July 28, 2009 at 08:00 PM
When panic about the economy hit a crescendo in November of last year and then again in March of this year, it wasn’t just for-profit firms that were under pressure. Nonprofits and the donors that support them were also panicked over the future course of philanthropic giving. But no matter what the economy does, donors are going to continue to shovel hundreds of billions of dollars into the social sector and wealth managers need to position themselves to help their clients give well.
It is widely assumed that when the economy seizes up and asset prices fall, that donors stop giving. But history shows this isn’t true. While the current economic situation is unique in many ways, it is still informative to know that when the dotcom bubble burst and the Nasdaq fell 78% from 2000 to 2002, annual charitable giving actually rose 11%, from $211 billion to $234 billion.
This dynamic holds because while large foundations give a percentage of their assets, individual donors tend to give a percentage of their income. With income far more stable than asset prices and the increasing need for social services during recessions, individual donors simply do not walk away from their charitable commitments.
The fact is that while big foundations might get the media coverage, individual charitable giving simply dwarfs institutional giving. Foundation grants account for only 13% of total charitable giving in the United States, according to the most recent Giving USA survey, while donations from individuals make up 82% of the annual total. (Corporations give the rest.)
But while individuals make the bulk of charitable donations, the way they make their gifts could be done a lot more effectively. This is where wealth managers can add tremendous value for their clients who give at high levels.
Every time one of your clients writes a check to charity, he or she is incurring phantom taxes. By integrating philanthropic services into your wealth management offering, you can capture these phantom taxes and return them to your client or help your client give even more to charity.
When your clients give cash to a nonprofit, even though they take an income tax deduction for the gift, they are inadvertently foregoing an opportunity to reduce their capital gains tax, estate tax, and gift tax. This missed opportunity to reduce taxes generates a tax bill in the future that does not need to occur. These taxes represent a phantom tax on donors who choose not to structure their gifts in the most efficient manner.
Let’s look at the simple example of a client making a gift of stock rather than a gift of cash. When a donor writes a check for $10,000, he reduces his federal tax bill by $3,500 (assuming he is in the top federal tax bracket). If instead he gives stock worth $10,000, which he bought for $5,000 years earlier, he will get the same income tax deduction and avoid paying $750 in capital gains tax, for a total of $4,250 in reduced taxes. In each case, he has parted with $10,000, but by giving stock, he has reduced his after-tax cost of giving from $6,500 to $5,750, a 12% drop. (Considering state taxes would make the example even more compelling.)
Making gifts of appreciated assets instead of writing checks is the simplest tool in the philanthropic toolbox. But it is one that most of your clients do not take advantage of. According to The 2008 Bank of America Study of High Net Worth Philanthropy, 98.2% of high net worth individuals give to charity each year. Individuals who make more than $200,000 a year give on average between 9% and 14% of their income. But if you compare these high levels of giving to the number of requests you get from your clients to transfer appreciated assets to the nonprofits they support, you’ll find a huge gap and a need for more proactive philanthropic planning.
One way to gain the skills to advise your clients on financially savvy ways to execute their philanthropy is to complete the Chartered Advisor in Philanthropy (CAP) program. The CAP program is offered by The American College, it’s called The American College: Chartered Advisor in Philanthropy program which also offers the Certified Financial Planner (CFP) designation. While still a rare designation, the CAP program has emerged as the leading “credential” for philanthropic advising.
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