In Demand: Nonprofits Seek Advice Amid 'Brutal' Market Reforms
For more than 100 years, taxpayers have been rewarded for charitable giving as part of the federal tax code. But as of this year the new tax bill’s doubling of standardized deductions -- at the expense of itemized filings -- is projected by philanthropy experts to result in as much as a $20 billion drop in donations to U.S. nonprofits.
"Working with nonprofits is a great way to build your image as an advisor in the community," says Jim Maher, chief executive of St. Louis-based Archford Capital Strategies, which manages more than $750 million. "Under this current tax regime, the loss of tax benefits to service-type organizations is really going to be brutal."
After finishing graduate school, the mid-20s budding professional moved to St. Louis to start his career. "Coming to a new city where I’d never lived before as a young professional, it was hard to make new business contacts," recalls Maher. "So I decided to focus on nonprofit networking groups and charities that met my personal interests and were especially meaningful to me."
The relationships he’s built over the years by donating his time to local boards and charity campaigns today represent more than half of the veteran FA’s total client base. "When you’re working on a joint effort to improve some aspect of life in your community, it brings together people with similar attitudes -- volunteer work has led to some of my strongest friendships and developed very close bonds with people I really admire and care about," Maher says.
As a result, in 2018 he’s setting out to help nonprofits battle to overcome "an unintended bad consequence" of tax reform. Last week, Maher spoke to development officers at nine local community colleges. His message: "We need to educate families about how to redirect household budgets to free up savings to pass along to worthwhile causes."
Maher has developed a list of six different suggestions he’s giving to wealth clients and organizations. Those include greater use of donor-advised funds to accelerate individual tax deductions and taking qualified charitable distributions in conjunction with older clients' required minimum distributions. "There are ways to be diligent about receiving a charitable deduction by supporting nonprofits," he says.
Peter Klein, a HighTower advisor in New York whose team manages $300 million, is doing much the same.
In fact he reports finding himself in more demand than ever these days with nonprofit leaders. "The need for experienced advisors who enjoy working with these types of organizations is greater than ever," he says. "But it’s a specialized knowledge built around charitable planning -- it’s a body of work that one has to put a lot of time and energy into developing over time."
As much as a third of his practice involves working with nonprofits. Post-tax reform, Klein expects such activity to become an even bigger part of his practice’s long-term growth strategy. "I don’t suggest to younger advisors that they jump feet first into charitable planning," he says. "You really need to study the basics of finance and then wade into working with nonprofits."
Klein has taken time to earn a chartered advisor in philanthropy designation through the American College. That’s helped lead him to a niche working with foundation leaders and other nonprofit managers in managing their finances.
"I’ve been counseling them to be a bit more careful with their investments given that donations are expected to be down this year," Klein says. Instead of "stretching" by taking on more market risks in their portfolios, he’s telling nonprofits they’re going to have to "pull in their belt straps" and not to rely too heavily on any savings.
"They also have to change the way they raise money," Klein says. "Just because the tax reform package might change the velocity or amount of donations they’re getting, they’ve got to target bigger givers."
Smaller donations are most likely to slide as a result of new tax reforms, he adds. But instead of looking at such changes as a negative, Klein is presenting "a new marketplace for donations" as an opportunity for savvy nonprofit managers who challenge themselves to become "more efficient" operators.
Michael Barancyk, a senior partner at Oak Partners Wealth Management in suburban Chicago, sees tax reform as a way to encourage clients with a strong track record of charitable giving to re-examine their philanthropy plans.
"For people who are very community-minded and have built up a lot of capital gains during this multiyear bull run in stocks, charitable giving is still going to be a good tool to shield their income from taxes," he says.
For example, a local business owner who's a client of his firm, which manages about $750 million, started aggressively buying shares of Apple and Amazon several years ago. Heading into 2018, the client had accumulated more than $25,000 in capital gains just from those two stocks, according to the advisor.
Barancyk is recommending his client donate those highly appreciated stock shares to a local foundation that gives scholarships and grants to those in need. "Being a nonprofit, the charity can sell those shares and not have to pay income tax on the proceeds," Barancyk says. "At the same time, the donor gets to write off a certain percentage of that amount on his taxes."
Before this year’s tax changes, the advisor might’ve suggested his client spread out those donations to maximize deductibility limits. "But this year we’re telling our clients with capital gains it might be worthwhile to make lump sum contributions to their favorite charities," he says.
Under the new tax code, Barancyk is advising clients to take a closer look at their entire taxable portfolio and any investment where they’ve realized capital appreciation. That could include anything from rental homes to commercial properties where they have unrealized gains, he notes.
"If you can help clients to stack any of their potential tax benefits together this year and front-load their strategic charitable strategies," Barancyk says, "that’s going to really help them to maximize their philanthropy efforts in terms of realizing the greatest benefits in this new tax environment."