Charitable giving is too often thought about as a matter of tax planning — identifying highly appreciated securities to donate and creating complex structures like charitable remainder trusts and charitable lead trusts.
But the estate tax has declined in relevance for most donors as the federal estate tax exemption has soared — it is $5.49 million per individual this year. Further, as a candidate, President Trump advocated repealing the tax entirely. What’s more, only 18 states and the District of Columbia now have an estate tax, so even state estate tax savings are irrelevant for most donors.
The reality is that taxes have always been a secondary component of the charitable giving process and now may be less critical than ever before. As tax planning has become less relevant, personal goals and the role of the adviser have gained in importance.
For decades, clients planning a major gift would often focus with their advisers on maximizing the tax benefits (income and estate tax) of the donation. By contrast, today’s prospective donor may need to weigh the impact of a major gift on future financial security.
If a retired client has a 30-year planning horizon, how will a major gift or a long-term charitable commitment affect his ability to meet decades-long financial targets? The focus is changing as the worries of funding for long post-retirement years have overshadowed tax and estate planning.
A result of this change in focus should be more comprehensive financial forecasting to guide a client on how to structure large donations. More complex gift structures may be in order. A client may be willing to commit certain dollars now and in the future, but she might wish to make other commitments contingent on her future financial condition. The giver may pay part of a charitable pledge currently, another part over time and the balance upon some future event, all to permit the client to remain secure financially.
Here’s an example: A donor wishes to commit $500,000 to a charity. This may consist of an outright gift of $100,000 now and the funding of a $400,000 charitable remainder trust. If the donor’s financial status is secure in future years, she might donate some or all of the annuity payment she receives from the CRT to the charity. If in 10 years she is still meeting her financial targets, she could donate her remaining annuity interest in the CRT to the charity, thereby accelerating the entire gift.
Such discussions are more likely to involve the charitable gift officer and the financial adviser — rather than the client’s estate attorney, as may have been more common in the past.
Here’s another example: A donor would like to make a large visible commitment to a charity in which she is a board member. To address cash flow concerns, the donor funds part of the donation now and the balance with a life insurance policy. That way she feels more confident that if she dies prematurely her spouse will not be burdened by a large bequest. Further, since the bequest provides no estate tax benefit, she prefers the current income tax deduction for the amount she gives the charity each year to pay her premium.
Giving a remainder interest in a residence can permit a client to assure the intended charity will receive a valuable bequest even while she retains the economic benefit of continuing to live in that residence for life.
Sometimes, clients planning a large charitable gift will factor long-term care considerations into the plan. Long-term care insurance coverage may be purchased as part of the charitable planning to assure the donor a safety net.
QuoteThe reality is that taxes have always been a secondary component of the charitable giving process and now may be less critical than ever before.
THE DIVORCE FACTOR
Divorce has rarely been a part of the discussion about charitable giving, but perhaps it should be. Planners have long advised clients contemplating marriage to address prenuptial agreements. Discussing the potential for divorce when a large gift is planned is no less prudent.
As a general rule, it is useful to factor in the possibility of a divorce even if there is no immediate reason to suspect a marriage is on the rocks. The concept of dividing a CRT or splitting a private foundation could be drafted into the governing documents at inception. Donor agreements could address the financial and naming considerations of a divorce if it were to happen. This would be much less costly and adversarial than having it addressed in the future.
Baby boomers have changed many institutions in our society as they have moved up the age continuum. Charitable giving is no different. For many boomers, charity is not merely about writing a check, but also about making a difference and often about being actively involved in that process. There are many ways, depending on the client’s interest and goals, to tailor a donation to meet a wide range of client personal objectives.
For baby boomers dabbling with an encore career in the charitable arena, the mechanism to meld these goals is a written agreement with the charity. Specify how the donation will be used by the charity. Clarifying precisely what the donor wants can be quite different than what the donor and charity were separately inferring from the conversations they had leading up to the agreement.
Consider adding milestones at which additional donations will be made. When the charity fulfills certain program goals, then the next payment will be triggered. What investment management or other fees might the charity charge the donor’s fund? Will the charity allocate a portion of the initial gift or each year’s withdrawals to general charitable administrative expenses? Who can and should manage the funds?
What happens if the purpose of the gift is no longer relevant? For example, a client finances a significant planned gift to endow research for a disease and that disease is cured. Such contingencies should be addressed at the beginning.
A significant issue addressed in many donor agreements is the right and manner to name the gift. What prominence will be given to the donation? Where and how will it be acknowledged? If a donor is convicted of committing a crime, declares bankruptcy or somehow violates fundamental values of the charity, what can the charity do?
THE ADVISORY TEAM
As clients seeking estate and financial planning advice get older, there may be a greater need to involve a care manager on the planning team to outline future medical costs and to assure that the financial modeling supporting the gift is realistic. Relying on a client’s current budget or assumed cost of living is not realistic for a client who has a major health challenge like Parkinson’s disease or another severe chronic disorder.
Given the greater emphasis on non-tax aspects of planning, the major giving officer from the charitable organizations the client is seeking to benefit will play a more prominent role in the planning team. As donations require more personal and qualitative discussion, the giving professional and financial planner should lead more of the discussions.
Clients may not be willing to pay high attorney billing rates for discussions exploring values or for holding of family meetings to discuss broad general considerations about formulating a charitable giving strategy. Some lawyers and CPAs are not comfortable with these “warm and fuzzy” discussions.
By contrast, the wealth manager may have staff members with life coaching experience, and the planned-giving professional may have spent much of her career facilitating these discussions.