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Help Clients Avoid Charitable Planning Tax Surprises

April 20, 2017

Tax season is a valuable opportunity for advisors to expand their relationships with clients. If your clients received a surprisingly high tax bill this year, it can open the door for a conversation about charitable giving as a tax management strategy. Including philanthropy in the tax planning discussion can make it a more personal and rewarding topic because giving is an easy way for clients to support their favorite causes and lower their 2017 tax bill at the same time.

As you talk to clients about how to reduce tax exposure through charitable giving, keep in mind these three important points:

1. Consider appreciated investments instead of cash

While many donors write a check or give cash to charity, donating appreciated, non-cash assets that have been held for a year or more can be the most tax-effective way to give. With the S&P 500 up 60% over the past five years, it is a particularly good time for many clients to give appreciated assets. In addition to publicly-traded securities, they should also consider donating IPO stock, privately held stock or business interests and real estate. By donating appreciated assets, clients can take a current year tax deduction and generally avoid paying capital gains tax on the sale of the asset. This can allow them to give up to 20% more to their favorite charities and pay less in taxes.

If a client wants to support a charity that cannot accept non-cash assets, they can consider contributing the assets to a donor-advised fund and then making a grant to their charity of choice. Many donor-advised fund providers will liquidate the non-cash investments or assets and then deposit the proceeds in your client’s account, relieving you and the receiving charities of the associated administrative burden. Then, your client can make grants to charities immediately or at their convenience over time.

2. Keep an eye on the tax code

The new administration has placed tax reform on the legislative agenda, and changes could take effect as early as 2018. Reforms could reduce the value of the charitable deduction in future years, either because tax rates may go down or deductions could be capped. Many high earners have experienced an increase in both their income tax and capital gains tax rates in recent years, which has made the value of deductions worth more. Giving now before such changes could take place would ensure that clients maximize the value of their charitable tax deduction.

Additionally, the IRA charitable rollover has been a popular tax-law provision that was made permanent by legislation in late 2015. Clients who are 70 and a half or older can transfer as much as $100,000 of their required minimum distribution each year directly from an IRA to qualified charities without being taxed on the distribution.

3. Identify “late stage” assets

Advisors have reported that over half of their assets under management are in the late stages of the wealth lifecycle. These clients are the most likely to be charitably inclined. Clients in the later stages of wealth may also have an interest in reducing estate taxes. Philanthropically motivated clients can donate assets to a private foundation, charitable trust, charitable gift annuity or donor-advised fund account as a way to reduce their taxable estate and simultaneously create a charitable legacy. Many donor-advised fund providers offer legacy programs that allow clients to recommend successors.

The deductions available vary by asset type and charitable vehicle, so in some cases it is best to combine vehicles in order to meet a client’s specific charitable goals. For example, donor-advised funds can be named as the beneficiary of a charitable remainder trust, making it simpler and less expensive for donors to change the ultimate grant recipient over time.

Many advisors are facing an increasing need to differentiate their practices from their competition. Incorporating philanthropic services into tax planning discussions is one way to meet this challenge. 2017 could be the year your clients smile at their tax bill, knowing you have helped them give wisely to have a greater impact in the world.