Journal of Financial Planning: October 2020
Ann Gill is chief philanthropic officer at Vanguard Charitable. Her experience is in leading various sales, service, and credit teams focused on the financial institutions, health care, and most recently higher education and nonprofit banking sectors.
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Charitable giving is a well-established tool in year-end tax planning. With strategic and well-timed donations, financial advisers can help clients minimize taxes while executing a broader philanthropic strategy and supporting charities and causes. Yet traditionally, many clients often think of charitable giving as writing a check to a few non-profits near the end of the year in order to claim a deduction on that year’s tax returns. It’s a valuable but limited approach that can reduce the tax impact and philanthropic potential of the donations, especially for high-net-worth clients. What’s more, it represents a missed opportunity for advisers to deliver greater value and deepen relationships with their clients.
With the right approach, you can help clients understand a key truth around charitable giving—what and how you give can be just as important as how much you give.
Deciding which assets to donate and how best to structure giving is where the real tax strategies of charitable giving come into play. As a financial adviser, you often have a comprehensive view of clients’ financial portfolios. Use that unique position to conduct a meaningful analysis that uncovers the most tax-effective options and connect to a client’s overall financial well-being and philanthropic goals.
In a year marked by significant upheaval, helping clients navigate uncertainty is more important than ever and can pay dividends in helping you establish a deeper connection. From the COVID-19 pandemic and the ensuing market volatility to the most significant civil rights movement in a generation to the lead up to a presidential election season, many families are actively thinking about their long-term financial plan and their philanthropic priorities. These considerations all serve as touchpoints for you if you’re seeking to minimize your clients’ tax bill and enhance your client relationships.
To this end, it’s worth taking a closer look at established charitable giving tax saving tactics, as well as the best ways to structure the conversation around philanthropy to have the maximum impact.
Establishing a Donor-Advised Fund
Utilizing a donor-advised fund (DAF) allows donors to grant donations over a longer period of time while realizing immediate tax benefits. Clients can open a DAF and make tax-deductible contributions to the fund, which can be invested in the market and grow over time. These funds can be granted to charities of clients’ choosing at any time. Ultimately, tax-free market appreciation enables more money to be donated to charities, and a DAF’s structure provides clients with an opportunity to be strategic in their short- and long-term giving. With clients’ approval, many DAF sponsors can also grant advisers access to the fund, providing the ability to monitor market performance, make investment allocation changes, and coordinate grants.
Donating Appreciated Securities Instead of Cash
Gifting long-term held publicly traded securities offers a win-win tax planning scenario. Clients can claim a fair market value deduction of the stock, bond, or mutual fund on their income tax return. Additionally, donors are not required to pay capital gains taxes on the gifted securities. It’s a great way for high-net-worth clients to give, realize tax savings, and support portfolio rebalancing.
Many charities accept appreciated securities, but if clients are looking to liquidate a large amount of appreciated securities, donating first to a DAF provides additional flexibility for donating the funds to multiple non-profits over time.
Donating Complex Assets
Complex and illiquid assets can be another area of hidden opportunity for tax savings in a client’s larger financial picture. Donors who give private company stock, ownership in an LLC, limited partnership interests, life insurance policies, or even artwork and real estate can deduct the fair market value of the asset. While most non-profits do not have the infrastructure to accept complex assets, DAFs are typically well-suited to complete these types of charitable transactions.
Using a DAF also enables clients who have experienced a significant wealth event to recognize significant tax savings yet maintain control over their long-term philanthropic planning. In some cases, donors may want to divide particularly valuable complex assets among multiple causes and charities. By first transferring the assets to a DAF, donors can grant the funds from the liquidated complex asset to charities of their choosing at the time that is best for them.
Enhanced Tax Savings with a DAF
The example illustrated in the chart details two scenarios for gifting $150,000 in appreciated securities. In the first scenario, the assets are liquidated, and the proceeds are donated to charity immediately. In the second scenario, the securities are donated directly to the DAF, resulting in no capital gains taxes and a $150,000 deduction in taxable income. In these scenarios, the benefits of a DAF are clear—it results in an additional $30,000 to be gifted to charity and approximately $30,000 more in net tax savings.
