Taking the lead (trust) on clients’ charitable giving

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If you think this is another article reminding you that now is the time of year that thoughts turn to charitable giving, think again. It’s more like: “Why have you waited until now to broach the subject of charitable giving and estate planning with your clients?!?”

I know many of you are not estate attorneys or planned giving specialists, but you’re in an even more advantageous position. As your clients’ single most trusted advisor, you are the first to know when they are expecting a big wealth-triggering or tax event. It could be selling a business, coming into an inheritance, selling a piece of real estate, exercising stock options or cashing in a big block of stock, etc., but the CPA is almost always the first to find out — sometimes before your client’s family does.

It’s easy for you to intervene and remind clients: “Before you sell, these are some things to consider if you want to mitigate the taxes.” Isn’t that providing more value to your clients than simply reporting what happened after the fact?

Remember: With any of the wealth-triggering events or asset sales listed above, there are a number of charitable giving techniques that can help your clients save big on taxes while greatly benefiting their heirs and causes they support. You don’t need to be fluent in the alphabet soup of PIFs, CLTs, DAFs and CLATs, but you do owe it to yourself and your clients to become conversant.

Here are some of the most commonly used vehicles for tax-advantaged giving your clients can deploy all year round:

  • Charitable remainder trust: This kind of trust allows an individual or couple to make a gift, or a series of gifts (normally of appreciated assets), and then earn a charitable income tax deduction for the present value of the gift — and receive an income stream of a percentage that is based on the value of the trust assets. A CRT includes charitable remainder unitrusts (CRUTs) and charitable remainder annuity trusts (CRATs) among other types of trusts. Each type of CRT has a minimum payout of 5 percent. The trust is based on the life expectancy of the grantor, or it’s based on a term not to exceed 20 years. When the last income beneficiary dies, or the term expires, the remainder passes to the charitable beneficiary.
  • Charitable lead trust: This is a good vehicle for getting a big tax deduction after selling assets. A CLT provides for a “lead” interest to be paid to a charity (or charities) at least annually and then for a remainder interest to be paid to one or more individuals and/or trusts upon termination of the lead interest. The CLT is sometimes referred to as a “wait a while” trust since the individual heirs must wait before enjoying any benefitting from the trust.
  • Charitable gift annuity: This is best for older clients. A CGA provides steady, predictable income. The limitation for CGAs is that you can only use them with a charity, and the charity (not your heirs) gets the money when you die. Also, if you’re worried about inflation, a CGA cannot really protect your fixed monthly income from being eroded by the ever-rising cost of living — the annuity payments aren’t indexed for inflation.
  • Pooled income fund: This is a fund established by a public charity for which the charity acts as trustee. Donors may donate cash or property, then receive a charitable income tax deduction (as well as income) for as long as they survive.
  • Young pooled income fund: A PIF that is less than three years old (a "young PIF") utilizes a special rate published by the IRS to calculate the charitable income tax deduction (2.2 percent in 2019). The 2020 rate will be published shortly and is expected to decrease. These low rates allow for very large income tax deductions. PIFs must distribute all of their income and some PIFs allow interest, dividends, rents, royalties, short-term capital gains and some amount of realized long-term capital gains post-gift. Further, they allow the donor to select the charitable beneficiaries that are suitable for the family’s philanthropic goals.
  • Donor-advised fund: A DAF is a special account established at a public charity, normally a community foundation. A DAF allows a donor to make a gift of property without specifying the final charitable purpose for the gift. Donors often are allowed to maintain money management responsibility for the DAF and can also tell the community foundation where they would like the charitable funds to be distributed. The community foundation is not technically bound to direct the funds to the donor’s selection, but as a practical matter, most will follow the donor’s wishes. DAFs have no annual minimum requirement for distribution and are usually inexpensive to establish.

A real-world example

Jack and Dana are a 75-year-old couple living in Northern California. Jack is finally selling the remainder of his engineering firm (J&D Corp.) to his partner. The firm is valued at $ 4 million. Jack and Dana will then transfer their shares of the firm to a young PIF. With some careful planning, Jack and Dana name their two children, and then their two grandchildren, as successive income beneficiaries. As a result, their charitable income tax deduction is $1.4 million, which saves Jack and Dana over $500,000 of income tax. Further, as their stock is redeemed, the couple pays no capital gains tax. Jack and Dana’s family will receive income for three generations while only a minimal gift is made. To close the loop, Jack and Dana name an investment manager and also identify the charities to which they want the remainder of their assets to go after all of their beneficiaries have died.

Be proactive

Don’t wait for an invitation from your clients to advise them about estate planning and planned giving. They may not know exactly where they need help — or that you can be a great resource — but they will certainly listen to your advice. You may not be able to write a story like Jack and Dana’s for your clients, but you probably know several good estate planners and planned giving specialists in your area. If you don’t, check with colleagues and other firms with whom you share referrals. Talk to someone at your local community foundation. See a local list of professionals who have the Chartered Advisor in Philanthropy designation that’s administered by the American College of Financial Services. Chances are you will find several excellent professionals in your area.

Here are some important questions to ask when vetting estate and planned giving specialists:

  • How long have you been doing this?
  • What’s your experience?
  • How do you typically work with clients?
  • How do you get paid?

Always look for planning-oriented advisors, not people selling “products.” For instance, be very careful about referring clients to someone who says, “I sell life insurance. We replace the asset with life insurance before we do any planning first. They need to buy the policy first.”

Be a proactive solution provider rather than simply a financial historian. Saving a dollar of tax is a dollar more of yield that your client enjoys. While tax prep is being increasingly commoditized, great advice never is.

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Charitable deductions Trusts Philanthropy Tax planning Wealth management Donor-advised funds