Five ways to help your clients give smarter
Five ways to help your clients give smarter
Kim Laughton, president of Schwab Charitable, shares five tax-smart giving strategies to help your clients make a bigger impact in light of the Tax Cut and Jobs Act.
94% of high-net-worth households want to learn more about charitable planning.1 With year-end fast-approaching and tax season right around the corner, now is the ideal time to talk to your clients about their taxes and charitable giving strategy, especially in light of tax reform.
When the Tax Cuts and Jobs Act went into effect at the beginning of 2018, there was speculation that charitable giving would suffer as a result. However, supported by strong economic conditions, charitable giving seems to be thriving. In fact, between January and September alone, Schwab Charitable donors recommended $1.4 billion in grants to 60,000 nonprofit organizations, representing a 42% increase of dollars granted over the same period in 2017.
As tax-season approaches, here are five strategies you can implement with your clients to help them give more efficiently and make a bigger impact with their philanthropy.
1. Initiate conversations now
Charitable giving is one of the few remaining deductions that wasn’t capped or eliminated under the new tax law, so philanthropy is one of the best ways to reduce taxes for clients who itemize. The vast majority of your clients are already giving to charity, but they might not be doing so in the most tax-efficient manner.
Have proactive conversations with your clients to ensure they are incorporating charitable giving into their overall wealth management strategy. Whether you have clients who received a big bonus or a windfall this year (for example, from the sale of a business), have significant appreciated assets in their portfolio, or are approaching retirement, charitable giving could be a key strategy to consider to help minimize taxes.
And since 30% of annual giving in the United States occurs each December,2 the end of the year is a perfect opportunity to have these conversations with your clients and help them evaluate their charitable giving strategy. Start by asking your clients about the causes and organizations they are passionate about and try to understand what they want to accomplish with their philanthropy. Refer to these conversation starters for other ideas on ways to broach the topic with your clients.
2. Evaluate giving vehicle options
High-net-worth individuals and families tend to have a broader set of charitable planning objectives. But they may not fully understand how to leverage different giving vehicles (such as donor-advised funds, private foundations, charitable annuities or trusts) to meet their needs.
Ask your clients open-ended questions about what's important and listen for their charitable goals and objectives. Do they want to give now? Over time? Or are they looking for a source of income? Often times, clients want to meet multiple objectives.
For example, some donors may wish to complement their private foundation with a donor-advised fund account, so they have more flexibility in terms of timing grants, making grants outside of their foundation's mission, or maintaining a certain level of privacy.
In many cases, a donor-advised fund account can enhance your client's overall charitable giving strategy, whether used alone or in conjunction with another means of giving. Utilizing multiple giving vehicles provides additional opportunities for clients to better-achieve their goals both on the financial side and the charitable side.
3. Determine the best assets to give
Most clients don't realize that it's much more tax-effective to give appreciated assets instead of donating via cash or check.
Help your clients understand how they can give more to charity and potentially pay less in taxes by donating appreciated securities or non-cash assets.
Despite stock market turbulence in 2018, the S&P 500® index has risen more than 50% over the last five years3, initial public offering (IPO) volumes have increased more than 30% since last year4, and home prices on average continue to tick upward5. As a result, many investors may face a higher tax bill this year due to gains in their investments.
Savvy donors can simultaneously maximize tax benefits and the impact of charitable giving with appreciated non-cash assets, such as publicly traded stock, IPO stock, restricted stock, private business interests, real estate, and private equity. By contributing appreciated non-cash assets to a charity, including a donor-advised fund, individuals generally do not pay capital gains tax on the sale of assets that have been held for more than one year. This can increase the amount available for charity by up to 20% compared to selling the assets and donating the proceeds.
4. Make the most of tax reform changes
In spite of the reduced tax brackets, many households might be surprised by how much they owe in taxes and will be looking for ways to reduce their liability. The new tax law provides an opportunity for clients to take advantage of the charitable deduction and other tax benefits, before market volatility potentially changes the landscape of giving.
