Giving USA Foundation found charitable giving declined in 2021 after being adjusted for inflation and is expected to decline further when the 2022 numbers are counted. Additionally, data from Giving USA shows that it takes an average of three to four years for inflation-adjusted charitable giving to recover to pre-recession levels. As a result, your customers will receive more charity calls than ever as the holiday season approaches, because their contributions are so badly needed.
I know that many advisors are still hesitant to approach philanthropy with their clients because they worry about the migration of assets under management. Or perhaps they fear further outflows from a client’s portfolio after a bear market in stocks and bonds. Or maybe they just don’t want to appear uninformed in front of customers. None of these concerns is a valid reason to avoid philanthropic discussions with clients.
As the old saying goes, if you don’t discuss philanthropy with your clients, someone else will. Example: a US Trust Study of the Philanthropic Conversation found that a third of very wealthy respondents (31%) would switch advisors if that advisor could speak to them in a meaningful way about philanthropy.
Again, one in three wealthy families would switch advisors if that person was better able than their current advisor to help them donate their money. It has nothing to do with investment returns, asset allocation or finding popular alternative investments. It’s about understanding your client’s values and seeing the bigger picture.
Have conversations the right way
Too many advisors believe that by encouraging clients to make large planned gifts, clients will fear depriving their families of money. It is simply not true. Inheritance tax is essentially an “optional” tax, and your clients have three potential “beneficiaries” for this money:
1. The government;
2. Their family; Where
Tell your customers that they can choose two of the three above.
Unfortunately, as I discussed earlier this yearif your customers “show up at the counter” and don’t know what they want, the IRS tells them what they will get. He collects your client’s taxes instead of that money going to the charities most important to him and his family. no soup for you!
I know some of your clients will push back and say, “I’m not very charitable.” That’s not true either. Without doing any planning, they simply made government their charity of choice. Ask your customers if they could eliminate the government, where would they want to give their money? Ask them if you could plan their estate so that they can give generously to charity while giving their children 100% of their estate (not to the government), would they be interested in charitable donations? The answer is usually “Hell Yeah”.
However, if clients cite the bear market and recession as reasons for delaying charitable planning, reassure them that you can offer them a giving plan in the future that allows them to have enough money to live, even if we are in a recession or a bear market. We have always had periods in the history of our country when suddenly things are not going as well as before. This is what a planning relationship is. It’s about helping clients stabilize things so they always go well. As advisors, our job is to “bulletproof” clients’ estates, so they don’t have to worry about money all the time.
Basic blocking and tackling
Many advisors (and they are clients) are drawn to exotic and complex planning strategies, but they don’t master the basics. Take private foundations (FP). Unless a client really wants to create gainful employment for their adult child to sit on the board, there is no reason to spend the time and expense setting up a FP for charitable donations. In addition, the tax implications of PFs are not as advantageous as with a donor-advised core fund (DAF). The reporting, record keeping and oversight of a CFO is significantly lower than that of a foundation. The other reason I like DAFs over PFs is that with a DAF your client doesn’t have to file a separate tax return and they can keep their donations anonymous.
Don’t write checks
Another important thing to discuss with clients early in the planning process is to stop writing checks or swiping their credit card to support their favorite causes. By donating stocks, real estate or other appreciated assets to charity – instead of cash – they will generally be eligible for two important tax benefits.
First, their donation may qualify for a fair market value tax deduction. Second, they can potentially eliminate the capital gains taxes they owe on any appreciation of those donated assets, which can still be significant. Compared to donating cash or selling their securities and contributing the after-tax proceeds, they may be able to automatically increase their donation and tax deduction.
Real world example
Recently, a charity-inclined client came to me for advice. He had been an early investor in Amazon and his shares – which had almost no merit – were worth about ten times what he had paid for them. He wanted to get “money off the table” and support his church. Being a California resident, he was considering state and federal taxes of 37.1% on his Amazon gain. Ouch!
Instead of writing a check to his church, we arranged to transfer the same dollar value in Amazon stock to his church. The church can decide to sell the shares for its needs or keep them for future growth. It is their decision. Meanwhile, our client avoids a large capital gains tax bill, takes a charitable deduction for the full market value of Amazon stock, and can use the money he would otherwise donate to charity to purchase more products. ‘Amazon shares (after waiting 30 days according to the wash sale rules). This raises his base in a stock he likes. And if he doesn’t end up buying more Amazon stock, he can diversify into another stock or asset class.
Be better informed
As I constantly remind Advisors, when it comes to discussing philanthropy with clients, you don’t need to know everything about charitable giving. There are plenty of experts to consult and your customers won’t care. But you need to know where to find the right experts. Contact the estate lawyers you know or consult the Planned Giving Design Center.
Cover a high income year
If your client recently sold a business or exercised stock options, donating to a DAF sponsor can significantly reduce their taxable income. Donating to a DAF sponsor means they can donate now and in the future. Contributions can be invested and have the opportunity to grow tax-free, which could translate into additional charitable grant dollars.
Helping customers make the right decisions
Most of your clients are fortunate enough to be able to continue giving despite the economic and market headwinds that so many Americans face. The impact of their giving in the fourth quarter and beyond may be felt more significantly than at any other time in recent memory. By helping clients make the right decisions about where and how to donate, you can make a huge difference in their lives. And that only sets you up for more referrals.
Randy A.Fox, CFP, AEP is the founder of Two Hawks Consulting LLC. He is a nationally recognized wealth strategist, philanthropic estate planner, educator and speaker.