Looking for new ways to differentiate yourself as an advisor? Philanthropy and charitable giving are important to many clients, but are not top-of-mind for many advisors. Helping clients meet their charitable goals is not only the right thing to do, but helping them do it the right way can add significant financial value.
There are many ways to be financially charitable, but each method comes with its own challenges. While your client may be strictly concerned about ensuring the safe delivery of their contribution, you may be tasked with monitoring and managing various aspects of philanthropic giving to ensure the success of the gift.
Here are some things to consider as you approach a conversation about giving with your clients.
- Charitable giving is a great way for individuals to help good causes while also cutting down on their tax exposure.
- Your clients have a variety of assets they can contribute, with cash being the most common and easiest to transmit.
- Other common sources of philanthropic contributions include appreciated securities or real property.
- Your clients also have a plethora of philanthropic vehicles to transmit their vehicles through.
- While some vehicles like direct donation are easiest, others like DAF or trusts minimize tax exposure while providing the donor with other benefits.
Types of Gifts
While there are a number of vehicles and techniques that can be incorporated into your client’s estate plan, many clients are focused on how they can contribute while alive. As your client may have an already diverse portfolio full of various types of assets, your client may be able to contribute a variety of different types of gifts.
Cash is the most basic donation and is one that most clients are familiar with. As you know, giving in cash often entails writing a check to the charity or other tax-qualified organization of choice.
Cash can immediately be used by the beneficiary of the gift.
Cash is straight-forward to account for as a gift; there is no valuation or liquidation that must occur.
Cash donations are often eligible for itemized deductions on the donor's federal income tax return.
Unless your client was already holding the cash, there will likely be taxable transactions that occur to liquidate other holdings into cash.
Cash can be used by the beneficiary in any way. As opposed to ensuring donated tangible property will be used in a specific manner, there is less guarantee the cash will be used as intended by the donor.
Gifts of appreciated shares of individual stocks, mutual funds, ETFs, or closed-end funds can be made to qualified organizations. After contacting the organization directly to confirm they are equipped to accept such gifts, work with your client to facilitate the transfer of the shares from their account to the brokerage account of the organization.
This can be a great solution for clients with highly-appreciated, low-basis holdings. Your client receives the tax benefit of the charitable contribution based upon the market value of the shares at the time the contribution is made. They will also not be subject to the capital gains they would incur if the security was sold outright. This can be a sizable amount for securities that have been held for a number of years with an extremely low cost basis.
Gifting Appreciated Securities
Your client receives favorable tax treatment as opposed to if they sold the stock and donated cash.
As the process is managed by brokerage firms, there is less risk of your donation getting lost in the process (as opposed to a paper check).
Your client may potentially have more money in their investment portfolio than sitting in their bank as cash.
The receiving organization must be equipped with a brokerage account. Some smaller non-profits may not accept stock.
The stock donation process may be complicated; instead of simply writing a check, multiple brokerage firms must be involved as part of the donation.
Accounting for the stock donation is slightly more complex for the beneficiary, especially if material changes to the security's price occurs from when the security is received and when it is liquidated.
Stock donations must come from eligible brokerage accounts; the security cannot be transferred from an IRA or other retirement account.
Gifts of Other Property or Assets
Clients can also choose to gift non-securitized assets. In the case of real estate, stock in a privately held business, art, or collectibles, the value of the asset at the time of the gift is deductible, like publicly traded securities. Also, like publicly traded securities, the client will not be subject to capital gains tax due on the amount of unrealized appreciation of these assets.
Be aware, however, that the charity of your client's choosing needs to be able to take these types of assets as gifts. It is best to work with your client to contact the organization and confirm that this is the case. Generally, you will then need to have a third-party conduct an appraisal of the asset to be donated to determine its value.
Gifting Other Real Assets
Your client receives favorable tax treatment as opposed to if they sold the stock and donated cash.
Your client may potentially have more money tied in real property than sitting in their bank as cash.
Real property may have a specific use. For example, your client may want an art piece to be hung at a nonprofit's office. Your client may receive greater intrinsic value from the gift of real property.
Property typically must be valued in advance of the gift to understand the market value of the gift.
Some types of property may not have liquid markets. It make take the beneficiary some time to convert the real property into cash.
