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Be Generous With Charitable Planning Advice


Clients are seeking a place to do “one-stop shopping” for most financial activities, including tax planning and charitable-based endeavors.

Sep 27th 2019
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If you build a rapport with your clients, you can step in and offer a range of services to accommodate this need.

The Tax Cuts and Jobs Act (TCJA) discourages charitable gift-giving by taxpayers who may now opt to claim the standard deduction instead of itemizing deductions. That being said, there still are millions of taxpayers—including many high net-worth clients—who have significant tax incentive to donate money or property to charity. And other taxpayers will continue or begin contributions irrespective of the tax consequences.

According to the Charitable Giving Statistics provided by the National Philanthropic Trust (NPT), individuals donated a total of $292.09 billion to charities in 2018, the first year the key TCJA changes for individuals went into effect. For starters, clients who itemize can claim deductions for charitable donations, within generous limits.

Among other changes, the TCJA increases the annual deduction limit for monetary contributions from 50 percent of adjusted gross income (AGI) to 60 percent of AGI. If a client donates appreciated property owned longer than one year, he or she can deduct its current fair market value (FMV), subject to a 30 percent-of-AGI limit. There’s no tax due on the appreciation in value. 

But charitable planning goes far beyond efforts to maximize tax benefits. This requires some diligence on your part and a willingness to discuss the long-range charitable intentions of your clients, factoring in the tax implications.

For instance, clients will likely need guidance on which charities to reward and whether they qualify for 501(c)(3) tax-exempt status, how much to give to the appropriate charities and how to preserve assets for heirs while fulfilling charitable obligations. Typically, you may be initiate conversations with clients, or respond to their questions, about the following issues relating to charitable gift-giving.

Beneficiary designations: Review the beneficiary designations made for clients for qualified plans and IRAs. If a client wants to include a charity as a beneficiary, or has no heirs, the documents can be revised. Remember that the designations supersede representations in a will.  

Similarly, life insurance policies can be revised to provide proceeds to qualified charities. If a client no longer has a pressing need for the insurance coverage—for example, he or she has retired—this may encourage continuation of a policy.

Donor-advised funds: With a donor-advised fund (DAF), accounts are controlled by a sponsoring charitable organization that invests the assets and manages the accounts of the participating donors. Nonprofit arms of financial services firms like Vanguard and Charles Schwab often serve as the sponsoring organization. After a DAF is established, donors tell the sponsoring organization which charities they’d like to donate to from their accounts. Clients may request your guidance in establishing and participating in DAFs.

Qualified charitable distributions: A client over age 70½ may choose to transfer up to $100,000 of funds directly from an IRA to a qualified charity without any tax consequences (i.e., no tax on the distribution or deduction for the contribution). Notably, this qualified charitable distribution (QCD), also called a charitable rollover, counts as a required minimum distribution (RMD). Thus, clients will often use QCDs to satisfy their annual RMD requirements.

Investment planning: This can come into play in several instances, such as donating appreciated securities to charity, creating a private or community foundation or using capital gains or losses from securities sales to cancel each other out for tax purposes. This is particularly important at the end of the year. For example, a capital loss realized in December can offset a high-taxed short-term capital gain and up to $3,000 of ordinary income in 2019.

Estate planning:  Estate planning is often combined with charitable planning for favorable tax results. This might include use of DAFs, charitable remainder trusts (CRTs) and/or grantor retained annuity trusts (GRATs) for business interests. Discuss with your clients the options for pre- and post-mortem techniques that keep federal and state estate taxes to the bare minimum.

Not only will these discussions often lead to more revenue for your practice, it will help solidify existing relationships with clients and possibly open up new opportunities. Make this part of your practice development plan.

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