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Discussing Philanthropy With Clients During Difficult Times

Take advantage of the preholiday run-up to focus on charitable giving.

Giving USA Foundation found that charitable giving went down in 2021 after being adjusted for inflation and is likely to decline further when the 2022 numbers are tallied. Further, Giving USA data shows that it takes an average of three to four years for inflation-adjusted charitable giving to rise back up to prerecession levels. As a result, your clients will be receiving more charitable pleas than ever as we head into the holiday season because their contributions are so badly needed.

I know many advisors are still hesitant to bring up philanthropy with clients because they’re worried about assets under management migration. Or perhaps they’re worried about further outflows from a client’s portfolio after a bear market in stocks and bonds. Or perhaps they just don’t want to appear uninformed in front of clients. None of those concerns is a valid reason for avoiding philanthropic discussions with clients.

As they old saying goes, if you’re not discussing philanthropy with clients, someone else will. Case in point: a U.S. Trust Study of the Philanthropic Conversation found that one-third of ultra-high-net-worth respondents (31%) would switch to a new advisor if that advisor could talk to them meaningfully about philanthropy.

Again, one in three affluent families would switch to a new advisor if that individual was more adept than their current advisor at helping them give their money away. It has nothing to do with investment returns, asset allocation or finding hot alternative investments. It has to do with understanding your client’s values and seeing their entire picture.

Have Conversations the Right Way

Too many advisors believe that encouraging clients to make big, planned gifts means clients will fear taking money away from their family. That’s simply not true. Estate taxes are essentially an “optional” tax, and your clients have three potential “beneficiaries” for that money:

1. The government;
2. Their family; or
3. Charity.

Tell your clients they get to pick any two of the three above.

Unfortunately, as I discussed earlier this year, if your clients “step up to the counter” and don’t know what they want, the IRS tells them what they’ll be having. It collects taxes from your client instead of having that money go to the charitable organizations that are most important to them and their families 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’ve simply made the government their charity of choice. Ask your clients if they could eliminate the government, where would they want to give their money? Ask them if you could plan their estate in such a way that they could give generously to charity and still give their kids 100% of their estate (not the government), would they be interested in charitable giving? The answer is usually “Hell, yeah.”

Still, if clients bring up the bear market and recession as reasons to delay charitable planning, reassure them that you can model a giving plan for them on a going-forward basis that still allows them to have plenty of money to live on, even if we’re in a recession or bear market. We’ve always had periods in our nation’s history in which suddenly things aren’t as good as they were before. That’s what a planning relationship is all about. It’s about helping clients stabilize things so that they’ll always be OK. 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’re clients) are drawn to exotic, complex planning strategies, but they don’t do the fundamentals. Take private foundations (PFs). Unless a client really wants to create a paid job for their adult child to sit on the board, there’s no reason to go through the time and expense of setting up a PF for charitable giving. Also, the tax implications of PFs aren’t nearly as advantageous as they are with a basic donor-advised fund (DAF). The reporting, record-keeping and oversight for a DAF is significantly less than it is with 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 giving anonymous.

Don’t Write Checks

Another thing that’s important to bring up with clients early in the planning process is to stop writing checks or swiping their credit card to support their favorite causes. By donating appreciated stock, real estate or other assets to charity – instead of cash – they’ll 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 capital gains taxes that they owe on any appreciation of those donated assets—which may still be significant. Compared with donating cash or selling their securities and contributing the after-tax proceeds, they may be able to automatically increase their gift and tax deduction.

Real World Example

Recently, a charitably inclined client came to me for advice. He had been an early investor in Amazon and his shares—which had almost no basis—were worth about 10 times what he paid for them. He wanted to take some “money off the table” and support his church. Being a California resident, he was looking at state and federal taxes of 37.1% on the gain of his Amazon. Ouch!

Instead of writing a check to his church, we arranged to transfer the same dollar value in Amazon shares to his church. The church may decide to sell the shares for its needs or hold them for future growth. It’s their decision. Meanwhile, our client avoids a big capital gains tax bill, takes a charitable deduction for the full market value of the Amazon shares and can use the money he otherwise would have given to charity to buy more Amazon shares (after waiting 30 days as per wash sale rules). This raises his basis in a stock he loves. And if he doesn’t end up buying more Amazon shares, he can diversify into a different stock or asset class.

Get Better Informed
As I remind advisors all the time, 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 clients won’t mind. But you need to know where to find the right experts. Reach out to estate attorneys you know or consult the Planned Giving Design Center.

Hedge a High-Income Year

If your client recently sold a business or exercised stock options, donating to a DAF sponsor can greatly reduce their taxable income. Donating to a DAF sponsor means they can donate now—and in the future. Contributions may be invested and may have the opportunity to grow tax-free, which could result in additional dollars for charitable grants.

Help Clients Make the Right Decisions

Most of your clients are fortunate that they can afford to keep giving despite the economic and market headwinds so many Americans face. The impact of their giving in Q4 and beyond may be felt more significantly than at any time in recent memory. By helping clients make the right decisions about where and how to give, you can make a tremendous difference in their lives. And that only sets you up for more referrals.

Randy A. Fox,CFP, AEP, is the founder ofTwo Hawks Consulting LLC.He is a nationally known wealth strategist, philanthropic estate planner, educator and speaker. 

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