Advisor's Quarterly Update

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The Five Questions to Ask Charitably Inclined Clients

Are your clients strategically timing their gifts?

The timing for making charitable gifts can be significant for many reasons. 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, resulting in substantially higher taxable income in a given year is an opportunity for a client to increase their charitable giving in that year to generate an offsetting income tax charitable deduction. Otherwise, the opportunity is lost.

Clients who wish to increase their giving to a favorite charity should consider automatic monthly giving that might result in an overall larger annual gift when the amounts of the monthly gifts are totaled.

Are your clients evaluating which of their assets to give?

Having a client choose the best assets to give can result in the cost of the gift being reduced. Appreciated assets owned for more than one year 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. Typical examples of appreciated assets used for charitable giving are stocks, bonds, and mutual funds, but highly appreciated real estate and closely held stock also are ideal assets to avoid capital gain taxes.

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. Clients should be reminded that they have to transfer the asset directly to the charity to be liquidated in order to gain the maximum tax benefits from the gift.

Are your clients aware of gift strategies that will also achieve their personal financial objectives?

One of the unique aspects of charitable giving is that the donor can make a gift to a favorite charity and, depending on how the gift is made, accomplish 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 the required minimum distribution, although a charitable deduction cannot be taken.

For those clients who wish to receive income in exchange for their gift, they 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.

Are they getting the maximum tax benefits for their charitable gifts?

While clients make charitable gifts to support causes they care about, the tax benefits to be derived from such gifts 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 enable the client to itemize deductions if ordinarily they do not itemize.

IRS limits the use of charitable deductions to a percentage of adjusted gross income. 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. For gifts where 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 they support good stewards of their charitable gifts?

Every donor wants to believe that the charitable gifts they make are put to good use. Advisors can provide a valuable service to clients by vetting the charities to which clients want to make gifts. Through a review of annual reports, IRS Form 990, the use of 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. By providing clients with this information they will have the best chance of seeing their charitable intent fulfilled.

Answering these five questions will help your clients be more strategic in their charitable giving and, they may realize they can give more because the advice you provide makes their charitable giving cost less.