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Crafting the Right Charitable Plan for Your Client

Dec 8th 2015
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As the year comes to a close and the holidays approach, many of your clients will turn their thoughts to the subject of charitable giving. They may be prompted by year-end solicitations from their favorite nonprofit organizations, an awareness of their own financial successes over the past 12 months, or simply by tax-planning considerations. More likely than not, your clients will also be motivated by a genuine desire to help others and to make a difference in the world around them.

As their advisor, it is your goal to make philanthropic strategies a year-round discussion and to truly understand the core issues and charitable aspirations that drive your clients.

The case for making charitable giving an integral part of the financial-planning process for your clients is clear. Today, individual and corporate donations are on the rise, with the Giving USA Foundation reporting that charitable donations by Americans increased to a record $358.38 billion in 2014. In addition, earlier this year, a report from the Indiana University Lilly Family School of Philanthropy predicted that charitable giving will increase 4.8 percent by the end of 2015 and 4.9 percent in 2016. Simply stated, more people are engaging in philanthropy, and your clients are no doubt among them. Assisting them in developing a thorough plan that reflects their true interests while maximizing tax advantages is more important than ever.

Another set of statistics suggests just how critical it could be for financial planners and accountants to become more active factors in the philanthropy equation. A much-cited study by US Trust and the Philanthropic Initiative in 2013 reported that, according to surveyed clients, advisors initiated charitable giving and planning discussions only 17 percent of the time. The study also revealed that only 10 percent of surveyed clients engaged in philanthropy solely for tax purposes. In other words, Americans are giving for personal reasons, and there is room for their advisors to step in and offer direction.

Understanding What Drives Your Client
A successful charitable-planning strategy must begin with a clear understanding of your client's interests and goals. All too often, advisors allow tax-planning techniques and mathematical formulas to drive the charitable-planning discussion, when in fact it should be the other way around: Tax planning should be built around the decision of where and how to give.

Although some clients have a consistent pattern of giving, in many cases, clients will have a vague sense of their interests, but a review of their past donations will indicate haphazard gifts to multiple charities and inconsistent amounts from year to year. The first job of the advisor is to find true clarity when it comes to overarching charitable goals. In other words, where does your client really want to make an impact?

Some may be motivated by faith-based efforts, others by their community or loyalty to their alma mater. Depending on their level of income and net worth, they may be interested in pursuing naming rights at a university or hospital, for instance. Or perhaps they are driven by causes – helping children in need, animal rights, fighting disease, or recovery from natural disasters. Maybe they serve on a board and are dedicated to a particular organization as a result. They could be influenced by friends, colleagues, or established giving initiatives started by their workplace.

At Berger Singerman, for instance, the firm created a 30th anniversary giving drive and asked people across the firm to contribute. The drive not only allowed the firm to make significant gifts to a number of local charities, but it offered employees a method to make an impact and a way to identify with their colleagues.

Once you understand what your client is passionate about, and once you understand any ongoing commitments that he or she have made, the process of finding the right opportunities for giving becomes easier to manage.

Assessing Conditions and Crunching the Numbers
While working with clients to identify charitable goals, you will also be assessing circumstances that will influence how best to structure certain gifts. A major event, such as a plan to sell a business or a low-basis asset or security, for instance, may call for certain strategies. An advisor can help a client in this situation explore the options for donating all or a portion of the asset in order to minimize capital gains and other taxes. Of course, a clear understanding of the client's tax position based on a solid crunching of the numbers will determine the best option. In some cases, the use of a charitable remainder trust will make sense when a client intends to give, knows where to give, and plans to sell a large asset.

Year-end tax planning is another example of a condition that regularly comes into play in charitable discussions. For instance, a client may be able to donate appreciated stock without having to recognize the built-in gain. As a result, if a client has the option of giving away a specific amount in cash or the same amount of a low-basis stock, the stock will be preferred for year-end tax purposes. By donating the appreciated stock, instead of selling the stock and donating cash, the client gains the tax deduction and at the same time avoids paying capital gains tax.

Often, when clients give without the advice of a professional, they do so hastily, writing a check or even using a credit card to make a donation. In other words, their approach does not take tax considerations into account. With the help of an advisor who understands the overall tax situation along with ongoing changes in tax policy, clients can structure gifts that minimize taxes and take advantage of assets that may be underused, such as a life insurance policy that is no longer needed.

Looking at Specific Charitable Giving Techniques
There are multiple charitable giving methods that your client should understand. Ultimately, how gifts are structured should be a reflection of many factors, including the level of involvement he or she may want in the charities chosen and in the giving process overall, his or her tax positions, the types of assets involved, and, of course, overall giving goals. Clients may employ one or a combination of approaches, including charitable trusts, private foundations, charitable gift annuities, and donor-advised funds.

Here is a closer look at a few strategies:

Private foundations. Setting up a private foundation gives clients the chance to have more retained control over gifts, but involves a higher level of administrative work and tax filings. Many donors will establish a foundation in order to involve family members in the giving process, allowing them to work toward a common goal and involving younger family members early on.

Charitable lead annuity trust. Two versions of the charitable lead annuity trust (CLAT) offer specific benefits to donors. The grantor CLAT provides a significant tax deduction at the time the trust is funded, and it allows the donor to finalize the gift over a number of years. The nongrantor CLAT is its own taxable entity; while no deduction can be taken when the trust is set up, the CLAT itself will generate income and receive deductions.

Donor-advised funds. Growing in popularity in recent years, donor-advised funds (DAFs) allow donors to make a contribution to an “umbrella” charity and receive an immediate one-time tax deduction. The funds have their benefits, especially for donors who want less administrative work but still want a degree of influence on how the money is spent. DAFs are sponsored by national charities or by community organizations, such as a local United Way or community foundation. Donors provide the gift, which can be in the form of multiple asset classes, such as stocks or real estate, and the charity administers and distributes the grant, typically on the advice of the donor.

By actively engaging with your clients to develop a comprehensive charitable plan, you can improve your working relationship and increase the value you bring to the table, all while creating a comprehensive financial strategy that maximizes tax advantages now and into the future.

Related article:

Donor-Advised Funds and How Nonprofits Can Effectively Work with Them

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