demand because of staffing cuts during the pandemic and other reactions to the current economic environment.
These challenges make it harder for nonprofits to meet donors’ expectations for services and accountability. Reduced staff resources make completing impact research and reports harder. Many donors prefer to restrict the uses of their gifts in order to meet specific impact targets. In those situations, a nonprofit could find itself in the situation of having one well-funded, precisely targeted program while facing an overall shortage of funding for salaries, technology, and building maintenance.
“Nonprofits may have a greater need for unrestricted giving right now,” Buckley concludes.
Recommendations for charitable giving in 2023
Buckley and Bardwell have three actionable insights for families of means who want to give in a meaningful way in today’s conditions.
1. Activate your passion with a charitable giving plan. “You would think giving away money is really easy, but it definitely requires work,” says Buckley. Her advice: Team with your advisors and the specialists they can bring in to discuss your goals, and make a plan that fits your time and interest.
For example, family foundations can be portrayed as labor-intensive, but an experienced provider like The Private Bank can handle operations and help you set a mission that could translate to generations of impact.
“Oftentimes donors get stuck,” Buckley says. “Our team can help them get beyond that bump and say, ‘OK, let’s figure out what you want to achieve, how you want to do it, and then let’s create a road map to get you there.’”
2. Choose the right structure for your giving. A factor that can impact the effectiveness of giving tools is the applicable Section 7520 discount rates published by the IRS.
When the IRS Section 7520 Discount Rate is low, the strategies below can be more effective, while a rising IRS Section 7520 Discount Rate will increase the linked IRS hurdle rate.
A charitable lead trust, or CLT, pays income to a charity until the death of the donor or other specified term, with the non-charitable beneficiaries receiving the remaining assets in the trust at that time.
One type of CLT is the charitable lead annuity trust, or CLAT for short. Those who create this type of trust may choose to “zero it out” for income, gift, and/or estate tax purposes. That usually requires a higher annual payout to the CLAT beneficiary (public charity, donor-advised fund, or private foundation) when IRS Section 7520 discount rates are rising, which may translate into a lower inheritance from the trust for the family. If not zeroed out, a CLAT may deliver a decreased tax deduction.
A charitable remainder trust, or CRT, is an irrevocable trust that pays a charitable beneficiary a gift of cash or other property for a prescribed period. Depending on how it was structured, a CRT may provide an income, gift, or estate tax deduction. At the end of that period, remaining donated assets are distributed to charities named in the trust.
“We find that a charitable remainder trust is one of the most popular vehicles if somebody is looking to sell highly appreciated assets but doesn’t necessarily want to take the capital gains hit,” Buckley explains.
“Right now is a great time for such a move because a donor can take the highly appreciated assets, put them into the charitable remainder trust, sell them tax-free in the trust, and reinvest the proceeds,” she says. “And all else being equal, just the interest rate increase means you’re going to get a larger income tax deduction.”
3. Be ready in the next few years to adjust for potential changes to the lifetime gift and estate tax exemption. For people who pass away in 2023, the exemption amount will be $12.92 million. For a married couple, that comes to a combined exemption of $25.84 million.1 Something to keep in mind: The lifetime gift and estate tax exemption currently is scheduled to revert to $5 million (adjusted for inflation) as of January 1, 2026. According to IRS.gov, individuals who take advantage of the larger gift tax exclusion from 2018 to 2025 are not expected to be adversely impacted when the exclusion amount returns to pre-2018 levels.2
If you have not already used your lifetime gift and estate tax exemption, be sure to discuss potential transfers with your tax advisors to understand potential considerations. If the exemption goes back down to roughly the $5 million mark, Buckley explains, CLATs could take on fresh relevance.
“Income, gift, and/or estate tax deductions on the lead trust may decrease if IRS Section 7520 Discount Rates increase, with the other key variable being whether the CLT is zeroed out,” she says. “But lead trusts can be a great way to transfer assets to family members and reduce that exposure to the estate tax.”
The Private Bank offers products and services through Wells Fargo Bank, N.A., Member FDIC, and its various affiliates and subsidiaries. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.
Wells Fargo Wealth & Investment Management (WIM) is a division within Wells Fargo & Company. WIM provides financial products and services through various bank and brokerage affiliates of Wells Fargo & Company.
Wells Fargo & Company and its affiliates do not provide tax or legal advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your tax return is filed.
Trust services available through banking and trust affiliates in addition to non-affiliated companies of Wells Fargo Advisors. Any estate plan should be reviewed by an attorney who specializes in estate planning and is licensed to practice law in your state.