Here are some simple strategies to explore with your clients given the changes under the Tax Cut and Jobs Act:
For those who itemize: Although the standard deduction nearly doubled in size and less Americans overall are expected to itemize, the majority of high-income earning households will probably continue to itemize.
- These households might want to donate more in high-income years or to offset the loss of other deductions that are limited under the new law (such as mortgage interest and state and local taxes).
- They may continue to deduct up to 30% of their adjusted gross income (AGI) for appreciated non-cash donations.
- They also have the option to itemize up to 60% of their AGI in cash donations, compared to 50% in previous years.
For those on the cusp of itemizing: These clients could benefit from concentrating their contributions, so they can alternate between itemizing their charitable deductions in some years, and taking the increased standard deduction in other years (see case study below).
- Donors who have historically itemized their deductions on their tax returns can continue to do so in the years it makes sense, but can take advantage of the larger standard deduction in other years.
- They can leverage a donor-advised fund (DAF) to concentrate or bunch their contributions in higher income years, and then spread-out distributions to support charities over time.
For all clients:
- Donor-advised funds continue to be an easy and tax efficient way to donate long-term appreciated assets, and potentially eliminate capital gains taxes.
- Clients who don’t already have a donor-advised fund account should consider opening one if it meets their philanthropic goals.
5. Invest in socially responsible causes
It might be a good tax-year to make a significant donation, but many clients appreciate having more time to decide where to give the money. By opening a donor-advised fund account, they can invest the funds in investment pools, such as ones with socially responsible mandates while they’re determining which charities they want to support over time.
Individuals who have contributed to a donor-advised fund may invest their account balances for tax-free potential investment growth ahead of future granting, with the goal of increasing the amount available for charity over time. In fact, since Schwab Charitable was founded in 1999, investment growth has generated almost $3 billion in additional funds to support donors' philanthropy.
If individuals allocate their donor-advised fund account balance to socially responsible investments, they can make an impact on the world twice with the same funds. The socially responsible investments can provide needed capital to worthy businesses and social ventures. The funds can then be used to again to recommend a grant to their favorite charities.
At Schwab Charitable, donors may invest in two pools with socially responsible mandates. Donors with larger accounts may also recommend an investment advisor to manage a custom impact investment strategy for their charitable dollars.
Help clients unleash the power of strategic giving
Show your clients how to take a more thoughtful approach to giving by integrating charitable planning into their wealth management strategy. With the uncertainty of tax reform behind them and more favorable economic conditions still on their side, now is the perfect opportunity to supercharge their philanthropic impact this year and beyond.
Schwab Charitable offers a simple, efficient, tax-smart solution for clients, and valuable support services for advisors. To learn more, call Schwab Charitable at 800-746-6216, visit schwabcharitable.org or follow us on LinkedIn.
If you're thinking about becoming an independent advisor, consider a custodian who invests in your success. Contact us to learn more about the benefits of a custodial relationship with Schwab.
1. The 2016 U.S. Trust Study of High Net Worth Philanthropy.
2. Nonprofits Source, The Ultimate List Of Charitable Giving Statistics For 2018
3. CNN Money. As of November 14, 2018.
4. EY: Global IPO trends: Q3 2018 , page 10.
5. S&P Dow Jones Indices: RISE IN HOME PRICES REMAINS STEADY AT 6.4% ACCORDING TO S&P CORELOGIC CASE-SHILLER INDEX, July 31, 2018.
A donor's ability to claim itemized deductions is subject to a variety of limitations depending on the donor's specific tax situation.
This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Schwab Charitable does not provide legal or tax advice. Where specific advice is necessary or appropriate, Schwab Charitable recommends consultation with a qualified tax advisor or CPA.
Schwab Charitable is the name used for the combined programs and services of Schwab Charitable Fund™, an independent nonprofit organization. Schwab Charitable Fund has entered into service agreements with certain affiliates of The Charles Schwab Corporation.