Nobody’s in a hurry to put the shorts and sandals away, but the truth is, sweater season is just about here. And that means the end of the year, with all its deadlines and pressure isn’t far behind.
One area of wealth management that can be counted on to drive some year-end urgency is charitable giving. As Q4 winds down, your clients become inspired by the holidays to do good, urged by charitable organizations to make year-end contributions, and driven by tax concerns to finalize gifts before Dec. 31.
Does it seem like everybody draws from this inspiration to try to make things happen at the last minute? That’s because a lot of people do: Nonprofit Source reports that each year, roughly 30% of all charitable giving for the year occurs in December, and 10% of annual donations come in the last three days of the year.
That tight timeline not only makes things more stressful than they need to be, but it also often means clients are less strategic about their charitable giving than they could be.
Want to fend off this annual ritual? Using the following action list will help to ensure your clients make smart and strategic philanthropic decisions ahead of the year’s end.
Step One: Schedule a conversation
Reach out to your client now to begin this process by scheduling a conversation about overall philanthropic goals and objectives.
Step Two: Have a high-level chat about charitable giving
Begin the conversation at a high level, talking about charitable giving in general, and then drill down to specifics.
- Start with goals
Talk about what the client’s goals are when it comes to charitable giving, and what motivates them to give. Is it supporting particular causes? Tax breaks? Affecting change? Something else?
- Talk about past giving
How has the client approached giving in the past? What causes have they supported, and what ways did they give? Have they planned their giving or given impulsively? What did they do from a charitable standpoint last year, and how did they feel about the outcomes? What challenges did they experience with their giving?
- Review life changes
Has the client lived through major life events in the past year? Were there any experiences that left an impression, like illnesses, a child going off to college, a family celebration? How might that affect charitable giving?
- Discuss charitable legacies
Some families want to establish a charitable legacy so they can give long-term support to a cause, teach succeeding generations about charitable giving or address other desires. Talk about this with your client.
Step Three: Review financial status and tax factors
Urge your client to connect with their financial team – financial advisors, tax counsel, accountant, lawyer, etc. – and other interested parties such as family members and business partners to make sure they know where they stand financially and from a tax standpoint. Coordinate your work with the rest of the client’s team as much as possible.
- Review tax considerations
Make sure you and your client are aware of any tax matters that should be considered when planning charitable giving. Has the client experienced any significant financial events, such as a windfall or an unexpected major expense? Do any unusual tax liabilities need to be considered? Has the client moved into a different tax bracket? Questions like these will have an impact on giving decisions.
- Review investment asset allocation
Charitable giving can work in concert with portfolio rebalancing to offset gains or to leverage losses for tax benefit.
- Consider non-cash assets
Cash donations are often the least strategic and tax-beneficial form of giving. For many clients, donating non-cash assets such as appreciated public securities, real estate, businesses interests, and fine art not only can provide a great way to offset capital gains but also can help to deliver a bigger impact for charity. Some experts estimate that giving non-cash assets can result in having 20% more to give.
- Consider bunching
“Bunching” can help clients who give to charity on a regular basis but fall short of giving enough to surpass the standard deduction limit. By combining gifts from three to five years into a single year, they can bump their gift above the standard deduction limit for that year.
Step Four: Research charities
This step can begin earlier, but it works well to address it midway through the process so that the client has considered some strategies and tactics before identifying causes or charities to support. This will ensure that giving is smart and not based simply on impulse.
- Review basic information
Once your client has identified causes and charities that matter to them, encourage them to get to know the charities. Ren’s charity database can help in this regard, as can particular charities’ websites and Charity Navigator. If your client is unsure of which charities to support, they can contribute to a donor-advised fund (DAF) now, get a tax deduction for the current year, and direct funds to specific charities at a later date.
- Align that information with clients’ objectives
Once the client has information on the identified charities, discuss how those charities align with the client’s overall charitable goals and objectives, and whether the charities are fiscally sound and transparent enough to warrant a gift.
Step Five: Determine how to give
Your client has a broad array of options when it comes to how to give, but three commonly used approaches are direct gifts, donor-advised funds, and charitable remainder trusts.
- Direct gift
Donors can give gifts or assets directly to charities for immediate use in a specific mission or cause. While this is the most direct form of giving, it can be limiting depending on the donor’s goals, desire to involve their family in their plan, and type of gift they want to donate, such as certain complex assets.
- Donor-advised fund (DAF)
A donor-advised fund, the most popular charitable gift structure, allows a client to make a completed gift to a charity with the ability to recommend grants to other charitable organizations over time. The donor receives the exact same tax deduction and capital gains tax avoidance as with a direct gift.
- Charitable remainder trust (CRT)
A charitable remainder trust can help clients who want to give to charity while also maintaining an income stream. The trust invests donated assets and pays income from the assets to the donor or designated income beneficiary for a set time (the donor’s lifetime or a fixed period, up to 20 years) with the assets going to the charity at the end of the term. The donor avoids capital gains taxes on donated assets and also takes a current income tax deduction. The benefiting charity is identified when the CRT is established, and the trust is irrevocable.
Step Six: Review deadlines and limitations
At the most basic level, December 31st is the deadline you’re trying to beat with charitable giving decisions. However, unless your client is planning only to give cash donations directly to charities, waiting until the 31st will be too late. And it will also be too late to identify and respond to any giving targets or limits your client faces. That’s why starting early is essential.
- Give yourself time
Opening a DAF or establishing a CRT takes some time, some complex assets (assets not traded on a public exchange) require weeks of research and valuation work before they can be donated, and other actions will take other amounts of time. Make sure your client doesn’t expect anything to happen overnight when it comes to strategic giving.
- Know the numbers that matter
Work with your client’s tax counsel to identify specific financial limitations to be accommodated or levels to be achieved in order to make the tax benefits work best.
Step Seven: Put the plan into action
Having determined the best ways to give, what charities to support and when things have to happen, put the plan into motion, working with the client’s financial team to execute trades, make gifts and more, all before stress has a chance to set in.
Step Eight: Plan for future giving and documentation
Although you’ll be focused on the current year’s giving in these discussions, lay the groundwork now for future giving decisions, reinforcing the goals and objectives identified this year for guidance in the years to come. Who knows? Next year you might still be wearing your shorts when the process is well under way.