Anyone who’s attended an estate-planning conference or read print or online media recently can’t escape the trend: Charitable planning is a hot-button issue. The specific topic may be the convenience of a donor-advised fund, the benefits to a family of establishing a private foundation (PF), the tax wisdom of donating appreciated property, the economic benefits of selling appreciated property inside a charitable remainder trust (CRT) or the difference between the charitable deduction for individuals and trusts when planning for the 3.8 percent tax on net investment income. There have been plenty of great discussions and analyses on a variety of charitable planning subjects.
So, what’s missing in many of these discussions? Consideration of the donor’s charitable motivation. Without that, a transfer to a charity is the economic equivalent of a 60 percent tax (assuming a 40 percent tax benefit from the deduction). Some clients respond to a suggestion of charitable planning by claiming they would rather pay the 40 percent estate tax and leave 60 percent to their children than give 100 percent to charity and nothing to their children.
What’s the Motive?
Before introducing the various charitable planning techniques to a client, the conversation with a potential donor should start with the “why,” not the “what” or “which” of charitable planning. Sometimes, that’s an easy conversation: The client may have already expressed significant charitable intent, and it’s up to the advisor to bring the tax and legal codes to bear to accomplish the client’s goals. Sometimes, the client hasn’t given the advisor a hint, but would welcome the discussion.1 Perhaps the accountants have a slight advantage over the other advisors: The list of donations on the income tax return can provide a good starting point for the conversation. Significant annual cash donations to their alma mater or religious institution can be the catalyst for a discussion of a charitable plan. Certainly, a list of cash donations and gains on marketable securities on the same tax return should lead to a discussion of donating appreciated securities and, perhaps, more sophisticated planning techniques, such as a CRT.
But clients may have charitable motivations, even if they haven’t articulated them directly. Careful listening to clients’ concerns about their families or society in general may indicate that a donation to a cause that addresses those concerns might be in order. For example, a question about a pet trust or general concerns about caring for surviving animals might lead to a donation to an animal-focused charity. If there are, or have been, serious medical issues in the family, the discussion might lead to a donation to a disease-related charity, or even establishing the clients’ own medical research institute. Has the family been in the city for generations? Is there a park or a street bearing their family name? Perhaps they would want a perpetual fund at the local community foundation for maintenance of that park or street. Did a scholarship help them through college? Would they want to give others the same opportunity? Are they first generation Americans? Do they want to assist their country of origin or newly arrived immigrants? Are they art collectors? Do they have a plan for their collection?
Do the family members share the same charitable vision? (Again, the accountants who serve a whole family may have an edge here—others may have to ask.) If so, a PF or supporting organization may be a way of continuing and focusing the family’s passion. If they don’t, then a single PF may be more of a source of friction than harmony, so separate funds might be a better structure.
Whatever direction the conversation may go, it’s important that it gets started and that it begins with the charitable planning motive, not the technique.
—This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates and related entities, shall not be responsible for any loss sustained by any person who relies on this publication.
1. The Philanthropic Initiative, “The U.S. Trust Study of the Philanthropic Conversation: Understanding Advisor Approaches and Client Expectations” (October 2013).