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Why You Should Add Charitable Planning to Your Practice

Amid predicted tax hikes and anticipated market volatility, with 98 percent of high-net-worth households and 85 percent of all households making annual charitable contributions, charitable planning remains a largely untapped opportunity for financial advisors.

Recent studies show that only half of all advisors are proactively offering charitable planning advice. Yet, those who do offer this advice consider it an important aspect of their client relationships. Most of your clients are already giving to their favorite causes, but are unaware that there are simple programs recognized in the tax code that they can utilize to make their giving a more strategic part of their overall retirement, income and estate plans.

With simplified charitable planning programs available that provide tax benefits as well as income programs for families and their beneficiaries, there is no reason you cannot offer these programs and their associated benefits to clients. You can provide the needed guidance to enable clients to incorporate charitable planning thoughtfully and strategically into their overall plans. These programs can be easily implemented into your practice—providing new enhanced tax savings and income benefits for your clientele while augmenting your bottom line and creating a new profit center for your practice.

Most interviewed advisors say that there are three main reasons why they have not implemented charitable planning into their practices:

1. They think it is only for high-net worth clients.

2. They think the topic might be too complicated for them and their clients or too personal.

3. They did not believe they could be compensated for their time.

All of these reasons are flawed, and when advisors realize that they too can provide tax and income benefits to their average clients through simplified charitable programs that provide compensation for their own time as well as strategic planning benefits for their clients, most are very interested in adding these programs to their toolbox.

Historically, advisors that dealt with high-net-worth families have been able to offer their clientele various charitable planning programs such as Charitable Remainder Trusts (CRT’s) and Donor Advised Funds through major investment firms such as the Vanguard Charitable Endowment program and Fidelity Charitable, as well as local community foundations. Most of these vehicles allow the advisor to be compensated by continuing to manage the funds inside the programs or by charging fees for their planning services. These advisors will typically not work with households under a certain minimum of net worth. What can you do if you’re not a Registered Investment Advisor or Series 7 license-holder and you work with a wide range of clients of average-net worth doing basic estate and retirement planning?

As an advisor to your clients, not only do you have other simpler options to offer your clients, but they can be far more cost-effective for the client and still provide you with a level of compensation that is competitive with the other products and programs you offer. By learning the basic features of charitable gift annuities, charitable bargain installment sales and donor advised funds, you can provide your client with a variety of programs that can help strategically unlock assets that clients currently own, create tax deductions and setup structured payouts for them and their heirs while supporting their favorite charities. These simple programs are:

1) The traditional charitable gift annuity, which has been offered by hundreds of charities around the country for more than 100 years, and can create an immediate or deferred lifetime payout for up to two individuals.

2) The charitable bargain installment sale, which provides an immediate or deferred structured payout to the family for a set term or number of years.

3) The donor advised fund, which is an outright gift that generates systematic grants to the client’s selected charities over a number of years and allows them to create a charitable legacy for their family.

Think about how your clients could benefit from an immediate charitable income tax deduction. The deduction is reported on Schedule A of the itemized tax return and can be utilized to reduce their Adjusted Gross Income (AGI) by up to 50 percent (or 30 percent if the asset funding the charitable program was appreciated securities or real estate). If the tax deduction is too large to be fully utilized in the first year, then the remaining amount can be carried forward for up to five additional years. Typical examples of clients that can utilize these tax deductions include:

  • Clients who are currently taking RMD’s that they neither want nor need.
  • Clients who earn enough in social security, pension and other investment income that they are making quarterly tax payments.
  • Families who experience an unusual year of inflated income due to the sale of a business, real estate, or other type of windfall.
  • Families who are in the AMT tax bracket. Charitable deductions are one of the few tax deductions allowed that can actually move a client out of the AMT bracket.
  • Clients who would like to unlock or re-characterize their qualified money in a tax-advantaged manner.
  • Annuity owners who would prefer not to pass along an IRD asset with large taxable gains to their heirs.

Many advisors who help clients create this substantial charitable tax deduction end up using it to help unlock or re- characterize qualified money tax-free. For example, let’s say your client has an adjusted gross income of $100,000. They utilize existing cash assets that they had planned to pass to heirs in order to fund a charitable program that creates a $50,000 tax deduction. The deduction can either be utilized to reduce their AGI by 50 percent. Or, the advisor can help the clients do a $50,000 Roth conversion on some of their IRA assets, without any tax consequences. The charitable program creates a structured inheritance without the costs of setting up or administering a trust. This type of thinking can open up powerful planning opportunities for many of your clients.

One benefit of a reinsured Charitable Gift Annuity or Charitable Bargain Installment Sale versus a typical Charitable Remainder Trust is that the charity usually has to wait to receive funds until the payout period is over on a trust, or for the annuitants to die in the case of a non-reinsured charitable gift annuity. When a charity reinsures an income obligation, the money available for use by charities is freed up immediately. This is a huge benefit for intended charitable recipients. You help your clients accomplish something important – and at the same time, help them save significant amounts on their taxes. This improves their cash flow and greatly reduces the net cost of their giving.

When funding a charitable program with appreciated securities, there is a double blessing, so to speak. Not only do clients benefit from the immediate charitable income tax deduction, but depending on the program, either all or a portion of the capital gains taxes they would otherwise have to pay are eliminated.

With the capital gains tax rate currently at 15 percent for many families and at 20 percent for those in the higher brackets, it may make good sense for your clients to consider getting out of their appreciated risk-based assets via a charitable program. Additionally, the income tax deduction from a charitable program may reduce their income tax bracket, and as a result, lower their resulting capital gains tax rate.

Advisors who incorporate charitable planning into their practice say that there are both tangible and intangible benefits to be gained by offering these programs. First and foremost is the satisfaction of helping their clients fulfill their philanthropic desires and support their favorite causes. You’ll experience a greater sense of purpose as you assist your clients in setting up their long-term charitable giving plans.

Charitable Planning also helps you retain clients. You’re helping them accomplish something important, and at the same time, helping them save significant amounts on their taxes. By showing them how to give wisely, they can lower their income, capital gains, and estate taxes. They’ll also improve cash flow and greatly reduce the net cost of their giving.

Very few professional advisors are specialists in charitable giving. Developing this expertise can set you apart from your competitors. By offering this service, you will also help generate client referrals and grow your business. Helping your clients give more and give wisely builds trust. Clients who have strong feelings of trust in their advisors are far more likely to seek out additional services.

As far as increased revenue goes, there are several methods by which you can be compensated for the time you spend assisting your clients in establishing a charitable program, depending on your state laws and the structure of your practice. With charities struggling for funding support, more are becoming open to the concept that compensating an advisor for their role is both reasonable and justified. The sum total of these benefits is having deeper relationships with your clients, a greater sense of meaning in your work, and building a stronger practice with a new profit center.



About Barry Goldwater

Barry Goldwater
Goldwater Financial Group, an insurance consulting firm, Barry Goldwater, Principal Specializing in tax deductible planning ideas using Captives, Defined Benefit Planning and philanthropy without being philanthropic. You can contact Barry at 617-527-9736

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