The Nebraska charitable tax credit and community endowments

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By Maxine Moul Caring for those less fortunate has been a hallmark for Nebraska from its earliest days. Raising barns and harvesting crops for neighbors in need are traditions that have been passed down through the generations, and we still read of farm families who gather for spring plantings or urban folks who open their wallets and their hearts to those less fortunate. Nebraskans have ranked among the top in the nation in their annual charitable gifts, according to the charitable tax deductions they report on their federal income taxes. But those annual cash gifts don’t necessarily mean that Nebraskans have provided for the communities and charities they love through estate planning. A 2002 Rural Poll by the University of Nebraska-Lincoln underscored the need for both education and incentives for planned giving. In rural Nebraska, only four percent of those surveyed had made charitable plans for their community in their estates. Now Nebraskans have a new incentive to give charitably, specifically to the permanent endowments of Nebraska’s nonprofit organizations registered under IRS Section 501(c) (3). The Nebraska Legislature has established the Nebraska Charitable Tax Credit, which became effective with the 2006 tax year. The Nebraska charitable tax credit is modeled after similar legislation in Montana that resulted in an additional $74 million for that state’s endowments in just five years. Nebraska’s law provides a maximum annual credit of $5,000 for individuals making irrevocable planned gifts. Corporations doing business in Nebraska and paying state corporate taxes are also eligible for the $5,000 annual credit for their outright gifts to Nebraska nonprofit endowments. A coalition of Nebraska organizations and associations, called EndowNebraska, actively supported the passage of the authorizing bill in the Legislature. The coalition’s long-term goals are to increase awareness among all Nebraskans about the potential benefits of philanthropic contributions to Nebraska’s non-profit sector and its communities and to increase levels of charitable giving statewide. Nebraska is at a critical juncture in terms of its philanthropic potential. A study conducted by the Nebraska Community Foundation in 2001 shows an estimated $258 billion, or $5.2 billion annually, will be transferred from one generation to the next by the middle of this century. In rural Nebraska, 24 counties are already experiencing the peak years of transfer, because of aging populations and out-migration of young people. For rural Nebraska, the peak transfer is expected to occur around the year 2015. Three lightly populated Nebraska counties are among those currently experiencing that peak transfer of wealth. The Nebraska Community Foundation estimates that in Franklin County in south central Nebraska the annual wealth transfer in recent years has been around $8.7 million. In Loup County in north central Nebraska, the figure is $8.5 million. For Banner County in the Panhandle, it’s $10 million. Since the Nebraska Community Foundation launched a campaign to promote endowment giving, the state has seen notable progress. Six community endowments (Bassett, Lynch, Shickley, Spencer, St. Edward and Valley County) have reached their goal of endowing at least 5 percent of their community’s projected 10-year transfer of wealth. The total gifts and pledges for those endowments have ranged from $400,000 to more than $6 million - a wonderful demonstration of community spirit. An additional 45 community funds each have accumulated more than $100,000 in combined endowments and pledges. The individual success stories are quite encouraging. Oakland, Neb., in the northeastern part of the state, has seen two significant donations come in after a generous $1 million gift. The south-central community of Shickley, has built an endowment of $384,000 with pledges of an additional $1.4 million. Communities such as Ord and Atkinson, meanwhile, are proactively building for the long term by starting “founders clubs” in which each member provides a minimum donation of $1,000. Community endowments need not be in a rush to spend money too quickly. This is a long-term effort. And community endowments should focus on funding projects that encourage long-term economic development. In McCook, the Hormel Foundation has teamed up with a local matching fund to provide support for business startups in that southwest Nebraska community. An editorial by the Omaha World-Herald earlier this year said sustainable development is a key theme emphasized by many endowments across the state. A variety of programs are providing support for hometown entrepreneurs. “This type of practical approach to community endowments is crucial to the future of rural Nebraska. Ultimately, the destiny of rural communities will depend primarily on their own efforts, vision and solidarity. An indispensable tool in that effort will be public-spirited pledging that keeps a vital portion of rural income in the communities that need it most. Now is the time for Nebraskans to spread that word,” the editorial said. Much of the transfer of wealth, particularly in rural Nebraska, could be lost to federal estate taxes or to heirs residing outside the state. The EndowNebraska coalition members believe that a significant opportunity exists for Nebraska to retain some of this wealth in the form of charitable dollars that could be gifted to Nebraska’s nonprofit organizations. Those nonprofits provide a broad spectrum of vital social, cultural, educational and health-related services benefiting every citizen of the state. They fill critical gaps the government sector cannot fully address without raising taxes. Nonprofit organizations are restoring rural communities and urban neighborhoods, providing substance abuse counseling to teens, offering arts programs in schools and promoting Nebraska’s cultural resources. The Nebraska Charitable Tax Credit is an incentive to connect the state’s substantial philanthropic potential with the nonprofit organizations that are so critical to quality of life. With access to these endowed assets, nonprofits chartered and doing business in the state can build and sustain their capacity to deliver services to all residents. Charitable endowments can be established and utilized by nonprofit organizations as a stable source of operating income. These permanent endowments, composed of donations of cash or stock, may be invested in interest-bearing accounts, bonds or the stock market. The nonprofit organization can utilize the interest generated from the endowment to support its operating and personnel expenses and decrease the agency’s dependence on funding, such as grants and annual giving campaigns, which are more susceptible to shifts in the economy. Nebraskans are already using the new state charitable tax credit. The Nebraska Department of Revenue reports donations totaling $3.3 million to the endowments of Nebraska nonprofits. Most of the irrevocable donations from individuals have been charitable gift annuities. But paid-up life insurance policies and charitable remainder trusts have also been used. Also eligible are wealth-replacement trusts, charitable-lead trusts and retained-life estates. Charities from Omaha and Lincoln to McCook have reported gifts, along with smaller communities like Stuart, Pender and David City. And the value of the gifts has ranged from $5,000 to several hundred thousand dollars. Former State Senator Matt Connealy, who was vice-chair of the Legislature’s revenue committee, said he introduced the tax credit bill because “We simply must find a way to encourage more people to make donations to charitable organizations.” He said a Nebraska tax credit will encourage Nebraskans to think first of Nebraska nonprofits when they make their charitable giving decisions. With the passage of the tax credit, EndowNebraska launched a public awareness campaign to promote the credit and its impact to Nebraskans and the state’s nonprofit sector. The campaign includes special efforts to connect with tax attorneys, financial advisors, bankers and others involved in estate planning. The marketing and education programs have been supported by grants from the Peter Kiewit Foundation, the Cooper Foundation, the Woods Charitable Fund, and by contributions from First National Bank of Omaha, Co-Bank, Union Bank and Trust, Cass County Bank, Pinnacle Bank, Great Western Bank, the University of Nebraska Foundation, and numerous other corporations, individuals and nonprofits. EndowNebraska is providing Nebraska donors, nonprofits and financial advisors with new tools for spreading the word about Nebraska’s new charitable tax credit. Its Web site, at www.nebraskataxcredit.org, has detailed information about the Nebraska Charitable Tax Credit legislation and the current Statutes. A document from the Nebraska Department of Revenue includes tables for calculating the state credit. There are newspaper articles and editorials about the tax credit. On this site are examples of how certain gifts can affect individual taxes and answers to many commonly asked questions. The tools include downloadable brochures to promote the Nebraska Charitable Tax Credit and radio and print media ads suitable for public service announcements and paid advertisements. The Nebraska Charitable Tax Credit is available to both individuals and businesses. But it’s important to take advantage of the opportunity soon because the credit is scheduled to terminate at the end of the 2009 tax years.

Immigration in Nebraska