The beneficiary will need to safeguard the asset until liquidation; there is an increased risk of theft, damage, or loss of value prior to its conversion to cash.
How to Give
Knowing what to give is the first step. Understanding how to effectively pass a qualified gift with the most favorable tax implications is the second.
Giving Directly to the Organization
Direct donations are perhaps the most common form of giving. When a client’s gift of cash, securities, or other assets is made directly to the organization, the organization then takes the cash, or the value realized from the disposal of the assets or securities, and puts this money to work in line with its mission.
Donor-advised funds (DAF) are philanthropic funds established as public charities. Many major custodians, such as Charles Schwab and Fidelity, offer a version of these funds that take donor gifts and invest the money on donors' behalf. Depending upon the fund, donors can choose from investment options offered by the fund or have the money invested in a fashion suggested by an advisor.
Donors can usually designate the recipient(s) of their donations: most charitable organizations are eligible, provided that they meet IRS requirements. While not as direct as a cash gift, DAFs allow donors to gift several years’ worth of donations at one time, receiving credit for the gift for tax purposes in the year of the donation, but spreading their donations over a number of years.
The receiving organization benefits from any appreciation in the investment account. This allows clients to "bunch" deductions into specific years in order to ensure they are able to itemize deductions in advance of changes in the tax law. In some cases, donor-advised funds can also accept non-liquid assets, providing a source of liquidity for donors as well.
A foundation is a wealth fund established for a charitable purpose. Many recognizable foundations are public entities that receive financial support from many donors. Alternatively, a private foundation is a distinct type of philanthropic vehicle with a very limited number of funding sources. Often, a private foundation will only have one individual, family, or corporation responsible for all of the giving.
A private foundation is a tax-exempt, 501(c)3 organization. By setting up a private foundation, your client can have complete control over the mission of the foundation, who resides on the board, where and how funds are invested, and what charities to support. In addition, private foundations can be created to operate in perpetuity after the establishing member has passed away.
Charitable trusts can also have tax incentives and reduce assets that are overseen by an estate. Charitable trusts eliminate probate for your beneficiaries, and these vehicles can create income streams for your client or beneficiaries your client wishes to leave an inheritance with.
There are two main types of charitable trusts. First, a charitable lead trust distributions a portion of its proceeds to a charity. Your client receives a tax deduction for these payments, then your client's beneficiaries receive the remaining principal balance.
Second, a charitable remainder trust prioritizes the distributions to your client or their beneficiaries before distributions to the charity. Your client first receives income from the trust, then at the end of the term of the trust or at the passing of your client, the chosen charity receives the remaining balance of trust assets.
Qualified Charitable Distributions
Retirement accounts are not a philanthropic vehicle, but there is a way for clients who are required to distribute earnings from their IRA or 401(k) to minimize the tax on their required minimum distributions (RMDs). Clients who might be interested would designate all or a portion of their RMD towards an eligible charitable organization.
While they would not receive a deduction for the amount donated, this amount is reduced from the taxable portion of the RMD. The limit on these distributions is $100,000 per year.
What Types of Gifts Can I Give a Nonprofit?
The type of gift you can give to a nonprofit is largely driven by the types of gifts the nonprofit can receive. For a nonprofit to receive stock, they must have a brokerage account. To receive physical assets like art or furniture, they must have physical capacity
How Do I Donate to Charity?
You can make a donation to charity in a number of different ways. Most donors directly send cash via check or electronic payment, though different types of assets such as artwork, property, or financial instruments can also be donated.
What Are the Tax Benefits of Donations?
The tax benefits of a donation will depend on the asset being donated and the vehicle being used for the donation. Cash donations are typically eligible for itemized deduction on an individual's federal tax return. Depending on the valuation of real property or financial instruments, taxpayers may also receive the taxable benefit of capital gains avoidance for donating appreciated assets.
The Bottom Line
Working with your clients to fulfill their charitable intentions is a vital service to provide as part of the overall planning and advice services that you offer. Charitable planning can also provide financial benefits in addition to the satisfaction in helping others for your clients.
When helping clients through their charitable giving goals, be mindful of all of your options regarding the types of gifts your client can give and the best vehicle to disburse those assets.