Since last tax season, many clients have reassessed their charitable giving. Much has changed in the world since then, as nearly all clients have been impacted in some way by the pandemic and economic impact.
While some high-net-worth clients may have donated the same types of assets and amounts to the same charities last year as they did in the past, many clients did not. Some increased the amounts they donated, supported different causes and charities, gave more locally, or changed their giving timeframe.
As clients meet with their accountants at this time of year, it’s important to discuss whether they have made any changes in their giving in the past year or whether they intend to do so in the near or distant future. Though numerous studies have shown that donors do not primarily donate for tax reasons, they still want to be able to take advantage of any opportunities that would enable them to give or save more.
Tax season may be the ideal time for accountants to identify that clients may need help as their clients provide them with the information so they can prepare the tax returns. Since there is little time for in-depth conversation now and the past year’s donations have already been made, accountants can quickly point out what their clients could have done instead and set up a time to talk after April 15. This will enable them to discuss changes clients should make before they begin to make their charitable decisions for the rest of the year.
There are certain signs, changes or patterns that may stand out to accountants as they prepare the returns, and these can help them identify that a client would benefit from a conversation about charitable planning. These include:
- 1. The client donated significantly more than in the past.
- 2. The client’s income was very high, yet their donations remained the same or decreased.
- 3. The client gave to different charities or to a larger number of charities.
- 4. The client still donated by check or credit card.
- 5. The client will have a big tax bill because of capital gains, yet did not donate assets that could have limited taxes.
- 6. The client donated directly to charities, though they already had previously established and funded a donor-advised fund (DAF) account or foundation (some may have donated cash because of the temporary 100 percent of AGI deduction).
- 7. The client complained about the complexity or expense of their private foundation and would benefit from a simpler or less costly alternative like a donor-advised fund.
- 8. The client was unable to locate tax-receipt letters from different charities they supported.
- 9. The client tried to claim deductions for donations that were not eligible.
- 10. The client did not bunch several years of contributions into one year and fell short of or barely exceeded the standard deduction.
- 11. The client is approaching retirement in the next decade, yet has not yet created a DAF so they could donate and receive a large deduction now while income is high, and then make grants in the future during retirement when income is less.
- 12. The client will sell a business or other appreciated complex asset, and could donate some or all of the assets before the sale, thereby reducing capital gains taxes.
If the charitable planning conversation does not take place after seeing one of these items, clients will continue to make the same mistakes every year, which will result in fewer dollars going to their favorite charities. If the discussion does occur, clients will soon see the benefits. Including the clients’ wealth advisor and estate planning attorney in this discussion will result in the greatest benefits to the clients and will enable them to have a greater impact.
More than ever before, tax, legal and financial advisors have recommended their clients create donor-advised funds. There are now approximately 450,000 DAF accounts created by families and individuals, with another 400,000 smaller DAFs created by employees through their companies.
The number of foundations remains steady at about 90,000, which has not increased much over the past decade. Most advisors agree clients should not even begin to consider creating foundations unless the clients want to donate at least $10 million, $20 million or $50 million, and even then, a DAF may be preferable for clients who prefer simplicity, privacy, lower costs or greater tax benefits.
It is important that accountants consult with their clients’ wealth advisors to discuss the most appropriate DAF sponsor. On their own, clients may select a DAF sponsor that has high fees, few investment choices, limited succession, disposition, granting or transfer options, or is otherwise less than ideal. Many accountants and clients are unaware that some DAF sponsors allow the clients’ trusted financial advisors to select and manage the assets in the DAF accounts.
Springtime is often the best time to initially broach the subject with clients. Though clients may not ask for philanthropic planning guidance, they would welcome input once they understand that they may be able to have a greater impact. Many feel fortunate that their investments or businesses have performed well, and they are very aware that others were less fortunate and need help from organizations that the clients support.
