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Philanthropy Focus: Maximize Client Charitable Giving, Pt. 1—Assets & Vehicles

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It is once again the time of year when people tend to think more of giving than at any other—when “it is more than usually desirable that we should make some slight provision for the poor,” as Dickens put it in A Christmas Carol. And in the midst of an economy that makes every charitable cause determined to wring the most benefit from every dollar, you and your clients also may be brainstorming about how to get the most bang for their charitable bucks.

Fidelity Charitable has offered some suggestions on how to do just that, and we will look at them in this two-part series that can help you to help your clients contribute the most to the causes dearest to their hearts. Amy Danforth, senior vice president of Fidelity Charitable, points out that advisors can benefit, too, by making their clients’ charitable and philanthropic plans as much a part of their practices as growing and preserving their wealth. Indeed, she says it is the first thing many advisors overlook.

Nearly 75% of high-net-worth clients responding to a Fidelity Charitable survey said they plan to increase their giving in 2011, according to Danforth. “A large number [of advisors] in last year’s survey knew their clients were giving and don’t bring it up,” she says, but “it should be the first thing advisors incorporate into their practice.”

There are excellent reasons for doing so, she adds; it “deepens relationships with that client, because it’s something that’s very personal to them, and also reveals their levels of interest and areas of interest.” Danforth adds that charitable giving “often includes family. Advisors who include philanthropy in their practices are more likely to keep the next generation [as clients].”

Say you’ve already had the discussion. Your next objective is, of course, to make sure that your client’s giving is as far-reaching as possible, and there are four ways to do that.

First is choosing the assets that will deliver as much return for the charity as possible. These can include cash, of course; appreciated securities; and complex assets such as stock in nonpublicly traded companies, real estate, and other things like artwork or other relatively illiquid items.

While cash can be the first line of giving, Fidelity Charitable suggests that, instead of simply selling assets and donating the proceeds, advisors should consider the client’s direct contribution of securities instead. This strategy, says Fidelity, can up the gift ante by providing your client with a double tax advantage, perhaps allowing them to give more. By donating long-term appreciated securities, donors may be able to take a tax deduction for their fair market value; they can also eliminate capital gains tax on the donated securities’ appreciation in value.

Donate complex assets that can provide their own tax efficiencies can also allow gifts to stretch farther. These can include nonpublicly traded securities (such as private company stock, restricted stock, LLC and limited partnership interests and pre-IPO shares), real estate or other assets, which can also be donated without a need to sell first.

The second way to maximize gifts is through choice of vehicle, and sometimes the best choice is multiple choice. Vehicles can include everything from checkbooks to donor-advised funds to private foundations, and each offers different advantages.

Most vehicles do offer the opportunity for certain tax benefits; however, the amount of the deduction can vary, based not just on the vehicle, but also on the asset being contributed. Another consideration in choosing a vehicle is how much time the donor wants to expend on managing gifts.

Donors need not rely on a single choice, though that has often been the strategy in the past. Sometimes using a combination of giving strategies is best, and many donors now opt for a national donor-advised fund as one way to provide philanthropic funds, while using a private foundation or the donor-advised fund of a local community as a means of offering additional charitable support.

Such a multiple-venue approach is becoming more popular, as it can assist donors in using complementary vehicles that provide not only the opportunity to carry out separate philanthropic purposes but also to maximize tax incentives. While the standard tax deduction for cash donations to a private foundation is 30% of a donor’s adjusted gross income, those who would find it useful to take a tax deduction beyond 30% of AGI can leverage a donor-advised fund to make additional cash donations up to 50% of AGI.

Complex assets given directly to a donor-advised fund can also give the donor other tax advantages, as assets are liquidated with the donor bearing little or no cost for the transactions. A donation to a donor-advised fund also provides donors with the opportunity to contribute complex assets in a single transaction, while remaining able to recommend multiple grants to different charities over time.

Other advantages over the use of a private foundation are donor anonymity and fewer administrative burdens, a central location with better accessibility for charitable records, and the fact that they allow immediate credit for donations while buying the donor time to decide where to direct grants.

In Part 2, we will look at the third and fourth ways to boost the horsepower of charitable contributions: growing assets and optimizing granting.


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