Taking The Pulse Of Charitable Planning

‘Tis the season for giving. Among advisors active in the charitable planning arena, the closing weeks of 2008 will likely call to mind the many opportunities to help realize their affluent clients’ philanthropic ambitions. Question is, has the recent credit crisis and the prospect of a severe recession in 2009 put a damper on those ambitions?

To judge by the latest available statistics–from 2007–philanthropy of all types is on the rise. The Glenview, Ill.-based Giving USA Foundation estimated in June of this year that charitable contributions in the U.S. totaled $306.39 billion in 2007, exceeding $300 billion for “the first time in history.” The foundation’s annual report, “Giving USA 2008,” further notes that giving rose in 2007 by 3.9% (1% adjusted for inflation); and that every economic sector, except private foundations, projected increases in 2007.

That was then. Given the seismic events of the past few months, the results of next year’s report might look radically different. For advisors, the burning issue is not the contracting economy’s effect on overall giving, but on that part of the pie in which they have to role to play: using life insurance to help fund clients’ planned (or lifetime) gifts.

To a certain degree, sources tell National Underwriter, a client’s decision to pursue or put on hold charitable planning is insulated from the financial turmoil because the process is slow and time-intensive, often requiring many months or years for advisors to convert a client’s charitable inclinations into an actionable plan.

To the extent that clients are also intent on establishing a legacy to benefit their community or society, then philanthropic interests may also trump other financial considerations. Those, however, who are motivated chiefly by tax considerations are more likely to postpone gifting until market conditions and the tax environment become more favorable.

“Frankly, taxes are much less of an issue when you’re doing testamentary planning,” says Randy Siller, a family wealth advisor at Siller & Cohen, Rye Brook, N.Y. “But as asset valuations have declined in recent months, many of the tax incentives for doing lifetime gifting have gone away.”

Siller cites, for example, the inter vivos charitable remainder trust, long a favored vehicle among the affluent. By donating highly appreciated assets to the trust, donors can secure an income tax deduction. And by selling the assets inside the trust (executed to secure an income stream or interest for the themselves and a “remainder interest” for a designated charity) they can also avoid capital gains tax.

Siller notes that interest in the inter vivos CRT, which dipped after 2003 because of a decline in the long-term capital gains rate (it now stands at 15%), has declined further because assets that appreciated in boom times–most notably real estate, stock and businesses–now are suffering depressed valuations. Given the prospect of incurring losses, affluent clients are less likely to sell such assets. Or because no gain (or substantial gain) can be expected from a sale, the tax-favored treatment accorded the CRT becomes less attractive.

Among clients for whom tax considerations are paramount, the charitable lead trust and its permutations, the charitable lead annuity trust (CLAT) and charitable lead unitrust (CLUT), also are seeing less interest than in prior years. Distinguishing the CLT from a CRT is the order of the beneficiaries: The first pays an income interest to the charity and a remainder interest to non-charitable beneficiaries.

“I don’t see charitable lead trusts being implemented as much in today’s market,” says, Stephanie Enright, a certified financial planner and principal of Enright Premier Wealth Advisors, Torrence, Calif. “In a down market, the CLT is not as attractive because assets are not as highly appreciated. Where the CLT does well is in up markets, especially among the very wealthy.”

But if the current economic outlook has reduced lifetime charitable gifting among some clients, it has had on balance a neutral to positive effect among individuals who are seeking a secure retirement income stream or those for whom tax considerations are secondary. Especially popular now, say market-watchers, is the charitable gift annuity, a vehicle through which to transfer cash or marketable securities to a charitable organization issuing the gift annuity in exchange for a current income tax deduction and the organization’s promise to make fixed annual payments to the client for life. Annuity payments can begin immediately or can be deferred to some future date.

“In today’s economy, people want security,” says Bruce Ensrud, a financial consultant for the Colonnade Group, a Minneapolis, Minn.-based unit of Thrivent Financial for Lutherans, also of Minneapolis. “And tax-advantaged instruments like the charitable gift annuity provide the certainty of a steady stream of income.”

That income stream can also surpass what the client would otherwise receive by leaving funds targeted for gifting in other retirement income accounts. Ted Contag, also a senior financial consultant at the Colonnade Group, points to an elderly female client who cashed in a $50,000 CD to secure a higher-yielding (and tax-deductible) charitable gift annuity that pays out a quarterly 8.3% interest rate.