Tax Law Changes Present Additional Savings Opportunities
Advisers should also be aware of changes in tax law from the Tax Cuts and Jobs Act of 2017 (TCJA) as well as more recent policy shifts in the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
The TCJA raised the standard deduction threshold, which made it less likely that many families and taxpayers would qualify for the deduction in a single year. As a result, some have taken to “bunching” donations they would typically make over several years into a single year. They receive a higher deduction in the year they make the donations and take the standard deduction in the other years.
Under the CARES Act, taxpayers can deduct up to 100 percent of their adjusted gross income on their 2020 tax returns. In previous years, that deduction was capped at 60 percent under the TCJA.
Moving from Tax Planning to Trust Building with Clients
Smart charitable giving has the potential to drive significant tax savings, and it should be part of every advisers’ tax planning conversation with clients. Yet tax savings are just the tip of the iceberg when it comes to ways in which you can demonstrate your value and create new opportunities through evolved services around charitable giving. A family’s philanthropic priorities and the causes they choose to support reflect their values and the legacy they want to leave. If you can connect to that fundamental aspect of a client’s values and financial outlook, you can move into the arena of the trusted adviser.
Serving as that trusted adviser means broader conversations around a client’s wealth and the role their finances play in their lives and their legacies. A trusted holistic adviser goes beyond planning for a balanced portfolio to helping clients plan for a balanced life. They’re focused on a client’s goals, ambitions, and concerns. They help clients sleep better at night while living a more meaningful life. Their ultimate value lies in the human element of financial advice.
For some advisers, this shift in responsibilities and expectations means stepping out of their comfort zones. Fortunately, you don’t have to make the transition all at once. It starts with shifting the tone of conversations and client interactions. Year-end tax planning is an ideal time to start to broaden the focus. If clients are already talking about philanthropic goals and the charities they’re eager to support, it’s a chance to expand the conversation to talk about family mission, shared values, and long-term legacy.
There’s a strong financial incentive to pursue these deeper connections with clients, as well. Earning and keeping a client’s trust has been shown to connect to earning a larger share of their assets, as well as more referrals and a better relationship with next-generation clients. Here again, philanthropy is an ideal path for advisers to begin to expand their role. This could be bringing in a client’s children for a conversation around future philanthropic priorities, or it could be as simple as a call to the client to check in after a particularly volatile market day, reinforcing your worth as a calming presence in the client’s life.
COVID-19 and the New Giving Mandate
As you and your clients navigate these deeper relationships, COVID-19 will likely be a part of the broader considerations. The historic pandemic has shifted giving strategies and priorities significantly. Donors are rethinking where to give amid unprecedented need. Some clients may want to shift to causes that directly impact COVID-19 relief efforts, while others may double down on long-term philanthropic priorities to help cover economic hardships facing many non-profits. Some are pausing because of uncertainty around their financial situation. At the same time, a national conversation around racial justice has created new urgency in giving to related causes across the political spectrum. All of these shifts are occurring during a presidential election season with near-constant calls for donations and support.
Donors who have already established DAFs are in a good position to adjust their giving strategies to respond to the COVID-19 pandemic and other causes. In many cases, that has resulted in an immediate increase in giving as a direct response to the crisis. In a survey of Vanguard Charitable clients with DAFs, four in 10 said they plan to increase the amount they grant from the fund to support charities aiding in COVID-19 recovery. The added flexibility empowers them to give when it’s needed most for both short- and long-term priorities without sacrificing tax benefits.
These new realities and priorities should be part of an adviser’s holistic approach to philanthropy and human-focused client service. It’s an opportunity to have deeper conversations with clients and recommend strategies that can help them achieve their goals, minimize tax impact, and make a difference. DAFs and other tax-effective giving tools allow clients to forge an immediate philanthropic impact while sustaining their giving strategy for years and generations to come. Advisers who can help clients understand and utilize these tools will be well-positioned to deliver greater value and earn greater trust from clients far into the future.