Too often advisors have regarded charitable giving as a zero-sum game. Every penny your client gives to charity is a penny deducted from your AUM tally. In fact, knowing the basics of charitable giving can build up your bottom line in several ways. There is the obvious feel-good benefit from knowing that by helping your clients use charitable strategies in their estate planning, both you and they are doing some good in the world. And in a business based on trust — no pun intended — that's a big deal.
“The stockbroker is usually consulted by someone trying to increase his or her wealth, and giving tends to reduce wealth,” says Larry Elkin, founder of Palisades Hudson Asset Management in Scarsdale, N.Y. “So for a stockbroker to be consulted about this at all means the client views him as an advisor and that's a really good sign.”
Charitable intent aside, giving strategies can provide invaluable tax savings to your clients — and more assets under management for you. “You might see half a client's money going to Old Home U.,” says Laura Peebles, a director at Deloitte & Touche. “But if brokers are aware of the charitable vehicles their clients can choose from, that money could have stayed with them and fulfilled charitable intent.”
Thirty years of relative prosperity have seen charitable giving by individuals grow alongside wealth in this country, roughly doubling each decade since 1970 to $160.7 billion a year in 2001. Now baby boomers are poised to retire, many of them armed with savings and good intentions to make a difference in the world. They also are inheriting anywhere from $40 trillion to $130 trillion from their parents, of which about $4 trillion to $25 trillion is expected to go to charity, says Doug Mellinger, CEO of FoundationSource, which offers turnkey, ready-to-fund private foundations for financial advisors and their clients.
Private foundations, which over the past decade grew in number to 53,000 from about 30,000, held about $450 billion in assets last year, of which $26 billion was disbursed to charities. Community foundations held about $40 billion in assets. Donor-advised funds (offered by Fidelity, Schwab and other mutual fund families), the newest but one of the fastest-growing charitable vehicles, held $10 billion. Charitable remainder trusts (CRTs) held about $62 billion. “Someone has to manage all that money,” says Conrad Teitell, a partner at the law firm of Cummings & Lockwood in Stamford, Conn. Perhaps you?
Funds can be channeled to charities in many ways just as monies can be invested in a variety of financial instruments. At the most basic level, clients can write a check to the Girl Scouts or the ASPCA and take a tax deduction for it at year-end. Or they can transfer appreciated securities directly to the foundation, where the assets can be sold without taking a capital gains hit. Another option is writing a big check to a community foundation or to a donor-advised fund, which allow donors to take a current tax break but decide gradually over time which charities it should go to. Donors, who want more control over the grant-making process, can choose a private foundation, invest their funds and create their own charities or priorities.
Often donors use a combination of all these tools. An entire family may have an interest in improving race relations, for example, and set up a family foundation to work toward that end. However, the children may also be scattered around the country and interested in giving to organizations in their immediate neighborhoods through local community foundations as well as writing an occasional check to a nonprofit. “You use different vehicles to meet different objectives,” says Melissa Cliett, who works with financial planners and advisors at the Council on Foundations in Washington. “A lot of people can be just as sophisticated in their philanthropic giving as they are in investing their portfolios.”
One of the most popular philanthropic tools, the CRT, helps clients manage their finances by retaining an income stream for life from the assets set aside in trust for a charity when they die (for more, see page 47). “Charitable remainder trusts have mushroomed since 1970 when Congress codified the rules, and they continue to grow” as more individuals learn about them, says Teitell. And if current legislation allowing people to donate their IRAs tax-free passes Congress, charitable remainder trusts will become even bigger.
Registered reps should play a part in planning their clients' charitable strategies as part of managing their overall portfolios. “Financial advisors are trying to look at clients as a total relationship,” he says, “and philanthropy is becoming an ever more important element of clients' lives.”
On the most basic level, reps can suggest using a transfer of stock as a way to rebalance clients' portfolios. “If you see a client writing a check for $10,000 to a charity, you can suggest that they use it as an opportunity to rebalance their portfolios,” says Peebles. Brokers can facilitate that by setting up an account for the charity and transferring appreciated stock instead of cash to that account directly. “The client doesn't have a gain recognition, but they do get full fair market deduction,” she says.
Brokers may also have an opportunity to manage some money for charitable organizations. Some community foundations let advisors continue to manage funds in separate 401(k)-like funds within the foundation, says Brian Clontz, vice president at the Community Foundation for Greater Atlanta. Even if brokers can't directly manage donated funds, being associated with charities either as a volunteer or financial planner working with donors, can boost business.
“Brokers can be a desired contact for people in the planned giving departments of charities and associate with important people in the community,” says Teitell. “It's probably better than playing golf with somebody.”
Perhaps more importantly, philanthropic vehicles give donors — and advisors — a way to connect with future generations. Gifts made through donor-advised funds, community and private foundations, “don't just benefit charity, but are a way to involve the family in a group activity and to pass on values, not just assets,” says Teitell. Families plan annual meetings where everyone can gather, do philanthropic work and vacation together.
In so many ways, philanthropy is an intensely personal choice; it's about people's dreams and visions as much as any other part of financial planning. Brokers don't necessarily have to learn all the legal and financial ins and outs of charitable tools, but to not learn them is foolhardy, especially with an aging population that holds more wealthy individuals than ever before. “In the end, you may have to send your client to an attorney or accountant,” says Elkin. “But brokers can learn enough about these tools to understand the market in which it makes sense and know enough about the client to make a good match.”
