The following is an excerpt from “Take it to the Next Level,” part of the special charitable giving supplement that ran in the September issue of Trusts & Estates Magazine, a sister publication of Registered Rep.
You might think that charitable giving—particularly the giving of large gifts—would wane under economic pressure. But history tells us otherwise. American philanthropy is resilient: forging nearly continuous growth every year for the past four decades through every economic climate. According to the 2008 edition of <i>Giving USA</i>, giving in America has survived many economic storms, dipping only 1 percent on average (when adjusted for inflation) during recessionary periods going back at least as far as 1955. [Total giving in 2007 amounted to more than $300 billion dollars.]
So, in light of today’s economic challenges, advisors shouldn’t be surprised to see their clients increasingly seeking assistance in making larger gifts. And expect them to want to do so in such a way that meets multiple planning goals. Such gifts however, will likely take forms other than traditional pledges of cash over a three- to five-year period.
For example, some [of your clients] have seen the value of securities fall in recent months, but still enjoy significant gains when viewed from a longer-term perspective. They may be wise to gift those individual securities and use the cash they might have otherwise donated to charity to instead diversify their holdings through the purchase of a broader group of stocks at lower current market prices.
Older clients of means who are no longer working may be among those least affected by the current economic conditions. According to IRS reports, people over 65 account for over 50 percent of total giving of appreciated securities. So it’s important for advisors to keep information about giving non-cash property in front of them. Some may find this to be an excellent time to use securities that have increased in value but yield little income to fund charitable trusts and other gifts that provide additional income to help pay for higher medical expenses and other costs.
It’s a vital service to help clients make larger gifts in ways that enable them to provide for a more secure retirement, lend financial support to dependent loved ones, transfer wealth to future generations or meet any number of other financial objectives. Now may be a good time to revisit the charitable planning toolbox and determine which techniques are best suited for the economic picture that appears to be unfolding.
Assuaging Concerns
People make charitable gifts for any number of reasons—including the desire to help others, gain peer acceptance, satisfy a need for recognition, support their religious beliefs, express gratitude for services received and save on taxes.
Yet some motivated people who possess the means to give ultimately decide against making a gift, especially larger ones. Why? We have found that most impediments to giving can be boiled down to one or more of these reasons:
1.) Concerns over unfulfilled obligations to provide support for children, parents and others;
2.) Fear of outliving one’s resources during retirement years and/or not providing adequately for a spouse and/or other dependents;
3.) Worry about business or other financial losses that could occur in the future; and
4.) Concerns about catastrophic health problems or long-term mental and/or physical disabilities that could necessitate expensive care over an extended period of time.
Given all these potential worries, it’s surprising that many people ever come to the conclusion that it’s possible to make a large gift at all. These concerns are the reason that many donors and their advisors so often default to including a charity in their wills after death when these fears are no longer a factor.
But there are ways that advisors can assuage these concerns. Much is written about “planned giving,” “deferred giving,” charitable ‘gifting’ techniques,” “social capital planning,” etc., but in the final analysis all these tools fall into four primary categories:
Category 1—Outright gifts with no strings attached. Planning these gifts primarily revolves around timing for tax and other purposes as well as choosing the best property to use to fund the gift.
Category 2—Gifts made in such a way as to ensure the future economic security of a loved one; for example, charitable lead trusts, charitable remainder trusts (CRTs) coupled with wealth replacement, life income gifts for elderly parents and other options.
Category 3—Gifts funded during life that provide income for the donor and/or another loved one for life or other period of time, but not devoted to charitable purposes until death or expiration of another time period (CRTs, gift annuities and other split-interest gifts).
Category 4—Testamentary gifts that allow the donor to keep full access to income and corpus of funds for the remainder of his lifetime; examples include bequests via wills, remainder distributions from revocable living trusts, life insurance and retirement plan designations, pay on death provisions for investment accounts and others.
Many donors, advisors and representatives of charities are fairly well versed in the options enumerated above. Obviously, charities prefer category 1 because they receive the donations relatively quickly. For less experienced fundraisers and advisors, it’s easiest to default to category 4, because categories 2 and 3 can be more complex. But some charities are finding that category 1 is less of an option these days. [Baby boomer] donors are finding it increasingly difficult to complete larger outright gifts in today’s economic climate. Yet it’s unrealistic to automatically turn to bequests and other “death gifts” given donor life expectancies of several decades or longer.
All roads now seem to lead to gift plans in categories 2 and 3. And these gifts should be structured so as to possess as many of the following attributes as possible:
*Enables a client to make a large gift in relation to his means in a way that addresses a personal financial or economic challenge that would otherwise preclude the gift;
*Provides maximum benefits to the charitable recipient within a reasonable period of time;
*Places no undue investment risk on either the donor or the charitable recipient; and
*Affords the donor with maximum tax savings and other economic benefits.
The not-for-profits and advisors who master the incredible flexibility and power of these planning tools, as well as the tax savings, asset management, predictability and other advantages they bring, will find no shortage of eager donors and clients.