When it comes to client-advisor communications about charitable giving, something is amiss.
That, at least, is the conclusion of a survey conducted by The Philanthropic Initiative of Boston. The study found that half of all advisors say they routinely converse with clients about charitable giving. Meanwhile, 90 percent of clients say that this is not true — that no one is talking to them about giving even though they yearn for such conversation.
The communication problem is an important one because charity is big business. Americans give $250 billion a year, and that number has increased every year for the last 42 years, according to Professor King McGlaughon, executive vice president and chief academic officer at The American College in Bryn Mawr, Pa.
Perhaps more importantly, charitable giving can be a great tool for managing a client's taxable income, when used effectively. But before anything good can happen, advisors need to solve the communication problems.
A Hard Subject to Broach?
In many ways, it is counterintuitive to talk to clients about giving money away; an advisor's main job, after all, is to help clients hold onto their money.
Nor is broaching the subject easy for advisors. Clients' reasons for donating money are often very personal, and many advisors “don't want to probe around the emotional baggage of giving,” says Jay Quinn, senior vice president of fundraising and outreach for the Fidelity Charitable Gift Fund.
So, why should advisors risk offending their clients by broaching the subject of charitable giving? First, because there is a lot of money in play. A study conducted by Boston University found the average annual gift from a client with assets of at least $10 million is over $100,000.
A second reason to get involved with a client's charitable giving is that helping a client deal with such a personal matter can help shore up the client-advisor relationship. Clients often keep to themselves their reasons for donating to particular charities, but when a client chooses to open up a little, the advisor gets a window into the client's passions and motivations. He also begins to form a more personal bond with the client, because the client is sharing more than just financial information.
“You have then deepened your relationship and differentiated yourself from the guy who shows up every six months,” says McGlaughon, who spent eight years as the director of the Merrill Lynch Center for Philanthropy and Nonprofit Management and saw it happen on a daily basis.
There is a third reason to push for a conversation about charitable giving: The best clients tend to want to donate money, and it's the advisor's job to help them do that tax-efficiently. Ninety percent of clients with net assets of at least $1 million and 95 percent of those with $5 million give money away each year, says McGlaughon. The gifts from those people made up half of the $248 billion total that was donated to charity last year, according to Giving USA.
Holding the Client in Check
One of the most important services an advisor can provide is helping a client decide what form his donation should take. Because it's so easy to write a check, 85 percent of all charitable gifts in the U.S. are cash gifts. “But that's the most inefficient way to do it,” says McGlaughon.
At a minimum, he says, advisors should suggest would-be check writers donate appreciated stock instead. The client would get the charitable deduction at the fair market value of the stock and wouldn't have to pay any tax on the appreciation. Even better, the charity would get the step-up in basis and wouldn't owe tax either.
There are several other planning strategies that can help a client deal with charity-related taxation issues:
If a client has intangible assets to donate, make sure they are being donated to an organization that will use them. For instance, if your client wants to donate a painting, make sure the painting is going to a place that will display it and use it as a painting, like a museum. In that case, your client will get the deduction at fair market value. If the painting is going to, say a school that plans to auction it off at the next fundraiser, his deduction is then limited to his basis, because the contribution is unrelated to charitable organization, says Bob Scharin, editor of Warren, Gorham & Lamont/RIA's Practical Tax Strategies, a monthly journal written for tax professionals.
Discuss using a donor-advised fund, like the Fidelity Charitable Fund. Since the fund is a charitable organization, your client gets a deduction right when he gives his cash, appreciated or restricted stock to the fund. Then he can take his time and decide which organizations he would like to donate to. An additional upside is that the money is invested while it's waiting to be given out to his respective charities, says Quinn.
Consider a charitable remainder trust or a charitable foundation. By acting as an administrator, the advisor can help the client to get the most bang for his charity buck.
Granted, some of the above suggestions call for the help of an accountant or attorney. For those who do not already have relationships with such experts, it's high time to establish them anyway. Such partners can sometimes help break the ice in discussions of charitable giving, and this is help many advisors could use.
The benefits of talking with clients about charitable giving are numerous — for client and advisor alike. Like many things that are difficult, such conversations are well worth the effort.
Katrina Relief: Remind clients of special tax breaks through Dec. 31 to encourage charitable contributions to aid victims in the Gulf region. Normal limits on tax-deductible charitable gifts by individuals have been raised; conceivably a client could give (and deduct) 100 percent of gross adjusted income in 2005. There are also special breaks for donations of food and books. See irs.gov for details.