Clients who have any philanthropic inclination are often uninformed about charitable giving strategies. Advisors who ask the appropriate questions and offer expert advice will distinguish themselves in the eyes of grateful clients. Here are five questions to consider for those clients who are charitably inclined.
Are your clients strategically timing their gifts?
Timing is everything. For gifts of cash, it is easy to time the gift to happen in a desired calendar year for tax purposes. However, if the gift is an illiquid asset such as real estate or closely held stock the logistics of transferring the asset may require considerable advance planning to meet a giving deadline.
A financial event such as a large bonus or commission is an opportunity for a client to increase their charitable giving in that year to generate a needed income tax charitable deduction. One day into the next year and the opportunity is lost.
Are your clients evaluating which of their assets to give?
Appreciated assets qualifying for long-term capital gain tax treatment are almost always the best assets to give from a tax perspective. The client will get an income tax charitable deduction for the fair market value of the asset, while avoiding paying tax on the capital gain. Appreciated assets used for charitable giving are typically stocks, bonds, and mutual funds, but highly appreciated real estate and closely held stock also are ideal assets to avoid capital gain taxes. Clients should be reminded that the assets must be transferred to the charity for the charity to liquidate.
A tax strategy used by some donors is to give highly appreciated stock and to then repurchase shares in the same company thus avoiding capital gain taxes on the shares given, with the newly purchased shares having a higher cost basis.
Are your clients aware of gift strategies that will also achieve their personal financial objectives?
For clients age 70 ½ and older who have an IRA account, they can have their IRA custodian transfer up to $100,000 per year directly to a qualified charity without having to pay income tax on the transfer. The gift will count toward their required minimum distribution, although a charitable deduction cannot be taken.
Those clients who wish to receive income in exchange for their gift can fund a charitable gift annuity, a charitable remainder trust, or perhaps a pooled income fund. Clients should rely on their advisor to explain how each gift vehicle works and which best achieves the client’s financial objectives.
Donor-advised funds have gained great popularity with the charitably inclined. Clients can establish a donor-advised fund with a community foundation or another public charity. Some financial institutions have established public charities for this purpose. The client makes their gift to establish their fund, receives an immediate income tax charitable deduction, and then in the future suggests grants from their fund when charitable objectives have been decided. The threshold to establish the fund can be as little as $5,000 depending on the sponsoring charity.
Are they getting the maximum tax benefits for their charitable gifts?
The tax benefits for charitable giving can affect how much clients are willing and able to give. It may be that a client should aggregate charitable gifts in certain tax years to warrant itemizing deductions.
IRS limits the use of charitable deductions. For gifts of cash the limit is 50% of adjusted gross income (AGI), whereas for gifts of appreciated assets the limit is 30% of AGI. There is a five year carry-forward for any unused deductions. When carry forward deductions are being used, it may be to the client’s tax benefit to postpone additional gifts until deductions from previous gifts have been exhausted.
For clients who own assets that have lost value, they should sell the asset, take tax losses as permitted by IRS, and give the proceeds from sale to charity.
Are the charities clients support good stewards of their charitable gifts?
Unfortunately, there are some charities that are poor stewards of their resources. Advisors can provide a valuable service by vetting the charities to which clients want to make gifts. Through a review of annual reports, IRS Form 990, resources such as Charity Navigator, and firsthand knowledge, information can be obtained to see how effectively a charity uses the funds it receives. Donors care about transparency, accountability, and most importantly impact.
These five questions will make your clients more strategic in their charitable giving. Your clients may realize they can give more because the advice you provide makes their charitable giving cost less.