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Financial Planning > Charitable Giving

Despite Bear Market, Advisors Need Strategies For Charitable Giving

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Despite the recent difficult economy, advisors should know many of their clients remain committed to charitable giving and philanthropic causes. History shows this to be true–even with the ups and downs of the equity markets from 1969 to 2000, U.S. charitable giving increased every year except 1987, the year of a dramatic stock market crash.

Today, charitable giving continues. A national report by the Center on Philanthropy at Indiana University entitled Giving USA showed charitable giving in 2001 totaled $212 billion, including an astounding $160.7 billion from individuals. While the largest recipients of these funds were religious organizations, other areas that benefited were education, health, social services, the arts and culture.

Charitable giving by the high net worth is also consistent. The 2002 Phoenix Wealth Management Survey showed 20% of those with a net worth of more than $1 million increased their personal charitable giving levels last year, and more than two-thirds of those surveyed gave at the same level as last year.

In these tough economic times, its obvious charities and services benefit from individual philanthropy. What may be less apparent is the opportunity this fiscal environment presents to advisors. Participation in charitable giving–particularly through the use of trust products–can provide many benefits to their clients, especially those of high net worth.

For example, a few years ago, as the equity markets had successive years of double-digit gains, many donors looked to share their good fortune by establishing charitable remainder trusts (CRTs), funded by their appreciated stock portfolios. These trusts allowed for substantial gifts to charity, while helping donors avoid capital gains taxes on the appreciated assets. The CRT put their entire portfolio to work, helping charities while generating an income stream for donors.

Although fewer clients may be in the situation of appreciating portfolios today, a CRT still makes sense, but for different reasons. In the current climate, many have suffered a decline in retirement assets, which may create a need for income that did not previously exist. Because of this trend, a CRT may be a good alternative for converting a non-income-producing asset, such as real estate, to one that generates income. This can provide a substantial income stream for the donor while avoiding capital gains taxes.

There are other trust and investment vehicles advisors need to stay informed about if they are to fully serve their high-net-worth clients. A NIMCRUT (net income with make-up charitable remainder unitrust) may make sense when the client is looking to generate income in later years, while benefiting from an immediate income tax deduction. A CRAT (charitable remainder annuity trust) may be appropriate in situations where the client would like to rely on a fixed dollar payment to a charity or nonprofit program every year. Participating in a charitable gift annuity program may work for some donors who are looking to make smaller donations, but are still interested in retaining an income stream from the trust.

The most recent bear market conditions have underscored the benefits of investment diversification. However, many clients may still have concentrated positions in company stock from accumulated options or other compensation programs. Selling all or part of this stock to invest in a more balanced portfolio can have substantial income tax consequences; therefore, contributing a portion of the stock to a Charitable Remainder Unitrust (CRUT) can help diversify a portfolio while offsetting the tax impact. These stock contributions will avoid capital gains taxes; thus the entire amount will be available to be reinvested in a diversified portfolio.

This strategy allows a percentage of the portfolio value to be paid out to the donor regularly and as the trust grows, the donor will receive a larger payout. The donor will be eligible for a current income tax deduction, which may be used to offset any taxable income generated from selling additional shares of the stock to further diversify.

For those clients who are hesitant to transfer large amounts of wealth irrevocably, a CLT (Charitable Lead Trust) may be an especially attractive way to make a large donation, while preserving assets for non-charitable heirs. This strategy provides an income stream to charity, while the remainder of assets (including appreciation) pass to non-charitable beneficiaries after a defined period of time.

These are but a few examples of strategies that allow advisors to help a client accomplish philanthropic goals, while solving other personal financial needs. Regardless of the economic climate, clients will continue to look to use accumulated wealth to give back to the community.

As an advisor, you can be instrumental in helping them accomplish these goals, in a way that will best benefit them, their loved ones and their chosen charities.

Lynn M. Ryan is senior vice president of sales and marketing for Phoenix National Trust, a member of The Phoenix Companies Inc. She is responsible for distribution of trust products and services on a national level. She can be reached at [email protected].

Reproduced from National Underwriter Life & Health/Financial Services Edition, December 2, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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