Charitable Giving Linked to Higher Stocks, Not Lower Taxes

U.S. Trust managing director says advisors should not shy away from discussing charity

The stock market has risen 5% year to date, and that helps drive philanthropic giving than fears over ending the charitable deduction discourage it, a U.S. Trust wealth strategies advisor told AdvisorOne.

With a slew of tax law changes taking effect in the new year, and lingering questions about ending tax expenditures like the charitable deduction as Washington comes to grips with its fiscal difficulties, many discussions about philanthropy focus on the tax angle.

Ramsay SluggBut U.S. Trust managing director Ramsay Slugg (left) says tax matters are subordinate to the performance of stocks and the health of the overall economy.

“Charitable giving is not as tax-motivated as we conventionally think it is,” Slugg says. “We know that 65% of Americans give to charity each year, which is a lot more people than pay taxes or itemize deductions.

“Of people who make a half-million dollars on average or above, 95% of that group give to charity each year,” he continued. “Not all of them take itemized deductions or pay taxes.

“For people who don’t itemize, they don’t get any tax benefit for giving. Even for people who do itemize, it makes it a little cheaper, but you don’t come out with more money in the end.

“People give because they’re charitable first,” Slugg says.

The motivation for giving has policy implications, of course, but it also may serve as a signal of investor sentiment about the economy.

Slugg cites a biannual survey that Bank of America (owner of U.S. Trust) conducts with Indiana University’s Center on Philanthropy. The 2012 survey, released in November, suggested bullishness about the economy, since 76% of high-net-worth investors intended to maintain or increase their charitable giving through 2016.

“These [high-net-worth] people drive charitable giving. They feel bullish about the economy overall,” Slugg says.

Just under a third of the 700 wealthy donors surveyed viewed the favorable tax treatment of donations as a primary motivator for giving, and 50% said they would maintain or increase their donations if tax deductions were eliminated.

While the U.S. Trust executive sees the stock market and economy as having more impact than taxes on high-net-worth giving, he says increased taxes—not the tax deduction—have a large impact on middle-class donors.

Slugg says the restoration of the Social Security payroll tax, which is now taking 6.2% of workers’ paychecks, up two percentage points from last year, will likely have a negative impact on charities.

“Not all deductions are created the same,” he says. “Practically speaking, mortgage interest or real estate taxes have to be paid or a bad thing is going to happen to you. But charitable donations, if you don’t make them, nobody’s going to kick you out of your house.”

Nevertheless, he adds, “if we see market growth and economic growth, that will more than offset the tax hit” of diminished middle-class discretionary spending.

Slugg observes that many financial advisors don’t pay as much attention to their clients’ charitable giving as they might.

“They shy away from it because they feel it’s too personal,” he says. “But clients want to talk about their philanthropic giving.”

Advisors “ought to be having philanthropic conversations with their clients. If advisors themselves are not conversant, they should encourage their clients to talk with someone who is—whether it’s a community foundation or a friendly trust group who have philanthropic experts, so they can [give] in the best way.”

Slugg says his own U.S. Trust serves as a trustee and offers credit, banking and alternative investment services to which many independent brokers lack access. “There are a lot of different ways to go that an independent investment advisor’s not going to spend time on that they may want to partner with somebody,”

He cites as one key concern a client’s desire to give efficiently. Writing a check to a charity, for example, “is the easiest way but not the most tax-efficient way.” Slugg says a qualified charitable distribution from an IRA to a charity or the presale of a business or other asset are among the many possible ways clients can execute their desire to maximize the efficiency of their giving.

The level of charitable giving is currently estimated at $300 billion a year. Slugg, who works on the biannual Bank of America high-net-worth survey, says any reduction in that level of giving as a result of ending the tax subsidy would not likely be as significant as conventional wisdom suggests.

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