It’s a familiar scenario: The calendar is on its final pages and a client decides they want to contribute to charity. Maybe they’re looking for tax deductions, maybe they’re responding to a year-end appeal, or maybe they’re just feeling a need to share the wealth. Whatever the reason, they write some quick checks, click on a couple of “Donate” buttons, or find some other way to give.
Their generosity is admirable, but there are a few problems with this approach, like the fact that it can lead to impulse gifts rather than thoughtful contributions. Also, while the client might offset some tax liability, there’s a good chance they could benefit more with a strategic approach.
Considering how important charitable giving is to most people – Philanthropy Roundtable notes that 60% of Americans give to charity, and a recent Bank of America study pointed out that the number jumps to 90% for high-net-worth individuals – you can make yourself even more valuable to your clients if you help them give more efficiently and effectively.
The year-end scramble
Calling end-of-year donations a rush is an understatement. 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.
While that might not seem like a problem, it does suggest that this giving is driven more by impulse and deadlines than by careful consideration and strategic planning.
On the other hand, if donors planned their giving as part of their overall strategic wealth management, they could bypass some challenges, such as:
- Without taking the time to think about their bigger wealth management objectives, donors might make gifts that don’t align with their overall financial goals.
- Just like impulse purchases, impulse donations are seldom wise, simply because they might not fit with any larger philanthropic vision.
- Writing a check or giving a cash gift often is the least tax-efficient way to give. Without time to investigate giving options, a donor might miss out on strategies that can reduce the donor’s tax liabilities and increase the benefit to the charity.
- . This seems to be a pretty big issue, as Tithe.ly reports that nearly two-thirds of new donors don’t do research before contributing. Planning ahead would allow donors to check out charities and make informed giving decisions.
- Some asset contributions could take time to process … resulting in gifts that, while committed before the end of the year, don’t get credited until after New Year’s Day.
- Does anybody need more holiday-season stress? Hurrying to make charitable contributions before the stroke of midnight on Dec. 31 creates unnecessary anxiety.
There is a better way
You can play a big role in helping your client plan better so they can avoid these and other challenges, and get a greater benefit from their charitable giving.
Now is a great time to start the conversation, as your client probably isn’t thinking about annual charitable donations. By bringing the topic up when there’s no pressure or looming deadline, you’ll demonstrate that you are genuinely interested in your client’s holistic financial picture. If you’re not sure how to broach the topic, here’s how to talk to clients about charitable giving.
After you’ve discussed the client’s philanthropic vision and goals, you can dive into some of the specific tools and opportunities available to donors.
Here are some options that could have a real impact:
- Utilize a donor-advised fund (DAF) to receive the charitable deduction and take time to select the charities to support. By putting donations into a DAF, the donor can benefit immediately from tax deductions but doesn’t need to decide immediately what charities will benefit from their gift.
- Donate appreciated assets to avoid capital gains tax. By donating appreciated assets such as business interests, real estate, or fine art directly to a nonprofit organization or a DAF, a donor can disburse the assets without a taxable capital gain.
- Bunch charitable deductions via a DAF. Clients who have trouble exceeding the standard deduction amount can “bunch” contributions from years to come into one year by putting them into a DAF. This will allow the client to reach the standard deduction level for one year by making a large charitable contribution, and then use the DAF to support their charities as they normally do each year.
- Use charitable deductions to offset income from rebalancing the portfolio. If periodic portfolio rebalancing results in taxable income, the client can offset that income by donating to charity. As with the bunching approach above, donating to a DAF would allow the client to make a one-time charitable contribution but spread the benefit to charities over time.
- Make a charitable deduction to offset tax from Roth conversion. If your client is interested in converting an IRA into a Roth IRA, they can offset the resulting taxable income by making donations to charity.
- Make qualified charitable distributions (QCDs) from an IRA to charity. Clients who are 70.5 years old or older can avoid taking required minimum deductions by donating up to $100,000 from a taxable IRA.
- Consider a charitable gift annuity (CGA) or charitable remainder trust (CRT) to provide income while supporting charity. Clients might be surprised to learn that there are ways that they can give to charity while also generating income but the CGA and CRT can create several tax benefits while also ensuring the client is able to support their favorite causes for several years.
As you can imagine, while the eight options listed above could generate a lot of benefits for your clients and the causes they support, some are technical and can’t be executed in a tight timeline to meet the year-end deadline.
On the other hand, if you encourage your client to talk now about their charitable goals for this year, and even next year, you can help them tap into more strategic and tax-beneficial approaches to giving. You also put their giving into a larger context and make sure they have time to make informed decisions that can be executed before year’s end. And that likely will reduce everyone’s stress, including yours.
If you’d like to learn more about the way you can help donors reach their philanthropic goals, talk to our experts at Ren.